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.
Banking
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.
Taxes
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.
Oil Exports
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.
War Costs
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.
LABOR FORCE
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.
PETROLEUM
INDUSTRY
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.
Concession Agreements
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.
NON-OIL INDUSTRY
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.
Carpets
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.
Construction
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.
Utilities
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.
Laborers weigh and process jute in a small
mill
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.
Transportation
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.
Telecommunications
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.
Tourism
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.
AGRICULTURE
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.
Water
Siphon irrigation being used in a sugar-beet
field near Qazvin
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.
Land Use
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.
Crop Production
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.
Grains
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.
Sugar
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.
Livestock
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.
Fisheries
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.
Forestry
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.
FOREIGN TRADE
Imports
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.
Non-Oil Exports
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.
Trade Partners
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.)
Data as of December 1987
Source: The Library of Congress Country Studies
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