Final Report: Iran’s Economic Development

IRAN’S EXPERIENCE & STRUGGLE for ECONOMIC DEVELOPMENT

A Historical Approach

Introduction

Ever since the beginning of history, Iran has been either a major or a pivotal power with its strategic location, rich culture, and high ambitions. Iranians proved to be affective not only in political and military fronts but also in infrastructure, commerce, and trade. The Achaemenid Persia, considered by historians as the first global empire, has absorbed previous ancient civilizations in the Near East under a single political establishment built upon agriculture and trade surplus. In order to carry on further enhancement of economic development, the ancient Persians invested on a grand transportation project known as “the royal highway” delighting Babylonian as well as Phoenician merchants. In the end, it was them who enthusiastically financed Persian military adventures against the Athenians. Under the Parthians and the Sassanids, Iran was challenging Rome over the control of the Silk Road. During the Safavid period (1501-1722), trade with Europe, mainly with the Dutch, brought surplus in the beginning but revenues declined as trade routes gradually shifted away. This shift continued throughout the 18th century. Eventually, under the Qajar rule (1796-1925) Iran found itself politically weak, militarily defeated, and economically underdeveloped. In fact, this was a common fate of all counties in the Islamic world. Yet, today Iran once again is looking towards becoming a pivotal power despite global challenges, and that requires a strong economy. In this paper I will try to illustrate Iran’s economic development stages and obstacles that Iran struggled to overcome in each stage, while putting emphasis on its class relations. I will analyze various economic policies the country has followed keeping in mind political events and outcomes. This way it would be better to understand where Iran’s economy stands today.

Major Capitulations and Resistance (1870s-1920s)

Throughout 1800s, the volume of foreign trade grew tenfold. At that time, Iran followed the classical economic model, which was the dominant economic thought. Yet, the country was weak and unable to determine global economic events. The government saw no alternative other than giving concessions to foreigners especially to colonial powers that put Iran under pressure. At first, these pressures took place at the state level, and can be traced back to the treaties of Gulistan (1813) and Turkmanchai (1828) where Iran agreed to give up its territories in the Caucasus to Russia. Also, the British defeated the Qajars in Herat, Afghanistan in 1856, in order to protect their Indian empire. After 1857, however, the primary form of British and Russian penetration in Iran was economic where the Qajars were forced to give numerous concessions.

In 1872, the Iranian government gave concessions to Baron Julius de Reuter, founder of the Reuters News Agency. He was given control of customs revenues for 24 years; the monopoly of rail and tramway construction; exclusive rights to mine several minerals and metals, constructing canals and irrigation works, roads, telegraphs, and mills in return for royalties and a share of profits for the Shahs. Although, this was cancelled due to strong opposition of the ulama, it is an important example to demonstrate how poignant the economic situation in Iran used to be. In 1888, Caspian fisheries were turned over to Russia. In 1889, the Imperial Bank was founded under British patronage, and in 1891, the Bank of Persia was founded under Russian sponsorship. By 1920, the Imperial Bank was the only modern banking institution because the Soviets handed over all of Bank of Persia’s assets back to Iran and cancelled all of Iran’s debt. The Imperial Bank not only took deposits, made loans, dealt in foreign exchange, and financed trade and commerce, but also issued banknotes, controlled their circulation, and imported silver for minting into coins. It acted as the government’s banker. In addition, the bank cooperated with the British Foreign Office and had a closer link to Anglo-Persian Oil Company (APOC), the future British Petroleum (BP).

Moreover, Iranian native investors caught between ineffective government and foreign interests began to seek support from other resources. In fact, Nasreddin Shah had received a report from his prime minister that Iranian merchants who engage in foreign trade sought protection from British and French governments. While European traders benefited from low import duty and no border tax due to given concessions, their Iranian counterparts had to pay border taxes whenever they send their commodities. Understandably, the Qajar tax collectors did their best to collect as much tax as possible for their already inefficient economy from thriving merchants in the coastal regions of the Gulf and the Caspian since local merchants of the interior fell behind the amount of revenue generated from foreign trade. But it did not help the situation. Merchant-landowners in the north gave allegiance to the Tsar to get away from the Shah’s confiscation and government’s property laws. By 1907, Anglo-Russian Treaty divided Iran between British and Russian spheres of influence, leaving control of the interior to Tehran.

While many Iranian merchants put themselves under the protection of foreigners, others with more traditional orientation and social ties to the religious leaders sought the protection of the clergy, or the ulama. The ulama have led a boycott against the tobacco concession of 1890, granting the British Imperial Tobacco Company monopoly over production, sale, and export of Iranian tobacco for 50 years in exchange of sharing quarter of its annual profits with the Shahs. The ulama and the bazaar merchants successfully forced the deal to be cancelled. Alliance of the ulama, the bazaar merchants, and the western educated elites led to the Constitutional Revolution in 1906. Economically speaking, the constitutional revolution was a joint political operation of Iran’s national capital and intelligentsia against the incursion of foreign capital.

Among the most important of all concessions, however, was the one given to William Knox D’Arcy in 1901 to “explore, exploit, transport, and sell petroleum, natural gas, asphalt and mineral waxes in Persia.” It gave birth to the oil industry in Iran. In 1908, oil was discovered and by 1912, the first cargo of crude oil was exported from the giant refinery in Abadan by Anglo-Iranian Oil Company (AIOC). It became the single largest employer in the country. It already employed over a thousand workers.

Charles Issawi, The Economic History of Iran: 1800-1914, University of Chicago Press.

Nikki Keddie, Religion and Rebellion In Iran: The Tobacco Protest of 1891-92.

James Bill, The Politics of Iran, pg 11.

A Ashraf & H Hekmat, Merchants & Artisans & the Development Process of 19th century Iran.

Development under Autocracy (1926-1941)

As soon as he was inaugurated as the new shah, Reza Pahlavi took Iran into an intensive development stage under his vision. The Qajar period was over. Iran’s priority was now modern nation-state building, not free trade. He spent extensively on basic infrastructure projects. Iranian economy went through state-controlled modernization.

New hospitals were built. Tehran University was founded. A new customs office was established, staffed by Belgian officers. A Trans-Iranian railway was under construction and it was financed entirely by Iranian capital. The Indo-European Telegraph Company established by the British in 1868 to complete telegraphic link between Europe and India and to manage the internal telegraph network was handed over to the Iranian government. The new mandatory military service received 33% from the annual government budget. The National Bank of Iran (Bank Melli) was established to counter the Imperial Bank, and its note-issuing privilege was forced to surrender to Bank Melli within few years. The Mortgage Bank of Iran granted loans only to current homeowners on easy terms in the context of Tehran for a 25-year period at a low fixed interest rate of 6%. It was a very good deal compared to the bazaar rates which was 24%! The state also controlled trade and foreign exchange. It established a monopoly on imports of tea and sugar. Due to lack of support from landowners, the priority on industrial projects was given to consumer substitution industries to replace imports with domestic products such as cotton, woolen, silk, sugar, soap, glass, paper, matches, and cigarettes. Reza Shah also followed a foreign policy based on regulation of foreign interests. While AIOC was left alone to control the oil production and Russia became the largest trading partner, Germany provided its own capital and technical assistance. Lufthansa received a contract to fly over Iranian airspace instead of the UK based Imperial Airways. By 1933, Iran’s share of AIOC’s net profits increased from 16% to 21%, thanks to Reza Shah’s demand to reduce territories conceded for foreign exploration and a fixed income. In exchange, the company received an extension on the existing concession to 1993 and exempted from taxation. Annual oil revenue reached $17 million by 1938.

These measures alleviated the economy during Great Depression. State-controlled modernization and economic development model proved to be immune from global misery generated by classical model. Also, while working classes in capitalist Europe and the US were suffering from inflation and unemployment, no worker has ever been afflicted by either one in the Soviet Union. Economic affairs were fully controlled by the state which guaranteed full employment in the country. Although, third world Marxist intelligentsia took that as a “socialist model,” it was nothing other than well managed “state capitalism” where the owner of the means of production was the state. The structure of nationalized industrial production was still corporate where former board of directors was replaced by high ranking government employees. The Soviet model was attractive but not innovative; it was similar to that of Reza Shah. True, the Soviet economy was more advanced, and industrialization in Iran was primitive. These two separate factors may have shielded both economies from the global crisis. But both have placed the state in the driving seat. Only, the involvement of the state in economic development was slightly different than each other; it was more technocratic in Russia, more autocratic in Iran.

In the 1930s, Russian share of Iranian exports fell from 34% to 1%, and the German share rose from 20% to 42%. The state controlled roughly 33-40% of Iranian imports and exports. WWII broke out and soon Germany invaded Russia. In order to keep Germany away from Iran’s oil and to punish Reza Shah for his friendly relations with the Germans, the British and the Russians bilaterally invaded Iran, occupied Tehran, deposed Reza Shah, and made his son the new shah. Thus, Iran’s economy entered into an unstable condition for the next 12 years. Energy and banking industries were the two main focus of this period.

Nikki Keddie, Roots of Revolution: An Interpretive History of Modern Iran, New Haven, 1981.

F. Kazemzadeh, Russia and Britain in Persia, 1864-1914.

Amin Banani, The Modernization of Iran, 1921-1941.

Development under Keynesian Technocrats (1941-1977)

Since the new king Muhammad Reza II was still young, top level officials and bankers were engaging in economic and financial decisions. Among them was Abol Hasan Ebtejah who remained influential throughout the Pahlavi regime. He was the leading Keynesian in post-WWII Iran. Ebtehaj has been appointed as the Governor of Bank Melli in 1943. He was determined that Bank Melli should function as the Central Bank in Iran. He challenged the Imperial Bank’s dominance over currency exchange resulting in a new agreement and limitations on the bank’s activities by the end of the year. The Imperial Bank financed the entire business of the US military in Iran in 1942-43. Bank Melli (BM) under Ebtehaj began to provide better services. The Americans closed all their accounts with the Imperial Bank. The Imperial Bank continued to operate after the lapse of its concession in 1949, but with the collapse of British-Iranian relations after the nationalization of AIOC by Prime Minister Mohammad Mossadegh (1950-1953), it finally shut down its activities in Iran.

The Azerbaijan crisis in 1946, however, was serious enough to bankrupt the state. Throughout this crisis, the BM was unable to collect revenue from local banks and unable attract foreign investors. Aftermath of the crisis, the BM changed its credit policies. According to the new principle all credit by the bank to traders and industrialists should be spent on productive purposes, not for speculative purposes. The BM closely cooperated with the Plan Organization (PO) created in 1948, to create loans for assisting industry and for importing machinery. The BM and the PO urged the government to balance the budget. Both organizations were operating independently from the government.

Geoffrey Jones, Banking and Empire in Iran, pg 9-12.

Jahangir Amuzegar, Iran: An Economic Profile, pg 33-38.

The First Plan           

The Iranian government appointed a Supreme Planning Board in November 1947, under the Chairmanship of Hasan Nafisi and with Dr. Ali Amini as its Secretary General. They presented a seven year plan with the cost estimated £161.5 million to be distributed around,

  • 24% on agriculture;
  • 24% on roads, railroads, ports, and airports;
  • 14% on mines and industries;
  • 14% on health, education, the police, and other institutions;
  • 7% on constructing cheap housing;
  • and the remaining on various other projects.

This plan contrasted Soviet plans in which heavy industry had been given priority. As far as financing was concerned, it was proposed that 1/3rd of the cost should be borrowed from the World Bank (£50 million = $200 million) and the remaining should be raised internally from four different sources: royalties and the share profits received by the AIOC (£60 million), funds from Bank Melli, sale of state-owned companies operated by the Industrial Mining Bank to private investors, and from private investment & savings.

Ebtehaj, as the head of the Plan Organization, on the other hand, was asking for $250 million from the World Bank. He has been present at the Brettonwoods. He made Iran a member of the IMF and the World Bank. He was hopeful to receive the money but the World Bank, as well as the US & the UK denied Iran the loan. He complained to the US State Department in 1949 that Iran as a member of both establishments deserved the loan. The lenders’ priority at the time was reconstruction of Europe and military aid to third world countries.

In the mean time, politicians were working on nationalizing the oil industry. According to BP figures, London had collected some £194.1 million from 1932-1950, while Tehran had received £100.5 million over the same period. Unfortunately, the British boycott against nationalization of Anglo-Iranian Oil Company by PM Mossadegh deprived the economy of its most vital source of foreign exchange, and thus The First Development Plan set up in 1949 lacking financial resources had to be abandoned.

By 1952, Iranian production had plummeted to just 20,000 barrels per day, compared to 666,000 in 1950, while total world production had risen from 10.9 million barrels per day in 1950 to 13 million in 1952 – an increase more than three times greater than Iran’s total output in 1950!… Before nationalization, oil exports had generated 2/3rds of the country’s foreign exchange and half of government revenues. But there had been no oil revenues for two years, inflation was rampant, and the country was falling apart. The country was much worse off than before nationalization.” (The Prize, by David Yergin, pg 446, 449).

Geoffrey Jones, Banking and Empire in Iran, pg 9-12.

Daniel Yergin, The Prize.

The Other Development Plans

An oil consortium was formed aftermath of Mohammad Mossadegh’s overthrow by the US-backed coup. The National Iranian Oil Company (NIOC) was finally born. But it had no power over the consortium that consisted of five American oil companies alongside AIOC, Shell, and French Petroleum Company (CFP). And since then oil revenues began rising steadily, permitting development planning to proceed on sustained and secured basis. Annual oil revenue in 1969 was $908 million, in 1973 $5 billion, and by 1974, it jumped over $20 billion!

Beginning from 1954, the Plan & Budget Organization published four more plans: The Second Seven Year Plan 1954-1961, The Third Plan 1962-1968, The Fourth Plan 1968-1973, and The Fifth Plan 1973-1977. Although growth did take place, there were considerable issues: Agricultural development received little attention. Other than few giant dams, such as the Karaj Dam built in 1956 that supplies Tehran’s drinking water, investments were minimal. Primarily, all plans were restricted to the public sector. The private sector was initially left outside. Even in the public sector the plans were not widespread. Capital expenditures of the State Railways, Cereal Administration, Tobacco Monopoly, NIOC, and the Shah’s crown estates such as shipping, fisheries, and hotels were excluded. There were attempts to include private sector activities starting with the Third Plan. Also, public investment had been mainly concentrated in physical infrastructural development such as transportation, communication, and office building and large scale technology-intensive industrial ventures. In addition, the planning was heavily relied on foreign loans and investment. The given official net borrowing during the Third Plan was $100 million; in the Forth Plan it jumped to $1.8 billion. At the same period, planning got into the hands of government ministries from the autonomous Plan & Budget Organization. During 1945-1966, US foreign aid totaled $1.586 billion and $895 million of it was military aid. With oil prices rising, revenues increasing, and economic conditions improving, there was really no need for US aid. The US economic aid to Iran came to an end in 1962, but the military aid officially continued until the fall of the Shah.

The Fifth Plan coincided with the 1973 oil crisis. Yet, the planners put their expectations too high, and that contributed to a political calamity. All indicators pointed success by the inflow of petro-bullions. PM Amir Abbas Hoveyda opened the nuclear power plant in 1976. But each bullion coin had an opposite side and it lay on the back of marginalized classes.

Farhad Daftari, Development Planning in Iran: A Historical Essay.

Richard E. Benedict, Industrial Finance in Iran.

Iran’s Classes and Casts

Iranian peasantry is the lowest layer of the society and they live under the poorest conditions. Most of them were tenants and sharecroppers dependent upon their landlords. They lived under the iqta system which goes back to early Islamic times. Under the iqta system, peasants worked on the land to pay tax to the state, to pay the landlord his military wage, and to pay for their own living except armaments. Armaments were to be subsidized by their landlords. The Arbab, or the landlords, were military chiefs that received land by the state as a means to earn their salary. As absentee landlords, iqta holders were responsible for collecting taxes to the central authority, in charge of keeping order, and providing soldiers to the army from their peasants when it is needed. Once the peasants depopulated the area, the iqta would be dissolved and moved elsewhere to be redistributed. The peasants were rarely owners. Therefore the peasantry was too poor and too divided to participate in an insurrectionary movement.

The Arbab owned land and farms in the countryside and property in towns, but also engaged in commerce, and in some cases held government positions. Yet, life was more difficult for them compared to European feudals. Iran has a geography where numerous invasions swept through the country throughout history. In addition, uymaq or the “household state” was introduced to Iranian landlordism by Turkish & Mongol invasions. Uymaq chiefs were heads of confederations that were organized as a great household formed by smaller federations headed by lesser-chiefs. Competition among these groups made the uymaq very volatile and led to rapid rises and falls of fortune. Any land that was properly used would be noticed then arbitrarily confiscated by powerful kings and local notables. While the former owners were kicked out or killed, the lands would be sold in auction to merchants or other landlords. They would purchase these confiscated lands with the full awareness that one day the same thing can happen to them.

Arbitrary confiscations forced the Arbab to assign part of their land into “vaqf,” or private endowment. Vaqfs were inherited by the landlords’ children. They could continue to use vaqf revenues, after making token contributions to charities, thereby gathering extensive private estates of their own and becoming regional powers as the holders of religious/secular positions.

The ulama (“scholars of religion”), especially the Shiite ulama, were part of the state-controlled bureaucracy during the Safavid era. Furthermore, the religious elite became part of the Iranian landowning aristocracy. Grants of land called soyurghal given to eminent religious families were allowed to pass generation to generation immune from taxation. The ulama gained autonomy from the state with the dissolution of the Safavids. They withdrew from engagement in public affairs but consolidated their ties with the common people, through trust funds and charities. Their tie with the bazaaris was also important. A secure financial foundation was built up on the contributions of their followers and the religious vaqfs of state lands. The tobacco concession of 1890, as a matter affect, would have resulted in a massive profit loss for both Iranian tobacco merchants and the religious institutions whose vaqf lands tobacco was grown. The ulama were instrumental in the formation of several national companies and industrial projects designed to compete foreign products in Iran. Aqa Najafi, a leading cleric and the richest man in Isfahan established the Islamiyya Corporation in 1900, encouraging local industries and wearing woven cloth. However, in 1939, the state confiscated all vaqfs; religious lands and foundations. Ironically, Reza Shah’s restricting measures put the bazaaris and the ulama into closer alliance. Their opposition to the regime became independent from the state, thus more powerful. By cutting financial resources of the religious community, the state simply made them more dependent on the religious taxes & alms (khums & zakat) paid by the traditionally oriented bazaar merchants and shopkeepers.

In the absence of modern industry, bazaar became the most significant element in the domestic economy. Merchants, shopkeepers, and artisans dominated wholesale, retail, and franchise businesses. The French word “bourgeois,” was driven from Persian words “bazaar,” “bazergan,” “bazergan-e bozorg.” A bazaari is a shopkeeper that puts consumer goods in his showcase; a wholesaler who employs handworkers in his workshop; and any tradesman who take part in this type of mercantile activity. Towns and small cities are backbones of production of cheap handmade goods. These goods cost more in Grand Bazaars (bazaar-e-bozorg) in major cities. A rich bazaari is a successful merchant expanding his own business and/or expanding into other businesses. Bazaar merchants put up their shutters during the Constitutional Revolution. They were open for business when Mossadegh was ousted or when Ayatollah Khomeini first denounced the Shah. But they put up their shutters again at the time of the Islamic Revolution.

The state was also an active player. The Shahs, as the heads of central authority, were the biggest landowners themselves challenging the Arbab by either supporting lesser uymaq chiefs or by simply confiscating their lands. The Qajar state had good relations with the ulama and the bazaaris. The relations were strained under the Pahlavis because the state was “modernizing” the modern sector and alienating itself from the traditional one. Besides, the very nationality of the regime was dubious due to its comprador characteristics as Bijan Jazani has pointed out.

Modernization of the economy aimed to create a feeble proletariat, a vibrant middle-class bourgeoisie, industrialists and big businesses. Iranian proletariat was small in size yet vital in importance. They worked in construction, car factories, oil & natural gas, mining, and metal industries. Excluding the bazaaris, the “bourgeoisie” consisted of government employees, office employees, entrepreneurs, and professionals. The businessmen owed their possessions to rising oil prices. A factory owner would make enormous sums from his rising stocks at the Tehran Stock Exchange, then import necessary machinery in relatively fair price for production, exploit cheap labor with almost no energy cost, and sell the merchandises in domestic market or export them. As the oil revenues mounted in 1960s and 1970s, a class of “new rich” evolved mostly from humble backgrounds. As opposed to their European counterparts, they did not contribute to the spirit of capitalism. For them the future was uncertain and the system untrustworthy. It was considered wise to make a lot of money as soon as possible and keep it someplace safe; a Swiss bank or a US real estate, for instance. They could not make fortunes without right connections. Without affiliation to the Shah’s extended family or to foreign interests no contract would be signed, no permission to import machinery would be granted. The largest contractors were either the members of the royal family or they were closely related to it. Compared to their European counterparts, Iran’s “new rich” was actually its “new courtiers,” alongside casts of top bureaucrats and generals who rely on the same degree of affiliation for promotion. Only the religious cast was outside of the circle of dependence with its mullahs, imams, hojjas, and ayatollahs. In fact, the so-called “white revolution” was an economic war waged in favor of the modern secular sector against the traditional sector in which the clergy was an important part of.

Abrahamian, Iran between Two Revolutions.

A Bill, The Politics of Iran: Groups, Classes, and Modernization.

Bizhan Jazani, Capitalism and Revolution in Iran.

Iran’s “Revolutions”

The crucial aspect of the “white revolution” launched by the Shah and by PM Dr. Ali Amini before him was land reform. It was intended not to empower the peasantry but to weaken the absentee landlords. From 1962 to 1968, landowners were required by law to sell excess land to smallholders and tenants. Government purchased the land and sold it to the peasants with a 30% discount of a given market price and with a very low fixed rate loan to be paid back in 25 years. Because of evasion, not as much was distributed as had officially been proposed. The new owners lacked the capital, the technology, the cooperative organizations, and the government extension services necessary to maintain and increase productivity. Landless laborers, the Ranjbar, lacking the resources to farm or to pay for the land, received nothing. Having lost their employment in the countryside, they migrated to the cities. Subsequent redistributions benefitted the peasants in ownership and tenancy rights, but did not provide adequate lands for subsistence.

Actually, the major drive of the agricultural programs was the creation of large-scale, state-sponsored farm corporations and private agribusinesses. These farm corporations basically required peasants to pool their lands and take shares in the larger venture, often with the result that farms were mechanized and cultivators driven from the land. Private agribusinesses with heavy foreign investment also favored capital-intensive mechanized farming. Not surprisingly, the state favored capital-intensive agriculture in a country with surplus labor. Nomads were forced into sedentary life, and pastoral livestock herding was replaced with mechanized meat and dairy farms. But why these farms failed?

Smallholders faced increased demand for cash income to pay the services and the machinery provided by the state as the prominence on production of commodity crops grew. Since population pressure was high and land plots were small, the new land tenure system has created uncertainties about future access to farmland. The idea to turn peasants into rural capitalists on their own was impractical because entrepreneurship requires risk taking, yet peasants incline towards risk aversion. Based on their perception of risk, they use their own traditional survival methods. The opportunity cost of money for the peasants was usually high; that of labor and traditional skills, however, was low. Peasants facing financial risks decided to move to the cities. As a result, per capita agricultural production declined, and Iran became more dependent upon food imports and industrial development. Some landlords who sold their lands to the state also moved to the cities and invested their money in industrial sectors.

After 1973, the inflow of petrodollars quadrupled and helped the GNP to increase. Iranian industry, however, was still inefficient to compete in international markets due to lack of skilled management and labor. On top of that, rural migration to the cities increased the “reserved army of unemployed.” Wages went down, and that played to the hands of employers which also allowed “the new rich” to turn the corner. They contributed less to the national economy since profits were deposited in international banks. Huge influx of money plus no jobs led to inflation. Cost of living went up.

A middle manager or a civil servant in Tehran spent up to 70% of his salary on rent. Iran’s infrastructure could not cope with the pressure suddenly thrust upon it; the backward railway system was overwhelmed; Tehran’s streets were jammed with traffic. The national electricity grid could not meet the demand, and it broke down. Parts of Tehran and other cities were regularly blacked out, sometimes four or five hours a day, a disaster for industrial production and domestic life and a further source of anger and discontent” (Prize, by Daniel Yergin, page 656, 657).

Similar to the experience of 1789 in France, aristocracy and nobility were overthrown by the capitalist class. It would not be erroneous to observe the Islamic Revolution as a revolution of the bazaar. Upper classes were more adoptable to economic changes, and the poor have always been poor. However, besides the Arbab, the Ranjbar, the ulama, and the proletariat, the main losers during 1970s were the bazaaris in general, the artisan merchants in particular. As a declining middle class in two previous decades the bazaaris financed the Islamists and eliminated the regime. They eliminated the regime’s rising middle and upper classes, “the new rich,” fed by the secular structure. They tend to be nationalistic in world affairs, conservative in politics, and religious in their social and personal life. It made sense for them to join forces with the clergy who did not ignore the question of merchants in the center of a revolutionary vision strongly shaped by socialist discourse even if it was Islamicized. Before analyzing post-revolutionary economic model, the function of the government institutions should be illustrated.

Daniel Yergin, The Prize.

Abrahamian, Iran Between Two Revolutions.

Reinhard Schulze, A Modern History of the Islamic World.

Iranian Islamic Government

According to the constitution, people elect members of the majlis and the President in separate elections. There’re currently 310 seats in the majlis (parliament) and the number of seats may increase no more than twenty for each 10 year period based on population fluctuations in electoral districts. Majlis is elected every 4 years and elects its own Speaker. The president is elected for a 4-year term and reelection for a successive term is permissible only once. The president appoints his cabinet and goes to the majlis for vote of confidence.

Above the majlis and the president, is the Guardian Council (GC). It has the veto power over all legislation in violation of Islamic law. It can qualify and disqualify presidential candidates. It is consisted of 12 ulama; 6 of whom are appointed directly by the Supreme Leader and the remaining 6 members are nominated by the Judiciary Chief to be elected by the majlis. They are chosen for a 6-year term. The Judiciary Chief, on the other hand, is appointed by the supreme leader and serves for a period of 5 years.

Above the Guardian Council is the Supreme Leader. He holds the office of Velayat-e Faaqih or the Guardian Jurisconsult. He is the highest religious and judicial authority. He is the commander-in-chief of the arm forces and has the power to declare war. He controls the state media. He can formalize election results, appoint and remove the GC members, and “supervise” the president. He also sets up policies after consulting to the Expediency Council.

The Assembly of Experts (AE) is elected by the people for an 8-year term. It has the power to draft the constitution. It also has the power to elect the next supreme leader and to dismiss the current one. It is consisted of 86 Islamic jurists. The supreme leader is supposed to be chosen among the Guardian Council members. If the AE does not find an eligible candidate to be the next supreme leader, then it will elect one of its own members. The Guardian Council has the authority to examine the qualifications of the AE nominees. The assembly meets every 6 months.

The Expediency Council (EC) was created in 1988 as an intermediary council to find solutions to disputes between the majlis and the Guardian Council, to advise the supreme leader on issues referred to it by him, and other duties defined by law. It serves as the advisory board for the supreme leader who appoints its permanent and variable members for a 5-year term. 6 of the Guardian Council members are also part of the Expediency Council. While the real of role of the council is not clear, it has a critical importance in placing itself right at the center of the power struggle among various ruling factions:

According to Sohrab Behdad, “there are two general tendencies in the Islamic Republic’s ruling elite: a ‘moderate’ one comprised of those who believe in respect for private property and favored limited nationalization; and a ‘populist’ one whose members were in favor of a limitation of private property rights and the creation of various revolutionary foundations to inspire grass-roots support for a fundamentalist Islamic regime.” (Iran’s Struggle for Economic Independence, by Evaleila Pesaran, pg 34)

Google: Constitution of Islamic Republic of Iran.

Islamic Keynesianism?

Economic policies of the early Islamic Republic have been non-communist, and distinctively Keynesian in structure. While government intervention was seen essential, private enterprise was protected on the basis of serving the national economy as well as the religion. Three examples can be shown in regards to Islamic Republic’s attitude towards labor and capital.

In the early post-revolutionary period, the striking oil workers came up with a list of demands including redistribution of the oil income, worker’s control and the right to reject management appointees, and getting rid of transnational oil companies that function as intermediary link between producers and consumers in the market. The difference between the strikes that took place in 1951 was that now the oil workers were able to handle all the technical aspects of the industry from managing the oilfields to controlling the refining and distribution facilities. The sudden departure of 18,000 foreign technicians did not have any significant effect on oil production. Therefore the demands expressed by the oil workers were truly Marxist where the workers who produce the surplus would also be the people who appropriate and distribute that surplus. In other words, productive workers would become their own board of directors; they would collectively appropriate their own surpluses within enterprises. Even the government is out in this equation. As soon as the Islamic government consolidated its power, the entire oil province of Khuzistan was put under martial law and oil workers’ committees were destroyed.

As oil revenues and foreign direct investment sharply declined, capital flight skyrocketed. Foreign capital and the PBO were rejected in the name of economic independence. The initial opposition to interim PM Mehdi Bazargan was his insistence on keeping planners in his economic management team. He opposed nationalization of bank and oil industry proposed by Abulhasan Beni-Sadr, the first and the only secular President of the Islamic Republic. Following the fall of Beni-Sadr and successive governments, the hardliner PM Mir Hussein Musavi argued that the country needed a planned development regardless of regime change. However, the outbreak of war with Iraq made it impossible for long-term planning. The economy still fell under increasing state control, this time without planners. The government completely took over major industries including oil & natural gas, and it subsidized oil which lasted until 2011.

Yet, in 1982, the Guardian Council repealed the foreign trade nationalization law, calling it “non-Islamic.” It later forced the majlis to revise the bill on urban land ownership rights. That way, the majlis protected private ownership and required government to compensate the landlords in case of expropriation. Therefore the council limited the power of the government to take over property. Moreover, the first Majlis appointed a 7-member committee on the question of land ownership to oversee the equitable distribution among landless peasants. The dispute was over large tracts of lands (324,000 acres), whose owners were already executed or had fled the country. Some high-ranking clergymen opposed. Khomeini stopped the plan and sent it to the Guardian Council for decision. In January 1983, the GC called the program non-Islamic and rejected the Land Reform Bill in its entirety. The bill died and never introduced again.

Finally, Article 44 of the constitution clearly stated that the Iranian economy consisted of three sectors: state, private, and cooperative. “The cooperative sector is to include cooperative companies and enterprises concerned with production and distribution, in urban and rural areas, in accordance with Islamic criteria.” These Islamic cooperatives are bonyads or charitable trusts nationalized during the revolution to serve the poor and the families of martyred war veterans. They are government subsidized, exempt from taxation, receive donation, and answerable to the Supreme Leader. Bonyads control 1/5th of Iran’s GDP, and provides limited help to the poor.

According to UN Conference on Trade & Development the inflow of FDI which was $164 million in 1979, declined to $81 million in 1980, $28 million in 1982, and -$136 million in 1983, and -$308 million by 1987. According to the IMF, Iran’s GDP in 1979 was 185 billion rials (IR), 157 billion in 1980, steadily increased from 170 billion in 1981 to 210 billion in 1986, but declined sharply to 176 billion by 1988. Iran’s imports totaled nearly 62 billion IR in 1979, and jumped to 108 million in 1983, yet declined sharply to 43 million by 1988.

Evalia Pesaran, Iran’s Struggle for Economic Independence.

Sohrab Behdad, From Populism to Liberalism: The Iranian Predicament.

Hakimian and Karshenas, Dilemmas and Prospects.

Ali M Ansari, Modern Iran, Second Edition.

Rafsanjani & Khatami Years

Throughout Khomeini years, the mercantilist faction was headed by Ayatollah Ahmad Azari-Qomi while the economy was directed by the statist elites; namely president Ali Akbar Hashemi-Rafsanjani, PM Musavi, and the speaker Mehdi Karrubi. After the death of Khomeini, the AE voted Ali Khamanei from the statist camp as the next supreme leader. Their choice was against the wishes of the mercantilist faction now headed by Rafsanjani. In 1989, he ran against Abbas Sheibani from the Freedom Movement -an Islamic socialist movement founded by Mehdi Bazargan back in 1961- and received 96% of the votes with a 60% voter turnout.

Rafsanjani’s task was not an easy one. Iranians had gone through a 12-year era of tough economic and political instability from 1941 to 1953, and they lost another dozen years from 1977 to 1989. By 1975, Iran’s growth was at pace with South Korea and was faster than Turkey. While Turkey was attracting more foreign capital in 1980s, however, Iran was closing its doors. In addition, Iran engaged in a destructive conventional war with Iraq where a million of its most valuable asset, the young idealist male population, was wasted. That’s why Rafsanjani tried to follow Korea and Turkey as examples. By March 1989, the Islamic Republic issued its First Five Year Plan which focused on regenerating the economy, reconstructing war-damaged regions, encourage private investment, and most importantly liberalize trade and foreign exchange. Iran’s economic situation did get better enormously in the first two consecutive years. The real GDP growth jumped from 3% in 1989 to 12.1% in 1990 and 10.9% in 1991. The rise in revenues was partly due to oil price increases right before and during Iraq’s invasion of Kuwait in 1990 and partly due to increased output. Oil exports increased by 43% between 1988 and 1990; and by another 28% between 1990 and 1993, as production and export facilities damaged during the war were gradually restored. Yet, the oil prices went down in the following year and on top of that Iran’s external debt increased from $6 billion in 1991 to $23 billion in 1994. Iran’s GDP sharply declined from 4.8% in 1993 to 1.6% in 1994! Market liberalization attempt by Rafsanjani’s structural adjustment program met with a debt and inflation crisis which hurt the initial successes; even the conservative mercantile elites represented by powerful bazaaris began to complain since they have gained only a little. As a result, Rafsanjani was able win another election in 1993, but this time with 64% of the votes against conservative candidates Ahmad Tavakoli (24%) and Abdollah Jasbi (9%) with a 63% voter turnout.

The impact of oil prices, on the other hand, was greater for Iran’s recovery in the following years. However, the GDP sunk back to 1.6% in 1998 as the prices went down again. Foreign debt became the main concern of the statist elites as well as Ayatollah Khamanei. The statist members of the majlis were able to include an additional requirement into the Second Five Year Plan that annual repayments of foreign debts should not exceed 30% of the government’s foreign exchange income. Also, contracts given to foreign parties that undertake the initial investment for equipment and services had to be reported to the majlis. One of those contracts was given to an American company, Conoco, for investment in Iran’s oil industry in March 1995. But the Clinton administration blocked the deal and introduced D’Amato Act. It later turned into Iran-Libya Sanctions Act (ILSA). The statist elites attacked Rafsanjani on his handling of the economy as well as foreign relations. Nonetheless, the mercantile elites had no choice but to support him or support any candidate close to his faction because various sections of the society began to raise their voices against economic liberalization agenda and the mercantile elites were concerned that the statist camp could gain momentum. By 1996, while top 10% of the population enjoyed 40% of share in total income, the bottom 50% had to struggle for a share of 16.7% (Social Change in Iran, by Behzad Yaghmaian, pg 248, 249).

Income Distribution by Percentiles for 1996

Income Percentiles    Share in Income (%)

poorest  1                                                 1.4

                2                                                3.1

                3                                                3.3

                4                                                3.9

                5                                                5.1

                6                                               6.9

                7                                             10.2

                8                                             12.1

                9                                             14.2

richest 10                                             39.8

Source: from the research conducted by the Majlis (Social Change in Iran, pg 248).

It was under these conditions that the “reformist” Muhammad Khatami won 69.6% of the votes against conservative Ali Akbar Nateq-Nuri who had 25% in 1997 presidential elections with an 80% voter turnout. Khatami was supported by Rafsanjani followers who advocated privatization, a balanced budget, the dismantling of state subsidies, and reduction of state’s role in the economy. Rafsanjani’s neoliberal policies themselves were responsible for the widening gap between the rich and the poor in Iran. Yet, because of his enthusiastic reformist rhetoric in his election campaign, Khatami enjoyed a grand coalition that was able to attract members of the clergy, Islamic organizations, poor and unorganized wage earners, leftists, and even received the support of Mir Hussein Musavi and Mehdi Karrubi. These groups believed in regulation of the economy for social justice and a welfare state. Obviously there were shift of alliances in the statist camp to a more reformist one. But also, there was a split within the mercantilists between the pragmatists and the conservatives, and that led to a realization on the part of the statists to join forces with the pragmatists to confront the influence of the bazaar.

Khatami promised “social justice,” a more equitable distribution of income among citizens. However, oil prices declined in 1998 due to Asian market crisis. Iranian crude oil was traded $9.5 per barrel. 1998’s oil income was projected to be $10-12 billion, while annual import bill was $14 billion with an outstanding foreign debt of $12 billion. It had a very negative effect in the Iranian society. Prices have risen as imports declined and made foreign exchange less accessible. Unemployment rate was 12%.  Workers in various sectors from oil to textile began to strike in various cities. In some cases, workers have not received their wages for over a 12 month period. Then, by the summer of 1999, Khatami came up with The Economic Rehabilitation Plan which stressed the need to lower the unemployment rate, secure resources for domestic investment, and attract foreign investment including from Iranians living abroad. He requested more autonomy on managing the economy and implementing the Third Five Year Development Plan in a yearly basis and therefore reduce the inconsistencies in previous plans. Ayatollah Khamanei did not authorized his government to manage the economy autonomously. Despite limitations imposed from the supreme leader and unelected institutions, the reformist-pragmatist coalition was able win the majority seats in the majlis in 2000 elections. In June 2001, Khatami won a stunning 78.3% of the votes against his conservative challenger Ahmad Tavakoli’s 16%.

Three months after his second term in office, September 11 attacks took place and President George W. Bush included Iran into his “Axis of Evil.” It played to the hands of statist elites. To cope with international pressure, the Khatami government slowed down Iran’s nuclear energy project on one hand, and began to discuss the IMF plan which suggests elimination of oil subsidies, on the other. The plan aimed to increase oil exports and channeling the surplus revenue into trade. This plan would make Iran more attractive to foreign investors and inflow of global capital despite trade sanctions imposed by the US. However, Khatami’s camp was losing its base: the youth and the urban & rural lower underclass. The rise of the conservative nationalist sentiments added by domestic economic factors led to a severe decline in public support for the reformists. The income gap has remained almost unchanged. The poorest quintile’s share in national income or consumption was 6.4% by the time Khatami left the presidency. By 2004, 20% of the households were without refrigerators; 24% without gas stove; 23% without a television. Conservative members of the parliament won almost all the seats in the majlis in 2004 elections. Presidential elections in the following year would also reflect Iranian public opinion.

Evalia Pesaran, Iran’s Struggle for Economic Independence.

Sohrab Behdad, From Populism to Liberalism: The Iranian Predicament.

Hakimian and Karshenas, Dilemmas and Prospects.

Ali M Ansari, Modern Iran, Second Edition.

Google: Iran election results.

The 2005 Elections

By 2005, the reformist alliance has been completely broken. In addition to that, the unwaveringly conservative Guardian Council disqualified thousands of reformist candidates. Only eight candidates were eligible to run for president. There were 47 million eligible voters. But nearly 29 million voted in the first round. Voter turn was only 63%:

Cadidates                     Votes             Faction         Occupation

Rafsanjani                               6,179,653         bazaari               former President

Mahmud Ahmadinejad     5,710,354         conservative   then mayor of Tehran

Mehdi Karrubi                      5,066,316          reformist          former speaker of majlis

Mohammad Qalibaf            4 million            conservative   current mayor of Tehran

Mostafa Moeen                     3 million            reformist           advisor to Khatami

Ali Larijani                             1 million            conservative    former speaker of majlis

Mohsen Alizadeh                 1 million            reformist           former Vice president

Mohsen Rezaee                     stepped aside conservative    former Pasdaran commander

Although Hojatulislam Mehdi Karrubi publicly accused the military personnel of voter intimidation and claimed fraud in the election process due to his conviction that he came second, Ayatollah Khamanei formalized the results. Therefore, Rafsanjani and Ahmadinejad went into a second round. Ahmadinejad received 61.7% and Rafsanjani received 36%.  This time the turnout went down to only 47%!

Source: Iran A People Interrupted, by Hamid Dabashi, pg 219, 220.

A New Player and A New Game

During Ahmadinejad’s first term in office, Iran generated $280 billion from high oil prices which was due to US war in Iraq. National income has risen considerably. Ahmadinejad was the candidate supported by the Pasdaran, Iran’s Islamic Revolutionary Guard. High ranking Pasdaran joined his administration receiving credits and contracts to engage in import-export businesses. He opened Iran’s domestic markets to cheap Chinese goods. Cheap Chinese imports led to collapse of many local manufacturing jobs. Several small and medium size factories ran out of business. Unemployment rate increased. Soon after, however, these bankrupt manufacturing units were taking over by the former Pasdaran. The emergence of revolutionary guards as both national and comprador tradesmen challenged even the economic influence of the bazaaris. Because the bazaars were flooded with merchandise from China, they had to lower their prices to sell domestic goods. In some cases shopkeepers gave in. They completely stopped selling domestic goods and only put Chinese goods in their showcases. In 2007, mercantile elites received a blow when Rafsanjani lost his position as the chair of the Assembly of Experts.

In 2008, oil prices declined in response to global financial crisis. Although consumers were still able to buy cheap imported goods, suppliers suffered from declining national income. The controversial election results of 2009 granting Ahmadinejad 63.62% against Mir Hussein Musavi’s 33.75%, Rezaee’s 1.73%, and Karrubi’s 0.85%, received a fierce reaction from the youth, the reformist camp, as well as the bazaar. Many bazaaris put up their shutters after the results were formalized by Ayatollah Khamanei. However, the economy was not strangulated by the boycott of the bazaaris. The revolutionary guards, now military businessmen, turned out to be vital with their presence in other parts of the economy which was functioning at the time. Iran’s traditional sector proved to be weaker in face of military industrial complex.

Evalia Pesaran, Iran’s Struggle for Economic Independence.

Sanctions and Oil Markets

Iran exports 2.5 million barrels/day. It is the fourth largest oil producer. Iran has 151 billion barrels of oil reserves which is equivalent to 10% of world oil reserves. With oil revenues, Iran pays its foreign debt and also lends money abroad. The biggest debtor country is India. India owes Iran nearly $9 billion. Since 2009, countries that owe oil money to Iran use to pay their debt through European banks. In December 2010 that was no longer available. Then it was done by Asian Cleaning Union (ACU). When that was no longer available, India transferred money to Iran’s EIH Bank in Germany. Germany was put under US diplomatic pressure and forced to stop any such transactions. Iran was considering stop selling oil to India by the end of summer 2011. The US sanctions are not imposed upon the supply side but also on the demand side. In other words, the US is intervening in the trade activities of third parties.

Moreover, it was rumored that Saudi Arabia could supply Iran’s oil customers the same amount of oil they need if they stop buying from Iran. If that would be the case, then Iran would have to reduce its oil exports. If Iran would export less oil, OPEC would have to supply the market with the huge missing share in order to avoid the rise in oil prices. Then the sanctions would become a burden for the world economy in general. Despite sanctions and even false reports China imports 500,000 barrels/day from Iran. In the mean time, Iran wants to diversify its resources. Being well aware of the fact that 85% of the nation’s economy is composed of petroleum and natural gas industries, Iranians look for nuclear energy alternative, and an economic reform plan that would help to ease the country’s dependence on oil exports.

Mahmud Ahmadinejad appeared as a poor people’s president. But he’s a neoliberal in his economics not different from Rafsanjani or Khatami. The most important evidence of that is the implementation of The Subsidy Plan backed by the IMF.

Evalia Pesaran, Iran’s Struggle for Economic Independence.

No More Oil Subsidies

Iran’s cut on basic subsidies such as food, water, oil, electricity and fuel began to be implemented since the beginning of his presidency. Gas prices increased from 10.5 cents to 18.5 cents per gallon. Electricity prices quadrupled and natural gas prices jumped from $30 to $150 per cubic meter. Many people expressed their dissatisfaction. The government gave cash incentives of a $40 for two month period regardless of income. In addition to that, the population was divided by ten tiers, and people were asked to fill out forms to show their financial situations and assets. The government would then deposit a monthly sum to the accounts of low income families for a 9 month period. Yet, this plan did not work because many forms were filled out incorrectly. The average income in Iran is $500 a month today. Nevertheless, thanks to the oil subsidies going back to the early days of the Islamic revolution, Iranians consume about 16 million gallons of gasoline a day, second in the world after the United States!

There has been steady decline in daily domestic oil consumption in recent years. When Khatami left office it was 23.8 million gallons/day. By 2006, it declined to 19 million gallons/day. In 2011, it went further down to 15.75 million gallons/day. There are less cars on the road, less gas emissions are released to the air, more people take public transportation, and more revenue is collected by the government. Iranians are trying to adjust Ahmadinejad’s economic measures. Before the reform, the price of bottle water was the same as 3 liters of oil. By early 2011, the government decided to cut oil subsidies completely. The goal is to reduce domestic fuel consumption and increase export of oil, which is estimated to bring about $60 billion into the economy. The inflow of money is planned to be invested in oil  industry. The money can be invested in sectors other than oil, such as construction. There are 18 million housing units in Iran that needs to be energy efficient. 2/3 of Iran’s 75 million people are under the age 30. Rising number of marriages increases demand for new and energy efficient homes. Construction sector is almost completely privatized. Other than Iranian companies, Chinese, Italian, and Turkish companies also build housing complexes. It is indicated that $60 billion is needed for homes, $50 billion is needed for shops, and $140 billion is needed for industries. While household natural gas consumption in 2011 declined by 2% after the subsidy plan, compressed natural gas (CNG) consumption increased. Diesel consumption declined 4%, kerosene 27%, and liquid gas 20%. Electricity consumption dropped 10% but electricity export increased by 15%. However, rising prices also led to inflation. Because the lower segments of the Iranian society are not able to cope with the high prices, Ahmadinejad continues to subsidize Iranians with a hard cash of $40 billion. While high inflation rate depreciates the Rial the Central Bank tries to follow a managed floating system in regards to exchange market. When exchange rates soar in non-official markets and moves away from official markets, it creates a gap that leads to more speculation in the exchange market. In order to solve this problem, the Central Bank increased official rates to minimize the gap and then gradually led the rates to go down.

Aljazeera segment: Iran’s cut on basic subsidies.

Conclusion

From the early stages of history till the end of the Qajar era, Iran has been a pivotal power in world history. Economic development has not been smooth and Iran has gone through difficult paths. Under the dominance of foreign powers over global economy Iran tried to adopt itself into a laissez-faire world by the end of the Qajars then shifted its overall long-term economic policy into nation building under Reza Shah where infrastructure projects were closely managed by his supervision. Policy of nation building continued by planners who were Iran’s leading Keynesians. Despite achievements infrastructure was still poor and wealth distribution has always been unequal. The Shah decided to fasten the modernization process and he issued a land reform. His land reform triggered a clash among various classes both in modern sector and traditional sector that resulted in an Islamic revolution. Islamic Iran became a center stage between statist and mercantile elites. Shifting alliances between these groups determined Iran’s political economy.

Throughout these long and stormy stages, Iran struggled for economic independence. The Shah seemed to prefer growth over independence, and Khomeini seemed to prefer independence over growth. This dilemma does not exist anymore because regional interests, nuclear ambitions, and efforts to attract global capital all serve for both economic growth and economic independence. What exists is the uncertainty constructed by high inflation, fluctuations in the exchange markets, high demand for housing and energy efficiency, the future of nuclear energy program, the affects of The Subsidy Plan, and –last but not least- trade relations despite sanctions. These factors all together can directly influence a country to come up with a totally different mindset. If things will go well, then what would that mean for Iran? What will happen if Iran faces an economic crisis? President Mahmud Ahmadinejad will not be running for office in 2013. Will 2013 be the beginning of a new stage for Iran’s economic development? Will the political and economic elites situated in various factions have an agreement to continue current economic policies or will they clash against each other? The last word will come from not the United States, not the global markets, and not even the supreme leader; it will come from the Iranian people.

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