Institutions and Economic Growth: A Fundamental Analysis of the Institutional Barriers to Sustainable Economic Growth in Iran during the Second Pahlavi Period

One of the prevalent theoretical models for understanding the historical roots of the underdevelopment of various societies is the new institutionalist theory of institutional quality improvement which emphasizes the fundamental origins of economic growth. According to this theory, societies with inclusive institutions will experience a sustainable economic growth and development by creating a creative destruction process and a generative rent distribution while moving toward evolutionary cycles. Societies with extractive institutions, however, will lag behind and decline in the long run due to the dominance of rent relations and the non-generative rent distribution while moving toward vicious cycles. During the second Pahlavi period, despite its short-term experience of economic growth, Iran moved to vicious cycles instead of evolutionary ones; therefore, in order to investigate this issue, the reasons for the lack of sustainable   economic growth during this period will be addressed using the theory of institutional quality improvement. To this end, one of the most important institutional barriers to economic growth in this period will be addressed through examining the process of creative destruction on the political and economic market. The results of this study indicate that despite experiencing the short-term economic growth achieved under the shadow of extractive institutions during this period due to factors such as power struggles, dominance of personal relations over affairs, the non-generative rent distribution etc., the process of creative destruction did not take shape on the political and economic market, so that despite the abundance of sources of income and foreign aid, Iran could not maintain its economic growth and development.