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Chapter 3. The Economy

A 9th century ceramic plate from Neyshabur

REGARDLESS OF THE CHANGES in politics and ideology brought about by each successive regime in Iran, the one constant has been lack of fundamental economic change for the majority of Iran's people. Since the Islamic Revolution in 1979, Iran has repudiated the Western-style modernization initiated by Reza Shah Pahlavi and continued by his son, Mohammad Reza Shah Pahlavi. The postrevolutionary government of Ayatollah Sayyid Ruhollah Musavi Khomeini condemned the Pahlavi policy of allowing all countries to invest in, and trade freely with, Iran as unsatisfactory on political and cultural grounds and initiated a program of "self-reliance." Moreover, the modern production techniques introduced by the Pahlavis had eventually proved inappropriate for Iran because they required large capital investments. Having rejected Western models as inimical to the needs of Iran and being obliged to manage a wartime economy, the post-revolutionary government cut imports of luxury goods, began rationing subsistence items, nationalized industries, and expanded direct taxation. By late 1987, the result was a shortage of many goods that had once been imported, an insufficiently productive agricultural system, high unemployment, and a greater dependence than ever on revenues from oil and gas exports.

In the early 1920s, only a few large or modern industrial plants were in operation in Iran. The population was overwhelmingly rural, and transportation remained primitive. Except for the petroleum industry, still in its formative stage, production was geared to small, local markets. Increasing quantities of oil were produced for the international market, but with little impact on the domestic economy.

After establishing the Pahlavi dynasty in 1925, Reza Shah began to modernize Iran by developing a strong central government and entering Western markets. The results were mixed. The government improved communications, built an education system modeled on the Western example, and began construction of the Trans-Persian Railway. Centralization led, however, to authoritarianism, a state monopoly on foreign trade, and stagnant agricultural productivity. Many Iranians continued to reside in small, isolated settlements, and an estimated one- quarter of the population consisted of fiercely independent nomadic tribesmen. Modernization threatened the nomads' way of life and generally brought little benefit to Iran's undereducated, underemployed population because it focused on the development of capital-intensive industries rather than of labor-intensive enterprises.

When Mohammad Reza assumed power in 1941, he attempted to continue his father's modernization efforts (see The Post-Mossadeq Era and the Shah's White Revolution , ch. 1). By 1978 Iran had experienced great changes, but progress had been uneven for various elements of the population and different parts of the country over the preceding half- century. The Revolution of 1979 substituted "self-reliance" for Westernization as the focus of development. The importing of luxury goods, such as color televisions and stereos, was stopped, and the funding for development and construction in particular was cut significantly. Reductions in construction spending affected the entire economy and sent the gross national product (GNP--see Glossary) on a downward spiral. The budget cuts made in the name of "self-reliance," after the Revolution in 1979 and the onset of the war with Iraq in 1980, did additional damage to the economy.

During the 1970s, oil and gas exports remained Iran's main source of foreign exchange. This dependence increased in the years immediately following the Revolution, as the price of oil peaked at US$40 per barrel. Although non-oil exports began to drop sharply because of the 1980 international recession, earnings from oil exports remained high until the mid-1980s, when the price of oil began to decline. Oil revenues began to fall in 1984 and by 1985 averaged only US$1 billion per month, the approximate equivalent of the cost of continuing the war with Iraq. By 1986 monthly oil revenues averaged US$6.5 million per month. After 1984 the decline in oil revenues and the cost of the war created budget deficits. Consequently, the government reduced nonmilitary spending, which did further damage to the national economy. Domestic food production became insufficient, which forced Iran to import 65 percent of the food that it needed and to ration essential items such as meat, rice, and dairy products. Black marketing, long lines for consumer goods, and high unemployment exacerbated the effects of nonmilitary budget cuts. To ameliorate the situation, the government tried to reduce its dependence on declining oil revenues by investing in other key industries, such as copper and steel production. As of late 1987, however, economic problems remained severe and essential commodities scarce.

The Revolution of 1979 held forth to the Iranian populace the promise of "national integrity" through "self-reliance". Although intended to change Iran's economic and political course, the Revolution had produced no structural changes in the economy by late 1987. The growing need to sell oil on the international market demonstrated Iran's continuing inability to isolate its economy.

By late 1987, Iran was actually more dependent on oil than ever before. As in Reza Shah's time, attempts at modernization had been initiated by an autocratic government that stressed Iran's "unique" identity. In the late 1980s, that identity increasingly has been defined by Islam, rather than by any particular economic policy. Although much economic activity has occurred within Iran since 1979, the lack of fundamental change has been the constant. Oil earnings have fluctuated, banks have been nationalized, industries have developed--yet the power structure has merely shifted from the shah's circle to the clerical class.

Data as of December 1987

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