For years discussion of Iran’s nuclear program and how best to address the surrounding impasse focused on international relations—chiefly, the extent to which the United States and the Islamic Republic could and should trust each other to reach a negotiated settlement. Amidst all the conjecture, the domestic Iranian politics of the nuclear issue were often reduced to Kremlinology-style questions about the motives and capacities of hardliners in the Islamic Republic and the unknowable mind of the Leader, Ayatollah Ali Khamenei. If Iran’s political economy was spoken of at all, it was only to offer more speculation about whether the economic sanctions imposed by the UN and the US would bring Iran to the negotiating table and, if so, how tough those penalties needed to be.

Sanctions did gnaw at Iran, as Washington hoped, but the debate in the West was nonetheless miscast. Since 2003, after all, decision makers in the Islamic Republic had expressed a willingness to bargain over Iranian nuclear activities safeguarded under the Non-Proliferation Treaty. In the last two years, both the administration of President Hassan Rouhani and the Leader have repeatedly explained that the issue was not whether or not to negotiate but if, by the logic of compromise, Iran would receive an economic payoff for doing so. As it happened, the Iranian leadership decided the answer was yes even before Rouhani was elected in 2013, engaging in secret direct discussions with the US in Oman beginning in late 2012. These contacts led to the ultimate agreement between and the P5+1 announced on July 14, 2015.

What is the calculus for the Islamic Republic in opting, effectively, to end its decades-long isolation from the global economy? Simply put, the regime’s elite knows it cannot rule by ideological persuasion and targeted coercion alone: If the political system is to be stable, it must have a social base that sees material advantage in that system enduring. To date, the efforts of the Islamic Republic to forge a social contract have failed to deliver dependable quiescence, whether in the streets, factories and universities, or on the parliamentary floor and newspaper op-ed pages. At least since the contested 2009 presidential election, it appears, a growing number of the regime’s decision makers, including confidants of the Leader and now President Rouhani, too, have hoped to build a new political economy that will secure the compliance of Iranian citizens, if not their active support. Social contracts are always partial, and come with peril as well as promise for all involved. But, as it enters its thirty-eighth year, the Islamic Republic is employing the nuclear deal as part of a gambit to achieve a new one.

Revolutionary Brick and Mortar

In the opening decade of the Islamic Republic, Ayatollah Ruhollah Khomeini and other regime founders struggled to demobilize a highly politicized society in the aftermath of the fall of the Pahlavi monarchy and, at the same time, mobilize specific strata of society in support for their own project. This contestation was shaped, first, by civil war between factions of the broad revolutionary coalition and, then, the strains of the eight-year war with Iraq. The emergent state had to redirect the energies of men and women, and economic resources, to the war effort, but also manage popular dissent and deter the rise of political rivals with revolutionary and military credentials. Violence, both discriminate and indiscriminate, was used to suppress opponents, but so was social policy.

Redress of social inequality was a central demand of the revolution. The regime adopted several policies aimed at leveling society and thus cementing a social base for itself. There were two main pillars of this program: mass employment in the expanding state apparatus and mass housing. Available data shows that public-sector employment as a share of total employment jumped from 19 percent to 31 percent, with the number of state employees in urban areas growing by 80 percent during the same period. [1] In this expansion, many of the rank-and-file personnel of the Pahlavi state and bureaucracy retained their positions; despite the idiom of “cleansing,” there was no purge beyond the upper echelons of the ministries in the 1980s. And additional millions of people gained the job security and benefits that a public-sector job entailed, in keeping with the regime’s claim to be a provider of opportunity and upward mobility to the majority of Iranians who were shunted aside by Pahlavi modernization.

The regime sought to further this claim by legalizing informal housing and privatizing public lands to incorporate the large numbers of rural-to-urban migrants who had been arriving in the major cities—Tehran, Mashhad, Isfahan and others—since the late 1960s. Asef Bayat estimates that by 1980 half a million people, or 15 percent of Tehran’s population, were squatting in the capital’s metropolitan area. Together with slum dwellers, the squatters accounted for 35 percent of the population of greater Tehran. [2] While the new regime eventually removed many squatters with evictions and brute force, it also legally recognized the homes of many others. Dozens of settlements inside and around major cities were integrated into municipalities and supplied with city services; by 1990 1.2 million Tehranis were living in these new townships that enhanced their social, legal and economic security. [3] Kaveh Ehsani concludes, “Remarkably, by 1986 urban housing stock had doubled, as Housing Ministry surveys showed that more than half of all urban dwellings in the entire country had been built after the revolution. It was private individuals who built these 2.3 million new units. The state merely transferred the public land into private hands; its share of investment in housing construction (affordable or otherwise) was less than 2 percent of the total after the revolution.” [4] These and like policies may not have produced ideological adherents to Khomeinism, but they did fashion a new social order that was directly and indirectly tied to the new political system.

By the presidency of Akbar Hashemi-Rafsanjani, which began in 1989, this social contract was showing signs of wear. Enduring recession and running up against the limits of the regime’s willingness to accommodate informal housing, in 1991 the urban poor and veterans of the Iran-Iraq war took to the streets to demand accountability from the political elite that claimed to be ruling on behalf of the “disinherited.” [5] The war had ended with no loss of territory, but not before slaughtering and maiming hundreds of thousands, depleting the national treasury, and severely damaging the petroleum and manufacturing sectors. Political insiders, as well as ordinary citizens, routinely aired public, pointed criticism of the regime’s handling of the war. Iran had enjoyed fairly consistently high oil prices since the early 1970s, but from the mid-1980s until the Iraqi invasion of Kuwait in 1990 prices declined dramatically. The symbolic core and unifying force of the regime, Ayatollah Khomeini, died in 1989. With the collapse of the Soviet Union and the belief that the US model of liberal capitalism was triumphant, Iran’s rulers faced an ominous new international order. The regime’s authority over the citizenry was vulnerable.


In response, Rafsanjani and his team of advisers and technocrats crafted new policies to nurture a new social base for the regime, making tactical concessions to certain social classes in order to retain strategic control. Again, there was a battery of policies, but two stood out. First, Rafsanjani’s administration ordered a series of budget cuts and established the requirement that state ministries and organizations be financially self-sufficient. As these austerity measures took hold, state organizations and municipalities were forced to balance their budgets by launching profit-making enterprises that could compete for contracts in construction, manufacturing, commerce and services. Such organizations as the Islamic Revolutionary Guards Corps, the military and security apparatus founded by Khomeini to shield the regime from the regular army, and the bonyads, foundations charged to serve the poor and disadvantaged, came to be major players in these industries. From this development grew a host of consulting and subcontracting opportunities for private enterprise, which would bid for contracts from ministries, municipalities and state organizations. This manner of reconfiguring the state through quasi-privatization fused together links between small workshops, suit-wearing consultants and state organizations. Those with the right connections were poised to get bigger pieces of the pie, something that was only exacerbated once sanctions were imposed on Iran, expanding the gray economy. As so often, privatization was a vehicle for distributing resources to some and away from others, leading to real and politicized inequality that was manifest in real estate and commerce. Established merchant houses vied with fly-by-night operators to take advantage of Iran’s patchwork of free-trade zones and to do business in ports in the Arabian Peninsula, most famously Dubai. [6]

A second initiative aimed at generating citizens beholden to the new regime came in education. Basic literacy for men and women improved after the 1980s with the addition of more elementary and secondary schools, particularly outside metropolitan areas, but in the 1990s the regime focused on expanding access to higher education. On the one hand, the state created long-distance learning centers (for example, Payam-e Noor) and technical programs to absorb the growing number of high-school graduates. Alongside this state system developed Azad (Open) University, a private (or “non-profit” and “non-state”) national higher educational network that allowed still more students to earn degrees if they were willing to pay tuition. [7] Although the Azad campuses were established in the 1980s, it was only under Rafsanjani that they achieved rapid growth. Between 1991 and 1999 the number of students enrolled at Azad University nearly tripled, and today it has 385 campuses, including several outside of Iran. [8] These diverse degree programs and institutions were particularly notable for extending opportunities to study and teach to small cities and towns. Select universities, such as Imam Sadeq, specialize in training ideological devotees to sustain the regime as bureaucrats. But, for the most part, the expansion of the universities was undertaken to absorb thousands of unemployed youth, and also to create a skilled work force to be employed in the post-war and quasi-privatized “knowledge economy.” Ironically, it was this very stratum of educated, confident and critically minded middle-class citizens that was the backbone of the reformist movement of the late 1990s and 2000s. An unintended byproduct of the post-war reformulation of the social contract, this cohort challenged the pact’s contradictions and unevenness.

The Search for a New Order

The challenge persisted, in one form or another, throughout the presidencies of reformist Mohammad Khatami and populist conservative Mahmoud Ahmadinejad. The conflict-ridden years of 1997-2013 are often understood solely as pitting comparative civil libertarians against revolutionary puritans or democrats against the unelected clerics at the commanding heights of the Islamic Republic. But the conflicts of those years were a product of the inability and unwillingness of Iran’s decision makers either to allow the new social forces to wield meaningful political power or to fashion another social contract that could encompass an increasingly stratified society. A parallel criticism can be made of the reformist opposition that sought to use the ballot box, print media and rights-oriented NGOs to carve out a space within the regime from which to transform it. Citizens were often considered political agents only at election time. Class inequality was ignored, at best, and at worst trivialized by bland agendas of market reform and promises of economic growth. [9] Hence, the apotheosis of the reformist current, the Green Movement protesting the result of the 2009 presidential election, was unable to integrate other social struggles. Amidst the chants of “Where is my vote?” the vociferous shop-floor politics of industrial workers and the persistent grievances of schoolteachers remained sideshows.

As these battles played out, Ayatollah Khamenei turned to the politics of crisis to maintain his hold on power, cycling through alternative, and seemingly disposable, factions, elites and personalities. As a result, many observers floundered when they sought to interpret Khamenei’s actions through the lens of ideology or the reformist-hardliner binary opposition. It is noteworthy that the nezam, the euphemism used to describe the Leader and his inner circle, increasingly had as little patience for Ahmadinejad’s brand of right-wing populism as it did for Khatami’s aspiration to liberal Islamism.

Instead, in 2013, after Khamenei and the Guardian Council deemed Hassan Rouhani eligible to run for president, he was able to broker a coalition that could generate 73 percent turnout and win over half the vote. Both the robust participation of the electorate and the pragmatist turn that Rouhani represented were significant after the 2009 electoral crisis and the regime clampdown on political activism. Rouhani was a compromise candidate in domestic political terms but a man who had been Iran’s chief nuclear negotiator from 2003-2005, when there was some movement in the talks and, at least in Iran, some hope of eventual rapprochement. Rouhani may have not been the Leader’s favorite, but was clearly not objectionable to him given the debacle of the previous election, the ensuing polarization and the deep economic recession. Khamenei was not categorically opposed to reopening the nuclear file. Even before Rouhani’s election, the Leader approved the testing of waters when he sent his representatives to Oman to meet with US envoys. These initially clandestine encounters, and the subsequently very public negotiations with the P5+1, are indications that the regime’s leadership is seeking to govern anew. A major motivation for détente with the US is to leverage it into structural changes at home, although not necessarily in a more inclusionary or participatory manner.

As before the nuclear deal, the debate about Iran’s political economy afterward is dominated by tired motifs of international relations: “Will Iran use sanctions relief to send weapons to Hamas, Hizballah or Syria?” “Did sanctions work?” For the Islamic Republic—and for Iranian citizens—there is a lot more at stake. It is too soon to say what the new social contract will look like or what classes, new and old, will be elevated or whittled down as the nuclear deal comes to fruition, sanctions disappear and Iran’s economy opens up to the world. But there are some hints.

One open question concerns the cash payments the state began making to Iranian households under Ahmadinejad in 2010. The payments were intended to cushion the blow to consumers of the phased elimination of state subsidies on the prices of bread, electricity, water and gasoline. [10] In one stroke, the idea was, the state could address its own budget deficits, ameliorate absolute poverty and relieve the pressures of sanctions on Iranian families. It is noteworthy that, despite meeting with much criticism from Ahmadinejad’s foes at the time it was introduced, this policy has survived under Rouhani. Some small-town entrepreneurs have used these payments to open up home hair salons or other shops geared toward consumption; others have simply built a second floor atop their homes. Yet the cash payments have been eaten away by inflation and continued removal of fuel subsidies. They are insufficient to meet the basic needs of the poor, let alone ameliorate inequality. In fact, as Djavad Salehi-Isfahani has pointed out, the latest round of subsidy reforms is particularly regressive. Salehi-Isfahani, a mainstream economist who regularly participates in Iran’s policy debates, infers that there is little indication that the Rouhani administration will route the cash transfers to those hardest hit by the price hikes. [11] Nor have Rouhani’s budgets directed more government spending toward development and job creation than Ahmadinejad’s. The austerity budgets are linked to low oil prices, which may force the state to raise tax revenue and cut deals with the social groups that have the clout to make their objections heard.

In the absence of any real break with austerity, the lifting of sanctions and reintegration into the international economy is viewed as a panacea. One of the goals of the nuclear deal era is to attract foreign investors into joint ventures inside Iran, rather than simply increase legal commercial interchange with the outside world. Yet to make Iran lucrative for foreign investors and create jobs for the larger college-educated urban population, tax and labor laws have to be rewritten to reduce the tax rate and weaken the protections now in place for Iranian workers. Such is not only the view of business broadsheets in London and New York, but also of Iranian outlets covering economics, such as Eqtesad News and Tejarat-e Farda. It is also the perspective of the former head of the Tehran chamber of commerce and Rouhani’s chief of staff, Mohammad Nahavandian. The state has a long history of repressing labor and civil society activists, but it is hard not to see the late 2015 round of arrests, and even deaths at police hands, in the new shadow of the planeloads of foreign ministers and businessmen landing at Khomeini Airport to discuss contracts with Iran’s petroleum and automobile sectors or to sell airplanes and green technology. It is not at all clear what sort of investment Iran will ultimately attract, but if the economic opening is to do more than simply flood the market with foreign consumer goods, it will surely require a reworking of Iran’s labor, financial and investment laws that will generate more conflict at the level of society and, as in the past, deny Iran’s rulers the compliant citizenry they crave.

Author’s Note: Thanks to Kevan Harris, Mohammad Maljoo and Nazanin Shahrokni for their comments and suggestions.


[1] Hooshang Amirahmadi, Revolution and Economic Transition: The Iranian Experience (Albany: State University of New York Press, 1990), p. 189. For a discussion of this process in provincial areas, see Kaveh Ehsani, “The Urban Provincial Periphery in Iran: Revolution and War in Ramhormoz,” in Ali Gheissari, ed., Contemporary Iran: Economy, Society, Politics (Oxford: Oxford University Press, 2009).
[2] Asef Bayat, Street Politics: Poor People’s Movements in Iran (New York: Columbia University Press, 1997), p. 29.
[3] Ibid., p. 77.
[4] Kaveh Ehsani, “Survival Through Dispossession: Privatization of Public Goods in the Islamic Republic,” Middle East Report 250 (Spring 2009).
[5] Asef Bayat, “Squatters and the State: Back-Street Politics in the Islamic Republic,” Middle East Report 191 (November-December 1994).
[6] See Ehsani, “Survival,” and Narges Erami and Arang Keshavarzian, “When Ties Don’t Bind: Smuggling Effects, Bazaars and Regulatory Regimes in Post-Revolutionary Iran,” Economy and Society 44/1 (2015).
[7] See Shervin Malakzadeh, “Keeping the Kids in School, Keeping the Quiet: Accommodation and Demobilization in Iran’s University System,” in Daniel Brumberg and Farideh Farhi, eds., Power and Change in Iran (Bloomington: Indiana University Press, forthcoming).
[8] Shervin Malakzadeh kindly provided this Statistical Center of Iran data in personal correspondence.
[9] Mohammad Maljoo, “The Green Movement Awaits an Invisible Hand,” Middle East Report Online, June 26, 2010.
[10] Kevan Harris, “The Politics of Subsidy Reform in Iran,” Middle East Report 254 (Spring 2010).
[11] Djavad Salehi-Isfahani, “Will Rouhani Complete the Reform of Subsidies?” Tyranny of Numbers, September 9, 2015.

How to cite this article:

Arang Keshavarzian "The Iran Deal as Social Contract," Middle East Report 277 (Winter 2015).

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