Back in the 1980s, when Iran's ruling fundamentalist clerics were filled with revolutionary zeal and paranoid about foreign threats, they made an urgent appeal to good Muslim couples: Go forth and procreate. The populace responded alarmingly well. Iran's annual population growth surged from 2.7% in 1976 to 4% in 1986. By the mid-'90s, the government realized that the population explosion was a potential calamity and reinstituted family planning. That worked, too. Iranian couples today bear an average of fewer than three children, down from six.

Because of those years of pro-family social policy, however, Iran has a demographic profile that some development experts regard as a dream. The high birth rate of the 1980s created an enormous pool of young adults beginning to pour into the labor force. Meanwhile, those starting families have fewer children to support, because of the resurgence of birth control. That means new parents can spend more on personal consumption and their children's education. What's more, a big government investment in university training means many new workers are highly skilled. This looks like the smart, pro-growth policy that helped East Asia achieve dramatic growth from the 1970s through the '90s.

But Iran is no Taiwan or Singapore. The Shia Muslim nation's economy is so strangled by government control and regulation that it produces too few jobs to absorb all those college grads. In the past, experts say, most graduates got jobs with the government. But government agencies are saturated, and there aren't enough private jobs to employ all the would-be engineers and computer programmers pouring out of the schools. Indeed, most private enterprises in Iran are small businesses that employ 10 or less. The surfeit of educated young people represents "an immense opportunity for the country," says Hassan Taee, a professor of economics at Allameh Tabatabie University in Tehran and the ex-deputy head of Parliament's research center. But the economy isn't structured to take advantage of it.

Experts offer a host of prescriptions for solving the problem. First, they say, the government should get out of business. Some 80% of the economy is produced by the state, which owns or controls most big enterprises, including almost all large manufacturers. Tehran should also do more to diversify the economy, which is dominated by the oil industry. East Asian-style high-tech factories making products for export are practically nonexistent. So is foreign investment, which is discouraged by the government, though foreign factories would be an easy way to employ Iran's highly educated, low-cost workforce. Also, Iran needs to take better advantage of its educated women. They make up more than 50% of the college graduates but just 14% of workers.

Moreover, critics of the education system complain that it is ill-matched to the job market. Too many economics graduates are driving cabs, they say, and too many humanities majors are working in banks. "Iranian youth have a very high potential, but we have a weak system here," says Alireza Khalaj, 26, a fourth-year industrial management student at Allameh Tabatabie. "It bears the massive costs of education but does not pay any attention to what this person who spends four years here will take with him to the job market." As the rest of the world grows grayer, Iran could be building a more dynamic future based on a young, educated populace. Instead, it's building a future based on frustration.

By Babak Pirouz in Tehran

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