# Newsletter

## Iran's Economic Potential and Challenges


This is Iran, a country that could be one of the most prosperous and powerful economies in the world in less than a decade, if it was given the chance. Iran is home to 88 million people that are relatively well educated, young and ready to work. The country also has immense natural resource wealth. As much as 5% of the world's extractable metals are in Iran. It has the second largest reserves of natural gas in the world, only behind Russia, and more oil than the UAE and Qatar combined. Iran is also in a perfect geographical position between Asia and Europe with easy access to the world's oceans. It could also build out its infrastructure very quickly. Even despite all of its problems now, people are still keen to invest into the country, which has been called the last untapped emerging market. To grow, economies need the factors of production, land, labour and capital, and Iran has them all in droves. A massive young skill population, some of the richest and best situated land in the world, and endless access to capital to build out industries quickly. If Iran fully realized its potential, it could have an output that rivaled Germany, Japan, or even the United States and China. If that sounds crazy, it might not by the end of this video. Of course, today Iran is a long way from that level of success. Despite all of its advantages, it only has a GDP of $360 billion, which works out to $4,091 on a per capita basis. That puts it in line with Sri Lanka and Lebanon, which are essentially failed states with none of the immense natural resource advantages that Iran has. Of course, Iran is led by an authoritarian government that has shown little regard for the well-being of their people, but even if they didn't care about the average person, this is still an economic failure because they aren't building wealth for themselves to hoard at the top. So, how did Iran go from one of the fastest-growing economies in the world to the economic failure it is today? Will it ever be able to live up to its full economic potential? And finally, why might its leadership not want it to? Once we've done all of that, we can put Iran on the Economics Explained National Leaderboard. This episode of Economics Explained is sponsored by our patrons. Our patreon offering just got better with new benefits that you won't want to miss out on. For example, there is an Economics Explained discord, getting access to our scripts, or even sponsoring the Economics Explained National Leaderboard. Head over to our patreon page linked in the description and join our community. The economy of Iran as we know it today really got started in 1979 after the Iranian revolution deposed the monarchy and established the Islamic Republic of Iran. The revolution was quite a surprise to most of the world, largely because Iran was doing alright for itself before the conflict started. The economy was growing and people were becoming wealthier, there weren't any defeats in war or financial crises or any of the usual motivators for a revolution. Of course, as we try to make as clear as possible, as often as possible, our area of expertise is in the economics here at AE, not in the geopolitics. But it could have been a really interesting case study, had the country not gone to war with Iraq just a year later. Between 1980 and 1988, the economy of Iran was fully dedicated to a conflict with its neighbor. Almost all of its industries were nationalized and the new government went even further than that. The assets of Iranian citizens who didn't align themselves with the ideals of the government were confiscated and given to something called a bonyad, which were organizations that were established late in the rule of the Iranian monarchy and were kept by the new government after the revolution. Bonyads are independent trusts that in theory work to provide social services to the poorest people in Iran. In practice, they are huge organizations that run a large share of Iran's industries, get funding from the government, don't need to pay taxes, and don't even need to keep any financial records. They also directly report only to the Supreme Leader of Iran, which gives Iran's head of state direct control over organizations which contribute 20% of the country's output, employ 10% of its workforce, and can effectively do anything without leaving a trace. From the beginning these bonyads just became tools of corruption. Most of the businesses they run are losing money, but that doesn't matter because they help to keep control over the population. If 10% of the workforce is directly dependent on these organizations, they are not going to speak out against the government that has unchecked control over them. At higher levels of influence, the bonyads can channel money towards officials through lucrative contracts and jobs that never even need to be reported. This is a good way to keep the Iranian elite happy with the current government. Bonyads can also be used as a threat to keep the few private businesses that exist in Iran in line. Since the businesses that the bonyads operate don't need to pay tax or even make money, they can easily outcompete private businesses in whatever industries they operate in. So if private businesses want to keep on making money, they need to keep the government happy. These operations have been terrible for the Iranian economy. Even outside of the wasted money and open corruption, it has made investment into Iran very unattractive because foreign investors will either be afraid of their investments being nationalized and claimed by the state, or out-competed by bonyads that don't have to play by the same rules. This is a major problem for their economy because Iran needs investment to build out other industries besides fossil fuels. Today oil accounts for 69% of its exports and petrochemical products are another 20%. Behind that are fruits, nuts and carpets, which are not going to make it an advanced economy. Other oil-rich countries in the region, even ones with similarly authoritarian governments are trying as hard as they can to grow alternative industries by encouraging business activity from abroad. The UAE has developed massive cities and transport infrastructure to attract tourists and businesses from all over the world. Qatar spent billions of dollars hosting the world cup to show off the progress it had made to varying degrees of success. And even Saudi Arabia, a country with its own geopolitical complications, is investing lots of money into megaprojects that are probably dumb from an engineering and city planning point of view, but will help the country attract lots of businesses all wanting to play a small part in what is really just a massive stimulus effort. Iran on the other hand is perfectly content to keep its anti-competitive bonyards in place even though it will hurt its economy because the decision makers don't really care. The small group of Iranian elites that benefit from the absolute control the government has over the country are all wealthy enough for wider economic growth to not really matter. A lot of their families don't even live in the country, so the economy doesn't matter to them beyond how much money they can get out of the corrupt systems in place. A wealthier population has more capacity for political activism. A poor population is also less likely to demand higher wages from the state-run oil corporations and bonyads which could eat into their profits. Because of this there is little incentive to pursue economic development if it comes at the expense of the control that they have over one of the biggest oil suppliers in the world. Even if economists remove the influence of self-interest corruption, a lot of these systems are heavily intertwined with the country's theocracy. The fact that they also employ a lot of people means that despite their problems, they remain quite popular in the country itself. Bonyads are also semi-religious organizations, and in between funneling money around they do actually do some good for the poor, but they also get the country into a lot of trouble as well. Because a lot of these organizations have very little oversight and religious clerics amongst their top ranks, they have time and time again been caught financing internationally targeted military groups. And that leads us onto the external forces holding back the Iranian economy. Sanctions Sanctions are economic restrictions placed on trade and financial flows to countries or organizations for political, military and social reasons. It's the motivation that really differentiates sanctions from regular trade restrictions. There are lots of trade restrictions between Australia and the USA, but they are some of the closest allies in the world both militarily and economically. Australia still imposes trade restrictions on the USA because it wants to protect its local industries and because some of the products made over there don't comply with local regulations, and the US has trade restrictions on Australia for the same reasons. If however the USA said that NFL is more hardcore than NRL then Australia could impose economic sanctions on the country until they formally retract their statement. Sanctions range in severity from not buying certain goods from a country, all the way up to blocking all of their imports, exports, and financial flows, and seizing foreign assets while encouraging allies to do the same. The goal is to cripple the country's economy so they either lose their ability to continue fighting a war, they're forced to comply with the terms of the countries imposing the sanctions, or their own people get sick of their declining quality of life and force change from within. Sanctions are much more effective when the country or group of countries imposing them are larger trading blocks than the countries that are the target of the sanctions. In the example where Australia imposes sanctions on the USA, they probably wouldn't even notice because Australia is such a comparatively insignificant economy. But if the USA imposed sanctions on Australia, then it would probably cripple our economy. Sanctions from the US tend to be a lot scarier for the targeted countries. They can block access to payment networks and render foreign reserves practically useless because they control the world's reserve currency. The USA also has a lot of influence over other countries that follow its guidance on sanctions to implement their own. This is what happened with the Russian invasion of Ukraine, and today Russian companies, Russian individuals, and Russia itself is sanctioned by dozens of countries. Iran has also been the victim of varying degrees of sanctions pushed by the USA, basically since the beginning of the new government following the revolution of 1979. 7 months after the establishment of the new state, the Iranian hostage crisis unfolded where 52 US and Canadian diplomats and citizens were captured after the embassy in Tehran was taken over. In response to this aggression, the state was placed under a trade embargo and 8.1 billion dollars worth of foreign assets were seized. The sanctions were an effective tool because lifting them was a key part of the negotiations that eventually got the hostages freed 444 days after they were first captured. Since then, Iran has had sanctions lifted and placed back on it too many times to list. But the general trend is that the country has become more and more cut off from the west as time goes on. Iran continues to attract sanctions because organizations like the Bonyads continue to provide funding and support to internationally restricted groups. The government has also broken agreements with the west over the development of nuclear weapons and ballistic missiles, and select individuals and groups in the country have been selectively targeted for human rights abuses. Again on this channel we focus on the economics, not the geopolitics, so we're not going to get into the debate of if these sanctions were justified, but what isn't up for debate is how they have effectively ruined any chance of the Iranian economy ever living up to its full potential. Before the Russian invasion of Ukraine, Iran was the most heavily sanctioned country in the world, beating out even North Korea. Sanctions have had a profound effect on the Iranian economy. Its output figures almost tell the story of sanctions being eased and heightened over time as industries in the country are allowed to grow, only to be cut off from the outside world over and over again. A large part of what has made the modern world so wealthy today is global trade and the exchange of knowledge and technology. Allowing countries to specialize in what they do best and giving them access to modern equipment without requiring them to build it from scratch has made everybody on average much richer. Getting cut off from this exchange will eventually push a country back to running its economy like it's the 1920s. A lot of debate has been had about the effectiveness of sanctions in countries like Russia, but purely from the perspective of how much economic damage they do, it's clear by looking at countries like Iran that they do work, especially over a long enough time period. The most disappointing part of all of this is that Iran could be a true economic superpower. In 2012 Iran had a GDP of $644 billion, which was almost 6 times what it was a decade prior. Now a decade on, it's GDP is half that because of all the problems we've explored in this video. But with proper economic management, there is no reason that it wouldn't have kept growing at that rate for a long time. Between 2000 and 2012 it was still sanctioned by the west, but the controls were slowly easing in exchange for agreements around nuclear development and other oversights. Business was developing, but it still had challenges, primarily from corruption, an inefficient banking system, and unfair competition from state-owned companies and bonyads. Labor was getting utilized more effectively, but even still more than half of the potential workforce was massively underrepresented because it's extremely hard for women to get a job in Iran. This is especially tragic because most of the workforce, including women, are very educated in the country and could be extremely productive if given the opportunity. Even with all of these challenges still in place, Iran peaked at being the 15th largest economy in the world. It's now number 41. Its natural resource wealth combined with its talented young workforce and the desire from investors all over the world to build out its economy means that it could easily have a per capita output in line with regional peers like the UAE or Qatar. Given that it's a much larger and more populous economy overall, if it was able to achieve that level of output on an individual level, it could have a GDP as high as 5 or 6 trillion dollars. What economic success looks like really depends on who is making the decisions. In most countries, more output means more prosperity for everyone, more jobs, more goods and services. The push for endless growth has its problems, but everybody sharing in a larger economic pie is normally a good thing overall. Economic success to the leaders of authoritarian regimes doesn't take much account of the average person's quality of life. Economic success to them is maintaining the status quo and making their people better off can sometimes even run counter to that goal. Okay, now it's time to put Iran on the economics explained national leaderboard. Starting as always with size. As mentioned, Iran has a GDP of 360 billion US dollars, currently making it the 41st largest economy in the world. It has all of the factors of production to make it much larger, but for now it gets a 6 out of 10. That underwhelming GDP is spread over a population of 86 million people, making it the 17th most populous country in the world. It also means each individual only contributes $4,091 to total output, less than half the global average. Despite all of its advantages, it's one of the poorest countries in the world, and gets a 2 out of 10. Stability and confidence is obviously terrible. The country is continuously the target of sanctions and any investments that can be made in Iran are just as likely to get seized or out-competed by a semi-government entity that doesn't have to play by the same rules as everyone else. Iran is also heavily reliant on its natural resource wealth and has done basically nothing to diversify its international revenues. The country gets a 1 out of 10. The only way it could score lower is if it was actively engaged in a civil or territorial war. Growth has also been disappointing. From the beginning of the new millennium up until 2012, Iran was one of the fastest-growing economies in the world. But since then, it's regressed, and it's now half the size it was a decade ago. It gets a 0 out of 10. Finally, industry. Due to sanctions, bonyads, and an overall poor business environment, it's very hard for any companies to operate effectively in Iran. The country does have a large service sector, but that doesn't mean much by itself when it's still ultimately dependent on selling oil and other natural resources. Fortunately if there was any country that could get away with relying on natural resource wealth it would be Iran because it has so much of it. So the country gets a 5 out of 10. Altogether that gives Iran an average score of 2.8 out of 10, which puts it all the way down here on the Economics Explained National Leaderboard. Thank you.

Iran's Economic Potential and Challenges

What has prevented Iran, teeming with natural resources and a young, educated population, from becoming a world-leading economy? How did it go from rapid growth to economic failure, and why is it still unable to fulfil it's potential?

This video was made possible by our Patreon community! ❤️
See new videos early, participate in exclusive Q&As, and more!
➡️ https://www.patreon.com/EconomicsExplained

▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀
The Economic Explained team uses Statista for conducting our research. Check out their YouTube channel: https://www.youtube.com/channel/UCuj2Bne141HGmYFsbkfnbqw

Enjoyed the video? Comment below! 💬
⭑ Enjoyed? Hit the like button! 👍

Check out our second channel Economics Explained Essentials → https://www.youtube.com/@economicsexplainedessentia551

✉️ Business Enquiries → hello@economicsexplained.com

🎧 Listen to EE on Spotify! 👉 https://open.spotify.com/show/5TFVUEJnYLOCmmfaDNHaM2
Also on Apple Podcasts or anywhere else you listen!
Follow EE on social media:
Twitter 🐦 → https://twitter.com/EconomicsEx
Facebook → https://www.facebook.com/EconomicsEx
Instagram → https://www.instagram.com/economicsexplained/
TikTok → https://www.tiktok.com/@economicsexplained

#EconomicsExplained #EconomyofIran #FailedEconomy

▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀

ECONOMICS EXPLAINED IS MADE POSSIBLE BY OUR PATREON COMMUNITY 👊🙏
Support EE by becoming a Patron today! 👉 https://www.patreon.com/EconomicsExplained

The video you’re watching right now would not exist without the monthly support provided by our generous Patrons:

MIDDLE CLASS PATRONS
Andrew, Petronio, Istvan, Donald, David, Patrick, Demo, Arjan, Andrey, Ash, Jim, Michael, Shane, Eric, Simon, Stefano, Marton, Tahsin Likes Chips, Alex, Elisabeth, Empyre18, Seth, Dragan, Tenebrion, Jason, Aimee, Jamie, Rick, John, Leah, Bacongravy, Klaus, Ps0Fa, Abel, Adam, Brian, Johann, Leonid, Thomas, Nicholas, TParkin, Kim, Ted, Joshua, John, Joe, Wees, Justin, Karan, Alex, roGER, Marton, Randy, Liubov, Jeff, Michael, Long, hunter, Craig, Kent, Stefan, ZETTAwith3TEEES, Zac, Jacqueline, Roman~1, Chris, Wesley, Robert, David, Anthony, Arend Peter, Daniel, Kamil, Dodd, Leo, How long can a profile name be... this long... Wow, this is longer than I would have expected. Good lord, the letters! Secunda!, Hugh, David, Will, Kheng Lai, Scott, Jane, Zachary, Michael, Steffen, skuerzo, Siegfried, PM, Jack, michael, Jonathan, Franklin, Trevor, Marcel, Daniel, Bradley, Connor, John, Kevin, Travis, Matthew, Andrew, Zachary, AZbytes, Johannes, Reuben, Nigel, Jacob, AB3, Sridev, Matt, Norrawed, Victor, Pedro, Michael, John, Rimvydas, George, John, Shivan, Caleb, Brenton, Hayden.

UPPER MIDDLE CLASS PATRONS
Anthony, Cy 'kkm' K'Nelson, Stephanie, JKH, Grégoire, Mikhail1, Laor, Maximiliano, Pineapples&bricks, Peter, std__mpa, Bac, Michael, Bob, Frank, David, Jay, Ryan, Sophie, Brett, Jill, Nathan, Post Apocalyptic In Missouri, Constanza, Kib, Forodon, Daniel, Paul, Igor, Mcfeld, Wendover Productions, Andrew, Morgon, Igor.

UPPER CLASS PATRONS 
Jeromy Johnson, Juan Benet

This is Iran, a country that could be 1 of the most prosperous and powerful economies in the world in less than a decade, if it

Iran is home to 88 million people that are relatively well educated, young and ready to work.

The country also has immense natural resource wealth.

As much as 5% of the world's extractable metals are in Iran.

It has the second largest reserves of natural gas in the world, only behind Russia,

and more oil than the UAE and Qatar combined.

Iran is also in a perfect geographical position between Asia and Europe with easy access to the world's oceans.

It could also build out its infrastructure very quickly.

of its problems now, people are still keen to invest into the country, which has been called the last untapped emerging market.

To grow, economies need the factors of production, land, labour and capital, and Iran has them all in droves.

A massive young skill population, some of the richest and best situated land in the world, and endless access to capital to build out industries quickly.

If Iran fully realised its potential, it could have an output that rivaled Germany, Japan, or even the United States and China.

If that sounds crazy, it might not by the end of this video.

Despite all of its advantages, it only has a GDP of $360 billion, which works out to $4, 091 on a per capita basis.

That puts it in line with Sri Lanka and Lebanon, which are essentially failed states with none of the immense natural resource advantages that Iran has.

Of course, Iran is led by an authoritarian government that has shown little regard for the well-being of their people, but even if they didn't care about the average person, this is still an economic failure because they aren't building wealth for themselves to hoard at the top.

So, how did Iran go from 1 of the fastest-growing economies in the world to the economic failure it is today?

Will it ever be able to live up to its full economic potential?

And finally, why might its leadership not want it to?

that, we can put Iran on the Economics Explained National Leaderboard.

This episode of Economics Explained is sponsored by our patrons.

Our patreon offering just got better with new benefits that you won't want

For example, there is an Economics Explained discord, getting access to

our scripts, or even sponsoring the Economics Explained National Leaderboard.

Head over to our patreon page linked in the description and join our community.

The economy of Iran as we know it today really got started in 1979 after the Iranian revolution deposed the monarchy and established the Islamic Republic of Iran.

The revolution was quite a surprise to most of the world, largely because Iran was doing alright for itself before the conflict started.

The economy was growing and people were becoming wealthier, there weren't any defeats in war or financial crises or any of the usual motivators for a revolution.

Of course, as we try to make as clear as possible, as often as possible, our area of expertise is in the economics here at AE, not in the geopolitics.

But it could have been a really interesting case study, had the country not gone to war with Iraq just a year later.

Between 1980 and 1988, the economy of Iran was fully dedicated to a conflict with its neighbour.

Almost all of its industries were nationalised and the new government went even further than that.

The assets of Iranian citizens who didn't align themselves with the ideals of

the government were confiscated and given to something called

a bonyad, which were organisations that were established late in the rule of the Iranian monarchy and were kept by the new government after the revolution.

Bonyads are independent trusts that in theory work to provide social services to the poorest people in Iran.

In practice, they are huge organisations that run a large share of Iran's industries, get funding from the government, don't need to pay taxes, and don't even need to keep any financial records.

They also directly report only to the Supreme Leader of Iran, which gives Iran's head of state direct control over organizations which contribute 20% of the country's output, employ 10% of its workforce, and can effectively do anything without leaving a trace.

From the beginning these bonyads just became tools of corruption.

Most of the businesses they run are losing money, but that doesn't matter because they help to keep control over the population.

If 10% of the workforce is directly dependent on these organizations, they are not going to speak out against the government that has unchecked control over them.

the bonyads can channel money towards officials through lucrative contracts and jobs that never even need to be reported.

This is a good way to keep the Iranian elite happy with the current government.

Bonyads can also be used as a threat to keep the few private businesses that exist in Iran in line.

Since the businesses that the bonyads operate don't need

they can easily outcompete private businesses in whatever industries they operate in.

So if private businesses want to keep on making money, they need to

These operations have been terrible for the Iranian economy.

the wasted money and open corruption, it has made investment into Iran very unattractive because foreign investors will either be afraid of their investments being nationalised and claimed by

bonyads that don't have to play by the same rules.

This is a major problem for their economy because Iran needs investment to build out other industries besides fossil fuels.

Today oil accounts for 69% of its exports and petrochemical products are another 20%.

Behind that are fruits, nuts and carpets, which are not going to make it an advanced economy.

Other oil-rich countries in the region, even ones with similarly authoritarian governments are trying as hard as they can to grow alternative industries by encouraging business activity from abroad.

The UAE has developed massive cities and transport infrastructure

to attract tourists and businesses from all over the world.

Qatar spent billions of dollars hosting the world cup to show off the progress

it had made to varying degrees of success.

And even Saudi Arabia, a country with its own geopolitical complications,

is investing lots of money into megaprojects that are probably dumb from an engineering and city planning point of view, but will help the country attract lots of businesses all wanting to play a small part in what is really just a massive stimulus effort.

Iran on the other hand is perfectly content to

keep its anti-competitive bonyards in place even though

it will hurt its economy because the decision makers don't really care.

The small group of Iranian elites that benefit from the absolute control the government has over the country are all wealthy enough for wider economic growth to not really matter.

A lot of their families don't even live in the country, so the economy doesn't matter to them beyond how much money they can get out of

A wealthier population has more capacity for political activism.

A poor population is also less likely to demand higher wages from the state-run oil corporations and bonyads which could eat into their profits.

Because of this there is little incentive to pursue economic development if it comes at

the expense of the control that they have over 1 of the biggest oil suppliers in the world.

Even if economists remove the influence of self-interest corruption, a lot of these systems are heavily intertwined with the country's theocracy.

The fact that they also employ a lot of people means that despite their problems, they remain quite popular in the country itself.

Bonyads are also semi-religious organizations, and in

between funneling money around they do actually do some good for the poor, but they also get

the country into a lot of trouble as well.

Because a lot of these organisations have very little oversight and religious clerics amongst their top ranks, they have time and time again been caught financing internationally targeted military groups.

And that leads us onto the external forces holding back the Iranian economy.

Sanctions Sanctions are economic restrictions placed on trade and financial flows to countries or organisations for political, military and social reasons.

It's the motivation that really differentiates sanctions from regular trade restrictions.

There are lots of trade restrictions between Australia and

closest allies in the world both militarily and economically.

Australia still imposes trade restrictions on the USA because it wants to protect its local industries and because some of the products made over there don't comply with local regulations, and the US has trade restrictions on Australia for the same reasons.

If however the USA said that NFL is more hardcore than NRL then Australia could impose economic sanctions on the country until they formally retract their statement.

Sanctions range in severity from not buying certain goods from a country, all the way up to blocking all of their imports, exports, and financial flows, and seizing foreign assets while encouraging allies to do the same.

The goal is to cripple the country's economy so they either lose their ability to continue fighting a war, they're forced to comply with the terms of the countries imposing the sanctions, or their own people get sick of their declining quality of life and force change from within.

Sanctions are much more effective when the country or group of countries imposing them are larger trading blocks than the countries that are the target of the sanctions.

In the example where Australia imposes sanctions on the USA, they probably wouldn't even notice because Australia is such a comparatively insignificant economy.

But if the USA imposed sanctions on Australia, then it would probably cripple our economy.

Sanctions from the US tend to be a lot scarier for the targeted countries.

They can block access to payment networks and render foreign reserves practically useless because they control

of influence over other countries that follow its guidance on sanctions to implement their own.

This is what happened with the Russian invasion of Ukraine, and today Russian companies, Russian individuals, and Russia itself is sanctioned by dozens of countries.

Iran has also been the victim of varying degrees of sanctions pushed by

the USA, basically since the beginning of

the new government following the revolution of

of the new state, the Iranian hostage crisis unfolded where 52 US and Canadian diplomats and citizens were captured after the embassy in Tehran was taken over.

In response to this aggression, the state was placed under a trade embargo and 8.1 billion dollars worth of foreign assets

an effective tool because lifting them was a key part of the negotiations that eventually got the hostages freed

Since then, Iran has had sanctions lifted and placed back on it too many times to list.

But the general trend is that the country has become more and more cut off from the west as time goes on.

Iran continues to attract sanctions because organizations like the Bonyads continue to provide funding and support to internationally restricted groups.

The government has also broken agreements with the west over the development of nuclear weapons

and ballistic missiles, and select individuals and groups in

the country have been selectively targeted for human rights abuses.

this channel we focus on the economics, not the geopolitics, so we're not going to get into the debate of if these sanctions were justified, but what isn't up

for debate is how they have effectively ruined any chance of the Iranian economy ever living up to its full potential.

Before the Russian invasion of Ukraine, Iran was the most heavily sanctioned country in the world, beating out even North Korea.

Sanctions have had a profound effect on the Iranian economy.

Its output figures almost tell the story of sanctions being eased and heightened over time as industries in the country are allowed to grow, only to be cut off from the outside world over and over again.

A large part of what has made the modern world so wealthy today is global trade and the exchange of knowledge and

Allowing countries to specialize in what they do best and giving them access

to modern equipment without requiring them to build it from scratch has made everybody on average much richer.

Getting cut off from this exchange will eventually push a country back to running its economy like it's the 1920s.

A lot of debate has been had about the effectiveness of sanctions in countries like Russia, but purely from the perspective of how much economic damage they do, it's clear by looking at countries like Iran that they do work, especially over a long enough time period.

all of this is that Iran could be a true economic superpower.

In 2012 Iran had a GDP of $644 billion, which was almost 6 times what it was a decade prior.

Now a decade on, it's GDP is half that because of all the problems we've explored in this video.

But with proper economic management, there is no reason that it wouldn't have kept growing at that rate for a long time.

Between 2000 and 2012 it was still sanctioned by the west, but the controls were slowly easing in exchange for agreements around nuclear development and other oversights.

Business was developing, but it still had challenges, primarily from corruption, an inefficient banking system, and unfair competition from state-owned companies

Labor was getting utilized more effectively, but even still more than half

of the potential workforce was massively underrepresented because it's extremely hard for women to get a job in Iran.

This is especially tragic because most of the workforce, including women, are very educated in the country and could be extremely productive if given the opportunity.

of these challenges still in place, Iran peaked at

being the 15th largest economy in the world.

Its natural resource wealth combined with its talented young workforce and the desire from investors all over the world to build out its economy means that it could easily have a per capita output in line with regional peers like the UAE or Qatar.

Given that it's a much larger and more populous economy overall, if it was able to achieve that level of output on an individual level, it could have a GDP as high as 5 or 6 trillion dollars.

What economic success looks like really depends on who is making the decisions.

In most countries, more output means more prosperity for everyone, more jobs, more goods and services.

The push for endless growth has its problems, but everybody sharing in a larger economic pie is normally a good thing overall.

Economic success to the leaders of authoritarian regimes doesn't take much account of the average person's quality of life.

and making their people better off can sometimes even run counter to that goal.

Okay, now it's time to put Iran on the economics explained national leaderboard.

As mentioned, Iran has a GDP of 360 billion US dollars, currently making it the 41st largest economy in the world.

It has all of the factors of production to make it much larger, but for now it gets a 6 out of 10.

That underwhelming GDP is spread over a population of 86 million people, making it the 17th

It also means each individual only contributes $4, 091 to total output, less than half the global average.

Despite all of its advantages, it's 1 of the poorest countries in

Stability and confidence is obviously terrible.

of sanctions and any investments that can

be made in Iran are just as likely to get seized or out-competed by

a semi-government entity that doesn't have to play by

Iran is also heavily reliant on its natural resource wealth and has done basically nothing to diversify its international revenues.

The only way it could score lower is if it was actively engaged in a civil or territorial war.

From the beginning of the new millennium up until 2012, Iran was 1 of the fastest-growing economies in the world.

But since then, it's regressed, and it's now half the size it was a decade ago.

Due to sanctions, bonyads, and an overall poor business environment, it's very hard for any companies to operate effectively in Iran.

The country does have a large service sector, but that doesn't mean much by itself when it's still ultimately dependent on selling oil and other natural resources.

Fortunately if there was any country that could get away with relying on natural resource wealth it would be Iran because it has so much of it.

Altogether that gives Iran an average score of 2.8 out of 10, which puts it all the way down here on the Economics Explained National Leaderboard.


Speaker 0: This is Iran, a country that could be 1 of the most prosperous and powerful economies in the world in less than a decade, if it

Speaker 1: was given the chance. Iran is home to 88 million people that are relatively well educated, young and ready to work. The country also has immense natural resource wealth. As much as 5% of the world's extractable metals are in Iran. It has the second largest reserves of natural gas in the world, only behind Russia,

Speaker 0: and more oil than the UAE and Qatar combined.

Speaker 1: Iran is also in a perfect geographical position between Asia and Europe with easy access to the world's oceans.

Speaker 0: It could also build out its infrastructure very quickly. Even despite all

Speaker 1: of its problems now, people are still keen to invest into the country, which has been called the last untapped emerging market. To grow, economies need the factors of production, land, labour and capital, and Iran has them all in droves. A massive young skill population, some of the richest and best situated land in the world, and endless access to capital to build out industries quickly. If Iran fully realised its potential, it could have an output that rivaled Germany, Japan, or even the United States and China.

Speaker 0: If that sounds crazy, it might not by the end of this video. Of course, today Iran is

Speaker 1: a long way from that level of success. Despite all of its advantages, it only has a GDP of $360 billion, which works out to $4, 091 on a per capita basis. That puts it in line with Sri Lanka and Lebanon, which are essentially failed states with none of the immense natural resource advantages that Iran has. Of course, Iran is led by an authoritarian government that has shown little regard for the well-being of their people, but even if they didn't care about the average person, this is still an economic failure because they aren't building wealth for themselves to hoard at the top. So, how did Iran go from 1 of the fastest-growing economies in the world to the economic failure it is today?

Will it ever be able to live up to its full economic potential? And finally, why might its leadership not want it to?

Speaker 0: Once we've done all of

Speaker 1: that, we can put Iran on the Economics Explained National Leaderboard. This episode of Economics Explained is sponsored by our patrons. Our patreon offering just got better with new benefits that you won't want

Speaker 0: to miss out on. For example, there is an Economics Explained discord, getting access to

Speaker 1: our scripts, or even sponsoring the Economics Explained National Leaderboard.

Speaker 0: Head over to our patreon page linked in the description and join our community.

Speaker 1: The economy of Iran as we know it today really got started in 1979 after the Iranian revolution deposed the monarchy and established the Islamic Republic of Iran. The revolution was quite a surprise to most of the world, largely because Iran was doing alright for itself before the conflict started. The economy was growing and people were becoming wealthier, there weren't any defeats in war or financial crises or any of the usual motivators for a revolution. Of course, as we try to make as clear as possible, as often as possible, our area of expertise is in the economics here at AE, not in the geopolitics. But it could have been a really interesting case study, had the country not gone to war with Iraq just a year later.

Between 1980 and 1988, the economy of Iran was fully dedicated to a conflict with its neighbour. Almost all of its industries were nationalised and the new government went even further than that. The assets of Iranian citizens who didn't align themselves with the ideals of

Speaker 0: the government were confiscated and given to something called

Speaker 1: a bonyad, which were organisations that were established late in the rule of the Iranian monarchy and were kept by the new government after the revolution. Bonyads are independent trusts that in theory work to provide social services to the poorest people in Iran. In practice, they are huge organisations that run a large share of Iran's industries, get funding from the government, don't need to pay taxes, and don't even need to keep any financial records. They also directly report only to the Supreme Leader of Iran, which gives Iran's head of state direct control over organizations which contribute 20% of the country's output, employ 10% of its workforce, and can effectively do anything without leaving a trace. From the beginning these bonyads just became tools of corruption.

Speaker 0: Most of the businesses they run are losing money, but that doesn't matter because they help to keep control over the population.

Speaker 1: If 10% of the workforce is directly dependent on these organizations, they are not going to speak out against the government that has unchecked control over them.

Speaker 0: At higher levels of influence,

Speaker 1: the bonyads can channel money towards officials through lucrative contracts and jobs that never even need to be reported. This is a good way to keep the Iranian elite happy with the current government. Bonyads can also be used as a threat to keep the few private businesses that exist in Iran in line. Since the businesses that the bonyads operate don't need

Speaker 0: to pay tax or even make money,

Speaker 1: they can easily outcompete private businesses in whatever industries they operate in. So if private businesses want to keep on making money, they need to

Speaker 0: keep the government happy. These operations have been terrible for the Iranian economy. Even outside of

Speaker 1: the wasted money and open corruption, it has made investment into Iran very unattractive because foreign investors will either be afraid of their investments being nationalised and claimed by

Speaker 0: the state, or out-competed by

Speaker 1: bonyads that don't have to play by the same rules. This is a major problem for their economy because Iran needs investment to build out other industries besides fossil fuels.

Speaker 0: Today oil accounts for 69% of its exports and petrochemical products are another 20%. Behind that are fruits, nuts and carpets, which are not going to make it an advanced economy.

Speaker 1: Other oil-rich countries in the region, even ones with similarly authoritarian governments are trying as hard as they can to grow alternative industries by encouraging business activity from abroad.

Speaker 0: The UAE has developed massive cities and transport infrastructure

Speaker 1: to attract tourists and businesses from all over the world. Qatar spent billions of dollars hosting the world cup to show off the progress

Speaker 0: it had made to varying degrees of success. And even Saudi Arabia, a country with its own geopolitical complications,

Speaker 1: is investing lots of money into megaprojects that are probably dumb from an engineering and city planning point of view, but will help the country attract lots of businesses all wanting to play a small part in what is really just a massive stimulus effort. Iran on the other hand is perfectly content to

Speaker 0: keep its anti-competitive bonyards in place even though

Speaker 1: it will hurt its economy because the decision makers don't really care. The small group of Iranian elites that benefit from the absolute control the government has over the country are all wealthy enough for wider economic growth to not really matter.

Speaker 0: A lot of their families don't even live in the country, so the economy doesn't matter to them beyond how much money they can get out of

Speaker 1: the corrupt systems in place.

Speaker 0: A wealthier population has more capacity for political activism.

Speaker 1: A poor population is also less likely to demand higher wages from the state-run oil corporations and bonyads which could eat into their profits.

Speaker 0: Because of this there is little incentive to pursue economic development if it comes at

Speaker 1: the expense of the control that they have over 1 of the biggest oil suppliers in the world. Even if economists remove the influence of self-interest corruption, a lot of these systems are heavily intertwined with the country's theocracy. The fact that they also employ a lot of people means that despite their problems, they remain quite popular in the country itself. Bonyads are also semi-religious organizations, and in

Speaker 0: between funneling money around they do actually do some good for the poor, but they also get

Speaker 1: the country into a lot of trouble as well. Because a lot of these organisations have very little oversight and religious clerics amongst their top ranks, they have time and time again been caught financing internationally targeted military groups. And that leads us onto the external forces holding back the Iranian economy. Sanctions Sanctions are economic restrictions placed on trade and financial flows to countries or organisations for political, military and social reasons. It's the motivation that really differentiates sanctions from regular trade restrictions.

There are lots of trade restrictions between Australia and

Speaker 0: the USA, but they are some of the

Speaker 1: closest allies in the world both militarily and economically. Australia still imposes trade restrictions on the USA because it wants to protect its local industries and because some of the products made over there don't comply with local regulations, and the US has trade restrictions on Australia for the same reasons. If however the USA said that NFL is more hardcore than NRL then Australia could impose economic sanctions on the country until they formally retract their statement. Sanctions range in severity from not buying certain goods from a country, all the way up to blocking all of their imports, exports, and financial flows, and seizing foreign assets while encouraging allies to do the same. The goal is to cripple the country's economy so they either lose their ability to continue fighting a war, they're forced to comply with the terms of the countries imposing the sanctions, or their own people get sick of their declining quality of life and force change from within.

Sanctions are much more effective when the country or group of countries imposing them are larger trading blocks than the countries that are the target of the sanctions. In the example where Australia imposes sanctions on the USA, they probably wouldn't even notice because Australia is such a comparatively insignificant economy. But if the USA imposed sanctions on Australia, then it would probably cripple our economy. Sanctions from the US tend to be a lot scarier for the targeted countries. They can block access to payment networks and render foreign reserves practically useless because they control

Speaker 0: the world's reserve currency. The USA also has a lot

Speaker 1: of influence over other countries that follow its guidance on sanctions to implement their own. This is what happened with the Russian invasion of Ukraine, and today Russian companies, Russian individuals, and Russia itself is sanctioned by dozens of countries. Iran has also been the victim of varying degrees of sanctions pushed by

Speaker 0: the USA, basically since the beginning of

Speaker 1: the new government following the revolution of

Speaker 0: 1979. 7 months after the establishment

Speaker 1: of the new state, the Iranian hostage crisis unfolded where 52 US and Canadian diplomats and citizens were captured after the embassy in Tehran was taken over. In response to this aggression, the state was placed under a trade embargo and 8.1 billion dollars worth of foreign assets

Speaker 0: were seized. The sanctions were

Speaker 1: an effective tool because lifting them was a key part of the negotiations that eventually got the hostages freed

Speaker 0: 444

Speaker 1: days after they were first captured. Since then, Iran has had sanctions lifted and placed back on it too many times to list. But the general trend is that the country has become more and more cut off from the west as time goes on. Iran continues to attract sanctions because organizations like the Bonyads continue to provide funding and support to internationally restricted groups. The government has also broken agreements with the west over the development of nuclear weapons

Speaker 0: and ballistic missiles, and select individuals and groups in

Speaker 1: the country have been selectively targeted for human rights abuses. Again on

Speaker 0: this channel we focus on the economics, not the geopolitics, so we're not going to get into the debate of if these sanctions were justified, but what isn't up

Speaker 1: for debate is how they have effectively ruined any chance of the Iranian economy ever living up to its full potential. Before the Russian invasion of Ukraine, Iran was the most heavily sanctioned country in the world, beating out even North Korea. Sanctions have had a profound effect on the Iranian economy. Its output figures almost tell the story of sanctions being eased and heightened over time as industries in the country are allowed to grow, only to be cut off from the outside world over and over again. A large part of what has made the modern world so wealthy today is global trade and the exchange of knowledge and

Speaker 0: technology. Allowing countries to specialize in what they do best and giving them access

Speaker 1: to modern equipment without requiring them to build it from scratch has made everybody on average much richer. Getting cut off from this exchange will eventually push a country back to running its economy like it's the 1920s. A lot of debate has been had about the effectiveness of sanctions in countries like Russia, but purely from the perspective of how much economic damage they do, it's clear by looking at countries like Iran that they do work, especially over a long enough time period.

Speaker 0: The most disappointing part of

Speaker 1: all of this is that Iran could be a true economic superpower. In 2012 Iran had a GDP of $644 billion, which was almost 6 times what it was a decade prior. Now a decade on, it's GDP is half that because of all the problems we've explored in this video. But with proper economic management, there is no reason that it wouldn't have kept growing at that rate for a long time. Between 2000 and 2012 it was still sanctioned by the west, but the controls were slowly easing in exchange for agreements around nuclear development and other oversights.

Business was developing, but it still had challenges, primarily from corruption, an inefficient banking system, and unfair competition from state-owned companies

Speaker 0: and bonyads. Labor was getting utilized more effectively, but even still more than half

Speaker 1: of the potential workforce was massively underrepresented because it's extremely hard for women to get a job in Iran. This is especially tragic because most of the workforce, including women, are very educated in the country and could be extremely productive if given the opportunity. Even with all

Speaker 0: of these challenges still in place, Iran peaked at

Speaker 1: being the 15th largest economy in the world. It's now number 41. Its natural resource wealth combined with its talented young workforce and the desire from investors all over the world to build out its economy means that it could easily have a per capita output in line with regional peers like the UAE or Qatar. Given that it's a much larger and more populous economy overall, if it was able to achieve that level of output on an individual level, it could have a GDP as high as 5 or 6 trillion dollars. What economic success looks like really depends on who is making the decisions.

In most countries, more output means more prosperity for everyone, more jobs, more goods and services. The push for endless growth has its problems, but everybody sharing in a larger economic pie is normally a good thing overall. Economic success to the leaders of authoritarian regimes doesn't take much account of the average person's quality of life. Economic success to

Speaker 0: them is maintaining the status quo

Speaker 1: and making their people better off can sometimes even run counter to that goal. Okay, now it's time to put Iran on the economics explained national leaderboard. Starting as always with size. As mentioned, Iran has a GDP of 360 billion US dollars, currently making it the 41st largest economy in the world.

Speaker 0: It has all of the factors of production to make it much larger, but for now it gets a 6 out of 10. That underwhelming GDP is spread over a population of 86 million people, making it the 17th

Speaker 1: most populous country in the world. It also means each individual only contributes $4, 091 to total output, less than half the global average. Despite all of its advantages, it's 1 of the poorest countries in

Speaker 0: the world, and gets a 2

Speaker 1: out of 10. Stability and confidence is obviously terrible. The country is continuously the target

Speaker 0: of sanctions and any investments that can

Speaker 1: be made in Iran are just as likely to get seized or out-competed by

Speaker 0: a semi-government entity that doesn't have to play by

Speaker 1: the same rules as everyone else. Iran is also heavily reliant on its natural resource wealth and has done basically nothing to diversify its international revenues. The country gets a 1 out of

Speaker 0: 10.

Speaker 1: The only way it could score lower is if it was actively engaged in a civil or territorial war. Growth has also been disappointing. From the beginning of the new millennium up until 2012, Iran was 1 of the fastest-growing economies in the world. But since then, it's regressed, and it's now half the size it was a decade ago. It gets a 0 out of 10.

Finally, industry. Due to sanctions, bonyads, and an overall poor business environment, it's very hard for any companies to operate effectively in Iran. The country does have a large service sector, but that doesn't mean much by itself when it's still ultimately dependent on selling oil and other natural resources. Fortunately if there was any country that could get away with relying on natural resource wealth it would be Iran because it has so much of it. So the country gets a 5 out of 10.

Altogether that gives Iran an average score of 2.8 out of 10, which puts it all the way down here on the Economics Explained National Leaderboard.

Speaker 0: Thank you.

See all Economics Explained transcripts on Youtube

Iran's Economy Could Be Huge, But They Don't Care | Economics Explained