A critique of development policies based on oil revenues in recent years in Iran

The thesis deals with the opportunities and problems created for an oil economy by the price rise of 1973 with a special reference to Iran, and it is, as far as the author is aware, the first study to analyse the socio-economic performance of the Shah's regime in the subsequent period. We studied the Government's policies in the use of oil revenues, stressing the failure to pursue productive and social goals which would have been feasible. The data employed are based mainly on the Government budget, supplemented by figures on trade, national income, prices, employment, etc. The study includes two conceptual chapters, and the rest is empirical. The conceptual chapters argue that the opportunities provided by oil cannot last for ever; an oil economy should gradually diversify output and exports 'out of' this exhaustible resource, specialisation in which involves risks. We envisage diversification in a novel sense, as a dynamic concept interrelated with oil price and depletion policies, as a part of general development strategy. The economy may first go 'into' oil to raise revenues with the intention of diversifying 'out of' it in the long run. The revenues should be spent on accelerating the growth of non-oil GDP, paying due attention to basic needs. Development is the ultimate aim, diversification is the result; it is also the means through which development takes place. Developing the Kalecki approach to explain problems of acceleration of growth in an oil economy, we hypothesise that while the OPEC agreement raises the means to· diversification, its achievement is limited by i) various 'physical bottlenecks', and ii) institutional factors. Iran's experience shows that Kalecki over-stressed the role of imports in accelerating growth and combating inflation. Even where foreign exchange is ample, an increase in the rate of growth could nevertheless be limited by the physical capacity for imports, the shortage of skilled labour, the lack of infrastructure, and the ceiling on the rate of growth of 'supply determined' commodities, particularly non-tradeable inputs and agricultural goods. Moreover, a mixture of demand-pull and cost-push inflation may arise as a result of imbalances in both the commodity and labour markets. At the same time, given a strong exchange rate made possible by oil, inflation would reduce the competitiveness of non-oil exports in foreign markets. Outlining a socio-economic frameworkfor Iran, we showed also that both the pace of development and the pattern of distribution of its benefits were adversely affected by Government policies. Oil made the role of the Government in the Iranian economy more decisive than in many socialist countries; but the objectives of the Government diverged from the aspirations of the masses. Its various policies exacerbated shortages and inflation, and they were also responsible for the slow growth of agriculture. In particular, a large diversion of public expenditures to 'nonproductive' uses, together with a rapid expansion of private consumption and investment in housing, limited the supply of physical resources to productive sectors. Further, Government policies biased the distribution of social services and private consumption heavily in favour of a minority 'governmental class'; and 'despotism' was intensified through militarism. The bias against ·rural areas too was pronouncede The study indicates that the factorial distribution of income changed in favour of profit earners owing to the increase in the 'degree of monopoly', as hypothesised by Kalecki and Riach. The results of Government policies were fast depletion of oil, yet disappearance of the surplus in the balance of payments. Economic failure accompanied by social frustration led to the collapse of the regime, leaving the economy more than ever dependent on oil and imports of necessities.
One conclusion is that the new regime would be well advised to aim at a strategy of slower economic growth associated with a slower rate of depletion; this allows more time to remove the structural bottlenecks.