Primary objective of this paper is to explain why Korea has been successful in economic growth and industrial transformation while Iran has failed in this area. To explain the different performances of the two countries, we have looked at their initial level of industrialization, nature of political regimes and economic institutions, trade and industrial policies in the two countries. Our conclusions are as follows: First, before 1960s, the level of per-capita GDP and industrial development in Korea was well above Iran, and Korea was better placed for long term growth and industrial development, than Iran. Second, in the period 1960-1977, political regimes, planning organization and baking system were similar in both countries, and despite the fact that Korea adopted export oriented policy and Iran adopted import substitution policy, the economic growth and industrial development in Korea and Iran were quite high, compared to the other developing countries. Third, in the period 1980-2012 Korean government liberalized its trade and FDI regimes, gave more role to markets and modified its industrial policies to facilitate entry of Korean economy to the knowledge based economy. Economy of Iran, however, during a long period from 1979 to 2013, faced a revolution, a prolonged war, international sanctions, institutional disruptions, and contradictory shifts in economic policies. Better performance of Korean economy in this period can be attributed to its superior institutions and policies. Fourth, even if Iran did not face with all of these adversaries, import substitution policy, coupled with no specific industrial policy, could not bring about the industrial transformation and competitive edge for the country.
JEL Classification: O11, O13, O14
Received: 6/1/2013 Approved: 12/30/2013