History of Iran Economy
Regardless of the changes in politics and ideology brought about by each successive regime in Iran, the one constant has been lack of fundamental economic change for the majority of Iran’s people. Since the Islamic Revolution in 1979, Iran has repudiated the Western-style modernization initiated by Reza Shah Pahlavi and continued by his son, Mohammad Reza Shah Pahlavi. The postrevolutionary government of Ayatollah Sayyid Ruhollah Musavi Khomeini condemned the Pahlavi policy of allowing all countries to invest in, and trade freely with, Iran as unsatisfactory on political and cultural grounds and initiated a program of “self-reliance.” Moreover, the modern production techniques introduced by the Pahlavis had eventually proved inappropriate for Iran because they required large capital investments. Having rejected Western models as inimical to the needs of Iran and being obliged to manage a wartime economy, the post-revolutionary government cut imports of luxury goods, began rationing subsistence items, nationalized industries, and expanded direct taxation. By late 1987, the result was a shortage of many goods that had once been imported, an insufficiently productive agricultural system, high unemployment, and a greater dependence than ever on revenues from oil and gas exports.
In the early 1920s, only a few large or modern industrial plants were in operation in Iran. The population was overwhelmingly rural, and transportation remained primitive. Except for the petroleum industry, still in its formative stage, production was geared to small, local markets. Increasing quantities of oil were produced for the international market, but with little impact on the domestic economy.
After establishing the Pahlavi dynasty in 1925, Reza Shah began to modernize Iran by developing a strong central government and entering Western markets. The results were mixed. The government improved communications, built an education system modeled on the Western example, and began construction of the Trans-Persian Railway. Centralization led, however, to authoritarianism, a state monopoly on foreign trade, and stagnant agricultural productivity. Many Iranians continued to reside in small, isolated settlements, and an estimated one- quarter of the population consisted of fiercely independent nomadic tribesmen. Modernization threatened the nomads’ way of life and generally brought little benefit to Iran’s undereducated, underemployed population because it focused on the development of capital-intensive industries rather than of labor-intensive enterprises.
When Mohammad Reza assumed power in 1941, he attempted to continue his father’s modernization efforts. By 1978 Iran had experienced great changes, but progress had been uneven for various elements of the population and different parts of the country over the preceding half- century. The Revolution of 1979 substituted “self-reliance” for Westernization as the focus of development. The importing of luxury goods, such as color televisions and stereos, was stopped, and the funding for development and construction in particular was cut significantly. Reductions in construction spending affected the entire economy and sent the gross national product (GNP) on a downward spiral. The budget cuts made in the name of “self-reliance,” after the Revolution in 1979 and the onset of the war with Iraq in 1980, did additional damage to the economy.
During the 1970s, oil and gas exports remained Iran’s main source of foreign exchange. This dependence increased in the years immediately following the Revolution, as the price of oil peaked at US$40 per barrel. Although non-oil exports began to drop sharply because of the 1980 international recession, earnings from oil exports remained high until the mid-1980s, when the price of oil began to decline. Oil revenues began to fall in 1984 and by 1985 averaged only US$1 billion per month, the approximate equivalent of the cost of continuing the war with Iraq. By 1986 monthly oil revenues averaged US$6.5 million per month. After 1984 the decline in oil revenues and the cost of the war created budget deficits. Consequently, the government reduced nonmilitary spending, which did further damage to the national economy. Domestic food production became insufficient, which forced Iran to import 65 percent of the food that it needed and to ration essential items such as meat, rice, and dairy products. Black marketing, long lines for consumer goods, and high unemployment exacerbated the effects of nonmilitary budget cuts. To
ameliorate the situation, the government tried to reduce its dependence on declining oil revenues by investing in other key industries, such as copper and steel production. As of late 1987, however, economic problems remained severe and essential commodities scarce.
The Revolution of 1979 held forth to the Iranian populace the promise of “national integrity” through “self-reliance”. Although intended to change Iran’s economic and political course, the Revolution had produced no structural changes in the economy by late 1987. The growing need to sell oil on the international market demonstrated Iran’s continuing inability to isolate its economy.
By late 1987, Iran was actually more dependent on oil than ever before. As in Reza Shah’s time, attempts at modernization had been initiated by an autocratic government that stressed Iran’s “unique” identity. In the late 1980s, that identity increasingly has been defined by Islam, rather than by any particular economic policy. Although much economic activity has occurred within Iran since 1979, the lack of fundamental change has been the constant. Oil earnings have fluctuated, banks have been nationalized, industries have developed — yet the power structure has merely shifted from the shah’s circle to the clerical class.
ROLE OF THE GOVERNMENT
The central economic role of government in post-World War II Iran has been the manipulation and allocation of oil revenues. Since the beginning of the production of petroleum in commercial quantities in the 1920s, government oil policies have reflected the varying priorities of the different regimes and have exacerbated economic and cultural cleavages within the society.
During the reign of Reza Shah (1925-41), oil revenues were modest, and most of the proceeds from oil went to Britain through the Anglo-Iranian Oil Company (AIOC). For its revenues, the regime relied upon indirect taxes (customs duties and excise taxes) on items such as tea and sugar. In contrast, after 1951, the government of Mohammad Reza Shah (1941-79) relied on oil income to finance the policies of centralization by which it was able to control most aspects of Iranian society until nearly the end of the shah’s rule.
Reza Shah’s regime financed its development programs through modest oil royalties, customs revenues, personal income taxes, and state monopolies. During his reign, oil production royalties, although still low, quadrupled in terms of the rial; this money was spent on defense and industrial development. Between 1926 and 1941, higher tariffs boosted annual customs revenues from approximately US$5.6 million to US$16.3 million. Institution of a small income tax replaced the local levies and enabled the government to extend its influence into the provinces; by 1941 the income tax provided annual revenues of US$10.8 million. Finally, the government relied upon state monopolies on consumer goods such as sugar, tobacco, tea, and fuel, which contributed approximately US$46.5 million annually by the early 1940s.
The Beginnings of Modernization: The Post-1925 Period
A copper artisan plies his trade on a street in Esfahan
Reza Shah introduced the concept of centralized economic planning to Iran at the expense of older societal values and traditions. Reza Shah consolidated power by developing support in three areas: the army, the government bureaucracy, and the court circle. Once his power was consolidated, he pursued economic, social, and cultural reforms. Reza Shah believed that the secret of modernization lay in replacing many religious and social norms of traditional society with the values of a twentieth-century nation-state. Reza Shah’s policies favored the urban over the rural, the wealthy over other classes, and industry in general over agriculture. Developing this “new order” gradually cost Reza Shah most of his base of support. Nevertheless, government centralization enabled him to achieve full control over
Economic development began with the expansion of the transportation system. The first project was the expansion of the Trans-Persian Railway. In the first five years of his reign, Reza Shah developed a network of railroads that connected ports to inland cities, thereby encouraging trade between rural and urban centers. By 1941 railroads crossed Iran from north to south and from east to west.
The existence of a modern transportation system by the 1930s encouraged industrial growth, which was further promoted by government financial incentives. Construction of modern manufacturing plants was a high priority, as was the development of whole industries rather than small, individual factories. Financial incentives included government- sanctioned monopolies, low-interest loans to prospective factory owners, and financial backing for plants and equipment by the Ministry of Industry. The number of industrial plants (excluding those processing petroleum) increased 1,700 percent during Reza Shah’s reign.
In 1925 only about twenty modern plants existed, of which five were relatively large, employing about fifty workers each. By 1941 the number of modern plants had risen to 346, of which 146 were large installations. These large plants included thirty-seven textile mills, eight sugar refineries, eleven match factories, eight chemical companies, two glassworks, one tobacco-processing plant, and five tea-processing plants.
Between 1926 and 1941, the oil industry labor force increased from 20,000 to 31,000. By 1941 the oil industry employed 16,000 workers at the Abadan refinery and another 4,800 at drilling sites in Khuzestan. These wage earners, in conjunction with those employed in emerging modern industrial enterprises, formed a working class of about 170,000 and represented about 4 percent of the total labor force in 1941.
Rapid industrial growth created a modern, urban working class that nonetheless coexisted with people who had more traditional occupations, values, and ways of life. This new industrial work force developed in the five major urban centers, where 75 percent of the modern factories were located: the towns of Tehran, Tabriz, and Isfahan, and the provinces of Gilan and Mazandaran. Tehran’s population alone increased from more than 196,000 in 1922 to about 700,000 by 1941. Modernization accelerated the pace of life through changes in culture, education, and traditional social norms, including those governing the role of women.
The cost of developing the military establishment, centralized ministries, large-scale industrial plants, and institutions of higher education increased the budget nearly 1,800 percent during Reza Shah’s reign. The Iranian national budget grew from approximately US$15 million in 1925 to US$166.5 million in 1941 (based on the 1936 exchange rate). Because industrial development was predicated on oil revenues, the government’s lack of control over the oil industry created periodic tensions with foreign oil companies. The emphasis on industrial development also demonstrated the need for development planning.
The concept of development planning by the government dates back to 1947, when it was initiated by Mohammad Reza Shah’s government as a series of seven-year cycles. The Plan Organization consisted of leading government officials, who provided guidelines from which a development strategy was formed. Planning had a direct impact on the public sector because of its effect on allocations of capital expenditures. In Iran’s mixed economy, however, the planners had no direct power over private sector investments and development; instead, they had to rely on indirect measures, such as fiscal and financial incentives.
The First Development Plan (1948-55) failed, except for strengthening the role of the Plan Organization, which, after 1973 was called the Planning and Budget Organization and in January 1985 was transformed by the parliament, or Majlis, into a ministry. The basic development strategy was the pragmatic approach of accelerating growth by incorporating the latest technology into large-scale, capital-intensive industry. Expansion of the infrastructure, however, preceded the development of industry. The planners often built ahead of demand, creating physical and economic incentives for the private sector. Diversification of industry was also a goal, although the planners recognized that the excessive dependence on oil revenues would have to continue at first to provide the capital to diversify. Diversification was intended to facilitate import substitution, and development of large-scale industry meant that many plants producing for export could achieve economies of scale.
The Second Development Plan (1955-62) focused on public sector expenditures, with an investment program to be funded by foreign loans and 80 percent of oil revenues. The government spent so much money, however, that the regime faced severe inflation and depleted foreign currency reserves by fiscal year (FY) 1959. Although Iran was experiencing economic problems, the plan provided for the construction of several reservoir dams, the most important of which were located on the Dez, Safid, and Karaj rivers. Simultaneously, private sector investment in light industry remained strong until the economic crisis that began in 1959.
During the middle and late 1950s, economic instability exacerbated chronic social problems, such as overcentralization of government, concentration of land in the hands of relatively few wealthy landlords, enormous bureaucracy, and regressive tax laws. As early as 1949, the shah voiced his intention to consider needed changes, especially in land reform. It was not until the 1960s, however, that he actually instituted agrarian reform. The intervening decade was a period of consolidation following the regime of Reza Shah; it also featured a period of government control by Mohammad Mossadeq.
Oil Revenues and the Acceleration of Modernization (1960-1979)
During the reign of Mohammad Reza Shah, significant increases in oil revenues, coincident with the centralization of the economy, compounded societal stress and imbalance. The modernization that continued throughout the shah’s rule affected the economic infrastructure but not the monarchical political structure. The gap between the two was accentuated by the Western industrial policies promulgated by the shah.
In the 1960s, economic planning focused on four main goals. The first was rapid development of large industries by capital-intensive methods and the use of the latest technology; the second was employment of foreign advisers and technicians to guide the modern industrial complex. The third was encouragement of large industrial profits, and the fourth was control of wages by reallocating savings from labor costs to capital investment. It was assumed that wealthy industrialists would reinvest their capital in the economy, thereby stimulating economic development. But such investment did not occur, and the gap in income between industrial owners and the commercial class, or bazaar (traditional middle class merchants), was never closed, which contributed to the revolutionary pressures that eventually brought down the regime.
The bazaar did not benefit from the 1974-78 oil boom; as a consequence, bazaar members helped lead and finance the Revolution. The series of national reforms and development programs that Mohammad Reza Shah had embarked on in the 1950s came to be known in 1963 as the “White Revolution.” The White Revolution was simultaneously the shah’s attempt at economic modernization and his attempt at political stabilization. He intended to accelerate nation-building and to enhance his regime’s image as the promoter and guardian of the public welfare.
Land reform was a major element of the shah’s economic development program. Land reform affected both the economic structure and the social mores of the agrarian component of society. The Third Development Plan (1962-68) and the Fourth Development Plan (1968-73) together infused US$1.2 billion into agriculture through land reclamation, subsidized irrigation projects, and land redistribution programs. These programs undermined traditional rural authority figures, encouraged commercial farming, and transformed the rural class structure. By the 1970s, the rural class was divided into three components: absentee farmers, independent farmers, and rural wage earners.
The third plan was transitional to a new time frame of five years for development plans. Oil revenues supported the US$1.9 billion national budget, which fostered an economic boom in the public and private sectors. The government concentrated its activities on heavy industries, dam building, and public utilities, as well as on expansion of oil and gas production. Private industry benefited from bank credits given as part of the third plan.
The fourth plan accelerated economic growth and integrated sectoral and regional concerns into a national development program. During the fourth plan, the annual rate of growth in gross domestic product (GDP) averaged 11.8 percent, which exceeded the growth target. The strongest growth occurred in industry, petroleum, transportation, and communications. Several large projects under construction during the fourth plan included a steel mill, an aluminum smelter, a petrochemical complex, a tractor plant, and a gas pipeline leading to the Soviet border. Farming and crop production were given low priority during this period of industrialization, which widened the large gap between the industrial and agricultural sectors.
The third and fourth development plans affected the urban population in particular because of the emphasis on the increased production of consumer goods and the expansion of industries such as gas and oil. Between 1963 and 1977, many industrial facilities were constructed, primarily in urban areas.
The Fifth Development Plan (1973-78) set investment at US$36.5 billion; this figure almost doubled to US$70 billion as a result of large increases in oil revenues during the period. Almost two-thirds of the capital allocated under the fifth plan was concentrated in housing, manufacturing and mining, oil and gas projects, and transportation and communications. Some additional oil revenues were spent on ad hoc defense and construction projects rather than on the fifth plan’s priority areas.
In the period between the quadrupling of oil prices in 1973 and mid- 1977, Mohammad Reza Shah pushed both industrialization and the establishment of a modern, mechanized military much too rapidly. As a result, inflation increased, corruption became commonplace, and rural-to- urban migration intensified. In addition, because of a lack of technically trained Iranian personnel, the shah increasingly brought foreign consultants into Iran. This further exacerbated an already severe housing shortage in Tehran.
In mid-1977, the shah appointed Jamshid Amuzegar as prime minister, and the latter immediately launched a deflationary program. This sudden slowdown in the economy led to widespread unemployment, especially among unskilled and semiskilled workers, which further increased the gap between rich and poor. The economic slowdown was a major factor in radicalizing large segments of the population and turning them against the shah.
Some argue that rapid modernization created the disequilibrium that brought about the shah’s fall. Others, however, stress the importance of the way in which the rapid modernization was implemented. After the economy’s initial development, inequalities in income distribution were not addressed. Those at the lower end of the economic spectrum — for example, small merchants and businessmen, urban migrants, and artisans — felt disadvantaged in relation to workers in large businesses, industries, and enterprises with foreign associations. Western-educated Iranians rapidly became a well-paid elite, as did factory workers. Bazaar merchants, students, and the ulama, however, did not benefit so directly from modernization.
The increased availability of health and educational resources in towns and cities that resulted from Mohammad Reza Shah’s programs contributed to an explosion of the urban population. In the 1950s, urban areas accounted for 31 percent of the population; by the late 1970s, that number had increased to about 50 percent. The urban population became stratified into an upper class, a propertied middle class, a salaried (managerial) class that included the bazaar, and a wage-earning working class.
The Post-1979 Period
The disparity between the economic promises of the shah’s regime and the results as perceived by the majority of Iran’s citizens contributed to a revolutionary climate in the late 1970s. When the revolutionary regime came to power in 1979 (on the heels of the economic downturn of the late 1970s), it claimed that modernization and Westernization had nothing to offer Iran, as the recession had made evident. Islam, not economic planning, was cited as the basis for correcting the perceived ills of Iranian society stemming from the alleged excesses of the shah. The regime came to power criticizing Mohammad Reza Shah’s failed agricultural policies and promising self-sufficiency and economic independence. The government adopted an emphasis on agriculture as the foundation of its program. To consolidate power quickly among the rural poor, the Khomeini regime capitalized on popular resentment of the shah for having largely ignored the agricultural sector.
All six of the development plans designed under the shah aimed at economic development; the Sixth Development Plan, intended for 1978-83, was never implemented because the Revolution occurred in early 1979. The First Development Plan of the Islamic Republic (1983-88) proclaimed that its goals were to establish Iran’s economic independence through self-sufficiency in foodstuffs and to reduce the country’s dependence on oil exports.
The first “republican” plan focused on five points: expanding education, representing the interests of the mostazafin (the disinherited), achieving economic independence, diversifying the economy to lessen the dependence on oil and gas exports, and developing agriculture. The development plan did not include a factor for defense expenditures. Criticism of this plan resulted in its revision in 1984, although the changes were not approved by the Majlis until January 1986. The revision included an increase in the investment in agriculture (from 15.5 to 16.7 percent of the national budget) and a smaller investment in non-oil industry (the share fell to 52 percent). Projected oil revenues in this version of the plan were based on the lower oil price prevailing in 1985.
The budget for the first republican plan was US$166 billion, but the allocation of funds was delayed because of political and economic pressures. The political pressures came from newly empowered groups and individuals interested in using the social disruption caused by the Revolution to create their own financial empires, free of state control. The war with Iraq also affected funding for the first republican plan. Oil revenue shortfalls caused the first republican plan to be revised again in early 1987. The shortfalls, in combination with the expenses associated with the Iran-Iraq War, resulted in nearly half the budget being allocated to military goods. Imports of consumer products were cut in half, and projects under the development plan were given low priority. Austerity measures and increased unemployment resulted.
Gauging the relationship between government economic policy and actual operation of the economy subsequent to the Revolution of 1979 is difficult because official economic policy has been obscured by religious and ideological themes. Iran’s financial system began adhering to Islamic principles after the Revolution, a process that accelerated in the 1980s. Although the Planning and Budget Organization prepared budgets, in coordination with several other ministries, the Majlis, the majority of whose members were Muslim religious leaders, was responsible for ratification.
The budget presented a financial outline within which outlays were planned for military purposes, education, and other government activities. There was an increasing discrepancy between budget estimates for the war and actual costs. Whereas the government claimed in 1982 that 13 percent of the total budget was spent on defense, independent analysts claimed that the figure rose from 11.5 percent of the budget in 1979 to 46.9 percent in 1982. However unreliable the Iranian claims about defense spending, one thing was increasingly clear: the Iranian government dedicated virtually all foreign exchange resources, including both advance drawings on revenues and uncollectible receivables (which were counted as assets) to prosecution of the war.
Inflation was a serious issue in the mid-1980s. The increase in prices, which was beyond the control of the monetary authorities and the Central Bank — founded originally in 1960 as Bank Markazi Iran and renamed Central Bank (Bank Markazi) of the Islamic Republic of Iran in December 1983 — began in the 1970s with the rapid rise in oil revenues and equally rapid increases in government expenditures. The latter had a multiplier effect on the money supply and added to the demand for goods and services, thereby inducing price rises. The monetary authorities attempted to minimize the multiplier effect by increasing the cost of borrowing and tightening credit. Imports increased as a result of lower duties, relaxed quotas, and an increase in government purchases of foreign goods. Bottlenecks at the ports and elsewhere in the transportation system limited the capacity of imports to satisfy demand, however.
Efforts to reduce inflation date to 1973, when a serious price control program was initiated. The government took additional measures to curb inflation in May 1980 by linking the rial to the Special Drawing Rights (SDR’s) of the International Monetary Fund (IMF) instead of the United States dollar and by encouraging investment in the private sector and growth in non-oil industries. In addition, subsidies on basic goods were increased to keep their prices down. Nevertheless, a 30- percent inflation rate persisted, a black market rate on the United States dollar flourished, and foreign exchange controls continued.
Inflation was continually understated by the government. The government asserted that the inflation rate had fallen from 32.5 percent in FY 1980 to 17 percent in FY 1983 and to 5.5 percent in FY 1985; independent analysts, however, claimed that a more accurate inflation rate for 1985 was 50 percent. As essential goods grew scarcer in the wartime economy, import controls fed inflation. Prices of basic foodstuffs and consumer goods increased faster than the Central Bank admitted. The increasing cost of rental property in urban areas and continued subsidies for consumers on basic foods reflected a serious inflationary problem in the mid-1980s.
To the surprise of many, the Majlis increased the FY 1986 budget in March 1986, even though oil revenues were projected downward. The increase went mainly to finance military spending and the steel and nuclear industries. The rising costs of the war, coupled with falling oil prices in 1986, led to the use of non-oil exports to generate revenue because oil income was no longer a guaranteed source of foreign currency. To finance short-term debts, Iran drained its small reserve of foreign currency by allowing advance drawing on revenues.
The FY 1987 budget also reflected the priority of the war effort. The government again promised to curb inflation, to continue to subsidize basic foodstuffs, and to make available to the import sector a revolving fund of US$7 billion, presumably for consumer use.
Monetary and Fiscal Policy
The Iranian fiscal year begins on March 21 and runs through March 20 of the following calendar year. The budget, presented to the Majlis by the Planning and Budget Organization, consists of three sections: ordinary, plan, and defense allocations. Because of conflict between the Revolution’s stated opposition to the massive defense expenditures of the shah and the high cost of the war with Iraq that began less than one year after the Revolution, as of late 1987 there had been no fiscal year in which defense expenditures were not severely understated for domestic political reasons. As a result, attempting to set forth actual figures on the money supply, especially as a function of fiscal policy, was almost pointless.
Western-style banks and insurance came late to Iran, but protected and stimulated by the government and fed by expanding economic activity, banking became one of the fastest growing sectors of the economy in the 1960s. The insurance industry had barely started in 1960 and had a negligible role in the accumulation of funds to finance development, largely because insurance was not used by most of the population. Before the modern era in Iranian banking, which dates to the opening of a branch of a British bank in 1888, credit was available only at high rates from noninstitutional lenders such as relatives, friends, wealthy landowners, and bazaar moneylenders. In 1988 these noninstitutional sources of credit were still available, particularly in the more isolated rural communities. Institutional banking spread rapidly in the late 1960s; by 1988 almost all small towns were served by at least one bank. None of these operations were private because banks were nationalized in 1979.
In 1960 Bank Markazi Iran was established as the central bank. Later legislation further defined its powers and responsibilities. The bank issued notes and acted as banker for the government, keeping accounts, marketing government securities, maintaining foreign exchange reserves, and overseeing international transactions. It also set standards for the supervised financial institutions, established credit and monetary policies, and took measures to enforce credit and monetary policies. The banking laws limited foreign participation to 40 percent in any banks operated in Iran (except the Soviet bank, which had been founded much earlier). Subsequently, the Central Bank limited foreign ownership in new banks to 35 percent.
By 1977 the banking system consisted of the Central Bank, twenty-four commercial banks, twelve specialized banks, and three savings and loan associations (these numbers decreased after the Revolution). The commercial banks had more than 7,400 branches, including a few in other countries. The specialized banks focused mostly on a particular kind of lending (e.g., industrial or agricultural loans), although three regional banks specialized in financing local development projects. In addition, in 1977 approximately seventy foreign banks (primarily from the major industrial nations) had representative offices in Iran, but they conducted no local banking business. Their purpose was to facilitate trade relations.
All domestic banks and insurance companies in Iran were nationalized in 1979. In 1980 the twenty-nine domestic banks remaining after the Revolution were consolidated into nine units. Foreign banks in Iran declined in number to thirty by 1987 and included the representative office of a small Soviet bank that financed trade. French banks were excluded from the Iranian market in 1983, leaving those of the Federal Republic of Germany (West Germany), as well as Swiss, Japanese, and British banks to finance about 30 percent of total trade.
Immediately after the Revolution, the government called for the establishment of an Islamic banking system (which became law in March 1984) that would replace interest payments with profit sharing. In Islamic terms, this meant that profit (interest) was acceptable only if a lender’s money were “not at risk.” The introduction of Islamic banking procedures was gradual; confusion and delays disrupted the initial stages of implementation. In March 1985, the Islamic code was extended to include bank loans and advances. By late 1987, however, only certain banks were fully Islamicized, and only about 10 percent of private deposits were subject to Islamic rules.
The Central Bank controlled the issuance of letters of credit. These were deferred payment instruments that relieved the cash-flow problem Iran experienced after oil prices began to decline in 1983. The government financed many imports with these high-interest letters of credit. Originally a letter of credit was to be repaid within 180 days, but by 1987 Iranian customers wanted 720 days’ credit. Up to US$4 billion in letters of credit remained outstanding in early 1987, but the government did not include these supplier credits when assessing its foreign debt.
The Central Bank established a good reputation in international banking circles in the 1980s. It had practically no long-term foreign debt in early 1987 — only US$5 million — and was recognized as an international creditor. Between 1979 and 1984, the government paid cash for US$66 billion worth of imports, and it repaid immediately US$7 billion of existing debts. The Central Bank’s reputation for honoring its financial obligations, however, did not change the attitudes of West European bankers, who, in a 1987 poll, expressed their unwillingness to lend money to Iran. To help relieve its cash-flow problem after 1983, the government sought repayment from several countries of money they borrowed from Iran during the reign of the Mohammad Reza Shah.
In the first quarter of 1986, Iranian deposits in international banks fell by US$570 million, reducing Iran’s holdings to US$7.1 billion. This reduction coincided with the continued fall in oil revenues, and foreign exchange deposits were expected to decrease further in the late 1980s.
In the past, Iranian officials had focused on increasing non-oil tax revenues, particularly through direct taxes on personal and business income. A major reform of the tax laws in 1967 nearly doubled direct tax revenues within two years. Additional legislation in the 1970s had the effect of increasing the importance of direct taxes, which grew to US$2.5 billion in FY 1976, up from US$156 million in FY 1967.
Like most developing countries that produced oil, Iran had relied on indirect taxes (customs duties and excise taxes) for most of its non-oil revenue. Indirect taxes accounted for 72 percent of non-oil tax revenues in FY 1962, 60 percent in FY 1972, and 45 percent in FY 1976. In FY 1986, indirect taxes fell 12 percent as a result of a 30-percent reduction in customs duties.
The rapid increase in oil production and oil revenues in the 1970s freed Iranian officials from having to develop the tax system. As a consequence, the narrow tax base focused on consumers generally and on the urban, salaried middle class specifically. In 1977 fiscal authorities attempted to reform the tax system. But the numerous exemptions, particularly those that had been granted to industries to encourage private investment, presented obstacles to the continued expansion of direct taxes.
By 1985 government workers were paying a disproportionate amount of Iran’s taxes — nearly three-quarters of all taxes in FY 1984 — according to the government. For example, in the last few months of 1984 about US$16 million was collected from individuals in the private sector and US$510 million (or 76 percent of tax revenues) from government employees.
Taxes were expected to contribute US$15.7 billion to the budget in FY 1987, an amount 11.2 percent less than that approved the previous year. In the FY 1987 budget, direct taxes were reduced to a level that accounted for 46 percent of tax income, while indirect taxes accounted for 53 percent. Companies accounted for most of the direct taxes (54 percent). Of the indirect taxes, 40 percent came from taxes on imports, and 60 percent from consumption and sales taxes. A decrease in imports resulted in an overall decline in tax revenue.
The decline in revenue from indirect taxes (such as customs duties) in FY 1986 caused total tax revenues to fall 1 percent below the FY 1985 level. The collection of direct taxes simultaneously increased by 9.5 percent, partly because of a new option that permitted payment of taxes into a regional development fund. Businesses paid income taxes at a higher rate than individuals, and the tax rate on government corporations was higher than that on private businesses.
THE WAR’S IMPACT ON THE ECONOMY
Iraq’s attack on Iran in September 1980 provided the new Iranian government with an external scapegoat to divert attention from its own economic mismanagement. The war created economic dislocation, decreased industrial and petroleum development, and caused further deterioration of the agricultural sector, which had already suffered from the flight of landlords in 1979 and 1980.
Iraq attacked Iranian ports, the oil terminal at Khark (then the main export teminal for crude oil, also cited as Kharg) Island and, beginning in 1984, tankers shuttling between Khark and Sirri islands in the Persian Gulf. The heavy damage to refineries and pipelines, factories, and industrial sites hurt oil production but did not significantly slow the export of oil until 1986; between 1982 and 1986, Iran produced 2.3 million barrels per day (bpd) on average. The combined effects of decreased oil production and falling oil prices, however, created an economic crisis and a shortage of foreign exchange by 1986. The destruction in 1980 of the important Abadan refinery (which produced an average of 628,000 bpd), the bombing of refineries and shuttle tankers, and the continued embargo on purchases of Iranian oil by Japan, the United States, and France contributed to the crisis. By November 1987, Iranian oil exports were estimated at 1 million bpd, down from an estimated 1.9 million bpd the previous month.
The Iraqi strategy of interrupting Iran’s export supply line dated back to February 1984, when Iraq attacked tankers shuttling between Khark and Sirri islands. The terminal and cargo handling jetties on Khark Island were hit, reducing the island’s export capacity from 6.5 million bpd to 2.5 million bpd within 3 months. This new tactic did not halt Iranian oil exports, but it did decrease them. As a consequence of lower export earnings, the new budgets showed deficits in fiscal years 1985 and 1986.
After the bombings of Khark Island, Iran developed Sirri Island as an alternate terminal. Operations began on Sirri Island in February 1985. Iraq attacked the refinery there on August 12, 1986, temporarily disrupting Iran’s oil exports, and again in the fall of 1986, this time inflicting damage from which Iran took longer to recover.
As a consequence of the early 1984 bombings, insurance rates for tankers in the Gulf increased. The increase prompted Iran to extend special incentives to tankers to compensate for the risk involved. During the Iraqi attacks, Iran’s main crude oil customer, Japan, banned its tankers from the Khark-Sirri shuttle. After Iran began giving preferential treatment to certain customers, Japan resumed its shipments in July 1984.
The August 1986 attacks on Sirri Island caused oil exports to fall to about one-third of their normal volume (from 1.6 million bpd to 600,000 bpd). An effort was made to develop Larak Island as a loading point, but monsoon winds temporarily closed Abu al Bukush, Larak Island’s main oil terminal, in September 1986. Iraqi attacks on Larak Island’s chief remaining oil export terminal in November and December 1986 further damaged it. By November 1987, Larak Island had recovered and had become Iran’s main export point because of its distance from Iraq’s air bases and because of its air defense system.
The oil export terminal at Lavan Island, which for years had exported 200,000 bpd, was also severely damaged in an attack in September 1986. The success of this attack made it clear that Iraq was gradually destroying Iran’s export industry. By the end of 1986, the Iraqis had bombed Khark, Sirri, and Larak islands, as well as the shuttle tankers to Sirri and Larak; thirteen tankers had been damaged in missile attacks in August 1986 alone. The war also postponed the completion (projected for 1989) of a large petrochemical plant at Bandar-e Khomeini (formerly known as Bandar Shahpur, but renamed after the Revolution), an Iranian-Japanese venture.
Half of Iran’s revenue was spent on arms imports in the mid-1980s. In order to dedicate half its budget to military expenditures, Iran was forced to reduce such essential imports as food, for which it spent about US$4 billion annually from 1983 to 1987. Rationing of essentials such as meat, rice, and dairy products after the beginning of the war resulted in long lines at shops and an active black market. Sometimes the need occurred, as in the spring of 1987, to add nonfood consumer items to the rationing list. These austerity measures gave rise to the possibility of political instability.
Because of the war, trade had to be rerouted through the Soviet Union and Turkey, which increased transportation costs. The war also caused Iran to deplete its foreign reserves and to depend on foreign suppliers for needed goods. Military equipment accounted for about 25 percent of total imports by the mid-1980s, and the budget for FY 1987 showed that funds for the war exceeded financial allocations to all other economic sectors. The total cost of the war from its beginning in 1980 until early 1987 was more than US$240 billion (based on a total of US$200 billion by the end of 1984 and a cost of US$20 billion for each year thereafter). If lost oil revenues were taken into account, the cost of the war through 1987 would be even higher.
Data on Iran’s labor force after the Revolution were incomplete in mid- 1987, but the economically active population was estimated to be about 12.5 million. Unemployment had been a serious problem since 1979. In the autumn of 1986, the government announced that 1.8 million persons — about 14.5 percent of the labor force — were registered as unemployed. This was a high percentage by comparison with the 1975 International Labour Organisation’s unemployment estimate of 3.5 percent. In 1987 economists believed that underemployment was also relatively high.
Agriculture remained the principal source of employment in the late 1980s. The decline in the size of the agricultural work force had been much more gradual since the Revolution than during 1949-79. At the end of World War II, approximately 60 percent of the work force was employed in agriculture; by 1979 the percentage of workers in agriculture had fallen to just under 40 percent. In 1987 an estimated 38 percent of the work force, or nearly 4.8 million workers, was employed in agriculture.
The industrial sector in 1987 employed about 31 percent of the work force, the same percentage as on the eve of the Revolution. From the 1920s until 1978, the industrial work force grew rapidly, especially during the 1970s, when industrial employment grew at an annual rate of 14 percent. The relative stasis of industrial employment in comparison to its rapid expansion before the Revolution has been attributed by economists to the war with Iraq, especially to the destruction of important industrial infrastructure in the southwestern part of the country.
According to an Iranian government report for FY 1984, the industrial work force employed in factories with 10 or more laborers totaled some 593,000. About 25 percent of this number, or 145,0000 workers, was employed in the textile and leather industries. Another 141,000 workers were employed in heavy industries.
The service sector employed about 31 percent of the work force in 1987. All commercial activity and most civil service jobs were considered part of this sector. A substantial proportion of service sector employment, however, was in marginal activities such as custodial work, street vending, and personal services such as barbering, attendant work at public baths, consumer goods repairs, and the performance of porter duties in town bazaars.
At the time of the Revolution in 1979, an estimated 1.3 million Iranians (13 percent of the work force) were women. (Rural women working the fields were not counted as part of the work force.) Female employment was highest in manufacturing, which accounted for an estimated 60 percent of all working females. Women were employed extensively in the textile mills and in labor-intensive manufacturing jobs requiring few skills and offering relatively low pay, such as carpet making and other handicrafts undertaken in factories, small workshops, and homes. Many women were employed in services as well. About 20 percent of working females were employed in domestic and other personal services and accounted for nearly 17 percent of all employment in this category. Less than 20 percent of working women were government employees, and a tiny minority held professional positions.
After the Revolution, work opportunities for professional women and those working in offices were severely constricted. The government opposed having women work in jobs that would enable them to render legal opinions or supervise males. Official statistics, however, indicated that the number of women in the labor force remained relatively constant because women were needed to work in war-related plant jobs. The government survey for FY 1984 reported that females made up more than 12.6 percent of the urban labor force and 6 percent of the industrial work force. The total number of women in the labor force in 1985 was 1.6 million, of whom about 18 percent were unemployed. Of the 1.3 million women actively employed, approximately 43 percent worked in urban areas; 61 percent of urban women workers were government employees.
Two factors for which there were no reliable data in 1988 affected the labor force after 1980: the war with Iraq and the presence of Afghan refugees. On the one hand, more than 500,000 working-age males were removed from the labor force at any given time for military service. War-related casualties removed additional tens of thousands of potential workers. On the other hand, many Afghan refugees, of whom there were slightly more than 2.3 million according to the preliminary 1986 figures, were working in Iran after 1980, most in unskilled jobs. There were no meaningful estimates of the number of workers who may have lost jobs because of the extensive war-inflicted destruction of industrial sites and commercial enterprises between 1980 and 1987.
Following the quadrupling of oil prices in the last quarter of 1973, prices remained relatively stable from 1975 to 1978. During this period, Mohammad Reza Shah encouraged a high level of oil production and increased spending on imported goods and services and on military and economic aid to a small number of Iran’s allies. Khomeini’s government shifted the emphasis by decreeing a policy of oil conservation, with production reduced to a level sufficient to do no more than meet foreign exchange needs.
The efforts, initiated by the shah, to develop the petrochemical industry were thwarted by the Iran-Iraq War. The shah had begun a large petrochemical plant at Bandar Shahpur (now Bandar-e Khomeini) to produce fertilizers and sulfur; the plan was to expand production to include aromatics and olefins in a joint venture with Mitsui, a Japanese consortium. The plant, which cost US$3 billion, had almost been completed at the time of the Revolution. Iraqi planes bombed the still- unfinished plant in late 1986. Other petrochemical plants were completed soon after 1979, including the Khemco sulfur plant on Khark Island and a fertilizer plant at Marv Dasht near Shiraz.
The global recession of the early 1980s depressed the demand for oil. Iranian exports were also affected by the increased production by countries that were not members of the Organization of Petroleum Exporting Countries (OPEC). The resulting glut on the market caused a decline in Iranian oil revenues, which in turn lowered the value of the Iranian GNP. From September to October 1980, output fell from 1.3 million bpd to 450,000 bpd. Iran’s petroleum production increased, however, to 2.4 million bpd in both 1982 and 1983, which enabled the government to end domestic rationing. However, production fell again in 1986 to 1.9 million bpd. OPEC prices for crude oil meanwhile fell from US$34 per barrel in 1982 to US$29 in March 1983. The government reduced oil exports in the early 1980s to promote a higher price per barrel and to foster conservation. Oil production fell as planned, although not as low as during 1980-81. By 1987 oil and gas exports produced only enough revenue to meet basic needs.
Oil revenues financed the import of weapons, food, medicine, and other critical goods and services by the mid-1980s. Whether or not the oil sector would be able to sustain losses as Iraq continued to target Iranian oil production and transportation facilities remained to be seen in late 1987. In addition to bombings of Iranian shuttle tankers, the Iranian oil industry was also troubled by fluctuating prices. Oil revenues decreased in 1985 and early 1986, remained steady in late 1986, and rose gradually in 1987. The government attempted to compensate for lost revenues in 1987 by further reductions in nonmilitary programs.
Oil and Gas Industry
Petroleum is the engine that drives the Iranian economy
Petroleum has been the main industry in Iran since the 1920s. Iran was the world’s fourth largest producer of crude oil and the second largest exporter of petroleum at the peak of its oil industry in the mid-1970s. The war with Iraq cut Iran’s production in the 1980s, although Iranian oil reserves remained the fourth largest in the world.
Nationalization of the oil industry in 1951 resulted in temporary political and financial chaos. Production did not resume until late 1954. As part of the nationalization process, the government formed the National Iranian Oil Company (NIOC). As owner, the government directed NIOC policy. As a result of the Consortium Agreement reached in 1954 between the government and a consortium of foreign oil companies, industry control of the oil companies was left virtually intact, but the agreement greatly increased the government’s share of income from each barrel of oil produced. The combination of the larger share of income and rising oil production provided the government with increased revenues with which to finance industrial development. In addition, slow but steady progress was made in reestablishing Iran’s relations with Western powers in the aftermath of nationalization. The resolution of the oil crisis in 1954 (nationalization of oil and the signing of the Consortium Agreement) led to a policy of increased economic and political cooperation between Iran and states outside the Soviet sphere of influence. In 1961 Iran joined with other major oil-exporting countries to form OPEC, whose members acted in concert to increase each country’s control over its own production and to maximize its revenues.
When Iran’s economy worsened after the outbreak of war with Iraq, its willingness to abide by OPEC guidelines decreased. From 1983 to 1984, OPEC priced oil at US$29 per barrel, but Iran undercut OPEC prices at US$28 per barrel through October 1984 and subsequently reduced it even further to US$26.50 per barrel. Iran continued deliberate undercutting until the pricing crisis in July 1986, when prices dropped below US$10 per barrel and the oil-exporting countries met to reach agreement on both price and production levels. The thirteen members of OPEC, and several non-OPEC countries, agreed in December 1986 to a price of US$18 per barrel, with a maximum differential of US$2.65 between light and heavy crude oil. (Light crude is the source of products such as gasoline and is more expensive, whereas heavy crude provides the components used in products such as residual fuel, oil coke, and waxes.) By January 1987, as a result of war damage and government conservation policies, crude production averaged 2.2 million bpd, about 100,000 bpd below Iran’s OPEC quota.
Production and Reserves
In 1986 Iran’s reported crude oil reserves of 48.5 billion barrels ranked behind only those of Saudi Arabia, the Soviet Union, and Kuwait. By February 1987, the NIOC estimated that Iran’s recoverable oil reserves had nearly doubled from the 1986 level to 93 billion barrels, a figure that could not be verified by outside specialists. In the first half of 1986, Iran had produced 1.9 million bpd of oil, of which 800,000 bpd went for domestic consumption and 1.1 million bpd for export. Production dropped during 1986 as a result of the oil pricing crisis and the bombings of Khark Island and Sirri Island. By early 1987, oil exports had increased and neared the level set in OPEC’s December 1986 agreement, averaging 1.5 to 1.7 million bpd.
Iran made strides in the development of the gas industry as well, with efforts dating back to the 1960s. One area of emphasis was the extraction of “associated” gas, natural gas found in solution with oil, which previously had been flared. In 1966 Iran reached agreement with the Soviet Union to deliver up to 28 million cubic meters of gas per day. In return, the Soviets committed equipment and expertise to build a steel mill, an engineering plant, and other related facilities. In 1966 the government also formed the National Iranian Gas Company, a wholly owned subsidiary of NIOC, to produce gas for both domestic consumption and export. By October 1970, the Iranian gas trunkline had been completed, capable of moving gas from the southwestern Iranian oil fields to the Soviet border at Astara on the Caspian Sea. Spur lines branched off the trunkline to major Iranian cities, supplying gas primarily for industrial use. Pipeline capacity reached 45.3 million cubic meters per day by 1975. Iran had made a heavy investment in developing the gas industry by 1977, anticipating a decline in oil production in the early 1980s.
Gas production increased from 20 billion cubic meters in 1980 to about 35 billion cubic meters in 1985. Much of this increased production, however, was flared (an inefficient but inexpensive process), peaking in 1982 at over 50 percent of gas produced (14.2 billion cubic meters flared of 24.5 billion cubic meters produced), largely as a result of Iraqi destruction of facilities for producing and reinjecting natural gas. Recovery of natural gas improved thereafter, with flaring accounting for less than 22 percent of production in 1984 and 17 percent in 1985.
The development of the Iranian gas industry was bolstered by the discovery of several natural gas fields in 1973 and 1974. Reserves in 1974 stood at 7.5 trillion cubic meters, and by 1977 known natural gas reserves amounted to 10.6 trillion cubic meters. According to Iranian sources, natural gas reserves in Iran were the second largest in the world at 13.8 trillion cubic meters in proven reserves as of 1987. This was more than the combined reserves of the entire Western world. Additional gas deposits were discovered in Baluchestan va Sistan Province in August 1986. Only Soviet reserves, estimated to be some 3.5 times larger, surpassed Iran’s. Despite its enormous reserves, Iran exported no gas from 1980, when a pricing agreement with the Soviet Union was canceled and the gas trunkline to the Soviet Union was closed, to 1986. Because the Soviets refused to pay Iran’s price, Iran turned its gas reserves to domestic industrial, commercial, and residential use. In August 1986, Iran announced that it would resume the export of natural gas to the Soviet Union, with the expectation of returning eventually to the previous export level of 10 billion cubic meters per year. Subsequently, the resumption of natural gas export was postponed and no deliveries had occurred as of the end of 1987.
Commercial extraction of oil began at the turn of the century, when exploration and exploitation rights were granted to foreigners. The first of these was an Englishman, W.K. D’Arcy, who in 1908 discovered commercial quantities of petroleum. D’Arcy’s discovery led to the formation of the Anglo-Persian Oil Company in 1909, which, after 1935, operated as the Anglo-Iranian Oil Company (AIOC).
Disagreements over revenues arose almost immediately between the government and the newly formed oil company. The interpretative agreement reached in 1920 temporarily quieted matters. When revenues fell sharply at the beginning of the Great Depression, however, Iran canceled the concession, causing Britain to take the case to the League of Nations in 1932. Before the league came to a decision, a significant modification of the original concession was negotiated by Iran and the company acting on their own. Royalty payments, previously a share of company profits, were supplanted by a fixed payment per ton of oil produced. Minimum payments to the government were established, and the life of the concession was extended by 32 years (until 1993), although the concession area was reduced about 80 percent.
After continued disputes over the terms of the contract with the AIOC, the Majlis voted to nationalize the petroleum industry in 1951. In 1954 the AIOC was renamed the Consortium, reflecting the 40-percent ownership held by British Petroleum, 14 percent by Royal Dutch Shell; 7 percent each by Gulf Oil, Socony-Mobil, Esso (later Exxon), Standard Oil of California, and Texaco; 6 percent by Compagnie Française des Pétroles; and 5 percent by various interests collectively known as the Iricon Agency. The Consortium’s concession was to run through 1979, with the expectation of negotiable fifteen-year options. Instead, at the request of the Iranian government, in 1973 the Consortium agreed to form a new agency to market Iranian petroleum. The Consortium members in return received a privileged buyer status for a twenty-year supply of crude petroleum.
This agreement was interrupted because of strikes in the oil fields in 1978 during the rebellion against Mohammad Reza Shah. Petroleum exporting was not resumed until his departure on January 16, 1979. Subsequently, the NIOC canceled the 1973 marketing agreement with former Consortium members, offering them instead a special nine-month supply agreement, after which they lost special buyer status.
Refining and Transport
At the beginning of 1977, Iran had six refineries in operation, with a combined capacity of more than 800,000 bpd. In 1986 Iran had refineries operating in Esfahan, Tabriz, Bakhtaran (formerly known as Kermanshah), Shiraz, Qom, Tehran, and Lavan Island, with a combined capacity of more than 1 million bpd. All contributed to the domestic supply of petroleum products, but the Abadan refinery in the late 1970s produced primarily for export. The high cost of transportation led to regional location of refineries. Pipelines brought the crude oil from the fields to the refineries for processing and regional distribution of products.
The Abadan refinery, located on the Persian Gulf, was completed in 1912 and, until bombed and destroyed in 1980 by Iraq, remained one of the world’s largest, with a capacity of 628,000 bpd. Foreign oil companies had operated it until the 1973 NIOC takeover. About 20 percent of its production had gone to the domestic market in the early 1970s, but in 1973 the NIOC geared the industry toward domestic needs and local consumption. The Abadan refinery was linked by pipeline to several fields and a seaport; the pipeline ran from Abadan north to Tehran, and then along Iran’s northern border from Tabriz in the west to Mashhad in the east.
The other refineries were smaller than the one at Abadan. Two, built and operated by the NIOC, were located near Tehran to supply that market; one was completed in 1968 and the other in 1975. Both were supplied by pipelines from the southwestern oil fields. An additional pipeline also carried petroleum products from the Abadan refinery for distribution in the Tehran area.
Crude oil for the Bakhtaran refinery came from a field close to the Iraqi border; the Shiraz refinery, completed in 1973 with a capacity of 40,000 bpd, distributed its products in the southern and eastern parts of the country. A topping plant, constructed in the 1930s, operated at Masjed-e Soleyman in southwestern Iran. It supplied oil for the domestic market and sent distillates by pipeline to the Abadan refinery.
A refinery in Tabriz, constructed in 1975 and having a capacity of 80,000 bpd, supplied the northwestern area of the country. Petroleum consumption had increased rapidly in the northwest, and a pipeline was completed by 1976 from Tehran to Tabriz to supply crude to the refinery.
Khark Island, located 483 kilometers from the mouth of the Persian Gulf and about 25 kilometers off the coast of Iran, was the principal sea terminal until bombed by the Iraqis in 1985 and 1986; it had been the world’s largest offshore crude oil terminal. Export of refined products then reverted to the terminal at Bandar-e Mashur in southwestern Iran, which had been used before the construction of the Khark Island installation.
The availability of new oil terminals allowed Iran to expand its oil production. In the 1960s, crude was sent to Abadan, then exported from Abadan and Bandar-e Mashur. The construction of the Khark Island terminal to export crude oil permitted use of Bandar-e Mashur exclusively for product exports. Some 95 percent of the crude oil came from the producing fields of Agha Jari, Karenj, Marun, Pariz, Bibi Hakimeh and Ahvaz.
During the 1980s, the Khark Island terminal continued to be responsible for 80 percent of oil exports. Khark Island had two terminals, one on a jetty and the other on a small island off the west coast of the island. The first was a complete complex, and the second was used for quick loading of ships. The jetty was bombed by Iraq to disrupt Iran’s main shipping point in early 1985 and again more heavily in September 1985. Shipments were slowed at the jetty, and the island terminal section was devastated.
Aside from Bandar-e Mashur, other export facilities were developed both inside and outside the Persian Gulf. To reduce the threat from Iraq, facilities were expanded at the port of Jask, located just outside the Persian Gulf on the Gulf of Oman, and Sirri Island became an alternative loading point. A petroleum shuttle was initiated between Khark and Sirri islands, and Khark Island continued to export most of the country’s oil until additional Iraqi bombing in January 1986. Reduced exports remained possible through the use of the shuttle service to Sirri Island, with its floating terminal for storage and reloading. The August 1986 bombing of shuttle tankers to Sirri and the resulting increase in insurance rates, however, prevented even this level of exports. Because the pipelines for Khark converge at a pumping station at Ganaveh (about forty kilometers northeast of Khark on the Gulf) before going underwater, Ganaveh replaced Khark as the western terminus of the oil shuttle to Sirri Island in the mid-1980s.
Government incentives to bolster domestic industry were offered in the mid-1980s, but they were offset by the effects of the war. Factories were forced to lay off workers or to shut down because of declines in imports of as much as nearly 50 percent. This decline resulted in raw material shortages. Other state and private industrial enterprises converted to production of military matériel.
In the mid-1980s, Iran halted importation of domestically producible machinery. As an incentive to domestic production, industries that produced war matériel were granted about US$400 million to replace items whose import value would have exceeded US$1.3 billion. Domestic production increases by 1986 resulted in local manufacture of 80 percent of required munitions, including an antitank missile and such items as gas masks for protection against Iraqi chemical weapons. Industrial production held steady in early 1987, following a 20 percent drop in 1985 from 1984. The Ministry of Heavy Industries anticipated US$75 million in industrial exports in FY 1986.
Among the projects scheduled for funding in FY 1987 were a pesticides plant at Qazvin and the completion of a steel plant at Mobarakeh. There were also plans to construct mineral processing plants in the northwestern city of Zanjan that would produce 40,000 tons of lead and 60,000 tons of zinc annually.
The non-oil industrial sector represented a small portion of the economy, but it provided labor-intensive domestic employment, such as the hand knotting of rugs. Foreign sales of Iran’s non-oil products also generated badly needed hard currency. Iran exported US$2.3 billion worth of non-oil goods between 1982 and 1987. Of this total, agricultural products accounted for 32.2 percent, carpets 29.3 percent, textiles 10.9 percent, and caviar 4.9 percent.
In 1986 Iran started placing greater emphasis on non-oil sectors to offset falling oil prices and revenue. Non-oil revenue totaled about US$700 million in 1986, in comparison with oil revenues of less than US$1 billion. Although it had increased by US$200 million over the previous year, non-oil revenue fell short of the official goal of US$1 billion. Carpet sales accounted for most of the increase, whereas exports of such items as industrial goods and minerals decreased. The FY 1987 target for non-oil exports was doubled to US$1.4 billion, including US$50 million in locally made goods.
The manufacturing of carpets and rugs is an important element in Iran’s economy
After the 1979 Revolution, the customary high volume of carpet exports was sharply reduced because of the new regime’s policy of conserving carpets as national treasures and its refusal to export them to “corrupt Westerners.” This policy was abandoned in 1984 in view of carpets’ importance as a source of foreign exchange. Carpet exports more than tripled in value (from US$35 million to US$110 million) and doubled in weight (from 1,154 tons to 2,845 tons) between March and August 1986, which contributed to a fall in world carpet prices.
The economic prosperity fueled by the growing oil revenues of the mid- 1970s encouraged a construction boom. The expansion of the construction industry slowed, however, and all but stopped after the Revolution. Construction continued to decline until 1984. The domestic recession, created by deliberate government reductions in oil production in 1979, caused a drop in new construction starts, fewer buyers, and a decreased demand for materials.
In FY 1983, the government decided once again to encourage private sector participation in construction. The subsequent increase in loans to private industries by commercial banks revived the construction industry by 1984, although it could not keep pace with housing needs in urban areas.
The housing shortage became severe by 1986. Exacerbated by population pressures, the shortage was an especially serious problem in Tehran. The allocation of credit for building construction accounted for 7 to 8 percent of the GNP. Half of all the 900,000 housing applicants countrywide were in Tehran,yet only half of these received housing. Tehran issued 25 percent of the country’s housing permits, with fixed construction investment accounting for 2 percent of the GNP. The government deliberately discouraged further expansion in Tehran, and new building construction regulations in 1986 tied construction permits to the ownership of land through an earlier order from a religious magistrate. According to the director of the Urban Land Organization, a government body created in June 1979 to administer the transfer of nationalized land to deserving families for housing purposes, the housing sector in early 1986 needed about US$10 billion to alleviate the shortage. The banks could only provide about US$4 billion of this total.
Manufacturing and Industrial Development
The first phase of modern industrial development occurred under Reza Shah in the 1930s. When Mohammad Reza Shah succeeded his father in 1941, he began a planning process designed to hasten economic modernization. During the mid-1950s, the state encouraged and supported the building of fertilizer, sugar-refining, cement, textile, and milling plants. By the late 1950s, the government had provided a role for private business by authorizing generous credits from the Plan Organization.
Industrialization led to a rapid increase in manufacturing output. Many new industries were established between 1962 and 1972. The impressive new range of domestic manufacturing enterprises included iron and steel, machine tools, agricultural implements, tractors, communications equipment, television sets, refrigerators, car and bus assembly, and petrochemical products.
Higher oil revenues in the 1970s accelerated economic development. A number of large-scale industrial projects were undertaken during the period of the Fifth Development Plan (1973-78), with government investments concentrated in petrochemicals and basic metal industries as well as crude oil production. Domestic and international private investment was projected to furnish 64 percent of a planned total of US$11 billion for manufacturing investments between FY 1973 and FY 1977. The economy proved incapable of absorbing such feverish growth, however; some projects were postponed, and completion dates were extended for others. Nevertheless, industrial production grew at close to 20 percent per year, and a diversified industrial base was established. By FY 1975, manufacturing and mining (excluding electric power and construction) contributed about 10 percent of GDP.
Shortages of skilled labor and equipment adversely affected production from 1977 onward. Business failures and a generally declining economy led to strikes and political instability in 1978 and 1979. The flight of capital and factory owners after the 1979 Revolution led to the nationalization of industries in the summer of 1979. The decline of the industrial sector was hastened by the war with Iraq; Iraqi bombing of petrochemical and steel plants in Abadan, Ahvaz, and Bandar-e Khomeini in 1980 and 1981 caused further disruption. Recovery began in 1982, but only among smaller industries. Efforts to revive the larger industrial and petrochemical plants began in 1982 and 1983. As a result of technical advances, the Esfahan steel mill was expected to produce 700,000 tons of iron rods in FY 1987 — enough to meet domestic needs. In May 1987, Iran’s minister of mines and metals reported that twenty exploration projects were underway, aimed at supplying raw materials for the country’s steel plants.
The war with Iraq slowed industrial production but also created a new industry, the manufacture of prosthetics. In August 1986, the head of the Iranian Rehabilitation Agency stated that more than 2 million handicapped individuals had sought the rehabilitation services offered by his agency in 1985 but that the agency was capable of serving only 40,000 newly handicapped persons annually. In response to this need, Iran reportedly planned to increase to six the number of factories producing artificial limbs and other prosthetic devices.
Mining and Quarrying
Iran’s mineral wealth, in addition to oil and gas, includes chromite, lead, zinc, copper, coal, gold, tin, iron, manganese, ferrous oxide, and tungsten. Commercial extraction of significant reserves of turquoise, fireclay, and kaolin is also possible. Most mining was small scale until modernization efforts in the 1960s led to the systematic recording of known deposits, as well as the systematic search for new ones. Industrialization increased the need for steel, which in turn boosted demand for coal, iron ore, and limestone. Construction of new roads and railroads since the 1960s improved transportation among mining centers throughout the country, especially around the Kerman/Bafq area of south- central Iran.
Prior to the Revolution in 1979, the government intended to develop the copper industry to the point that it would rival oil as a source of foreign exchange. Iranian copper deposits are among the world’s largest, and mining is particularly advanced southwest of Kerman near Sirjan. The Iran-Iraq War risks and declining world copper prices inhibited copper extraction, which prior to FY 1982 had remained insignificant. The government, however, promoted private sector investment in copper in FY 1982, which may have been responsible for the improved copper output in 1983.
In the 1980s, Iran’s major nonmetallic mineral exports were chromite and construction stone. Iran’s total chromite reserves were estimated at 20 to 30 million tons in 1987. Exports of construction stone to the Persian Gulf countries increased 200 percent in 1986 over the previous year.
The government conducted surveys in the 1970s to ascertain the commercial potential of known mineral deposits. By 1977 about half the country had been surveyed from the air, but less than one-fifth had been explored on the ground. Studies of mineral deposits throughout the country were completed in the mid-1980s, detailing the most recent discoveries of reserves of silica, limestone, granite, and iron ore. In addition, several uranium deposits were discovered in Baluchestan va Sistan in August 1986, and in September 1986 another 750,000 tons of white kaolin deposits on the Iran-Afghanistan border near Birjand were reported.
The extent of mineral resources was indicated by the fact that approximately 2.7 million tons of minerals were extracted from 27 active mines in Yazd Province in FY 1986. Iran earned a total of US$85 million from mineral exports in that year.
In 1963 the Iranian government created a hydroelectric management authority. Its functions were incorporated into the Ministry of Water and Power in 1967. The electric power industry had been nationalized in 1965 so that a large, integrated system might be built. In 1967 all water resources were nationalized except generators attached to industrial plants.
The Fourth Development Plan (1968-73) ushered in a new phase of utility development designed to add 4,915 million cubic meters of storage capacity for water, which in turn would generate electricity. Projects designed under this program were completed after the Revolution; they included dam projects in Halil Rud (Jiroft), Shahrud (Taleghan), Lar, Minab, and Qeshlaq.
By 1972, about one-quarter of the population had electricity, and approximately 3,218 kilometers of transmission and distribution lines had been constructed as the start of a national system. Two smaller, separate networks were centered on Kerman in the south central area and Mashhad in the northeast.
During the 1960s and early 1970s, the rapid growth of manufacturing, increasing urbanization, and the extension of electrical service to more of the population put great pressure on planners to build ahead of demand. They did not always succeed, even with extensive foreign advice. For example, industrial development was temporarily held up in the vicinity of Bandar-e Abbas because of insufficient power, and by mid-1977 brownouts and blackouts were frequently disrupting industry. Nevertheless, many experts favored building a network with large, interconnected power stations rather than the more costly and inefficient construction of separate facilities to head off each impending local shortage. The near doubling of investment goals for the fifth plan compounded the problem of keeping the power supply ahead of demand, however, for it meant a substantial increase in the number of industrial consumers.
In the 1980s, the government began to emphasize the development of steam-powered plants, as part of a plan to reduce hydroelectric power from 25 percent to 10 percent of available national energy by the end of the century. Reversing this policy in the mid-1980s, Minister of Energy Mohammad Taqi Banki stated that hydroelectric power had once again been given priority for reasons of environmental safety and higher productivity.
By the end of 1986, 17 dams were operating with a total energy generation capacity of 7,000 megawatts, a 10-percent increase over 1985. Construction on the Qom River of a US$130 million dam with a 200- million-cubic-meter capacity was scheduled to begin in December 1986. It would supply the northern city of Qom, seventy kilometers away, with drinking and irrigation water. A three-megawatt power station was planned nearby. A feasibility study for a US$1 billion hydroelectric dam on the Karun River was submitted in early 1987. This dam, which would take 6 years to build, would generate 800 megawatts of electricity and replace 2 other proposed dams.
Iran’s total electric power capacity was approximately 12 million kilowatts in 1985, the most recent year for which statistics were available in 1987. It produced almost 42 billion kilowatt-hours in 1985, compared with 33 billion kilowatt-hours in 1983. In the FY 1987 budget, the Ministry of Water and Power was authorized to raise electricity rates for consumers who used more than 250 kilowatts, with a further increase for those using more than 400 kilowatts, in order to boost revenues by US$830.4 million.
The national supply of electricity dropped 40 percent in early 1986 because of Iraqi bombing of power plants. The minister of energy announced that the shortages began in January because of severe gas shortages at the Esfah power plants in Rey, Lowshan, Rasht, and several other locations. Again, in December 1986, the minister of energy announced impending power cuts as a result of shortfalls in generation.
Iranian officials had earlier opted for nuclear power plants to meet part of the demand for electricity, entering into discussions with representatives from West Germany and France. The plants under consideration were pressurized water reactors using enriched uranium. They were to be built near the Persian Gulf because of the need for large quantities of water for cooling. The decision in favor of nuclear power stemmed from policy decisions to develop non-oil energy sources.
Nuclear power was not abandoned in the 1980s. The Atomic Energy Organization of Iran, set up in 1973 to produce nuclear energy for electricity needs, focused in 1987 on the exploration and use of uranium deposits and on the use of nuclear energy in industry, agriculture, and medicine. The construction of the nuclear power plant in Bushehr ceased in 1982 as a result of a fire in the plant; additional damage stemmed from three Iraqi attacks in 1985 and 1986. In 1987 an Argentine-Spanish firm was negotiating to finish construction of the nuclear power plant. Designed to have two 1,200-megawatt reactors, it was expected to take 3 years to complete.
Transportation and Telecommunications
As part of Reza Shah’s development plan, modernization of the transportation and telecommunications sectors began in the 1930s and received huge infusions of capital investment from the mid-1960s onward under Mohammad Reza Shah’s regime. In May 1979, Mehdi Bazargan’s government created an organization called the Crusade for Reconstruction (Jihad-e Sazandegi or Jihad), which focused on rural reconstruction. In 1982 the organization claimed to have built 12,872 kilometers of roads, or nearly 1 kilometer per village.
The rugged terrain and sheer size of Iran made the expansion of transportation facilities difficult. Emphasis was placed on linking the major population centers and economic centers by rail and road; superimposed on a map, such main arteries would form a “T,” with the crossbar extending from the northwestern corner to the northeast along the southern coast of the Caspian Sea. The vertical line would run through Tehran down to the Gulf.
In 1925 Iran had only 3,218 kilometers of railroad — much of it in disrepair, but in 1931 a railroad was built to link the two bodies of water on Iran’s northern and southern borders, the port of Bandar-e Shah (known as Bandar-e Torkaman after the Revolution of 1979) on the Caspian Sea near Gorgan was linked by rail to the port of Bandar-e Shahpur (known as Bandar-e Khomeini after the 1979 Revolution) on the southwestern coast, passing through Tehran, and in 1941 the northern regions of Iran were connected by rail from west to east (from Tabriz to Mashhad). This was accomplished with the aid of foreign technicians and engineers. The railroad had expanded southeast from Tabriz to Kerman by 1977, and roads and air travel linked many parts of the country. Roads in good condition in 1941 totaled 22,526 kilometers; by 1984 there were 51,389 kilometers of paved roads. These roads, built primarily for military use, had the effect of stimulating development.
The leg of the “T” from Tehran to the Gulf was the most intensively used transportation corridor, accounting for half of all road traffic and two-thirds of all rail traffic by 1978. Domestic and foreign trade from the Gulf traversed this portion of road. Key ports were connected to each other and to Tehran through the “T” network. Foreign trade came through the Gulf ports of Khorramshahr, Bandar-e Shahpur, Bushehr, and Bandar-e Abbas. Khorramshahr handled trade primarily for the private sector, and Bandar-e Shahpur handled imports for the governments. Other foreign trade traversed the northwestern part of Iran. This area was connected by boad and railroad with Turkey and the Soviet Union and with two minor ports on the Caspian Sea.
The transportation system became incapable of meeting trade demands during the oil boom of the mid-1970s. Neither the ports nor the transportation infrastructure leading from the ports could handle the volume of goods. As a consequence, long lines of ships formed, some waiting months to unload and adding more than US$1 billion a year to freight costs. Perishable goods spoiled, and delayed deliveries of durable goods disrupted production and construction schedules. Consequently, the government gave the expansion of port and transportation facilities high priority. By 1976 the 6 major ports of Bandar-e Abbas, Bandar-e Shahpur, Chah Bahar (known as Bandar-e Beheshti after the 1979 Revolution), Bushehr, Abadan, and Khorramshahr had a capacity of 12 million tons, with expansion projects underway. By late 1977, unloading delays were no longer a problem. As a result of war damage, the ports of Abadan and Khorramshahr were closed in 1980, leaving the other four main ports and twelve minor ports in operation.
The construction of fourteen jetties along the Gulf coast was planned in 1986; one of these, at Jask near the Strait of Hormuz, opened in February 1986. Built at a cost of approximately US$20 million, it included a covered warehouse, a passenger terminal building, and a 130- meter-long jetty for the use of small ships up to 2,000 tons. Especially after the Revolution, the government expanded roads as well as port facilities. The total length of roads in 1974 was about 50,000 kilometers, of which 14 percent was hard-surfaced. A major post-1979 increase in road construction helped boost total road length in 1984 to 136,381 kilometers, of which 41 percent was paved. Main or national roads comprised 16,551 kilometers and secondary roads 34,838 kilometers of this total.
Post-Revolution maintenance of roads and railroads suffered, as did road access to the ports. The State Railways Organization extended Iran’s 4,567 kilometers of railroad track by the completion in 1987 of approximately 130 kilometers of electrified track in the north between Tabriz and Jolfa for imports from the Soviet Union. An additional 1,300 kilometers were scheduled to be added to the network by 1989, although war conditions made it unlikely that this goal would be realized. Other legs were planned between Mashhad in the northeast and the Soviet border at Sarakhs and in the north from Gorgan to Gonbad. A joint economic agreement between Iran and the Soviet Union in August 1987 reportedly called for a railroad route for the export of Soviet goods through Iran to the Gulf. A 560-kilometer extension to the World War II- era railroad linking Iran to Pakistan via Zahedan in southeastern Iran was completed in 1987 to join Zahedan to Kerman and thence to Tehran.
Iran’s two principal international airports were located in Tehran (Mehrabad Airport) and Abadan. A new international airport in Esfahan began operations in 1986, and another airport forty kilometers south of Tehran was under construction in 1987. In addition, an international airport was scheduled to be built at Gorgan, east of the Caspian Sea. In developments affecting smaller, national airports, the runway at Kerman was extended in FY 1986. Plans in 1987 called for the airports at Ardabil, Iranshahr, Mashhad, Sari, and Zabol to be lengthened and widened to accommodate larger airplanes and for a new runway to be built at Zahedan.
Reza Shah emphasized telecommunications as a focus of modernization in the 1930s. Telecommunications was reemphasized in the 1960s as part of Mohammad Reza Shah’s White Revolution. Development was financed by a consortium of international firms that established satellite links for Iran’s telecommunications. By the late 1970s, Iran had telegraph, television, and data communications capabilities. The National Iranian Radio and Television Organization had sufficient television transmission capability and enough relay stations to reach about 60 percent of the population. Iran had 1.7 million television sets in 1976 and 2.1 million by 1984.
The principal complaint about the telecommunications system remained the average citizen’s inability to obtain a telephone. Although the number of telephone lines increased from 400,000 to 800,000 between 1972 and 1977, hundreds of thousands of customers waited as long as two years for a telephone. By 1980 the number of telephones had increased to about 1.2 million, and by 1986 to 1.5 million. About 3,000 of 70,000 rural communities had telephones in 1987, compared with 300 in 1979. To meet the demand for telephones, authorities decided to seek local production of digital equipment, and in May 1987 the British company Plessey Major Systems was negotiating a US$166.3 million contract to supply the Ministry of Posts, Telephones, and Telegraph with almost 1 million lines of telephone exchange equipment. Automatic telephone facilities were also included in project planning.
As a result of the opening of additional microwave links between Tehran, Ankara, and Karachi, international service generally improved in the early 1980s. Temporary disruption was caused, however, by an Iraqi attack on a communications installation near Hamadan on June 8, 1986.
The disincentives resulting from the war, the anti-Western stance of the revolutionary regime, and the restrictions on visas all discouraged tourism after 1979. Visitors to the famous sites of Persepolis, Pasargard, and Esfahan dwindled; the number of tourists fell from a high of 695,500 in 1977 to 62,373 in 1982. By 1984, however, the number of tourists had increased to 157,000. This increase had a virtually negligible effect, however, on the economy.
After nearly achieving agricultural self-sufficiency in the 1960s, Iran reached the point in 1979 where 65 percent of its food had to be imported. Declining productivity was blamed on the use of modern fertilizers, which had inadvertently scorched the thin Iranian soil. Unresolved land reform issues, a lack of economic incentives to raise surplus crops, and low profit ratios combined to drive increasingly large segments of the farm population into urban areas.
The 1979 Revolution sought self-sufficiency in foodstuffs as part of its overall goal of decreased economic dependence on the West. Higher government subsidies for grain and other staples and expanded short- term credit and tax exemptions for farmers complying with government quotas were intended by the new regime to promote self-sufficiency. But by early 1987, Iran was actually more dependent on agricultural imports than in the 1970s.
Iran’s land surface covers 165 million hectares, more than half of which is uncultivable. A total of 11.5 million hectares is under cultivation at any time, of which 3.5 million hectares were irrigated in 1987, and the rest watered by rain. Only 10 percent of the country receives adequate rainfall for agriculture; most of this area is in western Iran. The water shortage is intensified by seasonal rainfalls. The rainy season occurs between October and March, leaving the land parched for the remainder of the year. Immense seasonal variations in flow characterize Iran’s rivers. The Karun River and other rivers passing through Khuzestan (in the southwest at the head of the Gulf) carry water during periods of maximum flow that is ten times the amount borne in dry periods. Several of the government’s dam projects are on these rivers. In numerous localities, there may be no precipitation until sudden storms, accompanied by heavy rains, dump almost the entire year’s rainfall in a few days. Often causing floods and local damage, the runoffs are so rapid that they cannot be used for agricultural purposes.
Water shortages are compounded by the unequal distribution of water. Near the Caspian Sea, rainfall averages about 128 centimeters per year, but in the Central Plateau and in the lowlands to the south it seldom exceeds 10 to 12 centimeters, far below the 26 to 31 centimeters usually required for dry farming.
Scarcity of water and of the means for making use of it have constrained agriculture since ancient times. To make use of the limited amounts of water, the Iranians centuries ago developed man-made underground water channels called qanats that were still in use in 1987. They usually are located at the foot of a mountain and are limited to land with a slope. A qanat taps water that has seeped into the ground and channels it via straight tunnels to the land surface. The qanats are designed to surface in proximity to village crops.
The chief advantage of the qanat is that its underground location prevents most of the evaporation to which water carried in surface channels is subject. In addition, the qanat is preferable to the modern power-operated deep well because it draws upon underground water located far from the villages. The chief disadvantages of the qanat’s are the costs of construction and maintenance and a lack of flexibility; the flow cannot be controlled, and water is lost when it is not being used to irrigate crops.
In the late 1980s, an estimated 60,000 qanats were in use, and new units were still being dug (although not in western Iran, where rainfall is adequate). To assist villagers, the government undertook a program to clean many qanats after the Revolution in 1979. Qanat water is distributed in various ways: by turn, over specified periods; by division into shares; by damming; and by the opening of outlets through which the water flows to each plot of land. So important is the qanat system to the agricultural economy and so complex is the procedure for allocating water rights (which are inherited), that a large number of court cases regularly deal with adjudication of conflicting claims.
Construction of large reservoir dams since World War II has made a major contribution to water management for both irrigation and industrial purposes. Dam construction has centered in the province of Khuzestan in the southwest as a result of the configuration of its rivers flowing from the Zagros Mountains. The upper courses flow in parallel stretches before cutting through the surrounding mountains in extremely narrow gorges called tangs. The terrain in Khuzestan provides good dam sites. The government set up the Khuzestan Water and Power Authority in 1959 to manage natural resources in that province. All economic development plans emphasized the need to improve water supplies and reservoirs so as to improve crop production. Large reservoirs were built throughout the country, beginning with the Second Development Plan. The first dams were built on the Karaj, Safid, and Dez rivers.
The first of the major dams had a significant impact on the Iranian economy. Completed in 1962, the Mohammad Reza Shah Dam on the Dez River was designed to irrigate the Khuzestan plain and to supply electricity to the province. After several years of operation, the dam had achieved only a small part of its goals, and the government decided that the lands below the dam and other dams nearing completion required special administration. As a consequence, a law was passed in 1969 nationalizing irrigable lands downstream from dams. The lands below the Mohammad Reza Shah Dam were later leased to newly established domestic and foreign companies that became known as agribusinesses.
Desert, wasteland, and barren mountain ranges cover about half of Iran’s total land area. Of the rest, in the 1980s about 11 percent was forested, about 8 percent was used for grazing or pastureland, and about 1.5 percent was made up of cities, villages, industrial centers, and related areas. The remainder included land that was cultivated either permanently or on a rotation, dry-farming basis (about 14 percent) and land that could be farmed with adequate irrigation (about 15 to 16 percent). Some observers considered the latter category as pastureland.
In most regions, the natural cover is insufficient to build up much organic soil content, and on the steeper mountain slopes much of the original earth cover has been washed away. Although roughly half of Iran is made up of the arid Central Plateau, some of the gentler slopes and the Gulf lowlands have relatively good soils but poor drainage. In the southeast, a high wind that blows incessantly from May to September is strong enough to carry sand particles with it. Vegetation can be destroyed, and the lighter soils of the region have been stripped away.
In mountain valleys and in areas where rivers descending from the mountains have formed extensive alluvial plains, much of the soil is of medium to heavy texture and is suited to a variety of agricultural uses when brought under irrigation. Northern soils are the richest and the best watered. The regions adjacent to Lake Urmia (also cited as Lake Urumiyeh and formerly known as Lake Rezaiyeh under the Pahlavis) and the Caspian Sea make up only about 25 percent of the country’s area but produce 60 percent or more of its major crops.
The land reform program of 1962 affected agricultural lands and the production of crops. Implemented in three stages, the program redistributed agricultural lands to the peasantry, thereby lessening the power of the feudal landlords. By the time the program was declared complete in 1971, more than 90 percent of the farmers who held rights to cultivation had become owners of the land they farmed. The new owners, however, became disillusioned with the government and its policies as their real economic situation worsened by the late 1970s.
On average, the minimal landholding for subsistence farming in Iran is about seven hectares. If each of the 3.5 million sharecroppers and landowners in villages (as of 1981) were given an equal share of land (from the 16.6 million hectares of cropland), each family would be entitled to only 4.7 hectares, not enough land for
subsistence farming. Even if there were sufficient arable land, many of the sharecroppers could not afford to buy more than four of the seven hectares needed for subsistence farming.
The basic rural landholding infrastructure did not change after the Revolution. A minority of landowners continued to profit by exploiting the labor of sharecroppers. Prior to the land reform program, feudal and absentee landlords, including religious leaders responsible for vaqf land, comprised the ruling elite. Over the years, vaqf landholdings grew considerably, providing many Iranian clergy with a degree of economic independence from the central government. Redistribution of the land resulted in power being transferred to farmers who acquired ten or more hectares of land and to the rural bourgeoisie. Uncertainty about the prospect of effective land reform under Khomeini contributed to a massive loss of farm labor — 5 million people — between 1982 and 1986.
Emphasis on subsistence agriculture persisted because of the lack of capital allocated after the Revolution, perhaps because the regime’s technocrats were from urban areas and therefore uninformed about agriculture, or because the bazaar class, which constituted a disproportionate share of the 1979 government, did not represent the interests of agriculture. Uncertainties about future landownership, as well as the war with Iraq, caused further disruption of agriculture. Ten percent of agricultural land fell into Iraqi hands between 1980 and 1982, although the territory was subsequently regained by Iran. The war stifled agricultural development by causing a loss of revenue and by draining the already shrinking agricultural labor pool through heavy conscription.
By 1987, eight years after the Revolution, there had been no progress toward agricultural self-sufficiency. By the end of the first year following the 1979 Revolution, agricultural output had fallen by 3.5 percent, and it continued to decline, except for those growing seasons characterized by above-normal rainfall, such as FY 1982 and FY 1985. Sugar, wheat, cotton, and rice production increased in FY 1982, whereas wheat, barley, and rice production increased in FY 1985. Iran was the largest world supplier of pistachios, with 95,000 tons produced in 1982 to 1983 and 97,000 tons in 1986. The war did not inhibit the production of pistachios, which are grown in south central Iran.
Overall grain production increased throughout the 1970s, peaking in the late 1970s and again in the early 1980s and decreasing somewhat by 1985. Wheat is Iran’s main grain crop; its production increased in the early 1980s from that in the 1970s, along with that of barley.
Wheat is a staple for most of the population. Bread is the most important single item in the Iranian diet, except in certain parts of the Caspian lowlands where rice is more commonly grown. Wheat and barley are planted on dry-farmed and irrigated lands and on mountain slopes and plains. Wheat is used almost exclusively for human consumption, and barley is used mainly as animal feed.
Rice is the only crop grown exclusively under irrigation. The long- grain rice of Iran grows primarily in the wet Caspian lowlands in the northern provinces of Gilan and Mazandaran, where heavy rainfall facilitates paddy cultivation. Population growth and the rising standard of living stimulated production of the high-quality rice that could be used for export. Although the Ministry of Agriculture and Rural Development sought to develop rice as an export crop as early as 1977, by the end of that year 326,000 tons of rice had to be imported to meet domestic needs. In 1985 rice imports increased 3 percent over the previous year’s 710,000 tons.
Other grain imports fell in 1985 by 43 percent compared with 1984 levels. Wheat, flour, and feed grain imports declined as output increased.
During the early and mid-1970s, sugar output increased annually at a rate of 5 to 6 percent, but consumption rose at a rate of 10 percent or more. With an increased production of beet and cane sugar in the early 1970s, it was expected that Iran would export sugar by 1977. Instead, 300,000 tons of raw sugar were imported that year. To supplement sugar production, the government in 1976 initiated a large beekeeping and honey-processing operation at a site near Qom, which produced about 2,000 tons of honey annually.
The production of raw sugar decreased from 687,000 tons in 1976 to 412,000 tons in 1985. Sugar production dropped to a low of 380,000 tons in 1980.
Sugar cane production increased from about 1.7 million tons in FY 1981 to about 2 million tons in FY 1983. Sugar beet production, however, declined by 15.5 percent, from 4.3 million tons in FY 1982 to 3.7 million tons in FY 1983.
The value of livestock increased annually after 1981, but the decreases in livestock in the early revolutionary period were such that by 1985 the overall value of livestock remained below the 1976 level. Severe shortages of meat and eggs, coupled with high demand and the absence of price controls, encouraged the raising of livestock and were expected to improve livestock availability.
Livestock-raising methods were generally unsophisticated. Sheep and goats were kept by nomadic tribesmen and by sedentary villagers who supported a few animals as a sideline to farming. These animals had diets of grass and shrubs that often left them diseased and malnourished; in turn, the herders obtained little profit in the way of meat, milk, hair, and hides.
The Caspian Sea and the Persian Gulf remained the country’s two largest fishing areas. A variety of fish were found in both bodies of water; catches totaled 44,800 tons in 1981 and 34,500 tons in 1983. Fishing in the Persian Gulf has declined since the onset of war with Iraq. By 1986 national freshwater catches totaled only 25,000 to 35,000 tons per year.
Commercial fishing was controlled by two state-owned enterprises, the Northern Fishing Company operating in the Caspian Sea and the Southern Fisheries Company in the Persian Gulf and the Gulf of Oman. Sturgeon, white salmon, whitefish, carp, bream, pike, and catfish predominate in the Caspian, and sardines, sole, tuna, bream, snapper, mackerel, swordfish, and shrimp predominate in the Persian Gulf.
The Caspian sturgeon was of particular importance because it produces the roe that is processed into caviar. Known as “gray pearls,” Iranian caviar is said to be the finest in the world and commands a high price. The main importers of Iranian caviar were the Soviet Union and the West European countries. Increasing pollution in the Caspian Sea, however, posed a threat to the industry.
Some of Iran’s forest resources were nationalized under Mohammad Reza Shah’s development plans, beginning in 1963. Since then, the state has gradually gained control over forest use. The plentiful commercial timber in the Alborz and Zagros mountains was diminished by illegal cutting that did not show up in official statistics; approximately 6.5 million cubic meters were cut in 1986 alone. Of an estimated 18 million hectares of forest lands, only about 3.2 million hectares near the Caspian Sea can be regarded as commercially productive.
Plentiful rainfall, a mild climate, and a long growing season have combined to create a dense forest of high-quality timber in the Caspian region. There is an extensive growth of temperate-zone hardwoods, including oak, beech, maple, Siberian elm, ash, walnut, ironwood, alder, basswood, and fig. About half of the Caspian forests consists of these trees; the remainder is low-grade scrub. The Zagros Mountains in the west and areas in Khorasan and Fars provinces abound in oak, walnut, and maple trees. Shiraz is renowned for its cypresses.
To curtail indiscriminate forest destruction, the government in 1967 moved to nationalize all forests and pastures. A forest service was established; by 1970 more than 3,000 forest rangers and guards were employed, and 1.3 million saplings had been planted on 526,315 hectares of land. The value of exported forest products was six times greater in 1973 than in 1984; the decrease in exports probably resulted from increased domestic and war-related consumption.
Overall trade contracted in 1986, with import restrictions matching falling export earnings. The trade statistics did not, however, reflect the flourishing black market for foreign goods. Gasoline was available on the black market for five times the official rate; food and other goods were available at similarly inflated prices. Rising prices and fixed salaries (among civil servants, for example) compounded the rate of inflation, which ranged between 10 and 50 percent, depending on the kind of goods purchased.
Capital and consumer goods imports decreased after the 1979 Revolution, with capital goods falling from 30 percent of total imports in 1979 to 15 percent by 1982. Importation of luxury goods was restricted to conserve foreign currency and preserve the balance of payments. Food imports increased to more than US$2 billion by FY 1983, despite the emphasis on agricultural self-sufficiency. Rice imports alone increased by 200,000 tons in 1986, despite increased rice production.
Food imports in early 1986 consumed as much as 20 percent of total foreign exchange. Iran had become one of the largest per capita purchasers of wheat in the world, buying 3.4 million tons annually. The nation spent about US$3 billion per year on food items such as wheat, rice, meat, vegetable oil, eggs, chicken, tea, and sugar. By December 1986, Iran’s imports of meat and dairy products alone exceeded the value of the country’s entire industrial output.
Between March and June 1986, imports declined to US$2.6 billion, a drop of 16 percent compared with the same period the previous year. Shrinking imports reflected a conscious government effort to contain the financial crisis by further restricting the entry of luxury goods into the country. Discretionary imports for private consumption were expected to be halved in FY 1987 to US$5 billion, from the FY 1986 low of US$8 to US$10 billion.
Iran resorted to barter agreements with some countries in 1986 and 1987, trading oil for goods such as tea from Sri Lanka, rice from Thailand, wheat from Argentina, and various foodstuffs from Turkey. Failure to pay its debts caused Iran to lose its contract with Peugeot- Talbot for automobile assembly kits. Although the contract was suspended officially in November 1986, no new kits had been shipped since January 1986, and Iran lost business worth US$190 million per year as production of the Peykan automobile ceased. Iran also lost its barter agreement with New Zealand after failing to pay cash debts for imported goods; thus, in 1987 Iran paid for 90,000 tons of imported lamb in cash rather than with oil, as it had for 135,000 tons of New Zealand lamb imported in 1986.
In 1985 the government announced its new goal of doubling non-oil exports in 1986. Although the value of non-oil exports increased 70 percent between March and June 1986, this increase shrank to 59 percent by August 1986. Because inflation had reduced the value of non-oil exports, the government abandoned its goal for non-oil exports.
Despite government encouragement, non-oil exports in 1985 accounted for only 10 percent of total exports. Industrial and mineral exports together accounted for 25 percent of the value of non-oil exports in 1985 but only 5 percent in 1986. The export of manufactured goods and cotton also declined appreciably as a result of the war. A further 25 percent of non-oil export income came from carpets and fruit. Carpet exports were the exception to the overall downturn in non-oil exports in
1985. Carpet exports more than tripled from 1985 to 1986, but as carpet output increased, prices on the international market fell.
The other key non-oil export was agricultural produce. Some agricultural exports increased in FY 1986, whereas industrial exports continued to decline. Official figures showed that agricultural exports were up in value 46 percent for the period March-August 1986, as compared with the same period during the preceding fiscal year. This figure is misleading, however, because there was a decline in the ratio of the value of agricultural exports to agricultural imports. In the mid- 1980s, the agricultural sector operated at a subsistence level, growing food primarily to feed the general population and producing for export only the financially lucrative cash crops whose production varied according to seasonal fluctuations in rainfall. A halting though generally upward trend in the production and export of cash crops began just before the Revolution.
Fruit and vegetable exports increased in 1986 as a result of good weather, a big market in the Persian Gulf area for fresh produce, and incentives to grow and market cash crops, whose prices the government did not regulate. Fruit and vegetable exports accounted for 30 percent of the country’s non-oil exports in the first half of FY 1987. Previously, fruit had not exceeded 5 percent of total non-oil exports.
Bumper crops of pistachios sold at the international market rate and bumper crops of fruit and vegetables were the only exceptions to a general decline in agricultural production. Production of pistachios was so competitive that the United States Department of Commerce imposed a 318-percent duty on imports of Iranian roasted pistachios in the fall of 1986, causing a decline in exports to the United States.
Through 1986, Iranian caviar exports in the 1980s fluctuated between US$20 million and US$40 million. In 1986 the exports were worth only about US$20 million. That year, Iran sought to recapture the Italian market (estimated at US$900,000 annually) from the Soviet Union. Iran had sold only US$100,000 worth of caviar
(about 11 percent of the market) to Italy in 1985.
Before 1979 Iran had relied on the industrial West for trade. Little changed in subsequent years except rhetoric. Although the government purportedly sought to develop trade relations with other Islamic countries, figures showed that in 1985 approximately 64 percent of Iran’s imports came from the West, 28 percent from developing countries, and 8 percent from Eastern Europe. These figures, although representing an absolute increase in trade with Third World countries, actually indicated only a small percentage increase in total trade. Economic necessity mandated that Iran trade with whatever country was willing, notwithstanding policy pronouncements regarding self-sufficiency and Third World communities of interest. Nearly all foreign trade occurred through government-controlled purchasing and distribution companies, which were charged with enforcing government trade policies and regulating the quantity and quality of imports.
Despite trade sanctions applied in 1980 by the United States, the European Economic Community, and Japan, Iranian imports from the West actually increased 13.5 percent from FY 1980 to FY 1981. West Germany remained Iran’s primary supplier in 1985, followed by Japan, Britain, Italy, and Turkey.
As a result of United States trade restrictions following the Tehran embassy takeover in 1979, imports from the United States dropped dramatically. This lost market, coupled with the decline in oil revenues, forced the government to consider bartering Iranian oil for non-oil goods. It was estimated that total trade with new Islamic and Third World trade partners would increase from 20 percent in the mid-1980s to 35 percent in 1987 through barter.
Barter agreements became commonplace in 1984 to compensate for the fall in revenue from oil exports, this ch. These revenues were 15 percent less than expected in FY 1984 (US$17,000 billion), with barter arrangements making up the difference. About one-quarter of 1984 oil exports resulted from barter or bilateral trade agreements. Barter became a point of contention between the Ministry of Oil, which opposed it, and the Ministry of Foreign Affairs, which supported barter as a key element of foreign policy. Bartering ceased in late 1985 as a result of disagreement between the ministries but resumed in 1986 because of economic necessity occasioned by depressed oil prices. Bartering with other countries, especially in Eastern Europe, mitigated the effects of the economy’s structural problems but failed to solve them.
The United States resumed trade with Iran in FY 1981, with direct sales totaling US$300 million. United States exports to Iran fell to less than half that amount, however, in FY 1982. This led to Iran’s renewal of the Regional Cooperation for Development pact with Pakistan and Turkey in October 1984, which by 1985 had greatly increased trade among these partners. By early 1987, trade among the three countries was worth over US$3 billion, as compared with US$100 million before the Revolution.
In 1986 the United States imported US$612 million worth of Iranian products, principally crude oil, caviar, rugs, furs, spices, and gems. Of those imports, crude oil represented US$508.8 million, pistachios and other nuts US$15 million, carpets US$5.5 million, and caviar about US$2 million. In the first five months of 1987, the United States imported US$418.5 million in Iranian goods. The increase was probably caused by fluctuations in petroleum spot prices and in the demand for oil in general.
In 1986 Iran acknowledged the role of the Soviet Union as a major future trade partner by announcing its plans to complete the electrification of the railroad between Tabriz and the Soviet city of Jolfa. Moreover, the construction of railroad lines — to be completed by 1989 — linking other points in Iran with the Soviet Union and with Pakistan indicated the growing Iranian intent to deal with both countries as trade partners. In August 1987, Iran and the Soviet Union agreed to large-scale joint economic projects, including oil pipelines and a railroad to the Gulf. Despite the apparent intention on both sides to do business, overall Iranian-Soviet trade in FY 1986 was one-quarter that in FY 1985.
BALANCE OF PAYMENTS
Oil revenues in the mid-1970s brought Iran a foreign exchange surplus. But when oil revenues fell sharply in 1978, an economic crisis resulted. Iran went from being a long-term lender in the 1970s to a short-term borrower in the 1980s, with the acquisition of foreign currency a perennial problem. The revolutionary government resorted to barter with several countries in the mid-1980s, but some customers soon insisted on receiving payment from Iran before shipment because of disagreements over the terms of payment. Problems arose when countries wanted to renegotiate barter contracts in 1986, to reflect the lower cost of oil, and Iran insisted on the original terms. Also, barter did not improve the foreign currency situation; to maintain a foreign exchange balance, Iran would have had to earn at least US$1 billion more than the sums received from civilian non-oil exports.
Another method used by the government to improve its balance of payments was the collection of funds owed to Iran by foreign suppliers and governments. The Iranian government estimated in 1986 that several countries, chiefly Egypt, the United States, and France, owed Iran US$5 to US$6 billion. Clearly, the continued costs of the war coupled with falling oil revenues afforded the economy little elasticity.
Iran had a US$5.4 billion balance of payments deficit during 1986, largely as a result of low oil prices and the disruption of oil shipments caused by Iraqi bombing. Oil prices fell from US$27 per barrel in November 1985 to US$12 in February 1986. Although prices rose in the fall of 1986, the average price of oil for the year was US$13 per barrel, half that in 1985. The estimated US$10 billion in export earnings in 1986 was the lowest since 1973.
As a result of its high balance of payments deficit and foreign exchange shortage, Iran reduced its imports and divested itself of foreign financial assets acquired by Mohammad Reza Shah. For example, in 1986 it sold 25.6 percent of its holdings, worth approximately US$150 million, in the West German engineering firm Deutsche Babcock. Iran’s efforts to cope with its economic crisis by making barter agreements, repossessing funds, cutting imports, and divesting itself of foreign financial assets were superficial responses to deeper structural problems within the economy, such as the need for land and agricultural reforms and the redistribution of income.
The country’s balance of payments looked bleak for the final years of the 1980s. The continuing war with Iraq, declining oil revenues, high unemployment, reduced consumer imports, severe inflation, a rising foreign debt, and a severe foreign currency shortage tested the economic policies of the revolutionary regime. The economy produced essential products and addressed in some measure the problems facing the national budget, a remarkable feat given the war, but failed to address basic structural issues.
Despite the disruptive influences of war on all aspects of the national life, a surprising number of good publications on the Iranian economy were readily available in the late 1980s. The Central Bank (Bank Markazi) of the Islamic Republic publishes reliable annual statistics on the state of the economy, the budget, finances, and balance of payments. A publication from Tehran called Iran Press Digest has a superb weekly update of economic and political events. Iran Monitor, a monthly publication based in Switzerland, provides an up-to-date account of international financial and trade issues. Iran Times, an independent weekly newspaper with sections in English and Persian, details current economic developments and statistics. Two other sources of consistently good coverage of Iran are the Middle East Economic Digest (MEED), published in London, and Middle East Research and Information Project (MERIP) Reports, published in Washington.
Eric Hooglund provides an understanding of land reform issues in Land and Revolution in Iran, 1960-1980. For concise reports on the economic situation in Iran, the following sources are helpful: Patrick Clawson’s “Islamic Iran’s Economic Policies and Prospects”; Sohrab Behdad’s Foreign Exchange Gap, Structural Constraints and the Political Economy of Exchange Rate Determination in Iran; and Wolfgang Lautenschlager’s “The Effects of an Overvalued Exchange Rate on the Iranian Economy, 1979-1984.” (For further information and complete citations, see Bibliography.)