An inquiry into the sources of growth and stagnation in Iranian economy

Iran was a textbook example of economic success in the two decades prior to the advent of the Islamic Revolution in 1979. But she has turned into an example of economic failure ever since. This study finds that nearly half of the 11 percent difference in economic growth in the two periods can be attributed to productivity. The study confirms the presents of significant productivity differentials in the two periods in the manufacturing sub-sectors and tries to explain it. To explain manufacturing productivity differentials in the two periods a Tonrquist measure of TFP, corrected for market imperfection and non-constant returns to scale technology, is constructed. On the issue of market imperfection it is found that Iranian manufacturing sectors suffers from a decreasing return to scale technology and mark-up pricing since 1979. In the cross section of 23 manufacturing sectors it is found the degree of market participation of the private sector versus public sector has the highest explanatory power in explaining sectoral productivity differentials.