Mofid University The Journal of Economic Studies and Policies 2423-4648 Articles in Press 2026 07 01 Reversed Reform Sequencing: Elimination of Preferential Exchange Rate, Intensified Market Concentration, and Diminishing Economic Complexity in Iran Reversed Reform Sequencing: Elimination of Preferential Exchange Rate, Intensified Market Concentration, and Diminishing Economic Complexity in Iran 737203 10.22096/esp.2026.2084297.1866 FA Naser Elahi Associate Professor, Department of Economics, Mofid University, Qom, Iran. 0000-0002-3313-3366 Journal Article 2026 02 01 <span>Iran’s 2022 removal of the preferential exchange rate aimed to unify exchange rates, curb rent-seeking, and enhance transparency; yet it resulted in a major inflationary shock, weakened small and medium-sized enterprises (SMEs), and intensified market concentration. Using a historical–institutional approach that combines Timur Kuran’s “Long Divergence” thesis with Oliver Williamson’s four-level institutional analysis, this paper argues that the policy failure stemmed less from its stated objectives than from reversed reform sequencing: intervening in prices and resource allocation (Level 4) before strengthening formal rules and intermediary governance institutions (Levels 2 and 3). In a rent-based political economy lacking independent intermediary institutions, the price shock ceased to function as a neutral allocative signal and instead became a mechanism for reallocating power in favor of dominant actors through three channels: (1) asymmetric selection driven by unequal financial resilience and access to rents, (2) backward shock transmission along supply chains enabled by oligopsonistic buying power, and (3) rent stabilization through new institutional channels (preferential credit, exemptions, and targeted allocations). The macro outcome is the exit of more complex firms, the shortening of value chains, and a reduced capacity to upgrade economic complexity. The paper proposes a “pre-liberalization institution-building” strategy that prioritizes property-rights protection and contract enforcement, anti-monopoly policy, independent regulation, and SME resilience instruments before any major price liberalization.</span> <span>Iran’s 2022 removal of the preferential exchange rate aimed to unify exchange rates, curb rent-seeking, and enhance transparency; yet it resulted in a major inflationary shock, weakened small and medium-sized enterprises (SMEs), and intensified market concentration. Using a historical–institutional approach that combines Timur Kuran’s “Long Divergence” thesis with Oliver Williamson’s four-level institutional analysis, this paper argues that the policy failure stemmed less from its stated objectives than from reversed reform sequencing: intervening in prices and resource allocation (Level 4) before strengthening formal rules and intermediary governance institutions (Levels 2 and 3). In a rent-based political economy lacking independent intermediary institutions, the price shock ceased to function as a neutral allocative signal and instead became a mechanism for reallocating power in favor of dominant actors through three channels: (1) asymmetric selection driven by unequal financial resilience and access to rents, (2) backward shock transmission along supply chains enabled by oligopsonistic buying power, and (3) rent stabilization through new institutional channels (preferential credit, exemptions, and targeted allocations). The macro outcome is the exit of more complex firms, the shortening of value chains, and a reduced capacity to upgrade economic complexity. The paper proposes a “pre-liberalization institution-building” strategy that prioritizes property-rights protection and contract enforcement, anti-monopoly policy, independent regulation, and SME resilience instruments before any major price liberalization.</span>