Pre-revolutionary Iran's economic development was rapid. Traditionally an agricultural society, by the 1970s, Iran had achieved significant industrialization and economic modernization. However, the pace of growth had slowed dramatically by 1978, just before the Islamic revolution. Since the revolution, increased government involvement in the economy has further stunted growth. Iran's current difficulties can be traced to a combination of factors. Economic activity, severely disrupted by the revolution, was further depressed by the war with Iraq and by the decline of oil prices beginning in late 1985. After the war with Iraq ended, the situation began to improve: Iran's GDP grew for 2 years running, partly from an oil windfall in 1990, and there was a substantial increase in imports.

A decrease in oil revenues in 1991 and growing external debt, though, dampened optimism. In March 1989, Khomeini had approved Rafsanjani's 5-year plan for economic development, which allowed Iran to seek foreign loans. But mismanagement and inefficient bureaucracy, as well as political and ideological infighting, have hampered the formulation and execution of coherent economic policies. Today, Iran's economy is a mixture of central planning, state ownership of oil and other large enterprises, village agriculture, and smallscale private trading and service ventures. President Khatami has continued to follow the market reform plans of former President Rafsanjani and has indicated that he will pursue diversification of Iran's oil-reliant economy, although he has made little progress toward that goal.

Official unemployment was estimated to be 16% for 2002. Although Islam guarantees the right to private ownership, banks and some industries--including the petroleum, transportation, utilities, and mining sectors--were nationalized after the revolution. Iran has, however, been pursuing some privatization. The import-dependent industrial sector is further plagued by low labor productivity and shortages of raw materials and spare parts.

Agriculture also has suffered from shortages of capital, raw materials, and equipment, as well as from the war with Iraq; in addition, a major area of dissension within the regime has been how to proceed with land reform.