Background: Iran became an Islamic Republic after a popular uprising overthrew the regime of the shah in 1979. The Shia clergy assumed control of the state and reversed the shah's pro-Western stance. As vali-e-faqih (the supreme Islamic jurisprudent), Ayatollah Ruhollah Khomeini became the supreme religious and political leader. From 1980 to 1988 the country was at war with Iraq. Hashemi Rafsanjani held the post for two terms from 1989 to 1997, during which time attempts to introduce economic reforms were frustrated by internal opposition. Mohammed Khatami, who was first elected president in 1997, tried to introduce social and political reforms, backed by a reformist Majlis (parliament). However, the conservative establishment blocked these efforts, and in 2004 hardline conservatives won control of parliament. In 2005 Mahmoud Ahmadinejad, a populist conservative, was elected to the presidency.
Political structure: Iran is an Islamic Republic as defined by its constitution. The president is elected every four years by popular vote, although all candidates must be vetted by the Guardian Council. Superimposed on this republican constitutional structure are several unique Islamic features: the vali-e-faqih exercises considerable power over the government, and the conservative Guardian Council approves all legislation to ensure that it complies with Islamic law.
Policy issues: Iran's five-year economic plans have emphasised a gradual move towards a market-orientated economy, but political and social concerns, and external debt problems, have hampered progress. Faster progress, however, was made under the third five-year plan (2000-04), which advocated a more ambitious programme of liberalisation, diversification and privatisation. The resolution of Iran's external debt problems eased the policymaking environment and facilitated the unification of the exchange rate in 2002. However, the conservative-dominated Majlis and the government of Mr Ahmadinejad are unsympathetic to reform.
Taxation: Iranian tax laws are complex and have been applied inconsistently. The government has lowered unified corporate tax rates and aims to simplify tax administration, but the process is slow, and foreign firms are likely to continue to face some uncertainty when assessing their tax liabilities.
Foreign trade: Oil earnings comprise over 80% of export revenue. High oil prices since 2000 have seen Iran record large trade surpluses, even though import spending has risen quickly, as strong foreign-exchange earnings and the easing of the debt-repayment schedule have allowed Bank Markazi (the central bank) to relax its import compression programme.
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History in brief
The first Iranian state was the Persian empire, which rose in the first millennium BC and was for centuries the largest in the world. It was conquered by Alexander the Great in 330 BC, and later overwhelmed by Arab Muslim conquerors in the 7th century AD Iran became part of the Abbasid caliphate and its culture was both Islamised and itself exerted an influence on the rest of Islam. The Persian language and a distinct Iranian culture survived, to be reasserted and reinvented by most of the region’s rulers.
In the 10th and 11th centuries, the caliphs lost effective control of Iran to Persian and Turkish rulers, and in the 13th century the region was conquered by the Mongols, who themselves later converted to Islam. Mongol control diminished, and by the 16th century the Safavids, a powerful family from the north-west, emerged to unify Iran for the first time in the Islamic era under Ismail I. He proclaimed himself shah, and made Shia Islam Iran’s state religion.
Iran was weakened by wars in the 17th and 18th centuries and new dynasties followed the Savafids, notably the Turkic Qajars. New rivals emerged in Russia—to whom Iran lost much of the Caucasus and central Asia in 19th-century wars—and Britain, which sought a buffer between expanding Russia and nearby India. The two European powers came to dominate Iran. By tacit agreement, Russia took a sphere of influence in the north and Britain in the south, and each power interfered in local politics and forced trade concessions on its part of Iran. Large oil deposits were discovered in 1908, and when the monopolist Anglo-Persian Oil Company was formed in 1909, Britain controlled a majority share.
A popular desire for accountable government led to the creation of a constitutional monarchy and a parliament in 1906. In 1921, Reza Pahlavi, an army officer, supported a coup with his troops, and in 1925 he became shah. He sought to modernise the economy and society, encouraging study abroad and expanding women’s rights. During the second world war, however, he seemed too pro-German for the British and Soviets, who replaced him with his son, Mohammed Reza Shah.
In 1951, Mohammed Mossadegh became prime minister after leading a popular campaign to nationalise the oil industry. America and Britain had other ideas, assisting in his overthrow in 1953. After that, the shah pursued reforms in the 1960s, but later became ever more despotic and corrupt. In 1979, an exiled cleric, Ruhollah Khomeini, returned during roiling anti-government protests. He promised a purifying Islamic revolution and soon outmanoeuvred rivals (including communist groups) to take power. He oversaw the creation of a quasi-democratic Islamic Republic with elected institutions overseen by unelected clerics. Internal unity held during the disastrous war launched by Iraq (1980-1988), but since Khomeini’s death in 1989, the clerics have struggled to contain growing pressures for genuine democracy.
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Maps
