In Iran, it is widely understood that the official government plays a secondary role in governance, while the real power lies with Supreme Leader Ali Khamenei. This dual structure raises an important question: Who truly controls Iran’s economy?
The Shadow of the Underground Economy
According to official media, the underground economy—comprising unregistered or illegal economic activities—constitutes a staggering 26% of Iran’s GDP. A study published in Economic Research, a Tehran University journal, examined the role of government size in the expansion of Iran’s underground economy. The research highlighted that this sector has grown significantly in recent years, with over 196 trillion tomans of the country’s GDP attributed to informal activities.
Defining the Informal Economy
The underground economy encompasses activities that are not recorded in official accounts for various reasons, including tax evasion, avoidance of labor laws, or bypassing bureaucracy. This sector’s complexity is reflected in its many names: shadow economy, parallel economy, informal economy, and unregistered economy.
The World Bank defines the informal economy as encompassing economic activities that are not regulated or protected by the state. This includes a wide range of jobs and enterprises that, while they contribute to economic output, do not comply with formal regulations such as licensing, taxation, or labor laws.
The informal economy is significant in many countries, particularly in emerging markets and developing economies (EMDEs), where it can account for about one-third of GDP and 70% of employment. The informal economy’s presence has far-reaching implications, eroding government revenues, compromising public services, and imposing additional tax burdens on formal-sector participants.
The World Bank has addressed the informal economy in Iran, highlighting its significant role in the country’s labor market. As of 2019-2020, the informal sector accounted for 42% of employment in Iran.
A Vicious Economic Cycle
Efforts to offset lost revenues often result in higher taxes or other fiscal measures, which paradoxically drive more individuals and businesses into the informal sector. In Iran, this vicious cycle is exacerbated by the regime’s opacity. Even when underground activities are organized and known, they are censored and excluded from official reports.
Developing and underdeveloped countries typically have larger informal economies due to weak formal structures, which increase transaction costs and incentivize economic operators to avoid formal channels. Iran exemplifies this trend, with a unique, mafia-like underground economy reportedly under the supervision of Khamenei himself.
The Impact of Sanctions and Budget Imbalances
The period between 2017 and 2021 saw a significant rise in Iran’s underground economy. This coincided with the U.S. withdrawal from the Joint Comprehensive Plan of Action (JCPOA) and the tightening of economic sanctions. To circumvent sanctions, the regime turned to illicit activities, further entrenching the informal economy.
The Economic Research study also highlighted how budget imbalances fuel the underground economy through inflation and economic stagnation. Researchers suggested that expanding the government’s size could help reduce informal activities, though this approach risks exacerbating budget deficits and perpetuating the cycle of informality.
The Real Beneficiaries of Iran’s Underground Economy
Despite the research’s insights, it avoided addressing the true beneficiaries of Iran’s underground economy. Institutions such as the Islamic Revolutionary Guard Corps (IRGC), the “Execution of Imam Khomeini’s Order,” the Mostazafan Foundation, and Astan Quds Razavi—organizations directly tied to Ali Khamenei—are key players in managing this shadow economy.
Behzad Nabavi, a prominent Iranian politician, revealed in 2019 that 60% of the nation’s wealth is controlled by these entities. These organizations operate with impunity, using their influence to dominate economic sectors while avoiding accountability.
Conclusion
Iran’s underground economy represents not only a significant portion of its GDP but also a reflection of the regime’s opaque and corrupt practices. By prioritizing its survival over economic transparency, the Iranian government undermines formal institutions, deprives citizens of essential services, and perpetuates inequality. Addressing the root causes of this shadow economy will require systemic reforms—an unlikely prospect under the current regime.
