Middle class in Iran: Oil rents, modernization, and political development

This study probes the middle class in Iran in relation to oil rents and political development. We begin by discussing how the Iranian middle class has evolved through the 1979 Revolution and in the post-revolutionary period. We then empirically examine the relationships among per capita oil-rent shocks, the growth of the middle class, and the quality of political institutions as well as political conflict. We use annual time series data for 1965-2012 and employ a Vector Autoregressive (VAR) model along with impulse response and variance decomposition analyses. According to our results, the middle class response to positive oil shocks is positive and significant. Yet, positive oil shocks and the growth of the middle class have contrary effects on the quality of political institutions in the short term - negative and positive respectively. This prompts us to employ a weighted measure of conflict, whose positive response to the growth of the middle class in Iran we then capture. These results are robust when controlling for other channels in the nexus of oil rents and middle class. The estimated Autoregressive Distributed Lag (ARDL) models illustrated the long-run effects of oil rents on the size of middle class and long-run effects of both middle class and oil rents on conflict. Our findings hint at potential conflicts after oil shocks, whereby oil rents increase government's control over political institutions but at the same time give impetus to the growth of the middle class that is in turn associated with political instability.