Iran's economy is 43.1 percent free, according to our 2007 assessment, which makes it the world's 150th freest economy. Its overall score is 0.2 percentage point lower than last year, partially reflecting new methodological detail. Iran is ranked 16th out of 17 countries in the Middle East/North Africa region, and its overall score is extremely low—almost one-third below the regional average.
Iran's economy scores well in only one of the 10 factors measured: fiscal freedom. The top income tax rate is high, and the top corporate tax is moderate at 25 percent. Overall tax revenue as a percentage of GDP, however, is significant.
Iran's economy is unfree in many ways. Business freedom, trade freedom, investment freedom, financial freedom, property rights, and freedom from corruption are all weak. Business licensing and closing are regulated heavily by an intrusive and highly inefficient bureaucracy. High tariff rates and non-tariff barriers impede trade and foreign investment alike. Corruption is rampant, and the fair adjudication of property rights in a court of law cannot be guaranteed.
Iran's economy, once one of the most advanced in the Middle East, was crippled by the 1979 Islamic revolution, the Iran–Iraq war, and attendant economic mismanagement. The June 2005 presidential election elevated Mahmoud Ahmadinejad to power and halted tentative efforts to reform the state-dominated economy; instead, Ahmadinejad has promised the poor a greater share of Iran's oil wealth, greater subsidies, and greater state control. High world oil prices have raised export revenues and helped to service Iran's large foreign debt, but the economy remains burdened by high unemployment, inflation, corruption, expensive subsidies, and a bloated and inefficient public sector.
Business Freedom - 54.9%
Starting a business takes an average of 47 days, compared to the world average of 48 days. Entrepreneurship should be easier for maximum job creation. Obtaining a business license can be very difficult, and closing a business is difficult. Bureaucratic hurdles and slowness are persistent problems. The overall freedom to start, operate, and close a business is restricted by the national regulatory environment.
Trade Freedom - 50.4%
Iran's weighted average tariff rate was 14.8 percent in 2004. The government imposes restrictive sanitary and phytosanitary regulations, burdensome customs procedures, and import bans. Consequently, an additional 20 percent is deducted from Iran's trade freedom score to account for these non-tariff barriers.
Fiscal Freedom - 84.8%
Iran has a high income tax rate and a moderate corporate tax rate. The top income tax rate is 35 percent, and the top corporate tax rate is 25 percent. Other taxes include a tax on check transactions and a tax of property transfers. In the most recent year, overall tax revenue as a percentage of GDP was 20.9 percent.
Freedom from Government - 59.8%
Total government expenditures in Iran, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 31.4 percent of GDP, and the government received 51.5 percent of its total revenues from state-owned enterprises and government ownership of property. Privatization has proceeded slowly.
Monetary Freedom - 61.3%
Inflation in Iran is high, averaging 14 percent between 2003 and 2005. Relatively unstable prices explain most of the monetary freedom score. The government controls the prices of goods, including petroleum products, electricity, water, and wheat for the production of bread. It also provides economic subsidies and influences prices through the regulation of Iran's many state-owned enterprises. Consequently, an additional 15 percent is deducted from Iran's monetary freedom score to adjust for measures that distort domestic prices.
Investment Freedom - 10.0%
Foreign investment is restricted in banking, telecommunications, transport, and border control. The government allows the sale of 65 percent of the shares of state-owned enterprises, except for defense and security-related industries and the National Iranian Oil Company. Iran's constitution forbids foreigners to own any concessions, operate projects, or participate in production-sharing agreements in the oil and gas sector. The parliament has the power to veto projects in which foreign investors have a majority stake and has blocked two proposed investments. Most payments, transfers, credit operations, and capital transactions are subject to limitations, quantitative limits, or approval requirements.
Financial Freedom - 10.0%
Iran's financial sector is subject to very heavy government influence. All banks were nationalized following the 1979 revolution. Iran's laws require that the banking sector be run according to Islamic law, which prohibits interest payments. There are six state-owned commercial banks, four state-owned specialized banks, and a state-owned postal bank. State banks account for 98 percent of banking assets. Six small private banks have been established recently. Foreign banks are legally permitted to operate in free trade zones. The government directs credit allocation. All insurance companies were nationalized during the revolution, and the sector remains dominated by five state-owned companies. There were also five small private domestic companies and one foreign insurance company in 2005. Iran has a small stock exchange. Supervision of the financial sector is weak, and regulations on private banks are very restrictive.
Property Rights - 10.0%
Resort to Iranian courts is often counterproductive and rarely leads to a fast resolution of disputes. Most foreign firms have bad experiences when disputing a contract. Written agreements offer very little protection for the contracting party. Finding an influential local business partner who also enjoys substantial political patronage is the more effective way to protect contracts.
Freedom from Corruption - 29.0%
Corruption is perceived as widespread. Iran ranks 88th out of 158 countries in Transparency International's Corruption Perceptions Index for 2005.
Labor Freedom - 61.2%
The labor market operates under restrictive employment regulations that hinder employment and productivity growth. The non-salary cost of employing a worker is high, and dismissing a redundant employee is costly. Regulations on increasing or contracting the number of work hours are very inflexible. Firing a worker requires approval of the Islamic Labor Council or the Labor Discretionary Board.
- Rank: 150
- Regional Rank: 16 of 17
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· Population: 67 million
· GDP (PPP): $504.2 billion
5.6% growth in 2004
5.7% 5-yr. comp. ann. growth
$7,525 per capita
· Unemployment: 11.2%
· Inflation (CPI): 14.8%
· FDI (net inflow): $614.1 million
· Official Development Assistance: $173 million (3% from the U.S.)
· External Debt: $13.6 billion
· Exports: $18.2 billion (2004 estimate)
Primarily petroleum, chemical and petrochemical products, fruits and nuts, carpets
· Imports: $14.9 billion (2004 estimate)
Primarily industrial raw materials and intermediate goods, capital goods, food and other consumer goods, technical services, military supplies