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The Beginnings of Modernization: The Post-1925 Period


A copper artisan plies his trade on a street in Esfahan
Courtesy United Nations

Figure 6. First Development Plan of the Islamic Republic of Iran, 1983-88

Reza Shah introduced the concept of centralized economic planning to Iran at the expense of older societal values and traditions (see The Era of Reza Shah, 1921-41 , ch. 1). Reza Shah consolidated power by developing support in three areas: the army, the government bureaucracy, and the court circle. Once his power was consolidated, he pursued economic, social, and cultural reforms. Reza Shah believed that the secret of modernization lay in replacing many religious and social norms of traditional society with the values of a twentieth-century nation-state. Reza Shah's policies favored the urban over the rural, the wealthy over other classes, and industry in general over agriculture. Developing this "new order" gradually cost Reza Shah most of his base of support. Nevertheless, government centralization enabled him to achieve full control over the economy.

Economic development began with the expansion of the transportation system. The first project was the expansion of the Trans-Persian Railway. In the first five years of his reign, Reza Shah developed a network of railroads that connected ports to inland cities, thereby encouraging trade between rural and urban centers. By 1941 railroads crossed Iran from north to south and from east to west (see Transportation and Telecommunications , this ch.).

The existence of a modern transportation system by the 1930s encouraged industrial growth, which was further promoted by government financial incentives. Construction of modern manufacturing plants was a high priority, as was the development of whole industries rather than small, individual factories. Financial incentives included government- sanctioned monopolies, low-interest loans to prospective factory owners, and financial backing for plants and equipment by the Ministry of Industry. The number of industrial plants (excluding those processing petroleum) increased 1,700 percent during Reza Shah's reign.

In 1925 only about twenty modern plants existed, of which five were relatively large, employing about fifty workers each. By 1941 the number of modern plants had risen to 346, of which 146 were large installations. These large plants included thirty-seven textile mills, eight sugar refineries, eleven match factories, eight chemical companies, two glassworks, one tobacco-processing plant, and five tea-processing plants.

Between 1926 and 1941, the oil industry labor force increased from 20,000 to 31,000. By 1941 the oil industry employed 16,000 workers at the Abadan refinery and another 4,800 at drilling sites in Khuzestan. These wage earners, in conjunction with those employed in emerging modern industrial enterprises, formed a working class of about 170,000 and represented about 4 percent of the total labor force in 1941.

Rapid industrial growth created a modern, urban working class that nonetheless coexisted with people who had more traditional occupations, values, and ways of life. This new industrial work force developed in the five major urban centers, where 75 percent of the modern factories were located: the towns of Tehran, Tabriz, and Isfahan, and the provinces of Gilan and Mazandaran. Tehran's population alone increased from more than 196,000 in 1922 to about 700,000 by 1941. Modernization accelerated the pace of life through changes in culture, education, and traditional social norms, including those governing the role of women.

The cost of developing the military establishment, centralized ministries, large-scale industrial plants, and institutions of higher education increased the budget nearly 1,800 percent during Reza Shah's reign. The Iranian national budget grew from approximately US$15 million in 1925 to US$166.5 million in 1941 (based on the 1936 exchange rate). Because industrial development was predicated on oil revenues, the government's lack of control over the oil industry created periodic tensions with foreign oil companies. The emphasis on industrial development also demonstrated the need for development planning.

The concept of development planning by the government dates back to 1947, when it was initiated by Mohammad Reza Shah's government as a series of seven-year cycles. The Plan Organization consisted of leading government officials, who provided guidelines from which a development strategy was formed. Planning had a direct impact on the public sector because of its effect on allocations of capital expenditures. In Iran's mixed economy, however, the planners had no direct power over private sector investments and development; instead, they had to rely on indirect measures, such as fiscal and financial incentives.

The First Development Plan (1948-55) failed, except for strengthening the role of the Plan Organization, which, after 1973 was called the Planning and Budget Organization and in January 1985 was transformed by the parliament, or Majlis (see Glossary), into a ministry. The basic development strategy was the pragmatic approach of accelerating growth by incorporating the latest technology into large-scale, capital-intensive industry. Expansion of the infrastructure, however, preceded the development of industry. The planners often built ahead of demand, creating physical and economic incentives for the private sector. Diversification of industry was also a goal, although the planners recognized that the excessive dependence on oil revenues would have to continue at first to provide the capital to diversify. Diversification was intended to facilitate import substitution, and development of large-scale industry meant that many plants producing for export could achieve economies of scale.

The Second Development Plan (1955-62) focused on public sector expenditures, with an investment program to be funded by foreign loans and 80 percent of oil revenues. The government spent so much money, however, that the regime faced severe inflation and depleted foreign currency reserves by fiscal year (FY--see Glossary) 1959. Although Iran was experiencing economic problems, the plan provided for the construction of several reservoir dams, the most important of which were located on the Dez, Safid, and Karaj rivers. Simultaneously, private sector investment in light industry remained strong until the economic crisis that began in 1959.

During the middle and late 1950s, economic instability exacerbated chronic social problems, such as overcentralization of government, concentration of land in the hands of relatively few wealthy landlords, enormous bureaucracy, and regressive tax laws. As early as 1949, the shah voiced his intention to consider needed changes, especially in land reform. It was not until the 1960s, however, that he actually instituted agrarian reform. The intervening decade was a period of consolidation following the regime of Reza Shah; it also featured a period of government control by Mohammad Mossadeq (see Mossadeq and Oil Nationalization , ch. 1).

Data as of December 1987

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