Despite many optimistic predictions, the post-war economic growth enjoyed by developed countries has not spilled over to developing countries. In fact, a widening gap between per capita incomes has taken place over the last thirty years.' Growth rates in developing countries have often been quite dismal and their rates of growth have varied significantly more than those of the more advanced countries. Iran was an exception to the norm for developing countries sustaining high and growing rates of real economic growth after its stabilization program of the early 1960s. Iran's industrial sector lost its earlier dynamism by the late 1970s, and despite some growth in the agricultural sector, the economy began to experience severe stagnation. Two alternative explanations are possible to account for the slowdown. On the one hand, it can be attributed to short-run phenomena largely political in nature.2 On the other hand, the slowdown can be viewed as a direct result of the import substitution policies which had been adopted by the government to enable the manufacturing sector to catch up'. This paper examines the major mechanisms which led to the demise of the Iranian economy. First, we identify some of the more important economic trends at work before and after the oil price increases of 1973. Despite the aggregate nature of the data, several patterns suggest the broad forces underlying Iran's growth and decline. Second, we examine the Nugent thesis as described below in the context of Iran to see why the momentum of growth which was established in the 1960s did not carry forward into the 1970s as Nugent's thesis would suggest.