Western reporters tend to describe the current situation in Iran in alarmist terms, suggesting that the people are near revolt, the regime faces collapse, and the country is prone to political upheaval. Even if these assessments are premature or extreme, the relentless confrontations between the "reformist" Majles (national assembly) and the "conservative" Council of Guardians (which has veto power over Majles legislation and vets all candidates for elective office) augur a turbulent political future. The 1979 revolution faces a profound challenge from a new and disenchanted generation, widely known in Iran as "the Third Force." For this broad swath of society born after 1979, Ayatollah Ruhollah Khomeini's promise of a just and free Islamic society has proven a sham. After nearly a quarter-century of theocratic rule, Iran is now by all accounts politically repressed, economically troubled, and socially restless. And the ruling clerical oligarchy lacks any effective solutions for these ills.

The changes wrought by this turmoil call for a new and nuanced U.S. policy toward the Islamic Republic -- particularly if the United States goes to war against Iraq. Since the high-profile inclusion of Iran in President George W. Bush's "axis of evil," proposals to deal with that "rogue" state have run the gamut from a preemptive military strike to the pursuit of diplomatic engagement. Between these two extremes, suggestions have included covert action to destabilize the ruling regime, assistance to internal and external opposition groups, financial aid for foreign-based Iranian media, and a call for international condemnation of the ayatollahs. To know what shape U.S. policy should take, however, it is necessary to understand how Iran arrived at its current parlous state.


After the seizure of the U.S. embassy in Tehran in November 1979 by a radical group calling themselves "Students Following the Imam Line," the United States suspended diplomatic relations with Iran. But this "absence" of diplomatic ties has always been somewhat unreal. Mutual demonization has gone hand in hand with participation by the two countries in venues such as the claims tribunal set up in The Hague to arbitrate U.S.-Iran financial disputes. Formal encounters and even cooperation have taken place in the context of multilateral conferences on the future of Afghanistan and on antidrug efforts. The United States has maintained unilateral sanctions on trade and investment with Iran but also carried out clandestine arms-for-hostages deals. There are even reports of joint efforts to combat al Qaeda terrorists and Iraqi oil smugglers, as well as other forms of bilateral cooperation. But neither party has been willing to publicize these supposed contacts.

In fact, despite occasional signs of rapprochement in the last quarter-century, the relationship has remained stalled. Informal polls in both countries have shown no strong domestic opposition to resuming ties, but the influence of powerful hard-line minorities in each country and a number of outstanding disputes that push domestic political buttons have held back all efforts at conciliation. At the same time, Tehran's perception of Washington's eagerness to improve ties has encouraged Iranian foreign-policy makers to increase their demands.

Washington initially pointed to five major obstacles to the resumption of relations: Iran's state sponsorship of international terrorism, its pursuit of weapons of mass destruction, its opposition to the Arab-Israeli peace process, its threats to neighbors in the Persian Gulf, and its regime's violations of human rights at home. In recent years, the last two issues seem to have lost some of their potency and are now only infrequently raised. On the other hand, a new accusation of Iran's harboring of al Qaeda operatives has recently been added to the list.

The Islamic Republic, for its part, originally demanded that the United States accept the legitimacy of the 1979 revolution, not interfere in Iran's internal affairs, and deal with the Iranian regime on the basis of "respect and equality." As Tehran became more secure domestically and reduced its international isolation, further conditions were added: lifting U.S. economic sanctions, releasing frozen Iranian assets in the United States, and removing the U.S. Navy from the Persian Gulf. The Clinton administration's mildly conciliatory gestures emboldened the ruling clerics to demand even more: an end to one-sided support for Israel and a formal apology for Washington's past misdeeds. Some of these demands have been emphasized more than others, depending on domestic politics within Iran.

After the election of President Muhammad Khatami in 1997 and his subsequent suggestion that "the wall of mistrust" between the two countries be torn down, reconciliation once more began to seem possible, particularly toward the end of Bill Clinton's administration. But mutual hostility was suddenly raised to a new high under George W. Bush. Lumping Iran with Iraq and North Korea in an "axis of evil," Bush castigated Iran for a series of wrongdoings, in particular the pursuit of weapons of mass destruction. This announcement was presumably designed to please hawks at home, garner international support for the war on terror, and warn Tehran of the consequences of any new mischief.

The message, not surprisingly, backfired. The implied threat in downgrading Iran from "rogue" to "evil" status pleased the Iranian opposition in exile but invoked a fiery response from the regime. Government officials dismissed the accusation as another brutish manifestation of the United States' "global arrogance," and many Iranians took it as a deep insult to their national dignity. Significantly, the conflict also caused considerable unease among U.S. allies in Europe and Japan. Ironically enough, the U.S. move also led to increased official contacts between Iran and Iraq.

In an apparent attempt to control the damage and separate good from evil, Washington subsequently drew a distinction between the powerless "elected" reformers in the Majles and the relatively weak local councils, and the "unelected" clerics who hold the levers of power. A White House press release on July 12, 2002, assured all Iranians who sought freedom and human rights that they had no better friend than the United States. This communique, however, which was apparently timed to coincide with the third anniversary of the prodemocracy student uprisings at Tehran University, again caused a backlash.

The unelected rulers whom Bush sought to condemn used the message to arouse public anger against the United States. Supreme Leader Ali Khamenei (who is backed by hard-line fundamentalists), Khatami (who spearheads the elected reformists), and former president Hashemi Rafsanjani (who leads the modern technocrats) joined together to denounce Bush's statement as interference in Iran's domestic politics. Even Ayatollah Jalaleddin Taheri -- a leading dissident who had chastised the theocracy days earlier and was expected to welcome U.S. support -- joined the three in asking for anti-American demonstrations. Indeed, many reformers, eager to prove their patriotic bona fides, were more vehement than were conservatives in repudiating the White House's message. As a result of this united front, government-sponsored demonstrations in Tehran and other major cities became a forum for a brand of virulent anti-Americanism rarely witnessed during Khatami's presidency.

Meanwhile, rumors circulated in Tehran that in response to the U.S. pressure, conservative hard-liners were planning to declare a state of emergency, dissolve the Majles, and dismiss the Khatami government. Although this crackdown did not happen, the conservative-led judiciary did close newspapers, harass and jail dissidents, forbid the teaching of Western music, insist that shops and restaurants close at midnight, and in general suppress domestic opposition -- all in the name of social order.

Noting the failure of its proreform effort, the Bush administration articulated a new "dual track" approach based on "moral clarity." Zalmay Khalilzad, a senior National Security Council staff member, unveiled the latest U.S. policy at an influential Washington think tank. The United States now would not seek to impose change in Iran but would instead support the Iranian people in their own quest for democracy. A literal interpretation of this dual-track policy is that the United States finds the Islamic Republic's behavior destructive and unacceptable and is thus calling for the regime change -- but that Washington trusts the Iranian people to do it themselves. Subsequent calls in mid-November 2002 by State Department officials and Voice of America broadcasts for the Islamic Republic to "listen to its people" who were demanding "a change in the way they are being governed" were again strongly rejected by Khatami's government as interference in Iran's internal affairs.


To find a truly effective policy within this new dual-track posture will require an understanding of what makes Iran tick -- a combination of a fierce sense of national independence, the Byzantine dynamics of Iran's domestic politics, the freewheeling character of Shi`a theology, and the emergence of the Third Force. A look at the interplay of these four factors reveals why past U.S. strategies (such as sanctions, containment, and diplomatic pressure) have not been able to change the Islamic Republic's behavior.

Iranians' fierce nationalism is characterized by intense suspicion and outright resentment of outside influences. For example, Ayatollah Khomeini climbed to the Peacock Throne not on the wings of Koranic angels but mainly by championing freedom from U.S. interference. Khomeini's portrayal of the shah as Washington's stooge drew wide appeal because it channeled resentment about British and Russian influence during the previous 200 years of Iranian history. Indeed, the well-publicized chants of "Death to America" by government-organized demonstrators resonate much less with the vast majority of Iranians than does Khomeini's famous comment in the wake of the revolution that "America cannot do a damn thing." Thus any U.S. strategy that even remotely raises the specter of foreign interference in Iran is doomed to fail.

Beyond looking at this yearning for independence, outside observers must also take into account the state of Iran's domestic politics. Contrary to the popular caricature, both the "reformers" and the "conservatives" in Iran are cut from the same cloth. Both camps are byproducts of the same revolution, and both are sworn to abide by the basically undemocratic and even subtly xenophobic 1979 constitution. Few of the current reformers are Jeffersonian democrats; in fact, they are firmly committed to the union of mosque and state. Neither they nor their conservative opponents share America's human rights culture. Consequently, any U.S. policy that favors one group over the other will have little chance of success. Overt support for the opposition abroad or dissidents at home will enable the conservative power-holders to brand the reformers as American lackeys. Similarly, any compromise with the conservatives will likewise be interpreted by the reformers as a sellout by Washington.

Third, it would be a major strategic mistake to treat the Shi`a clerics in Iran as a unified force that rejects modernization or even Westernization. The highly unstructured hierarchy of the Shi`a sect allows Iran's ten or so grand ayatollahs to have not only their own disciples and private financing but also to independently issue religious edicts, or fatwas. Khatami's "politics of inclusion" and his plea for a "dialogue among civilizations," both rooted in his view of Islamic scripture, can be understood in the same terms. Any successful U.S. strategy, therefore, should harness the positive influence of Iran's internal religious diversity and seek to direct it toward political change.

Finally, the government-encouraged baby boom of the early 1980s has now spawned a new generation, the Third Force, which sees neither the fundamentalists' concept of velayat-e faqih (the supremacy of Shi`a jurists) nor Khatami's "Islamic democracy" as the answer to Iran's current predicament. This highly politicized generation has no recollection of the 1979 revolution and no particular reverence for the eight-year "holy war" between Iran and Iraq. Rather, they focus on their frustrated ambitions for a better future. This group includes almost everyone who is not in power and a few who are, representing a wide swath of Iranian society. The common bond among these disparate groups is their disenchantment with the revolution and its aftermath and their distrust of the clerics' ability to cope with Iran's many problems. The Third Force, although still lacking resolute leadership and a specific platform, is united by a common goal of an independent, free, and prosperous Iran blessed by the rule of law. Indeed, some members have proposed a new constitution separating mosque and state, to be established by an internationally observed referendum.


The United States should seize this moment to plan for Iran's political endgame because the regime's particular brand of politics and religion is in a state of ferment. At the same time, the government has been further weakened because it has failed to deliver on its promises of economic development.

Ayatollah Khomeini built a governing ideology on concepts of independence, freedom, and the velayat-e faqih. This fusion of statecraft with piety through the absolute power of a supreme leader (the rahbar) is now beginning to crumble. The first crack appeared in 1997 when the philosophy's principal architect, Grand Ayatollah Hossein Ali Montazeri, rejected the unquestioned power of the rahbar on the grounds that Islam forbids the supremacy of fallible humans. Emboldened by this attack on Khomeini's orthodoxy, a number of mid-ranking clerics and seminarians have subsequently denounced theocratic intrusion into daily life, refusing to accept the inviolability of the rahbar's religious edicts and even allowing fresh interpretations of the Koran itself. The new generation of clerics, taking their cue from older theologians such as Montazeri, now openly questions the legitimacy of absolutist religious power and even speaks of the need for an Islamic reformation. Some young seminarians in the holy city of Qom are now even questioning whether the unity of mosque and state is in their interest, since the unpopularity of the Islamic regime has reduced the number of clerics in the Majles and local councils and has also shrunk sources of private funding.

The latest condemnation of the regime came from Ayatollah Taheri, who in July 2002, while resigning from his post as the leader of Friday prayers in Isfahan, lambasted the religious hard-liners for incompetence and corruption. The cleric, formerly a devoted Khomeini follower and an early revolutionary during the shah's time, bemoaned the host of social, political, and economic woes aÛicting the country -- from rising unemployment to growing drug addiction to increasing disregard for the law. No previous internal criticism of the theocratic regime had ever been this scathing. The response by the leadership was mostly dismissive. However, Supreme Leader Khamenei, while complaining that this type of dissent would only embolden the regime's enemies, did acknowledge that he himself had pointed to some of the same shortcomings.

Trust in the power of Islamist ideology has declined even more profoundly as Khomeini's mixture of religion and politics has failed to deliver its promised rewards of prosperity and social justice. Despite a 100 percent rise in average annual oil income since the revolution, most indicators of economic welfare have steadily deteriorated. The so-called misery index (a combination of inflation and unemployment) has reached new highs. Average inflation in the years after the revolution has been at least twice as high as during the 1970s, unemployment has been three times higher, and economic growth is two-thirds lower. As a result, Iran's per capita income has declined by at least 30 percent since 1979. By official admission, more than 15 percent of the population now lives below the absolute poverty line, and private estimates run as high as 40 percent.

A combination of slow growth, double-digit unemployment, high inflation, declining labor productivity, and increasing dependence on oil revenue has thus defied almost all government efforts to put the economy back on track. Although the alarming rate of population growth in the first decade after the revolution has been brought under control, both per capita income and domestic income distribution lag behind official targets. In short, the ailing economy has helped bring the regime's legitimacy further into question. A recent study leaked from Iran's Interior Ministry revealed that nearly 90 percent of the public is dissatisfied with the present government. Of this total, 28 percent wants "fundamental" changes in the regime's structure, and 66 percent desires "gradual reforms." Less than 11 percent -- most probably those on the government dole -- is satisfied with the status quo. Other private polls show an even greater degree of unhappiness with the government.

The combination of these two phenomena -- the bankruptcy of Iran's ideology and the failure of its economy -- now confronts the Islamic Republic with the worst challenge to its legitimacy yet. The public and the press now openly question the role of Islam -- and especially the concept of the velayat-e faqih -- in a society where people want greater freedom and the rule of law.


Iran's conservative clerics are now helplessly witnessing a slow but steady drive toward democratization. Despite the political crackdown, legislative deadlock, and rumors of a coup, two provocative and parallel developments are challenging the mullahs' hegemony and paving the way for the regime's eventual collapse.

The first development relates to the expansion of civil society and the use of civil disobedience to loosen the theocracy's grip on national institutions. Nongovernmental organizations are being formed by the thousands, with and without official permission, to deal with ongoing problems ranging from family planning to drug addiction to pollution. Workers have formed informal (and extralegal) trade unions, and students have organized both Islamic and secular unions of their own. Despite a wave of newspaper closings and press repression, there are now 22 percent more licensed publications than there were in 1998. Furthermore, journalists have found a new haven in cyberspace beyond the authorities' reach. Currently, more than 1.75 million Iranians reportedly have access to the Internet. Even some nonestablishment ayatollahs have set up their own Web sites to connect with their flock. Their fatwas are now used by dissidents to counter the positions of the ruling clerics.

Street demonstrations, labor strikes, teachers' boycotts, and other forms of civil disobedience (such as taunting the morals police with un-Islamic attire) are increasingly common. For instance, thousands of workers demonstrating against poor working conditions managed to increase this year's official minimum wage. Strikes by teachers resulted in a substantial increase in this year's education budget. Human rights activists have also pushed the authorities to respond to foreign public opinion. According to the latest report by Human Rights Watch, the Islamic Republic may now start cooperating with foreign monitors for the first time. And in a noteworthy victory, the government shelved a bizarre, religiously sanctioned scheme to set up "temporary weddings" after women's groups, politicians, and some clerics denounced it as legalized prostitution. Most recently, several consecutive days of nationwide student protest in mid-November 2002 forced the supreme leader and the head of the judiciary to order an appeals court to expedite review of the death sentence imposed on reformist scholar Hashem Aghajari. The rahbar also recommended to judges that they avoid opening themselves up to public criticism in their rulings.

The second important change in Iran is a series of small but significant economic measures that are likely to reduce the oligarchs' economic power and help integrate Iran's oil-dependent economy with the global marketplace. The reduction of the hard-liners' financial support is a critical factor in their declining political clout. Indeed, more than any ideological or religious factor, it is control of the nation's economic resources that has allowed Iran's ruling clerics to hold on to power. Donations by devout Muslims, public and private monopolies in key sectors, special business licenses dispensed through patronage, privileged access to cheap credit and foreign exchange, and even widely reported bank fraud have all helped fund the clerics.

Crucial economic reforms, repeatedly promised by Khatami in the last five years, have partially taken shape in the last few months. This change has occurred largely in response to pressure from foreign institutions such as the International Monetary Fund, the World Bank, and the European Commission, whose approval is necessary for the government's continued access to foreign credit. Although these reforms will not dry up all the hard-liners' sources of funding overnight, they can affect them in critical areas. For instance, the legalization of private banking and insurance since early 2000 has opened up new venues for the mobilization and allocation of national savings -- and removed them from potential political uses by state banks. The government's efforts to consolidate the country's multiple exchange rates since March 2002 has also bottled up corruption stemming from access to cheaper dollars by privileged institutions or favored cronies. Fiscal reform in late 2001 aimed at lowering corporate income taxes and eliminating tax exemption for so-called religious charitable foundations is expected to increase private investment and level the playing field for potential investors. The government's new law to protect foreign investment and enforce some copyrights may reduce dependence on oil revenue. A successful euro bond issue this past summer has opened up another source of foreign exchange to counter volatility in oil prices.

The government has promised to take a number of further steps in the coming months to privatize state enterprises and further diminish the hard-liners' control of the economy. Replacing the inefficient subsidy system (which takes up some 20 percent of GDP and benefits mostly the urban rich) with a means-tested social safety net would substantially lighten the government's fiscal burden. In addition, further consolidation of the tax code should reduce the more than 50 different fees that various ministries and agencies impose on production and imports, thus cutting collection costs and special sources of finance for pork-barrel projects. The government's plan to enact a value-added tax in lieu of the current uncollected (and uncollectable) income taxes would likely diminish reliance on oil income and also shrink the bureaucracy.

Replacing the current system of quotas and special licenses on imports with tariffs would eliminate the monopolies enjoyed by politically favored business interests. A comprehensive overhaul of the outdated 1968 commercial code would encourage more transparent and productive ventures, particularly in the small business sector. A revision of the current antibusiness labor law, enacted when leftist ideologues controlled the Fourth Majles in 1990, would encourage new employment. Downsizing the bloated bureaucracy may stop oil income from being invested in politically favored but economically unsound projects. Turning the Tehran Stock Exchange into a self-regulated but politically supervised institution would promote the establishment of mutual funds to attract both domestic and foreign capital.

Finally, Iran's entry into the World Trade Organization (so far blocked by the United States) and the conclusion of a comprehensive trade and cooperation accord with the European Union would shake the entrenched economic mafia to its roots and revolutionize the Iranian economy. The WTO's mantra of free markets is anathema to the Islamic Republic's state-dominated and highly politicized economic system. To qualify for full membership, Iran must make a host of economic changes, ranging from trade liberalization to financial deregulation to copyright protection. These new reforms will undoubtedly meet with severe resistance from vested interests. But the urgent need to find jobs for the millions of unemployed -- combined with the paucity of domestic investment, sluggish non-oil exports, and weak foreign-exchange reserves -- makes turning to the global economy inevitable. And this shift will not be possible without fundamental reform.


The internal currents shaping Iran's future will undoubtedly be affected by events in the region, particularly the fate of Saddam Hussein's regime in Iraq. At present official Iranian policy, under a principle of "active neutrality," opposes U.S. preemptive action without a United Nations mandate as a "dangerous precedent." In part, the government objects out of a scarcely concealed concern that it could face a similar U.S. challenge one day. Although Tehran would certainly be happy to see Saddam go, Iran's government also worries that the establishment of a pro-American regime in Baghdad would leave Iran encircled by U.S. allies. The ruling clerics are similarly not enthusiastic about the prospect of a free and democratic Iraq, which would surely encourage the Third Force to intensify its reform efforts.

Virtually all Iranians oppose Iraq's partition or potential disintegration for fear that Iraqi Kurds may incite their counterparts in Iran to rise up and agitate for an independent state. Additionally, Iran does not wish to see a long-term decline in the price of oil as Iraq again pumps at full capacity. There is also concern that major international oil companies may invest in Iraqi oil fields at Iran's expense. It is impossible to know at this stage how these various forces will interact.


The ongoing political impasse, economic distress, and social turmoil (not to mention a possible invasion of Iraq) all threaten the survival of the Islamic state. The discontent of the Third Force in particular has created a seemingly unstoppable momentum toward change. In its postrevolutionary history, Iran has never been as politically polarized or ideologically divided as it is today.

Khatami's recent belated attempt to reclaim his authority has raised the political temperature several degrees. His open suggestion that he might resign if further stymied by the Council of Guardians or the judiciary, as well as threats of mass resignation from members of the Islamic Participation Front (the largest bloc in the Majles), is an ominous warning of a looming constitutional crisis or worse in coming months. Two bills submitted by Khatami to the Majles in September 2002, which are now undergoing the long process of ratification, would curb the veto power of the Council of Guardians and give the president legal authority to force hard-line Islamic courts to abide by the constitution. The renewed crackdown by the judiciary on reformist groups is reported to be an attempt to pressure the president to withdraw these bills. Regardless of the ultimate fate of this controversial legislation, its very introduction marks a major turning point in Iran's domestic political dynamics.

Temporary reversals of democratization nevertheless remain likely. But the Iranian people have sown the seeds of change and the country's theocratic rulers cannot postpone their harvest forever. The autocratic and dubiously Islamic concept of the velayat-e faqih is clearly in retreat and the oligarchs know that if they do not bend, they will break. A recent open letter signed by more than 125 former Majles deputies lambasting the hard-liners made this point abundantly clear.

These developments should not suggest, however, that Washington can determine or even affect the outcome of Iran's political ferment. Events within Iran will dictate the U.S. posture rather than the other way around. Clerical dogmatism cannot be defeated from afar -- particularly given Iranians' profound mistrust of outside meddling.

If the United States truly wishes to see a modern, democratic, and peaceful Iran, Washington must follow a calculated "wait and see" policy. Neither Bush's anger, nor his empathy, nor even his promise of friendship with democratic forces will be enough to change Iran. Thus as long as U.S. vital national interests are not seriously threatened and Iran is not clearly implicated in anti-American terrorist acts, the United States should refrain from both unsubstantiated accusations and implied threats against the Islamic Republic. Washington would be best served by letting the currently accelerating process of democratization run its course. The theocracy's days are numbered -- Iran's own internal currents assure this.

You are reading a free article.

Subscribe to Foreign Affairs to get unlimited access.

  • Paywall-free reading of new articles and a century of archives
  • Unlock access to iOS/Android apps to save editions for offline reading
  • Six issues a year in print, online, and audio editions
Subscribe Now
  • Jahangir Amuzegar is an international economic consultant. He was Finance Minister and Economic Ambassador in Iran's pre-1979 government.
  • More By Jahangir Amuzegar