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The Optimization Of Economic Resources For Economic Growth In Iran

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The Optimization Of Economic Resources For Economic Growth In Iran

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Content This dissertation has been microfilmed exactly as received 66-8791 IS PA HA NI, Ahmed Saboonchl, 1936- THE OPTIMIZATION OF ECONOMIC RESOURCES FOR ECONOMIC GROWTH IN IRAN. University of Southern California, Ph.D., 1966 Economics, general University Microfilms, Inc., Ann Arbor, Michigan T H E OPTIMIZATION O F E C O N O M IC R E SO U R C E S FOR E C O N O M IC G R O W T H IN IRAN by Ahmed Saboonchl Ispahan! A D isse rtatio n Presented to the FA C U L TY O F TH E G R A D U A T E SC H O O L UNIVERSITY O F SO U T H E R N CALIFORNIA In P a rtia l F ulfillm ent of the Requirements for the Degree D O C T O R O F PH ILO SO PH Y (Economics) June 1966 UNIVERSITY O F SOUTHERN CALIFORNIA T H E GRADUATE SCHOOL U N IV ER SITY PARK LO S A N G ELES, C A LIFO R N IA 0 0 0 0 7 This dissertation, written by A fcro & l S f t b o p j ] f f i f e i . . I s p ^ a n i ................. under the direction of his..„Dissertation Com mittee, and approved by all its members, has been presented to and accepted by the Graduate School, in partial fulfillment of requirements for the degree of D O C T O R OF P H I L O S O P H Y Dtan DISSERTATION COMMITTEE t LAdet . TABLE O F CONTENTS C H A PTER P A G E I. INTRODUCTION....................................................................... 1 Statement of th e Problem .......................................... 1 Purpose of the S tu d y .................................................. 4 Importance of th e S t u d y .......................................... 5 Hypothesis ...................................................................... 6 Major Sources U t i l i z e d .............................................. 7 M eth o d o lo g y .................................................................. 8 Organization of the Remainder of the D i s s e r t a t i o n .............................................. 10 I I . THE TH EO RETICA L PA TH S T O PROGRESS......................... 11 D efin itio n of an Underdeveloped Country . . . 11 H isto ric a l Theories of Economic D ev elo p m en t.............................................................. 16 R ostov's stages of economic g ro w th ................. 16 C ritique of R ostov's an aly sis ......................... 17 Significance of the theory of the ta k e - o f f .................................................................. 19 i i CHAPTER PA G E Some S tra te g ic Problems in the Theory and Planning of Economic Development . . . . 20 Types of government expenditures conducive to economic g ro w th ......................... 22 Balanced v s. unbalanced growth ......................... 24 Indus try v s. a g r i c u l t u r e ...................................... 29 Government planning, p riv a te e n te rp rise , and market f o r c e s .............................................. 34 Maximum s o c ia l u t i l i t y .......................................... 38 S um m ary........................................................................... 41 I I I . TH E E C O N O M IC STR U C TU R E OF TH E IRANIAN E C O N O M Y : A G RICU LTU RA L SECTOR.................................................. 43 The A g ricu ltu ral Sector .......................................... 43 Methods of c u ltiv a tio n .......................................... 46 P rin cip al crops ...................................................... 49 F o r e s t s ........................................................................... 53 Animal R e so u rc e s........................................................... 55 F i s h e r i e s ....................................................................... 57 I r r i g a t i o n ....................................................................... 59 Land Ownership and M anagem ent............................. 63 D ivision of the p r o d u c e ...................................... 65 i l l CHAPTER PAG E S u m m ary ............................................................................ 69 IV. TH E E C O N O M IC STR U C TU R E O F TH E IRANIAN E C O N O M Y : INDUSTRIAL SECTOR....................................................... 73 The In d u stria l S t r u c t u r e .......................................... 73 Government and P riv ate I n d u s t r i e s ..................... 76 The Petroleum Industry o f I r a n .............................. 80 Development o f the o il Industry in Iran . 81 N atio n aliz atio n of the o il in d u stry . . . . 82 Production of crude o i l and n a tu ra l gas . . 85 The ro le of petroleum in the n a tio n a l economy: monetary in c o m e .................................. 89 Other m ineral resources of I r a n ..................... 92 H andicraft and Cottage I n d u s t r i e s ..................... 93 In d u s tria l P r o d u c t i v i t y .......................................... 96 Money and B a n k in g ....................................................... 98 T ransportation and Comm unication.............................. 102 R a i l r o a d s ........................................................................ 102 R o a d s .................................................................................103 Ports and a i r p o r t s ........................................................104 Com m unications................................................................105 S u m m a r y ............................................................................................. 107 iv CHAPTER P A G E V. TH E E C O N O M IC ST R U C TU R E O F TH E IRANIAN E C O N O M Y : G O V E R 1M E N T SECTOR...........................................................I l l S tru ctu re of the Government S e c t o r ..........................I l l Form of governm ent.......................................................I l l Functions of g o v e rn m e n t.......................................... 112 Size o f governm ent.......................................................116 Government organizations: Plan O r g a n iz a tio n ...................................................118 The Process of Developing Planning in Iran .............................................. 121 Nature of development p la n n in g ..............................121 Goals and t a r g e t s ......................................... 123 Sources of f u n d s ...........................................................127 A l l o c a t i o n s ...................................................................131 Execution and a c h ie v e m e n t...................................... 147 Planning and O p tim iz a tio n .......................................... 155 Restatement of the concept of o p tim iz a tio n ...............................................................155 H ow planning can promote optim ization . . . 157 S u m m a r y ........................................................................................... 159 v t ' CHAPTER PA G E VI. TA X A TIO N A N D TA X PO LIC Y FOR OPTIMIZATION A N D E C O N O M IC G R O W T H IN IR A N ................................. 163 Role of Taxation in F isc a l Policy fo r D evelopm ent...........................................................165 Taxation In I r a n ......................................................167 Income tax law in I r a n ......................................... 171 Taxation and Tax Policy to Stim ulate Economic G r o w th ......................................................174 Income t a x .......................................................................175 Business p r o f i t s ...........................................................179 Tax Incentive to foreign c a p i t a l ..........................182 Sum m ary............................................................................... 185 VII. PU BLIC EX PEN D ITU RE POLICY FO R G R O W T H A N D OPTIMIZATION...............................................................187 Government E x p e n d itu r e s .............................................. 187 Factor-purchase e x p e n d itu re s .............................188 T ransfer p a y m e n ts .......................................................189 Government Expenditures and Economic G row th............................................................................... 192 Education and economic p r o g r e s s ..........................195 R iblic h e a lth e x p e n d itu re s................................. 202 v i CHAPTER PAG E T ransportation f a c i l i t i e s and economic g r o w t h ........................................................................ 205 N atural resource development and economic p r o g r e s s ................................................... 208 Aids to a g ric u ltu re and i n d u s t r y ......................211 Summary.................................................................................214 V III. BU D G ETIN G A N D B O R R O W IN G FO R G R O W T H A N D OPTIMIZATION IN IR A N ................................................... 218 Budget P olicy for Growth and O ptim ization in I r a n ............................................................................ 218 D e fin itio n of a b u d g e t ...........................................218 Balanced vs. unbalanced b u d g e ts ..........................219 Aspects o f budgetary management fo r economic d e v e lo p m e n t...................................222 Budgetary policy in I r a n .......................................224 Borrowing fo r Growth and O ptim ization in I r a n ............................................................................ 229 In te rn a l b o r r o w in g ................................................... 232 Influence of h i s t o r y ............................................... 234 E xternal b o r r o w in g ................................................... 237 Sum m ary............................................................................................. 240 v i i CHAPTER P A G E IX. M O N E T A R Y POLICY FOR G R O W T H A N D OPTIMIZATION IN IRAN........................................................................243 Monetary Policy in I r a n ........................................243 The Instrum ents o f C entral Bank C ontrol . . . 248 Discount ra te p o l i c y .......................................249 Open market operations ........................................ 230 Commercial bank reserv e requirem ents . . . 251 S electiv e c re d it co n tro l .................................. 253 Savings and investm ents in I r a n ..................255 The lower income groups and investment . . 256 The upper income groups and investm ent . . 257 L im itations of voluntary savings..... ................ 259 Causes of low le v e ls of savings in Iran . . 261 The bazaar as a fin a n c ia l in s titu tio n — sources of bazaar funds .................................... 264 Banking p ra c tic e s and c o n tro l in Iran . . . 269 The g re a t need fo r establishm ent of fin a n c ia l i n s t i t u t i o n s ..........................271 Banking, savings, and c re d it in s titu tio n s ......................................................... 274 Few bank d e p o s it o r s ...........................................276 v i i i C H A PTER P A G E Government development corporations . . . . 279 C ap ital market d e v e lo p m e n t.................................. 280 Summary................................................................................284 X. S U M M A R Y A N D CONCLUSIONS...................................................286 Summary................................................................................286 T heoretical paths to progress . . . : . . 288 A g ricu ltu ral se c to r o£ th e econ'.iy . . . . 290 In d u stria l secto r o£ the e r jn o m y ......................295 Plan O rg a n iz a tio n .......................................................299 Public finance and f is c a l policy fo r economic growth In I r a n ...................................... 302 Taxation and tax p o l i c y ...........................................303 Public expenditure policy fo r growth and o p t i m i z a t i o n ...................................................308 Budgeting and borrowing fo r growth and o p t i m i z a tio n ...................................................317 Monetary policy ......................................................... 322 C o n c lu sio n s........................................................................330 BIBLIOGRAPHY........................................................................................ 335 ix LIST OF TABLES TABLE P A G E I. Percentage D istrib u tio n of Gross N ational Product, by Economic S ectors, 1963 . . . . 45 I I . P rin cip al C ro p s .......................................................... 50 I I I . Livestock P o p u l a t io n ............................................. 56 IV. Estimated Number of E nterprises and Number of Employees, by Industry Group, 1 9 6 1 .............................................................. 77 V. Government F a c t o r i e s ............................................. 79 VI. Companies Represented in C onsortium ................ 84 VII. Annual Production Trends Since 1948 ................ 87 V III. N atural Gas Production in Iran During 1956-1963 .................................................................. 88 IX. The Importance and S ignificance of O il Revenue Within the In d u stria l Sector of the Economy and fo r the Economy as a W hole...................................................................... 91 X. Mining, Quarrying in I r a n ................................... 94 x PA G E 129 130 132 134 135 136 140 142 144 145 146 233 Sources o f Revenue fo r the F i r s t Plan, I r a n ............................................................................ Sources of Revenue fo r the Second Plan, I r a n ............................................................................ Sources o f Revenue fo r the T hird Plan, I r a n ............................................................................ A llocations of the F ir s t Plan, I r a n ............... A llocations of the Second Plan, Iran . . . . Second Seven-Year Plan Law .................................. A llocations of the Third Plan, I r a n ............... A llocations of the Third Plan: A g ricu ltu re and I r r i g a t i o n ...................................................... A llocations o f the Third Plan: Power and F u e l ............................................................................ A llocations of the Third Plan: Communications and Telecommunications . . . A llocations o f the Third Plan: Education . . Public Debt: Domestic and F o r e ig n ..................... x i CHAPTER I IN TRO D U CTIO N Among the people of th e underdeveloped economies, there is a growing conviction th a t economic growth is the key to the achievement of n a tio n a l expectations and a s p ira tio n s. Economic growth involves u tiliz a tio n of the coun tr y 's resources to b rin g about a sustained increase in p er-c a p ita production of goods and se rv ic e s. Iran i s a ty p ic a l underdeveloped country. Many of the c o u n try 's n a tu ra l resources such as o i l , w ater, and arab le land a re u n d e r-u tiliz e d . The bulk of her population is dependent on a g ric u ltu re , and has a standard of liv in g not f a r above subsistence. I. ST A T E M E N T O F THE P R O B L E M The concept o f a llo c a tio n of resources is p a rt of the v ery core of the science of economics. In th is study we a re concerned w ith the a llo c a tio n of an underdeveloped 1 n a tio n 's (Iran ) resources in order to optim ize the r a te of i t s economic growth. The purpose of th is th e sis Is to examine the po ssib le co n trib u tio n s of planned a llo c a tio n of resources to the c e n tra l policy question: Given an underdeveloped economy (Iran ) w ith a c e rta in se t of r e sources, p o litic a l temperament, and the am bition to grow rap id ly , what a c tiv itie s provide the g re a te st p o te n tia l for improvement in n atio n al income? A fter examining th e se con-, trib u tio n s , a new development program is prepared to f i t the Iranian economy. The problem of Iran as an underdeveloped country is one o f u tiliz in g more e ffe c tiv e ly the p o te n tia l resources a v ailab le to th e country. Factors reta rd in g economic growth must be overcome. The v icio u s c ir c le of poverty, as Singer c a lls i t , ^ and th e low r a te of economic growth can be broken only by a w ell-coordinated program of develop ment, which, a f te r making a c a re fu l assessment of resources a v ailab le, d ire c ts these resources along th e channels maximizing the economic growth and w elfare of the country. ^Hans W . Singer, "Economic Progress in Under developed C ountries," S o cial Research. March, 1949, pp. 1- 11. Iran is In a fo rtu n ate p o sitio n because o£ the o i l ro y a ltie s i t receiv es. These may be used fo r re a l c a p ita l Investm ent, w ithout lowering th e standard of liv in g or even borrowing from abroad tem porarily. The ta sk of l i f t i n g the economy from i t s present low le v e l, and the changes necessary to break the vicious c ir c le o f poverty in Iran are too fundamental and d ra s tic to be performed by the time-consuming process of fre e mar ket fo rces alone. I t i s here th a t the ro le of the s ta te as in i t i a t o r of economic growth and development must be recog nized. F ir s t, in giving proper d ire c tio n to the course of economic a c tiv ity , mainly through the use of f is c a l and monetary p o lic ie s , the f is c a l measures should i n i t i a t e and stim u late the in cen tiv es of the p riv a te secto r of the economy to work, save, in v e st, and consume w isely. Second, the s ta te should take p a rt in the process of development I t s e l f only in areas which are beyond the capacity of the p riv a te se c to r. These include s o c ia l overhead c o sts lik e roads, education, h ealth , drinking w ater, e tc . Exclusive re lia n c e on the p riv a te se c to r w ill not be adequate in these a re a s. By using i t s f is c a l power and c re a tin g these p ro je c ts, government can provide many o f the e x te rn a l 4 economies needed to ra is e ra te s of re tu rn to th e le v e l which w ill make p riv a te investment p ro je c ts more p r o f it ab le. These government expenditures can have s ig n ific a n t e ffe c ts upon the r a te o f economic growth and development. They can a ffe c t the a llo c a tio n of resources, they can a l te r the d is trib u tio n of income, and they can exercise influence on the p ric e le v e l. I f a country can affo rd to depend on a purely c la s s ic a l fre e e n te rp rise system, or i f the In s titu tio n a l and economic environment is such th a t the p ric e system could produce th e desired end, no argument fo r governmental actio n would be e s s e n tia l. In o th er words, government p ar tic ip a tio n Is defended on the ground of n ecessity , not of i t s inherent m e rit. I I . PU RPO SE OF THE S T U D Y The purpose of th is d is s e rta tio n is to endeavor to provide g u idelines fo r workable planning fo r the economic development of the w r ite r 's homeland, Iran. I t is hoped th a t th is work w ill make a p o sitiv e co n trib u tio n to imple ment the fu tu re economic p o lic ie s of the Iranian govern ment. No claim is made, of course, th a t the ideas presented here a re perfected answers to a l l o f the plan n e r’s problems. Much improvement can be made, esp ecially In the area o f making th e s t a t i s t i c a l base more re lia b le . However, I t is believed th a t th is study may be a u sefu l co n trib u tio n to the body of thought concerning policy determ ination in Iran. Higgins has a sse rte d , in defense of a sim ila r approach, th a t: W e are faced w ith need to form ulate p o lic ie s for economic growth—we cannot aw ait p erfectio n of our th e o rie s. . . . Widespread understanding of the policy issu e s, both in underdeveloped and in advanced coun t r i e s , is o f the utmost importance fo r m aintaining peace and p ro sp e rity . I I I . IM PO R T A N C E O F THE ST U D Y The question of developing policy gu id elin es has perplexed developing co u n tries In th e past and w ill most c e rta in ly do so in the fu tu re . Every developing nation, reg ard less of i t s degree o f poverty, has th e problem of determ ining p o lic ie s , and consequently searches fo r con s is te n t, p ra c tic a l, and u se fu l c r i t e r i a fo r making develop ment d ecisio n s. One does n o t have to delve deeply in to 2 Benjamin Higgins, Economic Development: P rinciples Problems, and P o licies (New York: W . W . Norton and Com pany, In c ., 1959), p. xv. case stu d ie s to discover th a t th e re is much room fo r im provement . Although much of a general and non-professional nature has been w ritte n on the Iran ian economy, th ere is no comprehensive and u n ifie d work a v ailab le fo r the formu la tio n of a sound and resp o n sib le policy to achieve optimum economic growth. In the p a st, the Iran ian government c a rrie d out segmented programs which lacked u n ity of pur pose and fa ile d to provide optimum ra te s o f economic growth. A more comprehensive and in te g ra tiv e , but policy- o rien ted , study is needed. IV. HYPOTHESIS The hypothesis of th is d is s e rta tio n and research is th a t unlike o th er underdeveloped co u n tries, Iran possesses s u b sta n tia l u n u tiliz e d human as w ell as ric h productive m ineral resources. As such Iran has one o f the b est poten t i a l s fo r advancement among the developing countries of the world. The problem of Iran as an underdeveloped country is one of u tiliz in g fu lly and more e ffic ie n tly the p o te n tia l resources a v a ila b le to the country. The hypo th e sis of th is d is s e rta tio n is th a t i f Iron u tiliz e s i t s resources fu lly , In a sh o rt tin e i t may leave th e fellow ship of underdeveloped n atio n s, and i t can make so lid advances toward i t s goal of a modem economy. V. M A JO R SO U R C ES UTILIZED As sta te d previously, th e re is extensive m a terial on the Iran ian economy. The follow ing references c o n sti tu te by no means an exhaustive treatm ent of a l l th e l i t e r a tu re th a t is a v a ila b le . What is attem pted here, is to l i s t the major sources th a t were re lie d upon fo r economic diagnosis, research, and policy form ation in th is d is s e rta tio n . Iranian government p u b licatio n s, p a rtic u la rly those o f the Iranian M in istrie s, and th e Iran ian Plan Organiza tio n a re the most im portant sources of referen ce. The Annual Report of th e Bank Markezo and Bank M elll--p u b lic a tio n s of the C entral Bank and N ational Bank of Iran--and o th er lo c a l commercial banks, provide a wealth o f informa tio n on the economic a c tiv itie s in the various segments o f the economy, and compile data on the d ire c tio n of the movement of the economy. P erio d icals and jo u rn als present and discuss cu rre n t economic a f f a ir s , and the lo c a l Iran ian 8 newspapers re p o rt the day-to-day economic a c tiv itie s o f the country. Middle Eastern A ffairs (monthly), Middle East Journal (q u a rte rly ), Kavhan In te rn a tio n a l, and Echo Aim*n«r» and Book of F acts. 1965 were used ex ten siv ely in th is work. Other primary sources o f inform ation include pub lic a tio n s of th e United N ations, p a rtic u la rly United Nations S ta tis tic a l Yearbook. 1964. Press Release of In te rn a tio n a l Bank fo r R econstruction and Development, the Export-Import Bank of Washington, and p u b licatio n s of oth er re la te d in te rn a tio n a l organizations were also u se fu l. Various p riv a te co n su ltan ts and governmental pro grams of th e United S ta te s have conducted stu d ies and made recommendations regarding c e rta in segments of the economy. This d is s e rta tio n makes extensive use of these stu d ie s. VI. M E T H O D O L O G Y This d is s e rta tio n was commenced w ith an extensive study of the b e st known th e o re tic a l work in the area of economic growth and development. This study has been supplemented by an examination of the economic h isto ry of those co u n tries which have progressed through Rostov's stages of economic growth. Since th e re were many v a ria n t th e o ries o f economic growth, the w rite r analyzed th e logic and a p p lic a b ility of th ese th e o rie s fo r Ira n . Then he reviewed th e p a st and p re v a ilin g economic conditions of Ira n . One o f th e problems in diagnosing th e economic co n d itio n of underdeveloped co u n tries and p rescrib in g treatm ent fo r the problems is the lack of comprehensive and accu rate s t a t i s t i c s such as a re a v a ila b le in Western economies. In th e a u th o r's opinion, the sources quoted a re th e most dependable o f those a v a ila b le . The sources used have been both primary and second ary. The former have Included observations o f the w rite r, a n a tiv e o f Iran, based p a rtly on h is tra v e ls in both advanced and underdeveloped c o u n trie s. Thereby, th e author was able to make comparisons of th e s tru c tu re s and condi tio n s of th ese economies, and draw conclusions. In a rriv in g a t these recommendations, th e author is g ra te fu l fo r having had th e opportunity to meet and d iscu ss w ith se v e ra l resp o n sib le d ig n ita rie s th e problems of under developed c o u n trie s, and in p a rtic u la r those o f Iran . 10 V II. ORG A N IZA TIO N O F THE R E M A IN D E R O F THE DISSERTATION Chapter I provides an In tro d u ctio n ; Chapter I I , the th e o re tic a l path to economic growth; Chapter I I I , the eco nomic s tru c tu re o f the Iran ian economy, a g ric u ltu ra l ? se c to r; Chapter IV, s tru c tu re of th e Iran ian economy, in d u s tria l se c to r; Chapter V, s tru c tu re o f the Iran ian economy, Government se c to r; Chapter VI, tax atio n and tax policy fo r optim ization and economic growth in Iran ; Chapter V II, public expenditure policy fo r growth and optim ization; Chapter V III, budgeting and borrowing fo r growth and optim ization In Iran; Chapter IX, monetary policy fo r growth and optim ization in Iran ; Chapter X, sunxnary and conclusion. CHAPTER I I s'* THE THEORETICAL PA T H S TO PR O G R ESS Before analyzing the ro le o f government in i t s function as a stim ulant and i n i ti a to r of economic growth, i t would be u se fu l to discuss b rie fly some of the facto rs on which economic growth depends. I. DEFINITION O F A N U N D E R D E V E L O P E D C O U N T R Y By an underdeveloped country is meant a country "with a per c a p ita product so low th a t m a terial d ep riv atio n is widespread and reserves fo r emergency and growth are s m a l l . M o r e s p e c ific a lly , in underdeveloped co u n tries, per c a p ita income is very low, a high le v e l of under employment and disguised unemployment e x is ts , the popula tio n o ften increases a t a very high ra te , th e a llo c a tio n *S. Kuznets, "Present Underdeveloped Countries and Past Growth P a tte rn s," in E. Nelson, Economic Growth (Austin, Texas: U niversity of Texas Press, 1960), p. 17. 11 12 o f resources may be no re fle c tio n of com parative advan- 2 tag e, p ro d u ctiv ity Is very low, fu rth e r expansion of in te rn a tio n a l trad e (e sp e c ia lly fre e ) may hinder fu rth e r 3 development, investment and savings decisions a re not 4 Independent but interdependent, the market provides a lim ited guidance In a llo c a tin g resources so as to maximize the degree of development,5 and a developmental plan has a v i t a l im portance.^ Although th e problems which the underdeveloped coun t r i e s face vary g re a tly from country to country, and the problems before each country a re in many resp ects unique in view of i t s le v e l of development, s o c ia l s tru c tu re , c u l tu re , and resources, th e re are n evertheless many s im ila ri ti e s . o Benjamin Higgins, "Elements in a Theory of Under development," in E. Nelson, Economic Growth (A ustin, Texas: U niversity of Texas Press, 1960), p. 63. 3 C. P. K indleberger, Economic Development (New York: McGraw-Hill Book Company, 1958), pp. 246-251. 4 A lbert 0. Hlrschman, The S trategy of Economic Development (New Haven: Yale U niversity, 1958), p. 32. ^Higgins, in Nelson, op. c i t . . p. 64. ^E. S. Mason, Economic Planning in Underdeveloped Areas (New York: Fordham U niversity P ress, 1958), pp. 40- 41. 13 In almost a l l instances th e re is considerable illite r a c y , undernourishment, sickness and poor h e a lth , law l i f e expectancy, poor tra n sp o rta tio n f a c i l i t i e s , antiquated a g ric u ltu ra l methods, lack of modem to o ls and productive equipment, in e ff ic ie n t u tiliz a tio n of labor and other resources, low Income per c a p ita , lim ited horizons, and lim ited popular p a rtic ip a tio n in government.^ Economic development p o licy Involves a d e lib e ra te attem pt to a c t on th e forces o f the economy in order to expedite i t s growth, not fo r the sake of growth i t s e l f , but as a means of ensuring a steady Improvement in the liv in g standards of the lower and middle-income groups and th e ir progressive p a rtic ip a tio n in the d is trib u tio n of th e Q o v e r-a ll income. I t gives r is e to an Increase in 9 GNP , Consumption . Output AY e tc . Pop. Population Labor Force Y *John P. Young, The In te rn a tio n a l Economy (New York: The Ronald Press Company, 1963), p. 474. a Paul Prebish, "Economic Development and P rice S ta b ility : The F alse Dilemma," Economic B u lle tin fo r L atin VI (March, 1961), 13. ^Hyman P. Minsky, "In d ic a to rs of th e Development S tatus of an Economy," Economic Development and C u ltu ral Change. VII (January, 1959), 151. I t i s easy to l i s t d istin g u ish in g c h a ra c te ris tic s of underdeveloped co u n tries which in ad d itio n show the fa c to rs on which economic growth depends. The problem, however, o f is o la tin g causal re la tio n sh ip is not e a s ily f u lf ille d , because each of the c h a ra c te ris tic s o f underdevelopment and each fa c to r on which growth depends has a cause and e ffe c t in te rre la tio n s h ip . High m o rta lity and high f e r t i l i t y r a te s , for example, r e f le c t g en erally low le v e ls of h ealth conditions, which are the r e s u lt of underdevelopment but a t the same time a re b a rrie rs to economic growth. Tech niques tend to be re la tiv e ly in e ffic ie n t and th e low le v e l o f techniques is a drag on economic growth. The high pro p o rtio n of population in a g ric u ltu re is almost a d e f in i tio n , ra th e r than a cause, o f underdevelopment. I t r e f le c ts the fa c t th a t c a p ita l, te ch n ical, and m anagerial s k ills needed fo r in d u s tria liz a tio n have not been av ailab le to these co u n tries. The lack of c a p ita l is a cause o f underdevelopment, but i t is also a r e s u lt o f low le v e ls of income, and thus a r e s u lt o f underdevelopment. D ifferen t l i s t s of economic c h a ra c te ris tic s o f under developed areas are in s tru c tiv e and help us to understand 15 the n atu re and magnitude of th e problem. These l i s t s , however, do n o t help us In Is o la tin g th e v a ria b le s on which economic growth depends and in analyzing c a re fu lly the causes o f underdevelopment. S t i l l le s s do they help In In d icatin g p o lic ie s fo r overcoming underdevelopment or obtaining fu rth e r growth. The road to development is spread w ith vicio u s c ir c le s . The problem of growth, moreover, is a highly com p lic a te d phenomenon. Economists have tr ie d to c la s s ify the facto rs on which economic growth depends in d iffe re n t ways. The whole process is n o t c le a rly understood. Complete is o la tio n of th e main v a ria b le s is p ra c tic a lly im possible. I t is n o t c le a r why economic growth began in some coun tr ie s , continued ra p id ly , and u ltim a te ly slowed down. I t is not c le a r why in some co u n tries i t never began as a continuous se lf-re in fo rc in g process. W e do n o t know many Harvey L eibensteln, Economic Backwardness and Economic Growth (New York: John Wiley and Sons, In c ., 1957), p. 40. See a ls o : C harles P. K incleberger, In te r n a tio n a l Economics (Homewood, I ll in o is : R. D. Irw in, In c ., 1958), p. 412; Jacob Viner, In te rn a tio n a l Trade and Eco nomic Development (Chicago: The Free Press, 1952), p. 120; Norman S. Buchanan and Howard S. E llis , Approaches to Economic Development (New York: The Twentieth Century Fund, 1955), p. 7. 16 things about the long-run a c c e le ra tio n , re ta rd a tio n , and constancy of the ra te s of growth. I I . HISTORICAL THEORIES O F E C O N O M IC D E V E L O P M E N T R o sto v s Stages of Economic Growth One o f the most popular and persuasive cu rren t w rite rs on h is to r ic a l stages of economic growth is H. W . R ostov.1* - Rostov has observed the growth processes of n atio n s a t various points in th e ir economic h is to ry and has advanced a theory of economic development which suggests th a t nations u su ally pass through fiv e comparable stages of development—tra d itio n a l, preconditions, tak e o ff, d riv e to m aturity, and m atu rity —as they move along th e path o f economic progress. His process of development is uniform. I t repeats i t s e l f from country to country. In the tra d itio n a l stag e only a few people have any c le a r perception of th e requirem ents fo r m odernization. L iteracy and popular p a rtic ip a tio n in n atio n al l i f e are low, and the to o ls o f modem science and technology U V. W . Rostov, The Stages of Economic Growth (London: Cambridge U niversity Press, 1960). 17 a re not u tiliz e d * In th e second stag e are those s o c ie tie s Which are in tr a n s itio n and have gone some d ista n ce toward modernization* They have a group of train ed in d iv id u als and a sm all amount of s o c ia l overhead c a p ita l. The ta k e o ff stag e Includes those s o c ie tie s th a t are ready to attem pt a ta k e -o ff in to s e lf su stain ed growth, and have developed the human and s o c ia l overhead to make th is pos sible* Growth becomes the normal condition* In d u strie s expand ra p id ly a s s is te d by growing savings and investm ent. These th re e stag es apply to underdeveloped countries* The fo u rth stage c o n sists of what Rostov c a lls the d riv e to m atu rity . The growing economy seeks to extend modem technology to th e whole fro n t o f i t s economic a c tiv ity . In th e f i f t h stage o f economic growth, co u n tries have achieved m aturity and, thereby, the p o te n tia l fo r the p u rsu it o f ex tern al power and in flu en ce, including war; the promotion of th e w elfare s ta te ; and/or the mass production o f durable consumer goods. C ritiq u e of R ostov's A nalysis Among economic h is to ria n s th e re seems to be no general acceptance of th e stages proposed by Rostov. As one review er has w ritte n : 18 Many sch o lars have found the sta g e s—e sp e c ia lly th e ta k e -o ff—in h e re n tly p la u sib le . I t is easy to b eliev e in an in d u s tr ia l rev o lu tio n , e sp e c ia lly i f o n e's h is to r ic a l knowledge is scanty and out of d ate. But h is to ria n s are almost c e rta in to r e je c t th e ta k e -o ff's im p licatio n of sudden change. • . . Years o f research and controversy w ill be required to determ ine whether th e idea o f ta k e -o ff is em p irically sound, and whether R ostov's own ta k e -o ff dates are c o rre c t. Rostow him s e lf has m arshalled some ev id en ce--p lau sib le, but in s u ffic ie n t to prove h is case. U nfortunately, he has defined h is c r i t e r i a so vaguely th a t they w ill s tre tc h to cover any lik e ly in stan ce. And he seems w illin g to admit "exceptions" when ta k e -o ff occurs a t a time d iffe re n t from the time h is te s ts would suggest. The stages o f growth a re not defined w ith s u ffic ie n t p re c i sio n . 12 John U. Nef has contended th a t th e re was not one but two " In d u s tria l Revolutions" in B rita in . Obviously such a contention g re a tly com plicates th e ta sk of s e ttin g a p re c is e d ate fo r the " ta k e - o f f ." ^ Alexander Gerschenkron's in ten siv e an aly sis of th e growth process re fu te s R ostov's uniform ity theme. 12 Ian Drummond in h is review of The Stages of Eco n o m ic G rowth: A Non-Cow m w H n f M a n ife sto in Canadian Journal of Economics and P o litic a l Science. February, 1961, pp. 112-113. See a lso : A. K. C aim cross, "Essays in B ibliography and C riticism --T he Stages o f Economic Growth," The Ecopnw^f. Histo ry Review. X L V (A pril, 1961), 454. 13 John U. Nef, "Not One, But Two In d u stria l Revolu tio n s ," The In d u s tria l Revolution in B rita in , ed. P h ilip A. M. Taylor (Boston: D. C. Heath and Company, 1958), pp. 34-44. He contends th a t " th is Is a h a lf- tr u th which conceals s tra te g ic d ifferen c es between advanced and le ss developed 14 c o u n trie s." He suggests th a t the underdeveloped coun tr ie s w ill probably not follow the path of the advanced n atio n s, and i t should be expected th a t the le ss developed nations may skip c e rta in stages o f development and need not f u l f i l l the pre-conditions as Rostov o u tlin e s them. ^ S ignificance of the Theory of the iake-O ff The mystery of the growth process p e rta in s la rg e ly to th e "tak e-o ff" sta g e --th e breakthrough from the s ta te of economic stag n atio n to the dynamics of growth. What ex actly happens to cause the ta k e -o ff is not known, except th a t the causes are to a g re a te r or le s s e r ex ten t unique fo r each country. I t appears, however, th a t in any event, some fo rce, or fo rces, must come along, fo rtu ito u sly or otherw ise, to trig g e r the mechanism of growth. In the seventeenth and early eighteenth century England, such things as the 14 Alexander Gerschenkron, Economic Backwardness in H isto ric a l Perspective (Cambridge, M ass.: Harvard Univer s ity Press, 1962), p. 358. 20 enclosure movement and the discovery and invention o f new methods and techniques of a g ric u ltu re were among numerous Im portant "preconditions" fo r the ta k e -o ff in to growth. 16 Schumpeter, fo r example, has emphasized the c ru c ia l ro le _ 17 of entrep ren eu rsh ip and innovation fo r growth. So fa r as g e n e ra liz a tio n can be made concerning contemporary underdeveloped c o u n trie s, th e awakening of strong d e sire s to r a is e liv in g standards, the b e lie f th a t growth can d e lib e ra te ly be brought about, and upsurging n a tio n a lis tic p rid e and a n tic o lo n ia lism are to g e th er perhaps th e most powerful p ro p e lla n ts operating to take o ff in to growth. This does n o t mean, of course, th a t th e ta k e -o ff w ill occur; an economy, lik e an a irp la n e , needs l i f t i n g power as w ell as speed down the runway to accomplish ta k e -o ff.* 8 I I I . S O M E STRATEGIC PROBLBfS IN THE T H E O R Y A N D PLA N N IN G O F E C O N O M IC D E V E L O PM E N T So fa r th is study has emphasized the im portant f a c t th a t economic growth is a to t a l process, involving the in te ra c tio n o f a h o st o f elem ents. 16 Buchanan and E llis , on. c i t . . pp. 126-127. 1 ^Joseph A. Schumpeter, The Theory of Economic Development (Cambridge, M ass.: Harvard U niversity P ress, 1949). 18 D elbert A. Snider, In tro d u ctio n to In te rn a tio n a l Economics (Homewood, I ll in o i s : Richard D. Irw in, In c ., 1963), p. 531. 21 There is no s in g le answer among economists who have d e a lt w ith th e broad and complex su b ject of economic growth and development. "The fa c to rs th a t determ ine growth a re numerous, and each has i t s own s e t o f th e o r i e s ." ^ In order to fin d th e most s tr a te g ic fa c to rs in economic development, the course of development must be in v e s ti gated on a country-by-country b a s is , fo r every n atio n is 20 d if f e r e n t. Although th e re is no sin g le theory of economic de velopment fo r the underdeveloped c o u n trie s, economists in g en eral have emphasized the importance of n a tu ra l reso u rces, c a p ita l goods and c a p ita l accum ulation, popula tio n and th e lab o r fo rc e , technology, economic organization and favorable s o c ia l environment, ad m in istrativ e e ffic ie n c y o f government expenditures, psychological m otivations, entrepreneurship, and o th er fa c to rs in th e process o f eco nomic growth. This does not deny, however, the s tra te g ic 19 A rthur W . Lewis, The Theory o f Economic Growth (London: George A llen and Unwin, L td ., 1955), p. 5. 20 Gerald M . M eier and Robert E. Baldwin, Economic Development (New York: John Wiley and Sons, In c ., 1957), p. 442. 22 sig n ific a n c e of p a rtic u la r eleoient8 In th e o v e r-a ll pro c e ss. Some o f these p a r tic u la r elem ents th a t o fte n e x e rt a powerful Influence on the process o r p o te n tia litie s of growth a re examined in th is se c tio n . Types o f Government Expenditures Conducive to Econofnfft I t is now g e n e ra lly recognized th a t th e re are a num b e r of areas o f government a c tiv ity in which expenditures of government are more in th e form o f investm ent, than c u r re n t o p eratin g c o s ts . Some government expenditures con tr ib u te to long-run p ro d u c tiv ity and economic growth. In f a c t many government expenditures make p riv a te investm ent more productive. Some of th e more s ig n ific a n t government expenditures take th e se forms: the g en eral and sp e c ific types o f education, v ario u s types o f research , conservation and development of n a tu ra l reso u rces, tra n sp o rta tio n f a c i l i t i e s , public h e a lth and sa fe ty , and encouragement 21 to in d u stry and a g ric u ltu re . 2^William H. Anderson, "The F is c a l Economics of Public Expenditures" (unpublished Paper, U niversity of Southern C a lifo rn ia , Los Angeles, n .d .) , p. 7. (Mimeo graphed.) 23 Many o f th ese are s o c ia l overhead expenditures. By using i t s f is c a l powers and c re a tin g th ese p ro je c ts, government can provide many o f th e ex tern al economies to p riv a te b u sin ess. These e x te rn a l economies in tu rn in crease th e p ro d u c tiv ity o f p riv a te management and c a p ita l, which w ill make p riv a te Investm ent p ro je c ts more p r o f it a b le . These government expenditures can have s ig n ific a n t e ffe c ts upon th e r a te of economic growth and development. Since government expenditures a re not made in a vacuum, but a re d ire c te d and d iffu sed in to th e income stream , they, th e re fo re , have th e ir e ffe c ts on the in cen tiv e and cap acity o f people to work, save, in v e st, and spend fo r consumption. They a f f e c t th e a llo c a tio n of reso u rces, le v e l o f n a tio n a l income, p ric e le v e l, economic s ta b i lity , and economic growth. I t is the e ffe c t o f government outlays upon economic in c e n tiv e s, the n a tio n a l income, d is trib u tio n of in come, the a llo c a tio n of reso u rces, the le v e l of p ric e s, and economic growth th a t determ ine in p a rt th e le v e l and d ire c tio n o f th e o p eration of the e n tire economic system . 23 22 The ideas a re drawn from Dr. W illiam H. Anderson's Seminar in Government Finance and F isc a l Policy, a t the U n iv ersity o f Southern C a lifo rn ia , 1964. 23 Anderson, "The F isc a l Economics of Public Expendi tu r e s ," p. 7. 24 " 0 Each o£ these areas w ill be discussed in g re a t d e ta il when th e problem o f economic growth and development of Iran i s presented fo r d iscu ssio n in th e follow ing chap te r s . Balanced vs . Unbalanced Growth An im portant lin e o f cleavage now e x is ts between what may be c a lle d th e "balanced growth" th e o rie s on th e one hand, and th e "big push" th e o rie s on th e o th e r. The "balanced growth" theory shows g re a t a f f in ity w ith the c la s s ic a l and n e o c la ssic a l th e o rie s, s tre s s in g maximizing o f output by a c o rre c t a llo c a tio n o f fa c to rs so as to achieve equal m arginal- o r equal m arginal so cial-p ro d u ct in a l l lin e s o f a c tiv ity . The "unbalanced growth" theory does not d ir e c tly deny th is lin e o f thinking, but puts g re a te r emphasis on dynamic and unbalanced development pro je c ts wherein a la rg e r a te o f i n i t i a l saving and investm ent 24 is o ften necessary. Balanced growth. The balanced growth theory sug g e sts th a t a country should expand i t s output o f many ^Howard E llis , "Big Push," Theories o f Economic Develom»ynf (Milano: E d itric e L 'In d u s trie , 1957), p. 3. d iffe re n t goods In a balanced way th a t accords w ith the Income e la s tic ity o f consumer demand fo r I t s products. By sim ultaneously e sta b lish in g many new firm s and expanding a l l kinds of output then each new firm , by spending on production, c re a te s e ffe c tiv e demand fo r o th er firm s making consumer goods. Establishm ent of many new In d u stries a t once is advocated, as the s ta r tin g p oint In any expansion of production fo r domestic markets in the underdeveloped c o u n trie s. This balanced p a tte rn of investm ent re s u lts in a number o f d iffe re n t In d u strie s, so th a t people working more productively, w ith more c a p ita l and Improved techniques, become each o th e r's custom ers. In a sense th is is merely an extension of Adam Sm ith's th e sis th a t p ro d u ctiv ity is increased by the d iv isio n of labor and lim ited by the ex ten t of the m arket. In the absence of vigorous upward s h if ts In world demand fo r exports of primary products, a low-Income country through a process of d iv e rs ifie d in v e st ment can seek to bring about upward s h if ts in domestic demand schedules by means of increased p ro d u ctiv ity and, th e re fo re , increased re a l purchasing power. In th is way, a p a tte rn of m utually supporting investm ents in d iffe re n t 26 lin e s o f production can enlarge th e s iz e of th e market and help to f i l l th e vacuum in the dom estic economy of low Income areas. This, in b r ie f , is the notion o f balanced growth. ^ The balanced growth p rin c ip le envisages autonomous advance along a number o f lin e s more or le ss sim u lta neously. Balanced growth is a means to acce lerated growth. The balanced growth approach has been c r itic iz e d on the ground th a t because economic resources a re by d e f in i tio n severely lim ited , th e ir a llo c a tio n according to the c r ite r io n of balance may spread them so th in th a t they a re below c e rta in c ru c ia l minimum le v e ls which must be exceeded i f p ro d u ctiv ity and income are to be ra ise d in any d ire c - . « 26 tio n . Under such circum stances, i t is not p o ssib le to avoid p o lic ie s which seek to promote, in the sh o rt run 25 Ragnar Nurkse, "The C o n flic t Between 'Balanced Growth' and In te rn a tio n a l S p e c ia liz a tio n ," Lectures on Economic Development (Ista n b u l: F aculty of P o litic a l Science, 1957). 26 Ansley J . Coale and Edgar M . Hoover, Population Growth and Economic Development in Low-Income C o u n tries: A Case Study o f In d ia 's Prospects (P rinceton, New Jersey : Princeton U niversity P ress, 1958), p. 119. 27 a t le a s t, ra th e r d if f e r e n t ra te s of development In the a g ric u ltu ra l and th e In d u s tria l s e c to rs . N onetheless, some co n sid eratio n o f "balance" Is unavoidable in th e sense of . . . the m inimizing o f the w aste o f productive resources th a t r e s u lts when one s e c to r o f the economy a c ts fo r an u n n ecessarily long tim e as the e ffe c tiv e lim itin g fa c to r [b o ttlen eck ] on the growth of th e o th e r se c to rs . Hirschman b eliev es th a t th e theory o f balanced growtli f a i l s as a theory o f development because: . . . development presumably means th e process o f change of one type o f economy in to some o th e r more advanced type. But such a process is given up as hopeless by the balanced growth theory which fin d s I t d i f f i c u l t to v is u a liz e how the "underdevelopment . equilibrium " can be broken In to a t any one p o in t. 8 Unbalanced growth. A v a rie ty of econom ists, notably Harvey L eibenstein, Gunner Myrdal, Paul Prebisch, Rosen- stein-Rodan, H. W . Singer, and A. 0. Hirschman, a re advo c ates o f "unbalanced growth": In g en eral, development p o licy . . . must keep a liv e ra th e r than elim in ate d is e q u ilib r ia . . . . I f the economy is to be kept moving ahead, the ta sk o f development p o licy is to m aintain te n sio n s, d isp ro p o rtio n s, and d is e q u ilib r ia . That nightm are of 27Ib id . ofl Hirschm an, o p. c i t . . p . 52. equilibrium economics, the en d lessly spinning cobweb, is the kind o f mechanism we must assiduously look fo r as an invaluable help in the development p r o c e s s . 29 An id e a l s itu a tio n obtains when . . . one d is equilibrium c a lls fo rth a development move which in tu rn leads to a sim ila r d iseq u ilib riu m and so on ad infinitum . I f such a chain o f unbalanced growth sequences could be s e t up, the economic p o licy makers could ju s t watch the proceedings from the s id e lin e . Hirschman fe e ls th a t one way to unbalance th e economy—and thus in d ire c tly stim u late other forms of in vestm ents—is fo r the government to co n stru ct many forms of " so c ia l overhead c a p ita l." These would include p ro jects such as tran sp o rta tio n investments (e .g ., a irp o rts , h a r bors, ro llin g sto ck ), public u t i l i t i e s (e .g ., w ater, power, and lig h t) , communications (e .g ., telephone, ra d io te le graphy, and p o sta l se rv ic e s), h e a lth and education. I t is believed th a t a larg e Investment now in so c ia l overhead c a p ita l w ill encourage p riv a te investm ent la te r . For example, improved highways may stim u late truck farming; cheaper e le c tric power may encourage lig h t Industry, e tc . The basic idea is always th a t by tem porarily w isely in v e st ing in su b sta n tia l so c ia l overhead c a p ita l cap acity , the 29 co sts o f many d ire c tly productive a c tiv itie s can be reduced and, th e re fo re , investm ents in th ese e n te rp rise s encouraged and stim ulated. In e ffe c t, although i t is seldom i f ever described in such terms, the Social overhead c o st approach to economic development is to "unbalance" the economy in th e hope or b e lie f th a t subsequently th e re w ill be im portant and p riv a te induced investm ents. This is one of the few instances in which f u l l reco g n itio n has been given to " e ffic ie n t sequences" of investm ent.3* There is a minimum le v e l of resources th a t must be devoted to . . . a development program i f i t is to have any chance of success. Launching a country in to s e lf-s u s ta in in g growth is lik e g e ttin g an a irp la n e o ff th e ground. There is a c r i t i c a l ground speed which must be passed before the c r a f t can become a i r b o r n e . ^ Economic growth is seen as a discontinuous a f f a ir , ra th e r than a gradual one, w ith many e ffo rts below a c e rta in minimum being com paratively in e ffe c tu a l i f not downright u se le ss. 33 Industry v s. A griculture Another s tra te g ic problem is th a t of a llo c a tio n of scarce resources between a g ric u ltu re and in d u stry . Should 3^Stephen Enke, Economics fo r Development (Engle wood C liffs , New Jersey : P ren tice-H all, 1963), p. 322. 32 Rosenstein-Rodan, Notes on the Theory o f the "Big Push." Center fo r In te rn a tio n a l S tudies, M assachusetts I n s titu te of Technology, March, 1957, p. 1. 3 3 Bnke. o p. c l t . . p. 2 9 9 . 30 th e a g ric u ltu ra l o r the in d u s tria l se c to r, o r both, be re lie d upon as the d riv in g £orce in the development pro- 34 cess? Or, should in d iv id u al p ro je c ts be selected and re je c te d according to some investment c r i t e r i a , w ith the com parative emphasis on a g ric u ltu re and industry being an in c id e n ta l r e s u lt o£ these more numerous and sp e c ific d e c i sions? Opinions d i£ fe r as to the exact re la tio n in a policy fo r economic development between a g ric u ltu re and In d u s tria l development, between the r e la tiv e importance and p r io r ity le of investment in industry and investment in agriculture* The controversy concerns n o t only the broad composition of the n a tio n a l product but also th e d iv isio n of population in to ru ra l and urban* A way of l i f e is a lso a t stake. The case fo r a g ric u ltu re . In a fundamental sense, a g ric u ltu ra l progress is norm ally a p re re q u isite fo r 34 See Paul Baran, fo r example, in Bnke, o p . c i t . , p. 124* 33 See Nurkse, "The C o n flict Between 'Balanced Growth' and In te rn a tio n a l S p e c ia liz a tio n ," and Hirschman, The S trategy of Economic Development. 36 o p. c i t . . p . 124. 31 in d u s tria l development. In an underdeveloped economy the a g ric u ltu ra l se c to r has a s ig n ific a n t ro le sin ce the m ajo rity o f th e population d eriv e s i t s liv in g from th e land, and th is se c to r generates from one-fourth to o n e-h alf o r even more of the gross n a tio n a l product. I t is impor ta n t to analyze how a g ric u ltu re can induce o r f a c i l i t a t e o v e r-a ll development. I t is argued th a t ris in g a g ric u ltu ra l p ro d u ctiv ity supports and su stain s in d u s tr ia l development in se v e ra l ways. I t is from the a g ric u ltu ra l population th a t a m ajor p a rt o f c a p ita l accumulation must come in the f i r s t stag e of in d u s tria liz a tio n . I t is a ls o a g ric u ltu re which has to provide the needed su rp lu s fo r th e maintenance o f th e population employed in the in d u s tria liz a tio n process. A g ricu ltu ral surplus perm its the re le a se of p a rt of i t s labor fo rce fo r in d u s tria l employment. I t ra is e s a g ric u l tu ra l incomes, thereby c re a tin g th e r u r a l purchasing power needed to buy the new in d u s tr ia l goods and r u r a l savings which may then be m obilized, by d ir e c t o r in d ire c t means, to finance in d u s tria l development. F in a lly i t is from the land th a t th e workers in in d u stry , tra n sp o rt, tra d e , and 32 37 v ario u s serv ices a re re c ru ite d . Thus i t is argued th a t in c re asin g a g ric u ltu ra l p ro d u c tiv ity makes im portant co n trib u tio n s to g en eral eco nomic development and th a t, w ith in co n sid erab le lim its a t le a s t, i t is one o f the p re-co n d itio n s which must be e sta b lish ed before a ta k e -o ff in to s e lf-s u s ta in e d economic growth may become p o ssib le . Nurkse p resen ts the r e la tio n between a g ric u ltu re and in d u stry as a case of balance needed from economic growth. In a country where the peasantry is incapable of producing a su rp lu s o f food above i t s own subsistence needs, th ere is l i t t l e o r no in c en tiv e fo r in d u stry to e s ta b lis h i t s e l f . There i s not a s u f f ic ie n t market fo r manufactured goods. On th e o th e r hand, a g ric u ltu ra l im provements may be in h ib ite d by lack of a market fo r farm products i f the non-farm se c to r o f the economy is backward or undeveloped. Each of th e two se c to rs must try to move forward. I f one remains passive, th e o th e r is slowed down. The farm s e c to r 's m arketable surplus of farm 37 Carl Elcher and Lawrence W itt, A g ricu ltu re in Economic Development (New York: McGraw-Hill Book Company, In c ., 1964), p. 12. 33 products determ ines th e volume o f non-farm employment In m anufacturing and o th e r a c t iv it ie s . I t r e f le c ts the farm s e c to r's demand fo r n o n -a g ric u ltu ra l commodities. This is th e concept th a t is re le v a n t to balanced growth p rin c ip le . The c la s s ic examples o f c o u n trie s where a g ric u ltu re p re ceded in d u s tr ia l growth a re England and Japan. The c la s s ic example o f the rev erse i s Sw itzerland. The case fo r in d u stry . Hirschman, L eibenstein, and Higgins, w hile recognizing th e need fo r ra is in g a g ric u l tu r a l p ro d u c tiv ity , conclude th a t i t can be accomplished only by giving a "big push" in d u s tria liz a tio n program top p r io r ity . There is probably no underdeveloped country which can a t any stag e affo rd to co n cen trate a l l o f i t s in v e st ment on e ith e r a g ric u ltu ra l or in d u s tria l development. The w rite r f e e ls th a t w hile the p rin c ip le of balanced a g ric u l tu r a l and in d u s tria l development appears a t f i r s t glance to be reasonable enough, th e a c tu a lity o f p u ttin g th is Into p ra c tic e , p a rtic u la rly in co u n tries which a re seeking to launch ra th e r than to su sta in economic growth, is not pos s ib le . In stead , very d i f f i c u l t choices must be made in any given development plan, whose major o b je c tiv e must be 34 the concentration of extrem ely scarce resources on c e rta in s tra te g ic investm ents which w ill remove the most r e s t r i c tiv e bottlen eck s o£ the c u rre n t s itu a tio n . The contention in th is d is s e rta tio n is th a t th e re is no b a sis fo r d o c trin a ire statem ents th a t development should be launched w ith e ith e r an a g ric u ltu ra l or indus t r i a l expansion; Instead, ) Every economy has an a g ric u ltu ra l and a non- a g ric u ltu ra l se c to r, and one of the most im portant aspects of development is the changing, complex but always in tim ate re la tio n between the two. 38 Government, Planning. P riv ate E nterprise. and Market Forces In a market economy, the b asic d ecisio n s are made through the functioning of the p ric e system. Resources are d ire c te d toward the production of those goods which y ie ld the g re a te s t margin of p r o f it. The ra te of c a p ita l accumu la tio n is b a s ic a lly determined by the ex ten t to which p er sons and business firm s d iv id e th e ir incomes among saving, consumption, and dividends. Techniques of production are > selected on th e b a sis of r e la tiv e c o sts. The p ric e 38 A. J . Youngson, P o s s ib ilitie s of Economic Prog re ss (London: Cambridge U niversity Press, 1959), p. 284. 35 mechanism is the b asic re g u la to r of economic growth. I t guides business firm s and fa c to r owners in making th e ir d ecisions and balancing demand and supply. I t guides the in d iv id u a l's fre e choice in the expenditure o f h is money income. Through i t , the basic economic problems of what should be produced, how i t w ill be produced, and fo r whom i t w ill be produced a re solved. For many decades th e p rin c ip le of lim ited government and the opinion th a t th e fre e e n te rp ris e form of economic org an izatio n is su p erio r to any o th er form has been more or le ss g en erally accepted in the Western world. Economic f a c ts , and the recurrence o f periods of boom and depression, however, proved th a t the market mecha nism does not operate p e rfe c tly in solving th e basic eco nomic problems. The s e t o f m arginal co n d itio n s required fo r obtaining maximum w elfare sometimes are n o t n e c e ssa rily o r always f u lf i lle d . The p riv a te e n te rp rise system o ften is incapable of preserving continuous f u l l employment, of c re a tin g continuous expansion, and speeding up the r a te of economic growth. The unw illingness o f p riv a te in v e sto rs to o ffe r th e ir resources in s p ite o f la rg e s o c ia l gains may be the r e s u lt of e x istin g divergence between the o p p o rtu n ities fo r p riv a te gains and so c ia l gain. From the point o f view of the in d iv id u al entrepreneur, i t nay be q u ite ra tio n a l and p ro fita b le to in v e st In the establishm ent of movie houses, lip s tic k fa c to rie s , o r in th e operation and con s tru c tio n of luxury re a l e s ta te . But from th e p oint of view of the economy as a whole, and p a rtic u la rly using c r i t e r i a of "e x tern al economic s ig n if ic a n c e ," ^ th is type of investment is u n d esirab le. S o il Improvement, w ater works, big power p la n ts, roads, e t c ., f a l l in the category of government investment p ro je c ts which c re a te ex tern al economies. Besides th is , however, retu rn s from investment may be too fa r in th e fu tu re and the amount o f financing needed may be too larg e, so th a t only public a c tiv ity may be in a p o sitio n to carry out such p ro je c ts. The in crease in productive capacity by investment in s o c ia l overhead c a p ita l, such as in highways, in r a i l roads, in power in s ta lla tio n p ro je c ts, in s o i l reclam ation, in irrig a tio n works, e tc ., provides the necessary economic 30 Tibor Scitovsky, "Two Concepts of E xternal Eco nomics," The Journal of P o litic a l Economy. LXII (A pril, 1954), 143. 37 environment needed to make p riv a te investment more a ttr a c tiv e . In co u n tries th a t have had considerable development, th e re have been in the p a st various degrees o f government p a rtic ip a tio n in th e in itia tio n and d ire c tio n of the development process. Since backward co u n tries have r e mained almost sta tio n a ry fo r so long, i t is believed th a t development cannot now be as spontaneous as i t was under n in eteen th century conditions and, th erefo re, p o sitiv e government in te rv e n tio n is e s s e n tia l to get th ese countries "o ff dead center."^® Of course the ro le of government in in itia tin g and carrying out measures fo r economic growth and development has been su b ject to debate and controversy. N evertheless, sin ce th e end of the war in many of the underdeveloped co u n tries o f the world, governments have assumed p o sitiv e and resp o n sib le ro le s w ith resp ect to th e ir economic w elfare. Since th e end of World War I I , however, governments in other p a rts of the w orld--L atin America, A frica, the Middle East, Asia and some European co u n tries as w e ll— have become in creasin g ly "development minded." ^ k e i e r and Baldwin, op. c i t ., p. 361. 38 A good many of th ese have embarked on the p rep aratio n and execution of economic p la n s. 41 Using d a ta assembled by Kuznets, Rostov estim ates the required c a p ita l in underdeveloped co u n tries is a t le a s t 5 to 10 p er cen t of n e t n a tio n a l p ro d u c t.^ In most underdeveloped c o u n trie s, such an Increase in c a p ita l investm ent i s n early im possible, because these co u n tries a re almost a t a su b sisten ce le v e l of production. C ap ital accum ulation would work severe hardship on these economies, unless i t comes from abroad. Maximum S ocial U tility A c lo se ly re la te d issu e is th a t of th e c r i t e r i a fo r determ ining the extent to which various governmental a c tiv itie s and expenditures should be extended. I t should be p o ssib le fo r the Iran ian government to use the p rin c ip le o f optimum le v e ls of government a c tiv itie s as i t s yard s tic k . The b asic ru le of optimum resource a llo c a tio n which ap p lies to the p riv a te se c to r of th e economy, th a t o f 41 Benjamin Higgins, Economic Development: P rin c ip le s . Problems, and P o licies (New York: W . W . Norton and Company, In c ., 1959)* p. 3. 42 Rostov, on. c i t ., pp. 8-9. 39 e q u a lity o£ m arginal s o c ia l c o sts and b e n e fits , is a p p li- 43 cab le to the government se c to r as w ell. The p rin c ip le would re q u ire th a t each lin e o f governmental a c tiv ity be extended to th e le v e l a t which th e m arginal s o c ia l b e n e fits from the a c tiv ity a re equal to th e m arginal s o c ia l c o s ts . The m arginal s o c ia l b e n e fits rep resen t th e gains to the members of th e so ciety as a whole from th e governmental a c tiv itie s . The m arginal s o c ia l c o sts r e f le c t th e s a c r i fic e s from th e p riv a te se c to r production which a re given up when th e government acquires th e fa c to rs to carry on i t s a c tiv itie s . In th is way optimum resource a llo c a tio n and le v e ls of output and production w ill be a tta in e d .44 W e have here, so f a r as theory goes, a t e s t by means o f which the a llo c a tio n of government expenditures along d iffe re n t lin e s can be spread. Such a policy would req u ire the measurement and estim ation of conmunity b e n e fits and c o sts, by th e government of i t s various le v els of a c tiv i tie s and expenditures, in terms of general community goals. 43 John F. Due, Government Finance (Homewood, I llin o is : Richard D. Irwin, In c ., 1963), pp. 19-20. 4 4 Ib id . 40 45 This ta sk is o f'c o u rse in h eren tly d i f f i c u l t . I t is the re s p o n s ib ility of government to s e le c t th a t le v e l which appears to be most c lo se ly in conform ity w ith the consensus in so ciety w ith resp ect to v ario u s g o als. This process re q u ire s the c a re fu l weighing o f the gains from the v ario u s a c tiv itie s ag a in st one another, in the lig h t of th e government's estim ate of th e con sensus o f so ciety toward the d e s ir a b ility of various degrees o f attainm ent of the g o als. Likewise, the b en efits.m u st be weighed a g a in st th e r e a l co sts to so ciety . 1 ® In the la s t decade th e re has been extensive d iscu ssio n on the question o f determ ination of s o c ia l choice and the p a tte rn of ranking of v ario u s goals by th e government. Governments must have some methods o f finding out what people want, and how much of each s o c ia l good should be produced. 45Ib id . . pp. 19-29. 46Ib id . . p. 25. 47 O n th e question of optimum le v els of government a llo c a tio n , see: R. A. Musgrave, The Theory of ftablic Finance (New York: McGraw-Hill Book Company, In c ., 1959), Chapter VI; J . M . Buchanan, "The Pure Theory of Government Finance," Jo u rn al of P o litic a l Economy, LVII (December, 1949), 496-505; H. R. Bowen, Toward S ocial Economy (New York: Rinehart and Company, 1948), Chapter XVIII; N ational Bureau of Economic Research, Public Finances (Princeton: Princeton U niversity P ress, 1961). 41 A number of w rite rs have re c e n tly suggested th e p o s s ib ility of using p o lls , q u estio n n aires, in terv iew s, budget in v e stig a tio n s, and o th er devices involving samples, to study th e the d e s ire s o f the in d iv id u als who compose the p u b lic. With the in c re a sin g emphasis upon economic p lan ning, i t i s e s s e n tia l th a t th ese and o th e r techniques fo r discovering in d iv id u al ta s te s and preferences be developed 48 and used. IV. S U M M A R Y I t i s evident from the preceding d iscu ssio n th a t th e re is no hard and f a s t s e t of ru le s fo r economic d e velopment. In th is f ie ld o f economics "circum stances a l t e r c a se s." As has been pointed out th e re i s g e n erally a ta k e o ff in to economic development. The events precedent to the ta k e -o ff have been com pletely d is s im ila r to those o f seventeenth and eig h teen th century G reat B rita in , n in e te e n th century Japan, and n in eteen th century Canada. Also ^ ia u ric e Dobb, "Economic Theory and S o c ia lis t Eco nomy," Review of Economic Studies, February, 1935, pp. 137- 151. Also Barbara Wootton, fo r Economics (New York: F a rra r and R inehart, 1938), pp. 289-291. 42 th e re i s no reason to b eliev e th a t the paths to be followed in the fu tu re w ill be those of the p a st. Thus th e re have a rise n a g re a t number o f th e o rie s of growth. In th is chapter the balanced growth th eo ries have been co n trasted w ith the "big-push" th e o rie s and the weak nesses of each have been pointed o u t. A sim ila r examina tio n has been made o f the in d u s tria liz a tio n versus a g r i c u ltu ra l debate. The ex ten t to which government may, should, o r must a ffe c t or promote economic growth is a su b ject fo r even g re a te r debate, as was pointed out. In the d isc vis s ion of developmental planning in th e Iranian economy which follow s, frequent referen ces w ill be made to those th e o ries o u tlin ed above. Also th e re w ill be frequent comparisons made to s itu a tio n s described by eco nomic h is to ria n s . CHAPTER I I I TH E E C O N O M IC STR U C TU R E O F THE IRANIAN E C O N O M Y : A G R IC U LTU R A L SECTO R The proper evaluation and understanding of the prob lems of economic growth In Iran and p o te n tia litie s o f I t s resources req u ire an understanding of the co u n try 's basic economic s tru c tu re . The areas most p e rtin e n t and d ire c tly re la te d to--the su b ject o f th is study are the sta tu s of ag ricu ltu re* the ex ten t o f In d u stria liz a tio n * the banking system* and th e system of tra n sp o rta tio n and communication. The purpose of th is and th e succeeding chapter Is to p re sent* analyze* and evaluate these areas. I . TH E A G RICU LTU RA L SEC TO R Iran Is predominantly an a g ric u ltu ra l country. Nearly 80 per cen t of the population is engaged in some form of a g ric u ltu ra l production. A larg e p o rtio n of th e urban population also depends on the production or 43 processing of food, animal, and d airy products fo r i t s liv in g . Although the percentage of a g ric u ltu re in the country*s G N P is not p re c ise ly known, a v ailab le estim ates in d icate th a t i t is f a ir ly s ig n ific a n t. The estim ates in Table I show th a t a g ric u ltu re contributed 26.6 per cent to the gross n a tio n a l product o f $4.8 b illio n in 1963. The sig n ifican ce of a g ric u ltu re in th e Iranian economy is also re fle c te d in i t s share of Iran ian exports. In 1959-60, fo r example, o f th e to t a l exports, which fo r th a t year were 7,700 m illio n r i a l s , th e share of a g ric u l tu r a l and liv esto ck products was 7,000 m illio n r i a l s or about 90 per cen t, excluding o i l and petroleum p ro d u cts.* The main fe a tu re o f Iran ian a g ric u ltu re is i t s low p ro d u ctiv ity . Crop y ield s are low by almost any measure. P roductivity is low per man, per acre, per animal u n it, and per ru ra l community. This is not due to any sin g le fa c to r, but to a combination of se v e ra l. The s o il, the clim ate, the w ater supply, the methods o f c u ltiv a tio n and ir r ig a tio n , the system of land ownership and management, the Book of F acts. 1965 (Teheran: Echo of Iran , 1965), p. 314. 45 T A B U S I PE R C E N T A G E DISTRIBUTION O F G R O SS N A TIO N A L PR O D U C T , B Y E C O N O M IC SECTORS, 1963 Economic Sector Percentage A griculture 26.6 Petroleum 15.4 Manufacturing and Mining (excluding petroleum) 16.8 C onstruction 5.2 Government s 3 7.0 Services 29.0 T o tal 100.0 SOU RCE: United S tates O perations M ission Teheran, c ite d In Labor law and P ractices In Iran. United S tates Department of Labor, Bureau of Labor S ta tis tic s , Report No. 276 (Washington: U.S. Government P rin tin g O ffice, May, 1964), p. 6. 46 socioeconomic outlook of the peasantry, th e high r a te of I llite r a c y , and the lack of h e a lth f a c i l i t i e s - - a l l play 2 a p a rt. In Iran only about 10 per cent of th e to ta l land area i s under a g ric u ltu ra l production, and over h a lf of th a t must l i e fallow p a rt of the time in order to m aintain or regain f e r t i l i t y . An a d d itio n a l 20 p er cent o f the land is p o te n tia lly c u ltiv a b le i f w ater were a v a ila b le , while 10 per cent is s u ita b le fo r grazing; 10 p er cent i s fo re s t land; and the remaining 50 per c e n t is d e s e rt and w aste land.^ Methods of C u ltiv atio n Even His M ajesty the Shah is compelled to p ain t a gloomy p ic tu re of Iran ian a g ric u ltu re : At present only about one out of every th re e acres of our farmland is a c tu a lly under c u ltiv a tio n in any given year. Animal and chemical f e r ti liz e r s a re commonly lacking and, as in a number o f other Asian 2 Report on Seven-Year Development Plan fo r th e O rganization of th e Im perial Government in Iran (New York: Overseas C onsultants, In c ., 1949), I, 25-26. 3 United S tates Department o f Labor, Bureau o f Labor S ta tis tic s , Labor Law and P ractices in Ira n (Washington: U.S. Government P rin tin g O ffice, May, 1964), p. 6 . 47 co u n tries, animal manure is used mainly as fu e l. Fann ing to o ls a re poor hand-made a r tic le s of wood and iro n . In e ffic ie n t wooden ploughs, w ith e ith e r an iro n -tip p ed wooden ploughshare o r a sim ple Iron spike fo r plough share, are pulled by oxen o r occasionally other d r a f t animals Including w ater buffaloes in our m oister regions. Sowing and reaping are g en erally done by hand, and animals a re u su ally used to tram ple the g rain on a v illa g e threshing flo o r of packed mud.4 P rim itiv e c u ltiv a tio n methods a re the c h ie f fa c to rs resp o n sib le for. the low lev el o f Iran ian a g ric u ltu ra l p ro d u ctiv ity . The presen t methods of c u ltiv a tio n are as old as recorded history,"* h ab its are firm ly fixed and have th e ir bases "thoroughly entrenched in s u p e rs titio n and ignorance."* I t must be conceded, however, th a t fo r people • ^ - being on the b rin k of s ta rv a tio n a g ric u ltu ra l experiments may be fraught w ith p e r il. Plowing i s done by oxen, donkeys, mules, or camels dragging a crooked wooden s tic k w ith an old piece of iro n attached to i t . Seed is sc a tte re d upon the ground by hand. The crops are harvested w ith sm all hand s ic k le s . 4 His Im perial M ajesty Mohammed Reza Shah Pahlavi Shahanshah of Iran , M ission fo r M v Country (New York: McGraw-Hill Book Company, In c., 1961), p. 211. ^Report on Seven-Year Development Plan. I l l , 17. 6Ib id . . p. 19. 48 Seeds e re not g en erally se le c te d , as they a re In advanced co u n trie s, b u t a p a rt o f each y e a r's crop i s saved fo r th e next y e a r's c u ltiv a tio n . In most cases the b e st o f the crop is e ith e r sold or consumed, and only the remainder is used fo r fu rth e r c u ltiv a tio n . Crop ro ta tio n is not w idely used. F e r t i l i t y of a g ric u ltu ra l f ie ld s is u su ally re sto re d by having the land l i e fallow . F e r tiliz e r s a re ra re ly used. Commercial f e r t i l i z e r s a re e ith e r unknown to , or beyond th e fin a n c ia l reach o f, th e average peasant. Nor i s animal manure g en erally a v a ila b le fo r f e r ti liz a tio n , sin ce in most cases i t i s made in to sm all cakes and used as fu e l. Cross breeding is done in haphazard, unsystem atic ways. A r tif i c ia l insem ination i s p racticed on a very sm all sc a le .^ The lack o f knowledge about modern a g ric u ltu ra l techniques and p ra c tic e s is the main o b stacle to th e expan sion o f a g ric u ltu ra l output. The number of modern a g ric u l tu ra l machines and implements is n e g lig ib le . Consequently p ro d u c tiv ity o f the average farm er is low. ^This se c tio n is heavily drawn from Report on Seven- Year Development Plan. Vol. I. Even when y ie ld per acre i s n o t low, so many people o rd in a rily share in the output th a t the standard o f liv in g in the nural areas is g en eral!^ very low. Since th ere is an ab^frce o f o th er employment o p p o rtu n ities, the expanding population adds co n tin u ally to the number o f people who are forced to work on overcrowded holdings. The p ro d u ctiv ity of th ese a d d itio n a l workers i s n i l , and in some cases, negative. Thus in Iran a g ric u ltu re is c h arac terised by the g existence of mass "disguised unemployment." P rin cip al Crons The main a g ric u ltu ra l crops of Iran a re wheat, b arley , and r ic e , as shown in Table I I . Wheat is the c h ie f crop and is grown over most of Iran . Since wheat is th e basic crop of th e country, surpluses should be a v a ila b le . Although the wheat harvest has increased from 1,860 thou- o sand m etric tons in 1952 to 2,900 m etric tons in 1963, g For a d e fin itio n and an aly sis of "disguised unem ployment,” see Ragnar Hurkse, Problems of Capiffli Fnrmfltinn in Underdeveloped Countries (Oxford: B asil Blackwell, 1953), pp. 32-33, 34-36, 43-45. ^United Nations S ta tis tic a l Yearbook. 1964 (Hew York: Department of Economics and Social A ffa irs, 1965), p. 129. TABU II PRINCIPAL CROPS* (Thousand M etric Tons) Crop 1948-52 1955 1956 1957 1958 1959 1960 1961 1962 1963 Wheat 1,860 2,313 2,700 2,800 2,700 3,000 2,590 2,803 2,700 2,900 Barley 767 880 1,000 980 950 990 684 1,002 949 1,002 Rice 424 322 440 484 435 550 600 576 700 860 Cottonseed 53 119 124 130 143 180 235 255 203 253 Tea 4 .1 5.9 6.4 6.6 4 .4 6 .7 9.6 10.2 12.5 — Tobacco 12.4 11.2 14.4 14.3 11.8 8.5 11.1 12.4 9.5 11 Cotton ( l in t ) 26 60 62 65 72 81 99 116 92 115 > > vSOORCE: P nited N ations S t a ti s t i c a l Yearbook. 1964 (New York: Department of Bconoodca and S ocial A ffa irs , 1965), pp. 129-146. U l o 51 in recen t years Ira n has Imported wheat because producers have refused to s e l l a t p ric e s fixed by the governm ent" about $80 a ton. Some o f the n a tio n 's wheat producers have smuggled wheat across the fro n tie r and have sold I t a t higher p rices o u tsid e the country. Barley Is second In Importance to wheat, and Is grown In th e same d i s t r i c t s as wheat. As can be seen in Table I I , production of b arle y has also increased over the y ears. Barley rip en s th ree to four weeks e a r lie r than wheat and is fre e to some ex ten t from the ravages of sunna in se c ts, which come in la te summer and cause considerable lo sses in Iran. Much b arley is eaten by the Iran ian people, and the remainder is used as feed fo r a n im a ls .^ Rice is th ird in importance to wheat and barley , and i t flo u rish es in the Caspian provinces (Mazanderan, G ilan, and R asht). Smaller q u a n titie s of ric e a re also grown in o th er p a rts of Iran , where abundant w ater for ir r ig a tio n is av ailab le. ^D onald N. W ilber, Iran: Past and Present (Prince ton, N ew Jersey : Princeton U niversity P ress, 1963), p. 228. B. F ish er, The Middle East (New York: G. P. Dutton and Company, In c., 1961), p. 292. The q u a lity of Iran ian f r u its has long been known. Fruit-grow ing Is of considerable importance fo r both home consumption and export. There a re no r e lia b le data a v a il ab le on th e q u an tity o f f r u i t production in Iran . W ilber s ta te s th a t the annual f r u it production of th a t country is 12 about 875,000 to n s. Grapes, r a is in s , almonds, and p is tachio n u ts are among th e leading a g ric u ltu ra l exports of Iran . Tobacco, tea, and raw s ilk are produced in th e w ell- 13 watered Caspian provinces. S u ffic ie n t tobacco and s ilk a re ra ise d to perm it some exporting, b u t te a production covers only about a th ird of domestic requirem ents. Beet sugar production has been stepped up to about 100,000 m etric tons annually; however, about tw ice th is amount must be imported, as consumption is ris in g ra p id ly . ^^Wilber, o p . c i t .. p. 228. 13 The purchase and processing o f tobacco is in the hands of a monopoly o f the government (called a bonea) which c o n tra c ts w ith the growers. In 1937 th e production of s ilk became a monopoly of the government, and cen ters fo r p rep aratio n of cocoons and fo r weaving were estab lish ed along th e co ast of th e Caspian Sea. 53 I I . FORESTS The to ta l fo re s t a re a of Iran has been estim ated as 28,000,000 h e c ta re s. This Is about 17 per cent o f the to t a l land area. The Caspian region Is believed to be one of the w o rld 's ric h e s t hardwood fo re s ts ,* * and Is th e only dense, hig h ly productive fo re s t in the Middle E ast. These re p re se n t Im portant p o te n tia l n a tio n a l w ealth. These Caspian fo re s ts in no rth ern Iran comprise about tw o-thirds of the n a tio n 's t o t a l fo re s ts , much of them c o n sistin g of oak, ash, elm, beech, poplar, pine, box cypress, maple, w alnut, and honey lo c u s t.** This area supplies most o f th e c o u n try 's tim ber and is th e main source o f raw m a terials fo r th e lumber in d u stry : saw m ills, w ood-treating i n s t a l l a tio n s, and fa c to rie s producing plywood and fu rn itu re . C ertain w ild p la n ts, shrubs, and th e ir saps or re sin s are c o lle c te d and form an im portant item of export. **Fisher, op. c i t .. pp. 266-267. *^H. S. Keman, "F o rest C onservation fo r Ita n ," Foreign A g ricu ltu re. XVII (May, 1953), 91. **World Trade Inform ation S ervice, U.S. Department o f Commerce, Basic Data on th e Economy of Iran (Washington: U.S. Government P rin tin g O ffice, 1962), p. 6. :These include gum tragacanth, gum a ra b le , gum a sa fe tld a , galbanum, colocynth, and lic o r ic e . Colors fo r th e carp et industry come from Indigo, sa ffro n , and w alnuts. About 5,000 tons of ju te a re produced annually in th is reg io n . ^ Overgrazing and c u ttin g fo r firewood, however, have done serio u s damage to some fo re s t land, w hile o th er areas have gone unused because of th e ir in a c c e s s ib ility . Recently government in te r e s t in fo re s try and s o il conservation has increased s ig n ific a n tly , and i t has estab lish ed the Inde pendent F orestry C orporation. The organization derives funds from fo re s t ta x a tio n to be u tiliz e d fo r fo re s t r e h a b ilita tio n . Government fo re s t conservation measures, the s h if t from charcoal to kerosene fo r heating and cooking purposes, and the co n stru ctio n of new rosds in to untapped 18 fo re s t areas are now helping to ease th is s tr a in . The s itu a tio n seems favorable fo r development o f a sound fo re stry program, w ith b e tte r and more e ffe c tiv e execution of the law. 1 7 &id. 18 In te rn a tio n a l Economic Survey: Iran (New York: Chemical Bank, New York T rust Company, 1964), p. 4. 55 I I I . ANIMAL RESOURCES In a country o f many sm all and sc a tte re d v illa g e s the d if f ic u lty of taking an accu rate census o f the human population Is g re a t, and th a t o f estim atin g th e number of dom estic animals is o f course enormous. Table I I I shows th e liv e sto c k population o f Iran as estim ated by the United N ations. Livestock and d r a f t animals have a la rg e e ffe c t on the economic l i f e o f Ira n . Camels, mules, donkeys, and horses a re s t i l l th e c h ie f means o f tra n sp o rta tio n In many p a rts o f th e country. C a ttle a re not sy stem a tica lly fa tte n e d fo r b eef. In g en eral, the c a t tle a re sm all and poorly nourished. The c a t tle a re of In fe rio r q u a lity , both in meat and m ilk production. Sheep and goats a re th e most im portant sources o f I r a n 's meat and d a iry products. They too a re in f e r io r both in q u a lity and q u a n tity . Iran ian p o u ltry a lso f a i l s to meet American standards in weight and 1 0 in egg production. ^ W ilb e r , o p. c i t . , p . 2 4 3 . 56 TA BLE I I I LIVESTOCK PO PU LA TION (Thousand Head) 1947/48- 1951/52 1959-60 1960-61 1961-62 1962-63 C a ttle 3,225 5,400 5,500 4,800 - - Sheep 14,069 27,000 30,000 - - Horses 358 450 470 — - - Mules 127 100 130 — Asses 1,222 1,600 2,000 * * • SO URCE: United Nations S ta t is tic a l Yearbook. 1964 (New York: Department o£ Economics and S ocial A ffa irs, 1965), p. 151. 57 Several fa c to rs are resp o n sib le fo r the sm all quan t i t y and poor q u a lity of liv e sto c k . S c ie n tific c ro ss breeding and a r t i f i c i a l Insem ination are not fu lly developed. There is also a s c a rc ity of adequate grazing lands. Prevalence o f diseases and inadequacy of v eterin ary care complete th e l i s t of handicaps. However, progress toward improving the c h arac ter of the liv e sto c k i s being made. Many vaccines and serums are 20 now produced w ithin Iran . IV. FISHERIES The w aters of th e Caspian Sea have long been a source of food and of income to Ira n . In comparison to o th er in d u strie s, fish in g is a re la tiv e ly minor industry in Iran, employing some 12,000 people. To a la rg e extent i t is c a rrie d on by independent fisherm en and entrepreneurs u tiliz in g p rim itiv e equipment and techniques. The most im portant commercial fis h found in the Caspian Sea a re sturgeon, w hite salmon, w hite fis h , carp, bream, pike, c a tfis h , and h errin g . Those found in the 20 Ib id . P ersian Gulf inclu d e sard in es, tuna, bream, snappers, m ackerel, and shrimp. The average annual catch is e s t l - 21 mated a t 20,000 to 25,000 m etric tons. The e x p lo ita tio n o f th e resources of th e Persian G ulf has been neglected u n ti l re c e n t y ears. Expanded com m ercial fish in g began th e re around 1955. In 1927 a jo in t Iran o -S o v iet fis h e rie s company was iven a monopoly on the fo re ig n s a le s o f f is h and c a v ia r from th e Caspian Sea. Although th e company was owned in equal sh ares, the^Soviets^managed to dominate th e manage ment of th e f is h e r ie s . In 1952 th e concession expired, and Ira n refused to extend i t . In th e same year Iran n a tio n a l- 22 ized th e Caspian fish in g In d u stry . The most im portant fis h e ry e n te rp rise has been the Iran ian F ish e rie s Company (Sherkat Sahami S h ila t Ira n ), a government agency. Large q u a n titie s o f fre sh and smoked f is h a re s t i l l sold to R ussia as w ell as w ith in Ira n . About n in ety tons of c a v ia r a re exported annually, p rin c ip a lly to R ussia, France, 23 U nited S ta te s , Sw itzerland, and Germany. 21 Basic Data on the Economy of Iran , p. 5. ^ S h a h , op. c i t .. p. 199. 23 Basic Data on th e Economy of Iran , p. 5. V. IRRIGATION 59 Ira n 's r a in f a ll is very lim ited , and th e re fo re g re a te s t p o ssib le use must be made of the e x istin g w ater supply. Although dry farming 1b c a rrie d out In a sm all p a rt o f the country, Ira n 's a g ric u ltu ra l p ro d u ctiv ity is dependent mainly on th e a v a ila b ility of w ater from sources in ad d itio n to r a in f a ll. In Iran methods o f bringing a v a ila b le w ater to th e farm a re p rim itiv e and undeveloped.^ At p resen t, th e re a re e s s e n tia lly th re e methods of procuring w ater: "qanats” (underground ir r ig a tio n chan n e ls ), w ells, and ir r ig a tio n by crudely formed canals le ad ing from r iv e rs . The underground canal is f a ir ly good engineering by modern standards. However, many of the canals a re operated w astefu lly and inadequate precautions are taken to keep ir r ig a tio n w ater from co n trib u tin g to s o il erosion. The w ater channels a re u su ally d ir ty , caused in p a rt by th e 25 ~ fa c t th a t the w ater is used fo r t o i l e t purposes. The qanats ca rry w ater as much as th ir ty m iles from the shallow 24 F ish er, on. c i t .. p. 296. 25 Herbert H. Vreeland, ir * n (New Haven, Conn.: Human R elations Area F ile s , 1957), p. 183. 60 w ater ta b le in the h i l l s , o ften from a n a tu ra l spring, down in to the p la in s. Access w ells a re constructed every f i f t y or s ix ty yards. L ittle of th e w ater evaporates, but main tenance is c o stly and laborious, as the tunnels are un lin ed and su b ject to cav e-in s. Because the w ater moves by fo rce of g ra v ity , the tunnels must be of the c o rre c t slope to bring th e w ater to the surface a t th e desired p o in t. Brought to the surface above th e area where i t is needed, th e w ater is then d istrib u te d through ir r ig a tio n d itc h e s. The o th er forms of ir r ig a tio n Include sunken w ells and the use of r iv e r w ater. In most cases the person who owns the w ell also owns the land around i t . Most w ells are operated by animal power, although th e re a re a few gaso lin e-d riv en w ater pumps. The riv e rs are mostly snow fed and o rig in a te in the mountains. There has been l i t t l e system atic use of riv e rs fo r irrig a tio n . Landowners have taken w ater as they pleased, w ith l i t t l e a tte n tio n to conservation o r the rig h ts of o th ers, in s p ite of the fa c t th a t the g re a te st need of the Iranian a g ric u ltu re is w ater. 2 6 I b id . . p. 184 61 Two fa c to rs combine to reduce th e v alue of our w ater supplies fo r a g ric u ltu re . One is erosion, which is both a cause and a r e s u lt o f lack o f w ater a t the times when i t is needed. Since our mountains a re mostly barren of v eg etatio n , the w ater runs o ff them too f a s t in th e sp rin g . This in tu rn causes more erosion, both in the mountains and on the p la in s. Over-grazing and d e fo re sta tio n have also aggravated th e problem of erosion and th e re fo re of Irre g u la r w ater su p p lies. The o th er fa c to r is s a lin iz a tio n o f our w ater. I r r ig a tio n w ater, unlike v irg in rainw ater, u su ally contains a c e rta in percentage of dissolved s a lts which the w ater has picked up on i t s way to th e f ie ld s . Also, s a l t d ep o sits o ften u n d erlie the fie ld s them selves; and i f the land i s o v e r-irrig a te d , or i f drainage is poor, s a lts may be brought to the surface by a s o r t of p erco latin g a c tio n . Thus s a lts may accumulate in th e upper s o il in concentrations dangerous to p la n ts . 2? Because of the p a rtic u la r s tru c tu re and topographi c a l fe a tu re s of Iran , the system of drainage presents serious hydrographic problems. Much o f the r iv e r w ater is wasted in the in te r io r depressions or flows o u tsid e the borders, u n u tiliz e d . According to one estim ate, about 38 per cent of Ira n 's riv e r w ater is drained out of the country w ithout b e n e fitin g the s o il, w hile another 10 per cen t runs in to marshes and s a l t lak es. Some of the riv e rs have high s a l t content which makes them u seless fo r i r r i gating th e land. Owing to lack of w ater storage f a c i l i t i e s 27 Shah, on . c i t .. pp. 208-209 6 2 and absence o f w ater re se rv o irs, spring flood w aters a re wasted. 28 Since World War I I th e government of the country has taken a more a c tiv e ro le In th e development of the co u n try 's Irr ig a tio n and power. I ts a c tiv ity in w ater con serv atio n and supply is regarded by competent observers as an e s s e n tia l p re re q u isite fo r any program of land reform, inasmuch as the necessary c a p ita l and organization required to m aintain the qanats have been otherw ise w ithin the a b ility only of th e landlord. Crop y ie ld s, which a re very low in Iran even by Middle E astern standards, a re g en erally higher in the co u n try 's irrig a te d areas than in those re ly in g only on r a in f a ll. But ir r ig a tio n p ra c tic e s have in some places contributed to s o il erosion and excessive s a lin ity of the s o il. Apart from s k illf u l te rra c in g in various mountain v a lle y s, l i t t l e a tte n tio n is given to preventing s o il erosion. Contour plowing is seldom e ffe c tiv e ly c arrie d out, p a rtly because of the sm all s iz e of landholdings. 28Ib id . V I. LAND OWNERSHIP AND M A N A G E M E N T 63 The system of land ownership In Iran Is s t i l l feudal. A g ricu ltu ral land Is held by p riv a te landlords, by re lig io u s and c h a rita b le tr u s ts (Vaqf), by the govern ment (K haliseh), by the Shah (Amlak), and by in d iv id u al farmers who c u ltiv a te th e ir own holdings. The p riv a te landlords own about h a lf the arab le land. A sm all number o f big landlords own from sev eral to fo rty o r more v illa g e s each. Much of the worst-managed land in Iran is in the hands of the biggest lan d lo rd s. The landlords, g en erally 8peaking, are c ity dw ellers who have no in te r e s t in farm ing, and regard th e ir land so le ly as a source of income. U sually th e landlords e n tru st the management of th e ir lands to p ro fessio n als, who ru th le s sly ex ercise th e ir power over th e peasants w hile the landlords enjoy themselves in Teheran, Europe, or America. There a re exceptions, of course. Some landlords d isp lay notable s o c ia l conscious n ess, and are concerned about improvement and w elfare of th e peasants. But, on th e whole, th e big p riv a te landlords a re economic p a r a s ite s .^ 2 9 I b id . . p. 2 0 0 . 64 About 20 per cent o£ Ira n ia n c u ltiv a b le land is dedicated to c h a rita b le and re lig io u s purposes. I ts ad m in istra tio n and management a re la rg e ly in th e hands o f the c le r ic a l h ierarch y . Lay managers a re appointed g en erally by the clerg y . Although many are con scien tio u s, oth ers 3 0 o ften abuse th e ir p rero g ativ es. A landlord may own fiv e v illa g e s w ith the s u r rounding fie ld s and one o r more qanat lin e s , may own twenty o r more, o r. in exceptional cases, may own over 100 v illa g e s . S ta te lands a re adm inistered through th e M inistry o f Finance, w hile the M inistry o f Education supervises endowed lan d s. The Shah and th e Government own about 10 per cen t of 32 the arab le land. The government holdings were acquired through conquest, unclaimed tr a c ts , g if t s , and purchases. The s ta te plays the ro le of the landlord and th e land 3Q Ib id . 3H filber, op. c i t .. p. 241. 32Much has been w ritte n on th e system o f land owner ship in Iran . Most of the books and a r tic le s are not c le a r, and some a re confusing. The w rite r of th is d is s e rta tio n found th e b e st c le a r and concise treatm ent of the su b ject in Shah, M ission fo r M v Country, and the w rite r has drawn heav ily from th a t work. 65 is c u ltiv a te d by the peasants. The government c o lle c ts about th e same share o£ th e produce as do the p riv a te land lo rd s. In o th er in stan ces, the government su b lets land to a p riv a te c o n tra c to r who in tu rn c o lle c ts from th e peas a n ts. The Crown lands a re those which belong to the Shah. They were acquired and developed by th e Shah's fa th e r, and a re now adm inistered by th e Pahlavi Foundation. The rev e nue from the Crown lands mainly supports c h a rita b le and philanthropic p ro jec ts and s o c ia l se rv ices. The Shah has Introduced a land reform on the Crown lands which w ill be discussed in the follow ing chapter. Peasant p ro p rie to rs own th e remaining 20 per cent of the c u ltiv a b le lands. Here the farmer a ssiste d by h is fam ily t i l l s the s o il. These holdings are not very la rg e ; such p lo ts run from a q u a rte r of an acre to one acre, or 33 to te n or more. D ivision of the Produce Farmers working fo r landlords a re n early always sharecroppers, and the income earned by the peasant is 33W ilb er, o p. c i t ., p. 241. 66 u su ally a share of the crops. Under th e sharecropping system, lan d less peasants t i l l th e s o il fo r th e landlords and the crop Is divided between him and the landlord, according to c e n tu rie s-o ld customs and laws rep resen tin g the tra d itio n s of th e old Moslem so c ie ty . T ra d itio n a lly , fiv e elements a re taken in to account in d iv id in g the crop: land, w ater, draught anim als, seeds, labor; th e o re tic a lly one share is a llo c a te d to each element and goes to whoever provides th a t e le ment. In fa c t, however, th is is l i t t l e more than a th e o re tic a l a b stra c tio n , and the a c tu a l d iv isio n , although i t is m a te ria lly a ffected by the ownership and provision of th ese d iffe re n t elem ents, is seldom made on th e b asis of allotm ent of fiv e equal shares fo r each element. ^ O rdinarily, the peasant supplies the lab o r and is e n title d to a t le a s t o n e -fifth o f the produce. In many cases he also furnishes the d r a f t anim als, and thus r e ceives another f i f t h . The landlord g en erally supplies the land, w ater, and the seed, and th e re fo re receives th re e - f if t h s . However, the system of d iv id in g th e crop v a rie s from region to region. The p a r titio n of th e produce among the fa c to rs concerned v a rie s according to a number of facto rs 34A. K. S. Lambton, landlord and Peasant in P ersia (London: Oxford U niversity Press, 1953), p. 306. 67 involved. Local usage, q u a lity o f the land, type o f crop, methods of c u ltiv a tio n , the la n d lo rd 's bargaining power, and a v a rie ty of o th er s o c io -p o litic a l fa c to rs a l l play 35 th e ir p a rts . Since the share of the c u ltiv a to r in the to ta l product is sm all, he has l i t t l e Incentive to in crease 36 p ro d u ctiv ity or production. "He must maximize th e deple- 37 tlo n r a te ." Since the peasant has no land and has no prospect of owning i t , he is not in te re s te d in th e con serv atio n of the s o il, ro ta tio n of crops, f e r tiliz a tio n , or such ordinary care as weeding th e land. And, on the o th e r hand, the antiquated system of tenure and production enjoys none o f the advantages of larg e scale , consolidated farming. Most o f the land is owned in la rg e holdings. Yet, reg ard less of the s iz e of th e holding, the land is farmed in small s tr ip s , by ancient ^ W ilb er, op. c i t .. pp. 241*243. ^ Jo h n K. G albraith, "Economic Change in Under developed C ountries," Journal of Farm Economics. XXXIII (November, 1951), 691* 37 Baldur H. K ristjanson, "The Agrarian-Based Development o f Iran ," Land Economics. XXXVI (February, 1960), 4. 68 methods, and w ith sim ple, p rim itiv e implements. Thus, w hile the disadvantages of la rg e sc a le , absentee ownership a re ever p resen t, a g ric u ltu ra l production enjoys none of the advantages of la rg e sc a le operation. S trip farming prevents m odernization of a g ric u ltu ra l equipment. P r o f it ab le m echanization o f a g ric u ltu re , although w ithin the fin a n c ia l reach of wealthy lan d lo rd s, cannot be afforded by in d iv id u al peasants. In th e absence of a g ric u ltu ra l co -o p erativ es, o r any such schemes o f co n so lid atio n or co -o rd in atio n , w asteful and in e ffic ie n t production p erpetuates i t s e l f year In and year out. Both to ta l y ield s and output p er man a re held back due to lack of economic in cen tiv es, widespread fe e lin g of in se c u rity , and inadequate f a c i l i t i e s fo r marketing farm 38 products. A griculture is one of the p rin c ip a l sources of the accumulation o f c a p ita l. Much of th is c a p ita l, however, is drained o ff to urban areas where a la rg e p o rtio n of i t goes fo r conspicuous consumption expenditures. Landlords g en erally do not make su b sta n tia l investm ents in land and 38 Report on Seven-Year Development Plan. I, 26. 69 v illa g e improvements. The n atu re o£ the e x istin g land tenure m ilita te s ag a in st investm ent. A United Nations re p o rt condemned th e tenancy system on th re e counts: (1) th e ten an t has l i t t l e in cen tiv e to in crease h is output, sin ce a la rg e share in any such in creases w ill accrue to th e landowner, who has Incurred no p a rt of i t s co sts except the land; (2) the high share of th e produce taken by th e landowner may leave th e peasant a bare su b sisten ce minimum, w ith no margin fo r investm ent; and (3) much w ealth is held in land, and th is form of accumulation o f c a p ita l does n o t lead to productive in v e st- „ 39 ment. VII. SIMIARY Iran should normally be s e lf - s u f f ic ie n t in most foods. Iran has an area of 31,500,000 hectares of poten t i a l l y c u ltiv a b le land. Secondly, because of v a ria tio n s in reg io n al clim ate and s o il co n d itio n s, Iran has an as y et unrealized p o te n tia l to produce exportable surpluses o f a wide range of products. The most serio u s o b stacle to ^ U n ite d N ations, Land (New York: Department of Public A ffa irs, 1951), p. 18. Increased a g ric u ltu ra l p ro d u ctiv ity has been the d isin cen tiv e e ffe c t of a land tenure system ch aracterized by sharecropping and absentee lan d lo rd s. P rim itive methods, outmoded equipment, no n -g en eralizatio n of mechanized farm ing, in s u ffic ie n t u tiliz a tio n of chemical f e r t i l i z e r s , over-grazing o f p astu re lands, d e fo re sta tio n , lack of access to m arkets, and a shortage of c a p ita l have continued to re ta rd the progress of a g ric u ltu re . Furthermore, sc a rc ity of w ater in most p a rts o f Iran due to which out o f six m illio n h ectares of c u ltiv a te d land, only one th ird is irrig a te d , and th e r e s t is fallow . To optim ize a g ric u ltu ra l output an d 'p ro d u ctiv ity in Iran , th e w rite r fe e ls th a t th e follow ing a ctio n s should be taken w ithout any delay: 1. Changes in the present land-tenure system --but not only on paper; th e government should see th a t land reform i s c a rrie d out in p ra c tic e . 2. Training and tech n ical advice on farming and progressive techniques of cropping and husbandry p ra c tic e s should be provided. The w rite r fe e ls i t almost necessary to send abroad fo r tra in in g farmers (from the ru ra l areas) and not c ity dw ellers who are not in te re ste d in farming, 71 b u t are more anxious to obtain a fre e t r i p to Europe or th e United S tates and add to th e ir s o c ia l c la s s . I t is th e w r ite r 's opinion th a t th e re is a g re a t m isallo catlo n of th e precious human resources in Iran . 3. Land reform by i t s e l f cannot be su ccessfu l un le s s adequate amounts of a g ric u ltu ra l c r e d it a t reasonable in te r e s t ra te s a re also provided. 4 . The Iran ian government should seek foreign ex p e rt advice on hydrology to prevent the misuse of w ater. Iran has in s u ffic ie n t w ater of the rig h t kind, a t the rig h t tim es, and p laces. 5. F a c ilitie s fo r sto rin g and processing a g ric u l tu r a l produce should be provided. P riv ate e n te rp rise should be g re a tly encouraged to e sta b lis h th ese types of f a c i l i t i e s in Ira n . The experience of Russia and China has shown th a t as yet S ta te C o llectiv es cannot produce as e f f ic ie n tly as p riv a te firm s. 6 . Due to lack o f easy r u r a l tra n sp o rta tio n and coomunication, most of th e produce cannot be taken to the neighboring towns and c i t i e s . Most of th e produce ^ S e e "Water: Worldwide Use and M isuse,” Time. October 1, 1965, pp. 70-79* 72 is consumed by th e farm ers; the su rp lu s e ith e r r o ts o r is fed to a n im a ls .^ M obility is Impeded by lack o f tra n s p o rta tio n f a c i l i t i e s . A s t a r t should be made w ith cheap o i l su rface roads, to be follow ed, when c a p ita l i s a v a il ab le, by highways and ra ilro a d s . Iran i s a b ig country, w ith an area of 628 thousand square m iles. Obviously i f such a la rg e a rea, w ith p r a c ti c a lly no seaco ast, i s to develop, a network of in te rn a l means of tra n sp o rta tio n i s e s s e n tia l. The w rite r b eliev es stro n g ly th a t th e f a c ilita tio n and use o f these recommendations w ill go a long way toward achieving th e f u l l p o te n tia l and optim izatio n of the a g r i c u ltu ra l se c to r o f the economy of Iran . 41 I t is not an uncommon s ig h t in Ira n ia n ru ra l v i l lages to see horses and donkeys being fed w ith generous portions of apples, grapes, peaches, pears, e tc . CHAPTER IV THE E C O N O M IC STR U C TU R E O F TH E IRANIAN E C O N O M Y : INDUSTRIAL SECTO R While in d u s tria l development is in an e a rly stage and s t i l l sm all in Iran , plans a re being made to in crease i t s importance in the n a tio n 's economy both by modernizing and reorganizing e x istin g fa c to rie s and by broadening th e present range of m anufactures. S im ilarly, mining is s t i l l in i t s infancy but Iran possesses a ric h v a rie ty o f m iner a ls and, given modern equipment and good communications, mining can play an im portant p a rt in developing th e indus t r i a l se c to r of Ira n 's economy.*- I. THE INDUSTRIAL ST R U C T U R E Although Iranian h a n d ic ra ft products such as carpets, te x tile s , s ilv e r o b je cts, tilew o rk , ceram ics, glassw are, *F. C. Mason, Kfnpnpfc and Commercial Conditions in Ira n . Overseas Economic Survey (London: Her M ajesty's S tatio n ery O ffice, 1957), p. 48. 73 74 and masonry have enjoyed an ex cellen t rep u ta tio n £or cen tu rie s , I t was only a t th e beginning of the p resen t century th a t a concerted attem pt was made to in d u s tria liz e Iran on 2 modem lin e s . In d u s tria liz a tio n in Iran , w ith th e exception of the o i l in d u stry , d ates from th e governm ent-initiated programs of development in the middle 1920*8. The attem pt a t in d u s tria liz a tio n was made to achieve a g re a te r degree of economic se lf-s u ffic ie n c y to a lle v ia te the economic c r is is Iran experienced during World War I and the years th a t follow ed. 3 The government's in te r e s t in in d u s tria l development is based both on co n sid eratio n of n a tio n a l se c u rity (pro te c tin g Iran , through g re a te r s e lf-s u ffic ie n c y , ag ain st a c u ttin g -o ff of trad e w ith the o u tsid e world) and on the need fo r ra is in g the value of the co u n try 's output o f goods and se rv ic e s. Iran ian p riv a te and foreign in v esto rs were re lu c ta n t to in v e st in Iran ian in d u s tria l development because of the low buying power of th e population, high 2 In te rn a tio n a l Economic Survey: Iran (New York: Chemical Bank, New York T rust Company, 1964), p. 4. 3 Mason, op. c i t .. p. 6. tra n s p o rta tio n c o s ts , a shortage o£ tra in e d managers and 4 te c h n ic ia n s, and p o litic a l and p hysical in se c u rity . Because o£ the lack o f p riv a te experience and th e lack of p riv a te c a p ita l, th e Shah used th e S ta te as a pioneer and entrep ren eu r to expand th e c o n stru c tio n of r a i l and road tra n sp o rta tio n , and to b u ild in d u s trie s which would brin g revenues to th e S ta te o r elim in ate the need to import goods. The government sought to encourage p riv a te e n te r p ris e , e sp e c ia lly by f a c ilit a tin g im ports o f c a p ita l equip* ment, providing fin a n c ia l a ssista n c e , and introducing a p ro te c tio n is t tra d e p o licy as w ell as en te rin g d ir e c tly in to in d u s tr ia l development on i t s own account. Except fo r mining and re fin in g o f petroleum , th ere is l i t t l e heavy in d u stry in Iran . The more im portant branches o f in d u s tria l production include the manufacture o f c o tto n and woolen te x tile s , flo u r m illin g , sugar r e fin in g , te a processing, f r u i t processing, lig h t engineer ing, and m etal fa b ric a tio n , as w ell as th e production of ^H erbert H. Vr e e l and, Iran (New Haven, Conn.: Human R elations Area F ile s , 1957), p. 204. 5Ibid. 7 6 b u ild in g m a te ria ls, matches, tobacco products, t i r e s , and inner tubes. Other manufactures include e le c tr ic m otors, household and o ffic e fu rn itu re , b asic chem icals, dyes, pharm aceuticals, and p la s tic goods.® I I . G O V E R N M E N T A N D PRIVATE INDUSTRIES Iran ian in d u stry may be divided between th e p etro leum and o th er state-owned in d u strie s on th e one hand, and p riv a te e n te rp rise on th e o th er. The follow ing b r ie f d esc rip tio n of the investment se c to rs is intended to pro vide a p ro file of Persian in d u stry . However, any attem pt to presen t a survey of industry in Iran is complicated by th e existence of c o n flic tin g fig u res and s t a t i s t i c s , a l l released by branches o r agencies of the government. The concept of e d itin g such s ta t i s t i c s is s t i l l to be adopted. In 1961-62 th ere were 8,928 (both government and p riv a te ) in d u s tria l e n te rp rise s in Iran, excluding the petroleum in d u stry . Table IV shows the estim ated number of e n terp rises and number of employees, by industry group. Most o f the in d u strie s r e f le c t the a g ric u ltu ra l ^ In te rn a tio n a l Economic Survey: Iran, p. 6. T A B L E IV ESTIM ATED N U M B E R OF ENTERPRISES A N D N U M B E R OF 1 Averi Number of Number of E m f Industry Group E n terp rises Employees El T ex tile s 389 44,609 Food products 3,356 25,054 Metal products 2,285 13,094 Nonm etallie m ineral products 787 12,224 E le c tric a l power 345 5,501 Beverages and tobacco products 57 4,808 Chemicals and chemical products 119 4,637 P rin tin g and publishing 337 3,137 Wood products 419 2,610 A g ricu ltu ral products 88 2,592 Rubber products 38 2,101 F urniture 222 1,967 Basic m etal products 96 1,650 Leather 25 1,611 Machinery and transform er m anufacturing 98 1,537 M iscellaneous m anufacturing 141 1,144 Paper products 47 830 T ransportation equipment 62 335 M iscellaneous serv ices 12 235 Storage and warehousing 4 220 Water p u rific a tio n 1 35 T otal 8,928 129,931 SOURCE: M inistry of Economic A ffa irs , Summary of Industry and Mines: S t a tis tic a l Y ej 77 TA B LE IV M O ) N U M B E R OF EM PLO YEES, B Y IN D U STRY G ROUP, 1961 Average Number of f Employee* per ■ E n terp rise Leading In d u strie s, by Number of Employees 114 Cotton weaving, cotton spinning 7 Flour m illin g , sugar re fin in g 6 Machine shops, m etal doors and windows 16 Mosaic t i l e , b rick s, cement 16 84 Nonalcoholic beverages, c ig a re tte and cig ar manufacturing 39 Matches, drugs 9 Paper p rin tin g 6 Sawmills, plywood 29 Cotton ginning, raw and coarse s ilk SS T ire s, footwear 9 Hood fu rn itu re , m etal fu rn itu re 17 Foundries, ro llin g m ills 64 Leather 16 Machinery and transform ers 8 Ice , government mint 18 Cardboard, cardboard boxes 5 Bus and truck bodies 20 Rug washing 55 S ilo s 35 15 S t a tis tic a l Yearbook. 1961*62 (Teheran: 19631. Table B. 78 n atu re o£ Iran as the processing of food, fib re s , and hides is most s ig n ific a n t in terms o f employment and value added. As w ith the n atu re of a fre e e n te rp rise economy, these fa c to rie s a re owned and operated by p riv a te in d iv id u als, w ith the exception of 207 fa c to rie s which are government owned. The o f f ic i a l breakdown of the government fa c to rie s , according to the M inistry of Industry and Mines, is shown in Table V. A to t a l of 22,129 persons work in these fa c to rie s . In p ra c tic e , nearly a l l the government-owned fa c to rie s run a t a lo ss (with the exception of the Tobacco Monopoly, which makes huge p r o f its ) . Since 1954, the Flan O rganization has allo c a te d in i t s budget between 80 and 100 m illio n r i a l s a year to meet the lo sses o f some of the government fa c to rie s . The a c tu a l fig u res of lo sses have been released only once in 1952 when the Flan Organiza tio n adm itted a to ta l lo ss of over 133 m illio n r i a l s as follow s: ^ ^Iran Almanac and Book of F acts. 1965 (Teheran: Echo of Iran , 1965), pp. 238-239* 79 TA B LE V G O V E R N M E N T FACTORIES Type of Factory Number o f F actories A g ricu ltu ral Products 24 Foodstuffs 42 T ex tiles 9 W ood 2 P rin tin g and A llied 5 Chemical and Pharmaceutical 4 Non-Metal and M ineral 7 Ice Plants 4 Mint 1 E le c tric ity 108 Water Purifying 1 T otal 207 SO U RCE: Almanac and Book of F acts. 1963 (Teheran: Echo of Iran, 1963), p. 238. 80 * 1. Chemical fa c to rie s R ls. 130,476.26 2. Mechanical and o th ers R ls. 17,266,562.30 3. T ex tile s R ls. 92,963,562.20 While the government-owned fa c to rie s showed such huge lo sse s, private-owned fa c to rie s were making hundreds of m illio n s o f r i a l s p r o f its . The reasons a re many fo ld . This w ill be analyzed and discussed la t e r in th e follow ing c h a p te rs. I I I . TH E PE T R O L E U M IND USTRY O F IRAN Petroleum is I r a n 's most im portant m ineral resource, and has played a leading ro le in the c o u n try 's economic and p o litic a l development over th e l a s t h a lf century. I r a n 's petroleum in d u stry is n early f i f t y years o ld . Iran ranks th ird in production and reserv es in th e Middle E ast. These reserv es are estim ated a t 35 b illio n b a rre ls (7.49 b a rre ls equal 1 long ton) and c o n s titu te about 11 per cent of th e w o rld 's to t a l. Iran is also th e s ix th la rg e s t producer Q of crude petroleum in the world. Major o il f ie ld s are Q The Petroleum Industry o f Ira n . Department of In te r io r , Bureau of Mines, Inform ation C irc u la r 8203 (Wash ington: U.S. Government P rin tin g O ffice, 1963), p. 1. 81 located a t Mas j id - i - Sulaiman, Ka£t Kiel, Gach Saran, N a ft-i- Safid, N aft-i-Shah, Agha J a r i, L ali Ahwaz, and Alborz (Qnm).^ The Importance of the petroleum Industry to Ira n 's domestic economy is w ell known. In 1963 i t accounted fo r about 15.4 per cent of the co u n try 's gross n a tio n a l prod u c t. The industry is the la rg e s t in d u s tria l employer, the la rg e s t source of fo reig n exchange (nearly 85 per c e n t), and is estim ated to co n trib u te 25 per cent to the to ta l government revenue.1® Under the Mining Law, a l l petroleum d ep o sits are the property of th e S ta te . Development of the O il Industry in Iran O il was f i r s t stru ck in commercial q u a n titie s in Iran in 1908 a t M asjid-l-Sulalm an in Khuzlstan, and the o il industry was developed by the A nglo-Iranian O il Company, a B ritis h venture which had obtained a six ty -y e a r concession covering a l l of Iran except the fiv e northern provinces i ® Basic Data on th e Economy of Iran . U.S. Department of Commerce (Washington: U.S. Government P rin tin g O ffice, 1962), p. 6. 10L. Nahai and C. L. Kimbell, The Petroleum Industry of Ira n . U.S. Department of th e In te rio r, Bureau of Mines, Inform ation C ircu lar 8203 (Washington: U.S. Government P rin tin g O ffice, 1963), p. 1. 82 bordering the Soviet Union and th e Caspian Sea. 11 The re fin e ry which began a t Abadan in 1909 was th e f i r s t in the Middle E ast. 12 In 1914 the B ritis h Government acquired 51 per cen t ownership of th is company. Production rose from 40,000 long tons in 1912 to 31,750,000 long tons in 1950, and an immense re fin e ry was b u ilt in Abadan. Throughout th is period Iran was the leading o il producer in th e Middle E ast. Iran ranks s ix th in petroleum production a f te r the i United S ta te s, the Soviet Union, Venezuela, Kuwait, and Saudi Arabia. N atio n alizatio n of the O il Industry The Iranian Government in 1951 n atio n alized th e o il industry and placed i t in the hands of the N ational Iranian O il Company. The l a t t e r company, however, did not have the tech n ical know-how, shipping, or m arketing f a c i l it ie s needed to su sta in production, and during the next th ree ^Hiason, on. c i t . , pp. 79-80. 12 Labor Law and P rice in Iran. United S tates Depart ment of Labor, Bureau of Labor S ta tis tic s , Report No. 276 (Washington: U.S. Government P rin tin g O ffice, May, 1964), p. 7. years Iran was brought to the brin k of economic d is a s te r. F in a lly in October 1954, th e Iran ian government—the N ational Iran ian O il Company—made an agreement w ltlT Ir' group of in te rn a tio n a l o il companies—American, B ritish , Dutch, and French companies known as the Consortium --for operation of th e e x istin g o il fie ld s and Abadan re fin e ry . The companies represented in th e Consortium are shown in Table VI. Subsequently (A pril 29, 1955), one-eighth (5 per cent of 40 per cen t) of th e shares held by each of the o rig in a l fiv e United S tates firm s were divided among the follow ing nine United S tates firm s: American Independent O il Company A tla n tic Refining Company Hancock O il Company (now merged w ith Signal O il and Gas Company) P acific Western O il Corporation (now G etty O il Company) R ich field O il Corporation San Ja c in to Petroleum Corporation Signal O il and Gas Company Standard O il Company (Ohio) Tidewater A ssociation O il Company (now Tidewater O il Company) 84 TABLE VI C O M PA N IES R EPRESEN TED IN C O N SO R T IU M Company Per cent of Shares B ritis h Petroleum Company, Ltd. 40 Gulf O il Corporation 8 Socony Mobil O il Company, Inc. 8 Standard O il Company (New Jersey) 8 Standard O il Company of C alifo rn ia 8 Texaco, Inc. 8 Compagnie Franpaise des P etroles 6 Royal D utch-Shell group 14 SO U RCE: L. Nahai and C. L. Kimbell, Thy Pgfynl A .im Industry of Iran . United S tates Department o£ the In te rio r, Bureau of Mines, Inform ation C irc u lar 8203 (Washington: U.S. Government P rin tin g O ffice, 1963), pp. 3-6. 85 Under the 1954 Agreement, the government of Iran made an arrangement w ith the Consortium fo r th e e s ta b lis h ment of two operating companies fo r explo ratio n and produc tio n of o i l and fo r re fin in g w ith in a 100,000 square m ile "Agreement Area” In Southern Iran fo r a maximum period of fo rty y ears. The Consortium companies have formed two "operating com panies"--the Iran ian O il Exploration and Producing Company and the Iran ian Oil R efining Company. The Consortium owns no o i l but merely acts as a leg al agent h ired by the Iran ian Government through the wholly government-owned N ational Iranian O il Com pany (NIOC). NIOC pays the O perating Companies a fee fo r th e ir work, keeps enough o il fo r Ira n 's domestic use, and s e lls the r e s t to Consortium members. 3 Another way undertaken by Iran to Increase I t s o il revenue is e x p lo ita tio n of i t s o i l resources o u tsid e the agreement area, e ith e r through i t s own f a c i l i t i e s o r through leasin g arrangements w ith o th er foreign companies. Production of Crude O il and N atural Gas Iran produced over 73,000 m etric tons of crude o il in 1963; Iran ranks six th among world producers. Cumula tiv e production has exceeded fiv e b illio n b a rre ls since 13Ibid.. p. 8. 86 1908 when the discovery w ell a t Masj id-i-Sulaim an was 14 brought In. Iranian output In 1963 was almost £lve times as la rg e as th a t fo r 1955, the f i r s t f u l l year of oper atio n s of the Consortium In the agreement area* Annual production trends since 1948 are presented In Table V II. A ll n a tu ra l gas produced In Iran In recent years has been a by-product of crude o il production, except fo r gas from Mas j id-l-Sulaim an f ie ld th a t Is also obtained from the gas cap. Pazanum, esp e c ia lly a gas f ie ld , has been shut In since the early 1 9 4 0 's.1 ’ '’ N atural gas production In Iran during 1956 to 1963 Is given in Table V III. Although by 1962 consumption of n a tu ra l gas (as a fu e l) in Iran had increased almost 140 per cent over the le v e l atta in e d in 1956, a very la rg e share of to ta l n a tu ra l gas output Is s t i l l not u tiliz e d . In 1962, fo r example, only about 11.5 per cent o f the to ta l gas production was u tiliz e d as a fu e l, th is almost exclusively by the p e tro leum in d u stry . Another 21.6 per cent was fla re d a f te r being u tiliz e d expansively fo r d riv in g tu rb in es. About 14 Nahai and Kimbell, op. c i t .. p. 52. 15Ib id . . p. 55. 87 TA B LE VII A N N U A L PR O D U C TIO N T R E N D S SINCE 1948 Year Thousand M etric Tons 1948 25,270 1955 16,356 1956 26,598 1957 36,020 1958 40,903 1959 56,193 1960 52,392 1961 58,982 1962 65,338 1963 73,029 SO U RCE: United Nations S ta tis tic a l Yearbook. 1964 (New York: Department of Economics and S ocial A ffa irs, 1965), p. 184. 88 TABLE V III N A T U R A L G A S PR O D U C TIO N IN IR A N D U R IN G 1956-1963 Year N atural Gas Production (m illions o f cubic m eters) 1956 440 1957 724 1958 744 1959 908 1960 950 1961 983 1962 1,052 1963 1,139 SO U RCE: United Nations S ta tis tic a l Yearbook. 1964 (New York: Department of Economics and S ocial A ffa irs, 1965), p. 183. 66.9 per cen t was fla re d w ithout being put to any use. The Consortium uses gas p rin c ip a lly as fu e l fo r ra is in g steam fo r the power p lan t and re fin e ry a t Abadan. Lesser q u a n titie s are consumed in forges, foundry shops, and as household fu e ls in the workers* homes a t Abadan and in the 16 f ie ld s . In the follow ing chapter the p o s s ib ility of increasing consumption of n a tu ra l gas in Iran , both as household and Indus t r i a l fu e ls , w ill be discussed. The Role of Petroleum in the N ational Economy: Monetary Income For n early th ir ty years a f te r o il production s ta rte d in Iran, revenues from the industry were not an im portant fa c to r in th e o v e r-a ll economy of the country. During 1910-1932, Ira n 's re c e ip ts from the petroleum industry averaged about L 543,000 annually. Beginning in 1933 re c e ip ts increased, but much of the o il revenue was p re scribed fo r sp ecia l purposes th a t had l i t t l e e ffe c t on the general n atio n al economy. S ta rtin g in the early 1940*s petroleum income was used more fo r meeting general budget ary expenditures, and th is s itu a tio n prevailed u n til 90 n a tio n a liz a tio n of th e industry in 1951. During the period of n a tio n a liz a tio n (August 1951 to September 1954), the Income from the fo reig n sa le s was n e g lig ib le . The Iranian government was unable to fin d e ith e r foreign markets or tanker f a c i l i t i e s and was forced to c u r ta il production to about the le v e l of domestic con sumption. This was of course a sm all percentage of 18 capacity output. With the resumption of o il production in s ig n ific a n t q u a n titie s in 1954, o il revenues have become v ita lly impor ta n t in Ira n 's economy, and w ill continue to remain so in the foreseeable fu tu re . I ra n 's expanded economy, higher standard of liv in g , and ris in g in d u s tria liz a tio n neces s ita t e development expenditures th a t can be financed p rin - 19 c ip a lly , perhaps so le ly , through o il revenues. Table IX shows the amount of Ira n 's o i l revenue, i t s re la tio n sh ip to Ira n 's gross n a tio n a l product, to ta l foreign exchange earnings, and government expenditures. The o il industry brings both " d ire c t so c ia l income" 17Ib id . . p. 15 18Ib id . 91 TABLE IX TH E IM PO R TA N C E A N D SIGNIFICANCE O F OIL R E V E N U E WITHIN THE INDUSTRIAL SECTOR OF TH E E C O N O M Y A N D FOR THE E C O N O M Y AS A W H O L E 1960 1961 1962 R eceipt o f o i l revenue (In m illio n U.S. d o lla rs ) 370.8 395.6 429.5 As a percentage o f G N P 9.9% 8.7% - * As a percentage o f to ta l fo reig n exchange earnings 48.6% 45.0% - * As a percentage o f estim ated government expenditures 40.0% 39.0% 44.0% SO URCE: L. Nahai and C. L. Kimball, The Petroleum Industry o f Iran . United S ta te s Department o£ the I n te rio r, Bureau of Mines, Inform ation C irc u la r 8203 (Washington: U.S. Government P rin tin g O ffice, 1963), p. 15. *Data not a v a ila b le 92 and "In d ire c t b e n e fits" to Iran . In te rn s o f " d ire c t so c ia l income" is meant the in d u stry 's co n trib u tio n to GNP. By " in d ire c t b e n e fits" is meant a r is e in th e p ro fits of other in d u strie s th a t may e ith e r lower the input c o sts of those in d u strie s o r ra is e th e s a le s p ric e of th e ir output, or the b e n e fits gained by so ciety as a whole, such as c re a tio n of new demands, knowledge, s k ills , and in v en tiv e ness. In ad d itio n to the above, Iran b e n e fits from the o il industry in a number of o th er ways. The o il ind u stry is the la rg e s t in d u s tria l employer in Iran , employing nearly o n e-th ird of th e in d u s tria l labor fo rce. Almost 60,000 employees of the industry and th e ir dependents, 'to ta lin g perhaps one-quarter m illio n people, enjoy housing, medical serv ices, public u t i l i t i e s , schooling fo r th e ir ch ild ren , and o th er am enities th a t a re su p erio r to those offered by other in d u strie s. Other M ineral Resources of Iran The co u n try 's other m ineral resources have not been adequately surveyed as yet but i t is known th a t th e re are d ep o sits of a wide v a rie ty of m inerals. These resources a re co al, manganese, iro n , lead, zinc, chrome, n ick el, 93 antimony ore, e tc . Table X shows production of these m ineral resources from 1948 to 1963. There Is no system atic mining In Iran . According to the M inistry of Economy, these resources give Iran the p o te n tia l to become an Im portant In d u s tria l country, but to d ate th is optimism remains u n tested . No comprehensive m ineral survey has ever been undertaken, and most e x istin g 20 mines are sp o rad ically and In e ffic ie n tly operated. IV. H A N D IC R A FT A N D C O T T A G E INDUSTRIES In s p ite of the progress which In d u stries have made in Iran during the la s t th ir ty years, h an d icraft and c o t tage in d u strie s have not been displaced as the p rin c ip a l source of employment and output in the Iran ian economy. Iran was the home of co ttag e in d u strie s before th e advent of the In d u stria l Revolution In th e Western World. Iran used to export carp ets and rugs, woolen fa b ric s and s ilk , m etal wares, and em broideries as fa r as China. The carp et industry and enamelling work in gold, s ilv e r , and copper 20 Richard E. Benedick, In d u s tria l Finance in Iran (Cambridge, M ass.: Graduate School of Business Administra tio n , Harvard U niversity, 1964), p. 10. T A B L E X MINING, Q U A R R Y IN G IN IRAN* (Thousand M etric Tons) 1948 1955 1956 1957 1958 1959 1960 1961 1962 1963 Coal 150 245 190 176 194 237 230 198 160 mm m Manganese — 1.5 1.8 0.6 0.2 0 .7 2.3 0 .6 0.6 0 .3 Iro n Ore — 14 6 11 149 58 58 42 29 Lead Ore — 18.0 17.0 17.0 17.0 15.0 15.0 15.0 10.0 10.0 Zinc Ore m m 5.7 4.7 4.5 9.0 6.8 8.5 13.5 7.5 7.5 Chrome Ore — 15.5 18.9 16.8 20.8 28.3 29.0 31.7 44.7 — N ickel Ore — 12 16 15 15 — — — — — Antimony Ore 57 40 100 150 150 50 — — SOURCE: U nited N ations S t a t i s t i c a l Yearbook. 1964 (New York: Department o f Economics and S o cial A ffa irs , 1965), pp. 180-197. \D .p * 95 have been the p rid e o£ th e n a tio n . With th e advent o f th e In d u s tria l Revolution in the innovation and in tro d u ctio n o f modem technology and cheap machine ■'made goods, h a n d ic ra ft and c o tta g e in d u strie s have begun to decay. I t is now evident th a t th e r e la tiv e share of GNP produced by the h a n d ic ra fts and co ttag e in d u strie s has been s te a d ily d e c lin in g . In s p ite of th is , many of the " p re -In d u s tria l Revolution" lin e s of Iran ian products have survived th e com petition o f low c o st machine-made a r ti c le s . The ru ra l c r a f ts are an In te g ra l p a rt o f the s e lf - s u ffic ie n t r u r a l economy. They produce to meet lo c a l consumer demand. The v illa g e g en erally produces i t s own e s s e n tia l needs. More than a m illio n persons a re estim ated 21 to be employed in c o ttag e in d u s trie s . Among th e most im portant h a n d ic ra fts of Iran a re s ilv e r , gold, b ra ss, and enamel products, s ilk brocades, embroidered fa b ric s , mosaic t i l e s , wood carving, m iniature p ain tin g , and block p rin ted c h in tz . The la rg e s t and most lu c ra tiv e c o ttag e in d u stry of Iran is carp et weaving. 21 In te rn a tio n a l Economic Survey: Iran, p. 3 96 A ll carp ets are woven by hand. The preparation o£ ma te r ia ls , the techniques o£ weaving, and the choice of p attern s and colors follow the e a r lie r tra d itio n s . The Persians cherish these rugs as th e ir most prized posses sio n s. Most of the rug weaving is done in so -called fa c to rie s . A facto ry may be only a la rg e house in which two or more looms have been in s ta lle d , fo r th ere are com p a rativ ely few stru c tu re s which have been sp e c ia lly b u ilt to house looms. The number of weavers employed re g u la rly in the industry is about 30,000, and i t is estim ated th a t the number of people employed p art-tim e in the industry is around 100, 000. ^ V. INDUSTRIAL PRODUCTIVITY The le v el of in d u s tria l p ro d u ctiv ity in Iran is low by almost any standard. P roductivity is low per man, per machine, and per operation p la n t. Low production per in d u s tr ia l worker is la rg e ly the r e s u lt of an unnecessarily larg e number of workers employed in each p la n t. This is p a rtic u la rly tru e of government in d u s trie s . Government 22 Donald N. W ilber, Iran: Past and Present (P rince ton, New Jersey: Princeton U niversity Press, 1963), p. 254. fa c to rie s are always running a t a lo ss, because they are not operated on a commercial basis* Excess employment in both p riv a te and government e n te rp rise s is also due to lack of proper c o st accounting, preventing p riv a te entrepreneurs as w ell as government managers from determ ining labor 23 e ffic ie n c y . In p riv a te fa c to rie s the low le v e l of output per machine is the lack of co n sid eratio n about the capacity of the p lan t and the requirem ent of the country; lack of purchasing power of the people; in fe rio r q u a lity of the products; high c o st of lo c a l products as compared to lower p rices of foreign goods of sim ila r q u a lity ; excessive bureaucracy; obsolete and worn out p lan ts and poor manage ment. Operating methods a re o ften cumbersome and in e f f i c ie n t. Most of the p ro fits are often paid out as dividends; the working c a p ita l is perm itted to d e te rio ra te . Charges fo r d ep reciatio n a re v ir tu a lly unknown, and accurate 24 accounting and s t a t i s t i c a l inform ation a re lacking. The Iran ian fa c to rie s cannot en ter in to the export 23 Iran Almanac and Book of F acts. 1963 (Teheran: Echo of Iran, 1963), p. 236. 24Ibid. 98 markets or compete w ith other fo reig n goods even in the neighboring c o u n trie s. The c o st of Iran ian manufacture is higher because a portion of raw m a terial is imported from o u tsid e and th is bears a payment of heavy customs duty and commercial p r o f it tax . Labor expenditure is enormous and the le v e l of technology and automation is low in th e sense th a t i f a facto ry o u tsid e Iran manufactures 12,000 yards of c lo th w ith 20 workers working on i t , a sim ila r facto ry needs 200 workers in Iran . Low wages paid to Iranian 25 workers r e s u lt in low-output by them. VI. M O N E Y A N D B A N K IN G This sectio n discusses fin a n c ia l s tru c tu re and work ing c a p ita l p o lic ie s , competing o u tle ts fo r in v estab le funds, some domestic in v esto r preferences, and c a p ita l market co n sid eratio n s. U ntil a few years ago, Iran never had a c e n tra l bank. For many years the Bank M elli Iran, the co u n try 's la rg e s t commercial bank, was the so le issu e r of currency and performed the functions of a c e n tra l bank. 25„ , Ibid. In 1960 the Bank M elli Iran was reorganized in to two banks: th e Bank M elli Iran which is the N ational Bank of Iran , and the Bank Markezi Iran which is the C entral Bank o f Iran . The Bank M elli now performs i t s commercial fu n ctio n s, and i t s other functions were tra n sfe rre d to the Bank Markezi. The Bank Markezi, in ad d itio n to issu in g currency and c o n tro llin g foreign exchange, reg u la tes the o peration of the commercial banks and in general performs 26 a l l the usual functions of a c e n tra l bank. Money lending in Iran is of two types: organized and unorganized. The unorganized se c to r c o n sists p rim arily of th e a c tiv itie s o f p ro fessio n al money-lenders, who fu rn ish most of th e a g ric u ltu ra l c re d it. Charging ex o rb itan t ra te s of in te r e s t and obtaining promissory notes fo r amounts higher than a c tu a lly given are among the p ra c tic e s preva le n t. The organized se c to r c o n sists of Bank M elli, Bank Markezi, Commercial, and o th er sp ecia lize d fin a n c ia l i n s t i tu tio n s . They receive dep o sits from th e public and grant loans and advances. There are tw enty-eight such banks in 26Ib id .. p. 358. 27Ibid. Government-Owned Banks 1. The C entral Bank 2. Sepah 3. M elli Iran 4 ^ A g ricu ltu ral C redit and Rural Development 5. Mortgage 6. C onstruction and Rural Cooperation 7. In d u stria l C redits 8. Workers* Welfare Privately-Owned Commercial Banks 9. Bazorgani 10. Exports and Mining Bank 11. Bimeh Bazorgani 12. Pars 13. Asnaf 14. E tteb arat (C redit Bank o f Iran) 15. Kar (Labor Bank) 16. Bimeh Iran 17. Iran o -B ritish 18. Iran and Middle East 19* Foreign Trade Bank 20. Iran and Holland 1 0 1 21. Iran va Charb 22. In te rn a tio n a l Bank of Iran and Japan 23. In d u stria l and Mining Development Bank of Iran 24. Iranian Bank 25. Bank T ejarata K hareti Iran (The Foreign Trade Bank of Iran ) 26. Bank E tebarat Sanati (The In d u s tria l C redit Bank) 27. Bank Sakhtemani (The C onstruction Bank) 28. Bank Roos va Iran (Irano-R usslan Bank) In 1953 th ere were only seven banks In Iran . But banking f a c i l i t i e s have developed rap id ly over th e p ast few years. By March 1963, th e re were tw enty-eight banks w ith 1,064 branches, agencies, and sub-agencies and w ith to ta l a sse ts of $1,699 m illio n . Among th e new banks estab lish ed during th is period were a number of government in s titu tio n s sp e c ia liz in g in loans to a g ric u ltu re , industry, mining, 28 co n stru ctio n , e tc . The banking system has become a potent force in m arshaling savings and channeling them in to productive in vestm ent; but, n ev erth eless, a la rg e portion of the popula tio n is s t i l l not w ithin easy reach of banking f a c i l i t i e s . 28 In tern atio n al Economic Survey: Iran , p. 8. 102 Banking In Iran is s t i l l in an early stag e o f development. Checks a re seldom used, and savings are g en erally invested in r e a l e s ta te or loaned out In th e bazaar ra th e r than deposited w ith the banks. V II. TRA N SPO RTA TIO N A N D C O M M U N IC A T IO N Ira n 's e x istin g tra n sp o rta tio n and communication f a c i l i t i e s a re inadequate and are a g re a t o b stacle to eco nomic development. This problem p resen ts th e urgent need fo r an economical means of tra n sp o rta tio n of goods and passengers. Among th e major d if f ic u ltie s is the unfavor able physical s tru c tu re of the country. The population of Iran is widely dispersed over considerable d istan ces by n a tu ra l b a rrie rs . Rugged mountain ranges and v a st c e n tra l d e se rts a re among n a tu ra l impediments. R ailroads The ra ilro a d system, which in 1925 co n sisted of sev eral widely separated sectio n s w ith a to ta l length of le ss than 165 m iles, to some ex ten t has been in teg rated and expanded to more than 2,300 m iles, and now lin k s some of the major c i t ie s . The major lin e runs from the Persian Gulf to the Caspian Sea. There are also lin e s from Teheran 103 570 m iles eastward to Meshhad and 390 m iles westward to T abriz. Some of the shortcomings o f the present ra ilro a d system a re in e ffic ie n c y in operation, lack of c o rre la tio n between the physical f a c i l i t i e s and the volume of tr a f f ic , inadequate locomotive power, and poor maintenance. Roads An area of 629,000 square m iles \Jm crossed by le ss than 15,000 m iles of roads, including caravan t r a i l s . Only 10 per cent a re hard-surfaced, and the dust roads, o ften l i t t l e more than trac k s, a re of washboard q u a lity and plagued by maintenance problems. The volune of comnerce handled by truck tr a f f ic is considerable. In contravention o f reg u la tio n s, the trucks are g en erally overloaded w ith towering p ile s of goods, augmenting road maintenance prob lems. A not infrequent sig h t near a sharp curve is an overturned truck, surrounded by s p ille d sacks of charcoal, bales o f co tto n , boxes of melons, and a d riv e r engaged in 29 heated debate w ith h is a s s is ta n ts . 29 B enedick, on . c i t . . p . 11. 104 P orts and A irports Abadan is the p rin c ip a l p o rt £or the export of petroleum products. The p rin c ip a l p o rts fo r petroleum tra d e are Khorramshahr, Bandar Shahpur, Bushire, and Bandar Abbas on the Persian Gulf and Bandar Pahlavi on the Caspian Sea. During th e Second World War, the A llied forces used the Persian Gulf ports to supply Russia w ith ammunition. The f a c i l i t i e s o f th ese p o rts were expanded, the harbor 30 dredged, and the ra ilro a d extended to the p o rt. In the postwar period, the g re a t bulk of Ira n 's exports and Im p o rts has moved through Khorramshahr and Bandar Shahpur. Most of Ira n 's fo reig n tra d e is c a rrie d in foreign sh ip s. The Iran ian shipping Lines Company, a p riv a te ly owned concern, operates only about h a lf a dozen v essels involved in fo reig n tra d e . Iran ian a v ia tio n is not yet an im portant means of tra n sp o rta tio n . However, economic in te g ra tio n of the country w ill req u ire more a i r lin k s among various regions. A ir serv ices between the towns a re operated by the Iranian 30 R. B ullard, The Middle East. P o litic a l and Eco nomic Survey (3rd e d itio n ; London: Royal I n s titu te of In te rn a tio n a l A ffa irs, Oxford U niversity, 1958), p. 401. 105 Airways. Some a ir lin e s run serv ices to Teheran. Among fo reig n e n te rp rise s a re Pan American World A irlin e s , Middle East Royal Dutch, I ta lia n , French, and Scandinavian A irlin e s . Communications I t is im portant, of course, th a t n o t only tra n sp o rt but a lso communication f a c i l i t i e s expand w ith a growing economy. The communication serv ices in Iran c o n sist of lo c a l and long d ista n c e telephone systems, short-wave ra d io communication f a c i l i t i e s , and some in te rn a tio n a l s h o rt wave broadcasting. The major lo c a l telephone systems and some long d ista n c e p la n ts a re operated by th e government. V irtu a lly a l l rad io -teleg rap h and telephone se rv ic e con nections w ith fo reig n co u n tries a re operated by th e M inistry of P orts, Telegraph, and Telephone. In g en eral, a l l communication f a c i l i t i e s a re inade quate fo r presen t needs because o f poor maintenance, in s u ffic ie n t cap acity , or ob so lete design. There are unnecessary d u p licatio n s of telephone and teleg rap h lin es by se v e ra l o p eratin g agencies. Improvements in tra n sp o rta tio n means reduction in tra n sp o rta tio n co sts to shippers and g re a te r speed 106 in d e liv e ry . From the h is to r ic a l standpoint, reductions in tra n sp o rt c o sts have been sig n a lly Im portant in advanced economies. In Iran , th e in d iv is ib ilitie s of many manu fa c tu rin g processes and the sm all siz e of the market c o n s titu te major o b stacles to in d u s tria liz a tio n . These lim ita tio n s are asso ciated w ith low p e r-c a p ita income and d is c o n tin u itie s caused by n a tio n al b a rrie rs , poor tra n s p o rta tio n , and d is trib u tio n and communication f a c i l i t i e s . Thus, even i f th e size of the n a tio n a l market is s u ffic ie n t to absorb the product of manufacturing p la n ts, th e d i s c o n tin u itie s in th e market c re a te b ottlenecks, discouraging as uneconomical the establishm ent of new p la n ts. The d iv i- 31 sion of labor is lim ited by th e ex ten t of the market. Although th is i s tru e of any form of d iv isio n of lab o r, i t is e sp e c ia lly tru e of geographical d iv isio n o f labor. This re la tio n sh ip is illu s tr a te d by early ra ilro a d h isto ry in the United S ta te s. The existence of railw ays in providing cheap tra n sp o rta tio n made the early s p e c ia liz a tio n of a g r i c u ltu ra l products in th e West, of co tto n in th e South, and 31 Adam Smith, Wealth of Nations (New York: The Modem Library, 1937), Book I, Chap. I I I . Also, see A. 0. Hirschman, The S trategy of Economic Development (New Haven: Yale U niversity Press, 1958), p. 140. 107 manufactured goods In New England more economical. In Iran , m obility is impeded by lack o f tra n sp o rta tio n f a c i l i t i e s . I t is c le a r, however, th a t once the d isc o n tin u ity in th e n a tio n a l market is e ith e r elim inated or decreased through Improvement in tra n sp o rta tio n , com m unication, and d is trib u tio n , investm ent in many la rg e - sc a le p lan ts would become fe a s ib le . The p o te n tia l cap acity of many e x istin g p lan ts would be u tiliz e d . Small p lan ts would be able to expand. A ll of th is would enable such p la n ts to enjoy both sh o rt-ru n and long-run in te rn a l econo mies. V III. S U fctiA R Y There is no fundamental c a p ita l shortage in Iran in re la tio n to o p p o rtu n ities fo r sound investm ent. Any appar ent deficien cy is trac eab le to p rev ailin g a ttitu d e s toward consumption, speculation, and planning, and a general atmosphere of d is tr u s t and fa ta lism rein fo rced by c a p ri- 32 cious actio n s of public o f f ic ia ls . A ll incen tiv es and aid s to increasing in d u s tria l 32 B enedick , o p. c i t .. pp. 2 3 5 -2 3 6 . 108 p ro fits w ill be In vain I f s o c ia l customs continue to d is courage reinvestm ent of such earnings, but ra th e r fo s te rs 33 th e ir expenditure on luxuries and re a l e s ta te . Luxury im ports are a s ig n ific a n t element in the fo reig n exchange outflow . Imports o f pleasure v eh icles alone amounted to over $45 m illio n in 1959-60, w hile more fo reig n exchange was spent on s ilk s and ta ilo re d clo th in g than on e le c tr ic a l machinery, more on jew elry than a g ric u ltu ra l equipment, and 34 n early as much on perfumes as f e r t i l i z e r . The w rite r fe e ls th a t in th is area th e two elements of education and government a re v i t a l fo r any progress. The Iran ian people must le a rn to communicate w ith the o u t sid e world and one another so th a t they can le a rn what has been done and what can be done. They must see th a t th ere are governments th a t are s ta b le and not oppressive and th a t i f they can make th e ir government the same, th e people can secure th e advantages of the co u n tries w ith such govern ments. 33Ib id ., p. 236. 34 M inistry of Customs and Monopolies, S ta tis tic a l Yearbook fo r 1338 (Teheran: 1959-60). 109 Although improvements in a g ric u ltu ra l p ro d u ctiv ity g en erally c o n s titu te th e f i r s t p rio r ity in e ffo rts o f an underdeveloped country to achieve higher le v e ls of n a tio n a l income, a t some stag e in development th e stim u latio n of in d u s tria l c a p ita l form ation and expansion of m anufacturing become c ru c ia l to continuance of balanced growth. W ithin th e in d u s tria l se c to r, p riv a te c a p ita l and entrepreneurship have a p a rtic u la rly c ru c ia l ro le , due to the economic b e n e fits o f fre e market incen tiv es and decen tra liz e d decisio n making responsive to consumer demands and fa c to r c o sts. In Iran i t would be m isleading to d ep ict industry supplanting a g ric u ltu re as the co u n try 's primary economic a c tiv ity . Rather, i t has a d e fin ite ro le as an Important complement, meeting many consumer demands and thereby re lie v in g fo reig n exchange p ressu res; supplying implements fo r modern farm technology; processing and packaging in creased food output; and providing productive employment fo r growing urban masses and workers freed from the land by labor saving devices. Development planners—both p riv ate and governmental--must ex ert f u ll and earn est e ffo rts to f a c i l i t a t e the tra n s itio n from a few bazaar-dominated 110 fa c to rie s and in e ffic ie n t s ta te p la n ts to a ra tio n a l, progressive in d u s tria l se c to r. I t has been pointed o u t in th is chapter th a t Ira n 's n a tu ra l resources presen t no handicap to in d u s tria liz a tio n . I t was pointed out th a t the country has coal, manganese, iro n , lead, zinc, chrome, n ic k e l, antimony, and other m inerals in addition to it s petroleum and n a tu ra l gas. In ad d itio n th e p o te n tia l for a sound a g ric u ltu ra l base is th e re . With the revenue from o il a v a ila b le th e re is no reason why an educated Iran w ith honest, enlightened, and e ffic ie n t c iv il servants could not soon take i t s place among the in d u s tria l n atio n s. 35 Benedick, o p . c i t .. p . 235. CHAPTER V TH E E C O N O M IC STR U C TU R E O F THE IRANIAN E C O N O M Y : G O V E R N M E N T SECTO R The h is to ry of Iran goes back, l i t e r a l l y , thousands of y ears. The Persians had a c e n tra l government which goes back to Cyrus th e Great more than fiv e cen tu ries before C h rist. At i t s zen ith , the Persian Empire extended from the Indus to the N ile. Iran served as a ce n te r of tra d e between the East and th e West. Although th e re has been no c o n tin u ity in race, area, or government, from ancient times to the p resen t, Iran ian s, possibly due to th is h e rita g e , a re perhaps more amenable to the concept of a strong cen t r a l government than o th er Middle Eastern peoples. I. STR U C TU R E O F THE G O V E R N M E N T SECTO R Form of Government Iran has been a c o n s titu tio n a l monarchy since 1906, w ith th e Shah as h ered itary monarch. Under th e Iran ian 111 C onstitution, executive power Is vested in the cabinet of M inisters headed by the Prime M inister, who is appointed by the Shah and Is responsible to the Parliam ent. L egisla tiv e power re s ts w ith the Parliam ent, which co n sists of a lower house, the M ajlis (National Assembly), with two hundred popularly elected members, and an upper house, the Senate, with six ty members, h a lf of whom are appointed by the Shah. A ctually, the Shah has very wide powers. He commands the armed forces, declares war and concludes peace, may name and dism iss the Prime M inister and cabinet o ffic e rs , and has the power to d isso lv e the Parliam ent. He exercised the l a t t e r rig h t in May 1961, and fo r the f o l lowing tw enty-eight months Premiers A ll Amin and Assadallah Alam ruled by decree* A new Parliament was elected in September 1963. Functions of Government Although Iran is a country with a very ancient c iv iliz a tio n and a long estab lish ed p o litic a l system, the growing importance of the ro le played by the s ta te became apparent only in com paratively recent years. I t began in the early 1920's when Reza Khan in the course of a few yearB climbed up from a post as Cossack so ld ie r to the 113 Peacock Throne of P e rsia .^ P rio r to Reza Shah th e government's economic ro le had been p rim arily concerned w ith providing the necessary atmosphere fo r''th e economic development of the country. P riv ate e n te rp rise s were encouraged to e s ta b lis h new indus tr i e s . However, th ere was n o t adequate response due to in su fficien cy of p riv a te c a p ita l and lack of experienced entrepreneurs. In ad d itio n , the world-wide depression of the 1930's h it th e Iran ian economy hard. As a consequence i t became necessary fo r the Iran ian government to p a r tic i- pate d ire c tly in th e development of the country. When Reza Khan (Reza Shah) opened the f i r s t session of th e Eighth Parliam ent in December 1930, he sa id : "W e wish th is Parliam ent to be known in th e h isto ry of the country as the 'economic parliam ent.*" From th a t time on every e f f o r t was made to make Iran as s e lf - s u f f ic ie n t as p o ssib le, and th e government began th e ta sk of assuming ^Joseph H. Upton, The H istory of Modem Iran : An In te rp re ta tio n (Cambridge ,M M ass.: Harvard U niversity Press, 1960), Chap. 1. * — i J H. Cook, Challenge and Response in Middle E ast: The Quest fo r P ro sp erity . 1919-1951 (New York: Harper B ros., 1952), pp. 238-308. 114 3 the ro le o£ the "economic o rg a n iz e r." The economic pro je c ts adopted during th is period emphasized p rim arily the development o f in d u stry , tra n sp o rta tio n , and fin a n c ia l in s titu tio n s . ^ The tra n s -Ira n ia n Railway was b u ilt, sugar m ills were co n stru cted , co tto n and wool spinning and weaving p la n ts were in s ta lle d , a cement fa c to ry was e sta b lish e d , and numerous o th e r processing p la n ts were s e t up. ^ I t would be wrong to tr e a t th e p ro je c ts undertaken as p a rt of any in te g ra te d , d e lib e ra te scheme of government planning. Each departm ent of th e government prepared i t s own development p ro je c ts and implemented them. There was no co o rd in atin g body which would be synonymous w ith e ith e r th e "M inistry of Production" o f Barone, ^ o r th e "Supreme Economic Council" o f D ickinson.^ 3 Donald W ilber, Ira n . P ast and P resent (P rinceton, New Je rse y : P rinceton U n iv ersity P ress, 1963), p. 246. 4 Cook, op. c i t .. pp. 238-308. ^Donald W ilber, Ira n —O asis in S ta b ility in th e Middle East (New York: Foreign Policy A ssociation, 1959), No. 137, p. 26. ^Enrico Barone, Grundzugeder Theoretischen Nationalokonomie (B erlin : Dummlers, 1935). ^H. D. Dickinson, Economics o f Socialism (London: Oxford U n iv ersity P ress, 1939), p. 30. 115 A c h a ra c te ris tic fe a tu re o f th is period was th a t a l l th e development programs were financed exclusively from domestic resources. No foreign c a p ita l p a rtic ip a te d , nor was a la rg e in te rn a l public debt created . Financing was made p o ssib le through sp e c ia l taxes on items o f popular consumption such as te a and sugar. This was not u n lik e, but not n early as extensive as, the Japanese plan subse quent to 1868. The Japanese encouraged farm ers to g re a te r production and then taxed them heav ily to finance ra ilro a d s and o th er Ind u stry . In Iran "Public Finance" was a cash operation analogous to th a t of any s tr e e t peddler, expend!- o tu re s on development being decided on an ad hoc b a s is . "The s te m d ire c tio n and close personal supervision o f Reza Q Shah had much to do w ith the achievements of th a t p erio d ." Many of th e fa c to rie s constructed . . . may have been ill-fo u n d e d . Ambitious g rain elev ato rs were b u ilt but not always put to work. The famous railw ay from the Caspian Sea down to the P ersian Gulf may n o t have been based on any refin ed c o st-b e n e flt c a lc u la tio n . Q P. Bjora Olsen and P. Norregaard Rasmussen, "An Attempt a t Planning in a T rad itio n a l S ta te : Ira n ," ed. E verett E. Hagen, Planning Economic Development (Home wood, I llin o is : Richard D. Irwin, In c ., 1963), p. 223. ^Wilber, Iran--O asis of S ta b ility In th e Middle East. p. 26. 116 However, he was for change and he produced a change . . . In the fie ld s o f p o litic s and economics he was a tru e entrepreneur In the Schumpeterian sense of th e word.*® I t may thus be argued th a t the main impact during th is period was th e In tro d u ctio n of change ra th e r than the spe c if ic changes them selves. A w illingness to accept change precedes tru e development. In th is period such w illingness 1 1 was taught by example. With the m ilita ry occupation of Iran by the A llied forces in 1941, a l l development programs were suspended. The years th a t followed were dominated by chaos and r e tr o g ressio n . During the war period only those economic a c tiv itie s were undertaken which re la te d to war needs. Size of Government There are no s ta t i s t i c s a v a ila b le on the s iz e and number of government employees in Iran . Dr. Goudarzl, the Head of High A dm inistrative Council sa id : " If you ask the government how many employees i t has and how many receiv e th e ir s a la rie s from the government, they w ill be unable 10Hagen, on. c i t ., p. 223. ^ Ib id . . pp. 223-224. Also W . W . Rostov, The Stages off F^nnjntc Growth (London: Cambridge U niversity Press, 1960). 117 12 to give you any inform ation." Although an exact s t a t i s t i c of the number o f govern ment employees was to be released w ith the 1963-64 budget, i t did not m a te ria liz e . Kavhan In te rn a tio n a l has estim ated th a t the nunber of government employees was 300,000. In th is fig u re, the employees o f the M inistry o f War and the Armed Forces were not in c lu d e d .^ I f the fig u re o f 300,000 exclusive of th e M inistry o f War and the Armed Forces Is approxim ately c o rre c t, then the s iz e of the government of Iran is com paratively sm all in re la tio n to Western coun tr i e s . In Iran , w ith a population o f 22,182,000 in 1963, and th e 300,000 government employees, the siz e of govern ment employment in re la tio n to the to ta l population is only a l i t t l e over 1 per c e n t. In the United S ta te s, fo r example, w ith a population of 191 m illio n , th e re were a to ta l o f 9,090,419 m illio n lo c a l, s ta te , and government employees in 1964. This makes th e size o f government employment in th e United S tates over 4 per cent o f the ^ E tte la 'a t (Teheran), May 31, 1962. Kavhan In te rn a tio n a l (Teheran), May 26, 1962. 118 14 to t a l population. In 1961 in Iran out o£ a gross n a tio n a l product of 303 b illio n r i a l s , the Iran ian government's expenditures were 54 b illio n r i a l s . This shows th e share o f growth in 15 the G N P around 19 per cen t. In th e same year in th e United S ta te s, out of a G N P of 541.6 b illio n d o lla rs , the government's expenditures (fe d e ra l, s ta te , and lo c a l) amounted to 141*5 b illio n d o l la r s . This shows the share of government expenditures in th e G N P over 26 per cent.*** Thus, i t may be seen th a t th e share of th e government in the Iran ian economy i s sm aller in re la tio n to th e share of th e government In advanced and highly developed economies, such as the United S ta te s. Government O rganizations: Plan O rganization As was pointed out in th e f i r s t sectio n o f th is ^ S t a t i s t i c a l A bstract o f the United S ta te s. 1965. U.S. Department o f Commerce, Bureau o f the Census (86th e d itio n ; Washington: U.S. Government P rin tin g O ffice, 1965), pp. 414-443. 15Data compiled from ^.panac and Book of F acts. 1964 (Teheran: 1964), p. 385; and United Nations S t a t i s t i c a l Yearbook. 1964 (New York: Department of Economics and S ocial A ffa irs, 1965), p. 611. ^Economic Report of the P resident (Washington: U.S. Government P rin tin g O ffice, 1965), ppt 190, 261. 119 chapter, economic development was haphazard and la rg e ly th e r e s u lt o f p riv a te Investm ent, and to a sm aller degree by in d iv id u al Iran ian m in is trie s and Boneahs on the b asis o f th e ir budgets, p rio r to the advent of Reza Shah. D iscover ing th a t he could not make the progress he desired unless he introduced government Investm ent, the Shah proceeded to do so up to the abandonment of a l l economic planning in th e stru g g le fo r su rv iv al in World War I I . A fter th e end o f th e War, in 1949, the Iranian Parliam ent passed le g is la tio n fo r the c re a tio n and estab lishm ent o f an independent government agency c a lle d the Plan O rganization. This organization was given broad ad m in istra tiv e powers w ith i t s own ru le s and reg u latio n s o u tsid e o f th e ordinary ad m in istrativ e set-u p of the government, to adm inister the development p ro jec ts of the public se c to r. The Seven-Year Development; Plan Ant- s e t fo rth the functions of th e Plan O rganization in the follow ing terms: 1. To prepare plans and p ro je c ts, d e ta ile d budgets, ru le s and executive reg u latio n s in accordance w ith the working program previously approved by the Plan Comnittee of the M ajless; to supervise th e execution o f the operations included in th e Plan from the te c h n ic a l and fin a n c ia l points o f view and to over-see the coordination and co operation of th e executive agencies. 1 2 0 2. To c e n t r a l^ e the funds assigned f o r th e execu tio n of the*ttLan, to d isb u rse the expenditures provided In tjfe plan budget and to draw up an annual balarfcce sh eet o f th e operations each y e a r,1' The execution o f In d iv id u al p ro je c ts Is to be placed in th e hands o f the government where an ap p ro p riate d e p a rt ment e x is ts , e .g ., the railw ay s, or in th e hands o f th e p riv a te firm s supervised by th e Plan O rganization. In every case c o n tro l is to be shared between th e Plan Organ iz a tio n and th e re le v a n t government departm ent. The Plan O rganization i s also resp o n sib le fo r th e management o f State-owned in d u s trie s . The Plan O rganization has been th e prim ary hut not exclusive instrum ent o f public development e f f o r ts . The government p o licy is to encourage continued expansion of domestic p riv a te -c a p a c ity and, i f necessary, public in v e st ment in c e rta in key in d u s trie s so as to reduce import dependence, and to pioneer i t s e l f in p a rtic u la r areas to show p riv a te in v e sto rs th e p r o f it p o te n tia l o f fe a s ib le 18 but c u rre n tly u n fam iliar in d u s trie s . ^T he Seven-Year Development Plan Act (Teheran: September, 1946), A rtic le 8. 1®RLan O rganization, Review o f th e Second Seven-Year Plan o f Iran (Teheran: 1960), p. 58. Examples of th e demon- 8 t r a t ion category include s te e l, petrochem icals, and can ning. I I . THE PRO CESS O F D E V E L O P M E N T PLA N N IN G IN IRA N 121 Nature of Development Planning The organization o f production in th e Iranian economy is mixed, th a t i s , i t includes both p riv a te and public forms of e n te rp rise s. The Iran ian economy is p re dominantly p riv a te e n te rp rise in s tru c tu re . I t is p riv a te in th e sense th a t the v a s t m ajority of property and output is held by and accounted fo r by non-governmental and non- cooperative e n te rp rise . I t is p riv a te in th e sense th a t most of th e major and fundamental economic d ecisio n s—what, where, how, and how much of p ro duction--are made by p riv a te in d iv id u a ls. The Soviet Union, by c o n tra st, is e s s e n tia lly a public e n te rp rise economy in th a t most in d u s tria l prop e rty is owned by th e government and a l l but a re la tiv e ly in s ig n ific a n t portion of th e n a tio n a l output is produced in government p lan ts o r d ire c te d and co n tro lled by government 19 agencies. 19 John E. E llio tt, "C apitalism , Socialism , and Eco nomic Planning" (unpublished Paper, U niversity of Southern C a lifo rn ia , Los Angeles, n .d .) , Chapter I I , p. 4. (Mimeo graphed.) 122 Locus of economic power. In th e p riv a te se c to r of the economy, individuals (or Individual u n its of economic decisions, such as households, owners of productive r e sources, and business firm s), are fre e to s e le c t th e ir own goals and o b je ctiv e s, and form ulate th e ir own decisions and courses of actio n . In many s o c ie tie s , decisions a re not made by in d i v id u als, by groups, or governments, but by a combina tio n of a l l th ree . The United S tates is a s trik in g example of th is dispersed organization of economic decision-m aking. Workers, businessmen, farm ers, con sumers, and bankers a l l have a considerable degree of freedom to determ ine th e ir own goals and make th e ir own d ecisio n s. But these compete sometimes w ith the decisions and o b jectiv es of labor unions, corporations, farm groups, and oth er o rganizations. 0 O rganization of economic power. The p riv a te se c to r of the Iran ian economy is highly d ecen tralized : the power to make economic decisions is dispersed among a la rg e num ber of d ecen tralized , in d iv id u al households and businesses. In th e public secto r of the economy, the power to make economic decisions is highly c e n tra liz e d . Processes to coordinate economic d e c isio n s. In the p riv a te se c to r of th e economy, the market and th e p rice 20Ib ld .. p. 5. 123 i system coordinate economic d ecisio n s. P rices guide plans. In the public se c to r o£ th e economy, economic plans and decisions a re made in re la tio n to the "budget," not to the market. W ithin th e public se c to r, th e Iran ian Plan Organ iz a tio n is In essence a s o c ia l process whereby those in p o sitio n o£ power and re s p o n s ib ility c o n tro l those tinder them, o ften through planned d ire c tiv e s . . ^ Methods of government c o n tro l. The Plan Organiza tio n a c t8 as a tech n ical advisor to th e various m in istrie s and a llo c a te s funds to them. In ad d itio n , th e m in istrie s have c e rta in funds o f th e ir own and use th ese on minor a c tiv itie s in a semi-autonomous manner. N evertheless, as has been pointed out, th e c e n tra l a u th o rity re ta in s veto power in both the governmental and th e p riv a te se c to r. Goals and Targets The F ir s t Seven-Year Plan. A fter the war, the seriousness of economic d islo c a tio n made i t necessary to prepare a program fo r reco n stru ctio n and development in the Iranian economy through economic planning. Therefore in 1948, as soon as th e country began to recover from the chaos of th e war, th e Iran ian government c a lle d in a number 124 of well-known United S tates firm s organized as Overseas C onsultants, Incorporated. These technicians were asked to survey Ira n ’s p o te n tia litie s , and to recommend ways of using Ira n '8 la rg e o il revenues to speed up economic growth and development. The group drew up a five-volume rep o rt which o u tlin ed a n a tio n a l development program to be c a rrie d out over a seven-year period. Development and improvement of a g ric u ltu re , tra n s port and communications, industry and mines, and so c ia l a f f a ir s were the major goals and ta rg e ts of th e F ir s t Seven-Year Development Plan. However, the F ir s t Plan . . . was n e ith e r a comprehensive plan fo r the a llo c a tio n of th e co u n try 's resources nor even a plan fo r a l l governmental Investm ent. Rather, i t was a l i s t of p ro jec ts which had been Investigated b rie fly and endorsed by the engineering firm , w ith l i t t l e co n su ltatio n w ith the m in istrie s and o th er agencies concerned w ith the various fie ld s of a c tiv ity to which the plan re fe rre d . 21 The Second Seven-Year Development Plan. In 1955 the Second Seven-Year Development Plan was adopted • . • w ith a view to increasing production, develop ing exports, preparing public n e c e ssitie s w ithin the economy, and developing a g ric u ltu re and in d u strie s, 21 Hagen, o p. c l t . , pp. 2 2 4 -2 2 5 . 125 d iscovering and exploring mines and subterranean r e sources, Improving public h e a lth , f u l f i l l i n g any operations designed fo r th e development country, r a is ing the ed u catio n al and liv in g standard o f th e people, and Improving liv in g c o n d itio n s. 22 The Second Development Plan, lik e th e F ir s t Seven- Year Plan, was merely a l i s t o f p ro je c ts emphasizing c e r ta in areas w ith in the economy th a t were considered to be in d iv id u ally b e n e fic ia l to Ira n . As such th e re was "a long s e rie s of uncoordinated and u n related development and a c tiv itie s as w ell as o f programs and p ro je c ts commenced 23 but never completed o r never put in to o p eratio n . " The o p eratio n o f th e Second Seven-Year Plan was divided in to fo u r c a te g o rie s as follow s: Irrig a tio n , A g ricu ltu re, and Regional Development Roads and Communications Industry and Mines Social Works Third Development Plan. 1962-1968. In c o n tra s t to the f i r s t two plans, th e Third Development Plan was drawn 22 "Second Seven-Year Development Plan o f Ira n ," Bank M alli Iran B u lle tin (Teheran: Bank M elli Ira n P ress, May- June, 1956), pp. 192-202. ^ H a g en , op. c i t . . pp. 2 3 2 -2 3 3 . fo r a fiv e and a h a lf year period and was approved by the council of m in isters on September 9, 1962 to extend to March 1968. An im portant change took place In th is development plan. The Plan O rganization was no longer to play an executive ro le , but a l l the p ro je c ts would be c a r rie d out by the executive agencies o f the government. The Plan O rganization would only plan the p ro je c ts and would supervise th e ir implementation, thus becoming a tech n ical bureau. The th ird plan re la te d the general programming to an o v e r-a ll ta rg e t. The ta rg e t was to Increase the n a tio n al income by a y early average of 6 per cen t during the Third Development Flan period. Of course th is ta rg e t was s e t not on the b asis o f refin ed reasoning o r re lia b le s t a t i s t i c s . G enerally speaking, a growth of 6 per cent annually would be remarkable fo r an underdeveloped country. During th is period the population was expected to Increase a t the r a te o f 2.5 per cent per year. The income per c a p ita would in crease a t the r a te of 3.5 per cen t. Some urged the consideration of even a higher ta rg e t because I t was thought th a t on account of the unexpectedly high revenues from o i l th is fig u re of 6 per cent did not merely 24 rep resen t a pipedream. In order to m aintain th is 6 per cent o f Increase, i t was assumed th a t the volune o f invest** ment had to in crease a t 6 per cen t per annum. Along w ith the main ta rg e t o f ra is in g the n a tio n a l income, the Third Plan seeks to fo s te r a more eq u itab le d is trib u tio n o f th is Income, and to make the b e st use of the n a tio n 's manpower and s k ill s . With th is f a ir e r d i s t r i bution of n a tio n al Income, la rg e r and dependable markets could be created fo r consumer goods and in tu rn fo r in d u s tr ia l machines and to o ls. In order to achieve these ends, land reforms are under way and in d u s tria l workers are 25 sharing in p r o f its . / ~ Sources of Funds The Plan O rganization was authorized under th e F ir s t Seven-Year Plan Law to spend a sum of roughly $600 m illio n (27 b illio n r i a l s ) . The expenditure was to be financed from o il revenues, c re d it expansion, borrowing, s a le of government property, 24Ib id .. p. 238. 25 Approval of the Decree--Law o f January 7, 1963, providing fo r the Workers' P ro fit-S h arin g Scheme. Iran Alynynfl^ and Book of F acts. 1965 (Teheran: Echo of Iran, 1965), pp. 124-125. 128 and p riv a te p a rtic ip a tio n . I t was expected th a t th e r e sources needed would be obtained as shown In Table XI. Under the Second Seven-Year Plan Law, approved in March 1956, the Seven-Year Plan O rganization was authorized to spend a to ta l o f $1.1 b illio n (70 b illio n r i a l s ) . The Plan O rganization expenditure was to be financed su b sta n tia lly by o i l revenue; 80 per cent of the o il rever nues was a llo tte d to the Plan O rganization. C redit expan sion, borrowing, and fo reig n aid were to supplement the o il revenue. Table XII shows the sources of revenue fo r the Second Seven-Year Plan. The fig u res fo r the plan did not comprehend a l l the resources a v ailab le to Iran . Only an a rb itra ry p a rt o f the o i l revenues was earmarked fo r the plan. However, i t should be noted th a t the a c tiv itie s of the Plan O rganization were only p a rt of th e investment and development a c tiv itie s sponsored by the government. This is obvious from th e fa c t th a t even a f te r the establishm ent of the Plan O rganization, the in d iv id u al Iranian M in istries and Bongaha continued to in v e st d ire c tly on the b asis of th e ir own budgets, and were to some ex ten t supported by money from the Plan O rganization and other foreign agencies such as the United S tates Operations Mission (USOM), the 129 TA B LE XI SO U R C E S O F R E V E N U E FO R THE FIRST FLA N , IRA N Revenue Per cent O il 37 C redit Expansion 21 Borrowing (IBRD) 32 Sale o£ Government Property 5 P riv ate P a rtic ip a tio n 5 T otal 100 SO U RCE: Government of Iran , Plan O rganization, Review of the Second Seven-Year Plan Progiflgp fa’ gn (Teheran: 1960), Table !• 130 TA BLE XII SO U R C E S O F R E V E N U E FO R TH E SE C O N D PLAN , IRAN Source M illions o£ D ollars Per cent O il Revenue 800 69 C red it Expansion 60 5 Borrowing and Foreign Aid 300 26 Total 1,160 100 SO U RCE: E verett E. Hagen, e d ., Planning Economic Development (Homewood, I llin o is : Richard D. Irwin, In c ., 1963), p. 232. 131 26 Ford Foundation, and the Near East Foundation. The budget fo r the Third Development Plan is e s t i mated to be 220 b illio n r i a l s . Table X III shows an e s t i mate of sources o f revenue fo r the Third Development Plan of Iran . As can be seen in the Second and the Third Plan, heavy emphasis was given to o i l revenue as the source of funds. I n itia lly , Plan O rganization had been a llo tte d 80 per cen t of the o il revenues. L ater, as o th er govern ment agencies pressed th e ir claim fo r more o f the money, th is share was reduced. At presen t i t is 55 per cent. A llocations The F ir s t Seven-Year Plan. The F ir s t Seven-Year Plan was n e ith e r a comprehensive plan fo r th e a llo c a tio n of Ira n 's resources, nor even a plan fo r a l l governmental in vestm ent. I t was merely a l i s t of p ro je c ts which had been in v estig ated b rie fly and endorsed by th e engineering firm , with l i t t l e or no co n su ltatio n w ith th e in d iv id u al m inis tr ie s and the o th er government agencies Which were con cerned w ith the various fie ld s of a c tiv ity to which the 26 Hagen, on . c i t . . pp. 2 3 2 -2 3 3 . 132 TABLE X III SO U R C ES OF R E V E N U E FO R TH E THIRD FLA N , IRAN Source B illio n s of R ials O il Revenue 134 Loans outstanding from Second Plan 3 Foreign Technical A ssistance 4.3 Loans am ortized by Municipal A u th o rities, e tc . 3.7 Long-term Treasury Bonds (n et) 10 Foreign and Domestic Loans 65 T otal 220 SO U RCE: tT T R " A ff"anac and Book o f F acts. 1965 (Teheran: Echo of Iran , 1965), p. 341. i 133 plan re fe rre d . Table XIV shows th e a llo c a tio n s o f the F ir s t Flan. A llocations o f th e Second Plan. The budget of the Second Flan was to be in excess o f 1.1 b illio n d o lla rs . Table X V shows the a llo c a tio n s o f these funds in th e plan period. Table XVI shows in expanded form the d e ta ile d expenditures, as shown in Table XV. The a c tiv itie s of th e Plan O rganisation were only p a rt of the investm ent and development a c tiv itie s sponsored by the government. As already noted, even a f te r th e e sta b lishm ent of the Plan O rganization the in d iv id u al m in istrie s continued to in v e st d ire c tly on th e b asis o f th e ir own budgets. There was no coordination between Plan O rganization p ro je c ts and p ro je c ts of the o th er m in is trie s. The a llo c a tio n plan was not made on th e b asis of any c a re fu l, comprehensive f is c a l, monetary, manpower, or o th er 27 o v e r-a ll a n a ly sis. The Second Development Plan was not a d e ta ile d , nationwide program. W e have, on many occasions, discussed th e topic of th is plan in th e meetings of 27I b id . . p. 233. 134 TA BLE XIV A LLO C A TIO N S OF TH E FIRST FLA N , IRAN Expenditure Per cent A griculture 25 Transport and Communications 27 Industry and Mines 19 S ocial A ffairs 29 T otal 100 SOURCE: Government of Iran , Plan O rganization, Review of the Second Seven-Year Plan Program of Iran (Teheran: I960), Table 1. 135 TA BLE X V A LLO CA TIO N S OF THE SE C O N D PLA N , IRA N Expenditure M illions o f D ollars Per cent A griculture (Including Irrig a tio n ) 251 22 Transport and Communications 405 35 Industry and Mines 90 8 S ocial A ffairs 156 13 Special Regional Programs 163 14 A dm inistration, In te re s t, e tc . 97 8 T otal 1,162 100 SO URCE: Government o f Iren, Plan O rganization, Review of the Second Seven-Year Plan Progffflf of T Efln (Teheran: 1960), Table 4. 136 TA BLE XVI S E C O N D SEVEN-YEAR PLA N L A N Expenditure M illio n R ials Completion o f p ro jec ts included in the F ir s t Seven-Year Plan Law: A g ricu ltu re and ir r ig a tio n 6,260 Communications 5,367 In d u strie s and mines 2,759 Public u t i l i t i e s (S ocial Service) 2.814 17,200 New p ro je c ts: I. A griculture and Irrig a tio n Irrig a tio n and dam co n stru ctio n surveys 228 A g ric u ltu ra l and ir r ig a tio n tra in in g 226 C u ltiv atio n and Improvement of crops 553 Animal husbandry 976 P lan t p ests 915 F orests 1,098 Development of v illa g e s and barren lands 565 A g ric u ltu ra l extension 362 A g ric u ltu ra l machines 459 Meteorology . 94 Rural economy and a g ric u ltu ra l engineering 124 S ilo s 265 A g ric u ltu ra l industry 145 Irrig a tio n and dam co n stru ctio n 2,408 Loans fo r qanats and deep w ells 1,000 9,458 Chemical f e r t i l i z e r p la n ts, etc. (to be e sta b lish e d ) 2,500 T o ta l 1 1 ,9 5 8 TABLE XVI (c o n tin u e d ) 137 Expenditure M illion R ials I I . Communications Highways and asphalted roads 7,960 Railways 4,125 Aerodromes 1,085 Ports 2,392 Communications 1,451 Mapping 441 T otal 17,454 I I I . In d u strie s and Mines T e x tile in d u stry 558 Sugar in d u stry 1,715 Cement ind u stry 1,030 Mines 240 Copper sm elting 80 Iron sm elting 2,000 R efractory m a terials 40 F ish e rie s 36 L aboratories 45 P rofessional tra in in g cen ters 45 In d u s tria l c i tie s 75 In d u s tria l c re d its 937 6,801 Future amount to be spent 1,000 T o ta l 7 ,8 0 1 138 TABLE XVI (c o n tin u e d ) Expenditure M illion R ials IV. Public U til iti e s (S ocial Service) Public h ealth 5,824 Education 2,070 E le c tric ity fo r the provinces 1,500 H y d ro -electric and steam tu rb in es 978 U til iti e s and serv ices in the provinces 4,390 S ta tis tic s and census 200 Aid to co-operatives and producing companies 400 Aid to s o c ia l insurance organization fo r workers 225 T otal 15,587 Grand T otal 52,800 SO U RCE: F. C. Mason, Economic fjnrf ^flffnegcial Condi tio n s In Iran (New York: Chemical Bank, New York T rust Company, 1957), pp. 113*114. i 139 the cabinet* in Parliam ent, and in presence of His Im perial M ajesty . . . in the beginning th e re was no organization to carry out th is g ig a n tic ta sk sin ce the f i r s t 7 year Plan had n o t reached th e stag e of c re a tin g a proper o rganization fo r th is purpose. . . • The only s t a t i s t i c a l d a ta av a ila b le a t th a t time were the Customs and Bank reco rd s. W e knew nothing about conditions in our in d u stry and a g ric u ltu re . . . . On the o th er hand th e Government was pressin g us to s t a r t work as soon as p o ssib le, so th a t people might see th a t the jgney from o il was being spent fo r public bene- To a la rg e ex ten t, th e Second Plan, lik e the F ir s t Plan, was a l i s t of p ro je c ts considered to be in d iv id u ally 29 b e n e fic ia l to Iran . The Second Plan was biased toward monumental p ro je c ts: big dams, the reg io n al development o f the Khuzistan area, and the modem expensive highways. A llocation of th e Third Plan. Table XVII shows the a llo c a tio n of th e planned expenditures during the Third Plan period. The a llo c a tio n s fo r a g ric u ltu re were designed to 8tre s s the improvement of seeds, c o n tro l of p ests, tra in in g o f personnel, and extension o f farm lands. Other a g ric u ltu ra l expenditures included ir r ig a tio n p ro je c ts, land reform, a g ric u ltu ra l c re d its , tra in in g and research, 28 Kavhan In te rn a tio n a l (Teheran), November 22, 1962 2Q Hagen, o p. c i t . . p . 233. TA BLE XVII A LLO CA TIO N S OF TH E THIRD FLAN, 140 IRAN A llocations M illions of R ials A griculture and Irrig a tio n 45,000 In d u strie s and Mines 21,900 Fuel and Power 27,000 Communications and Telecommunications 50,000 Education 17,950 H ealth and S an itatio n 13,900 Labor and Manpower 7,900 Urban Development 8,000 S ta tis tic s 800 Housing, C onstruction, and Planning 7,550 T o tal 200,000 SO U RCE: ITRI A 1ffi*nac and Book o£ F acts. 1965 (Teheran: Echo of Iran, 1965), p. 341. 141 crop Improvement, p reserv atio n of n a tu ra l resources, animal husbandry end v e te rin a ry medicine, p la n t products, and 30 ru ra l development. Table XVIII shows the a llo c a tio n of expenditures fo r a g ric u ltu re and ir r ig a tio n . In the f ie ld o f ind u stry and mines a to ta l o f 21,900 m illio n r i a l s has been a llo c a te d . A sum of 400 m illio n r i a l s has been a llo cated to encourage p riv a te investm ent. This w ill be made av a ila b le to p riv a te industry through the In d u s tria l and Mining Development Bank of Iran . The aim is to encourage the members o f the p riv a te se c to r to show in i tia tiv e and e n te rp rise . Another sum of 4,500 m illio n r ia l s is earmarked fo r p a rtic ip a tio n in jo in t ventures w ith p riv a te in d u stry . The e n tire p a tte rn o f expenditure is shown in Table XVII. One o f the main o b stacles to a g ric u ltu ra l and in d u s tr ia l growth of Iran is th e lack of an inexpensive and re lia b le supply of e le c tr ic ity . To overcome th is problem the Third Plan has given sp e c ia l a tte n tio n to the supply of such e le c tr ic ity to meet th e demands o f the e x istin g and fu tu re in d u strie s and also th e ru ra l areas. The A ll-Ira n 30 Iran ATmanae pnd Book of F acts. 1963. p. 341. 142 TABLE XVXXI ALLOCATIONS OF THE THIRD PLAN: AGRICULTURE AND IRRIGATION Expenditure M illions o f R ials Irrig a tio n 16,500 Land Reforms 5,700 A g ricu ltu ral C red its 8,800 T raining and Research 1,000 Crop Improvement 3,991 Preservation o f N atural Resources 1,560 Animal Husbandry and V eterinary 1,400 P lant Products 1,130 Rural Development and Extension 5,000 T otal 45,000 SO U RCE: Iran Almanac and Book of F acts. 1965 (Teheran: Echo of Iran , 1965), pp. 341-342. 143 E le c trific a tio n A uthority was estab lish ed to meet th is challenge. The Third Plan recognized the n e c e ssity of supplying fu e l and power in th e growth process and a llo cated 27,000 m illio n r i a l s , as shown in Table XIX. In th e area of communications and telecommunications, a sum of 50,000 m illio n r i a l s is a llo c a te d . A major p o rtio n of th is amount w ill go fo r co n stru ctio n of roads. Many secondary roads and feeder roads a re to be b u ilt to connect im portant a g ric u ltu ra l cen ters to p ro v in cial and d i s t r i c t m arkets, o r to main highways. In th is way i t is expected th a t a g r i c u ltu ra l and in d u s tria l goods w ill be more speedily and e a sily transported between r u r a l and urban c e n te rs. See Table XX. Education and th e campaign ag ain st i llite r a c y is to be c a rrie d out w ith v ig o r; 17,950 m illio n r i a l s w ill be spent on education in the Third Plan, as shown in Table XXI. Health and s a n ita tio n , labor and manpower, urban development, s t a t i s t i c s , housing co n stru ctio n and planning have received extensive co n sid eratio n and w ill get the remaining 38,150 m illio n r i a l s of th e Third Plan. Rather than concentrate on b ig p ro je c ts, the Third plan emphasizes sm aller p ro je c ts which are so v ita lly 144 TABLE XIX A LLO CA TIO N S O F TH E THIRD PLAN: P O W E R A N D FUEL M illions o f Expenditure R ials Major power s ta tio n 13,870 Power fo r medium-size towns 2,500 Power fo r sm all towns 1,000 A dm inistrative and research c o st 870 Fuel 8,760 T otal 27,000 SO U RCE: T T T f l n A 1 i lw *r > f^ f nd Book of F acts. 1965 (Teheran: Echo o f Iran, 1965), p. 342. 145 TABLE XX ALLOCATIONS~OF THE THIRD FLAN: COM M UNICATIONS AND. TELECOM M UNICATIONS Expenditure M illions of R ials Roads Highways 25,000 Secondary roads 7,000 Railways 3,500 Ports 4,000 A irports 3,000 Meteorology 500 Radio and T elevision 6,500 Topography 250 T o u rist a ttra c tio n 250 T otal 50,000 SOU RCE: T y a n A ltn^nflff Book O f F a C tS . 1965 (Teheran: Echo of Iran , 1965), p. 342. 146 TABLE XXI ALLOCATIONS OF THE THIRD PLAN: EDUCATION Expenditure M illions o f R ials Primary education promotion 10,000 A n tl-illlte ra c y campaign 350 Secondary education promotion 2,375 Teachers' tra in in g 600 U n iv ersities 4,065 Physical c u ltu re and scouting 240 Aid to p riv a te educational In s titu tio n s 160 School lib r a r ie s and books 150 T otal 17,950 SO U R C E: T ^n Almanac and Book of F acts. 1965 (Teheran: Echo o f Iran, 1965), pp. 342-343. 147 necessary* but are so d if f i c u l t to design and adm inister because they req u ire th a t most d ecisio n s be made a t lo c a l d e -c e n tra llz e d le v e ls where necessary tra in e d technicians and ad m in istrato rs are not a v a ila b le in s u ffic ie n t num b e r s .31 Present government policy is to encourage continued expansion of domestic c a p a c ity --p riv a te and, i f neces sary, p u b lic—in c e rta in key in d u strie s so as to reduce import dependence, and to pioneer I t s e l f In p a rtic u la r areas to show p riv a te in v esto rs th e p r o f it p o te n tia l of fe a s ib le but c u rre n tly unfam iliar in d u s trie s .32 Execution and Achievement No economic plan has ever proceeded w ithout a h itc h to achieve I ts ends. The th re e Iran ian Plans have been no exceptions. Plan and a c tu a lity . 1. F ir s t Seven-Year Plan. The F ir s t Seven-Year Plan proved alm ost a complete f a ilu r e . During th e period 1951-1954, o il revenues declined to a mere tr ic k le as a r e s u lt of n a tio n a liz a tio n of the A nglo-Iranian O il 31 Hagen, op. c i t .. pp. 244-245. 32 Plan O rganization, Review o f the Second Seven-Year Plan of Iran (Teheran: 1960), p. 58. 148 Company's concession. Funds £or development were not a v a ila b le during these years, and the £ lr s t plan d id not go very £ar beyond the b lu e p rin t stag e. ^ I t was Dr. Mossa degh, " th a t weepy l i t t l e Premier" of Iran , who sp elled the doom of the F ir s t Seven-Year Plan. By h is [Mossadegh's] o i l policy he made c e rta in th a t th e plan could not succeed and th e common people could not receiv e I t s b e n e fits . O il revenues f e l l to nothing (In e ffe c t le ss than nothing, because the government had to go on meeting wage and o th er o b lig atio n s In th e stagnant In d u stry ), and o i l money was a v ailab le n e ith e r fo r ordinary Government purposes nor fo r n a tio n al de velopment. ^ Mossadegh was overthrown in 1953, and the o i l con troversy ended In 1954, but by th a t time th e development plan was la rg e ly a f a ilu r e . With the settlem ent o f the o il d isp u te, o i l revenues began to revive Iran , and a Second Seven-Year Plan was s e t up in 1955. 2. Achievements o f the Second Seven-Year Plan. Any o b jectiv e c ritic is m of Plan O rganization must none the le ss note w ith s a tis fa c tio n th e sev eral major achievements of the Second Plan. The f i r s t category o f accomplishment 33 Hagen, on. c i t . . pp. 225-226. ^ H is Im perial M ajesty Mohammed Reza Shah Pahlavi Shahanshah of Iran , M ission fo r M v Country (New York: McGraw-Hill Book Company, In c ., 1961), p. 139. includes the completion o f fiv e dams. The Karej D am measures 180 m eters in h e ig h t, 380 m eters in w idth a t the top, and the base is 30 m eters th ic k . I t holds 205 m illio n cubic m eters o f w ater, and i t s tu rb in es produce e le c tr ic power o f 150 m illio n k ilo w a tt hours which is tra n sfe rre d to Teheran over a lin e o f 54 kilom eters. This dam was inaugurated by the Shah in 1961, and was the f i r s t b ig dam constructed in Iran . Among o th e r dams completed is th e Sefidrud D am b u ilt 250 kilom eters northw est o f Teheran. I t measures 425 meters wide and 110 m eters high and has a cap acity fo r 1,800 m illio n cubic meters of w ater. With the w ater provided by the Sefidrud Dam, 240,000 h ectares of land can be c u ltiv a te d . The Mohammed Reza Shah Pahlavi Dam has a re s e rv o ir capacity o f 3,300 m illio n cubic meters to be released fo r irr ig a tio n o f 145,000 h ectares of farm land and fo r providing 520,000 K W of e le c tr ic power. This, as p a rt o f the Khuzestan Development P ro ject, w ill supply e le c tr ic power to new in d u strie s and w ill aid in the de velopment of sugar cane p la n ta tio n s and m ills . The Shahnaz Dam provides w ater fo r th e c ity o f Hamadan. The L atian Dam b u ilt by the Teheran Water Board is to supply the c a p ita l 150 c ity w ith w ater. In a d d itio n to b e n e fitin g from expanded use o f w ater fo r c u ltiv a tio n and e le c tr if ic a tio n , a g ric u ltu ra l areas were Involved In several other p ro je c ts. Grain elev ato rs were completed a t Ahwaz, Kermanshah, Meshed, and S hiraz. The Im portation and use o f chemical f e r ti liz e r s Increased many fo ld . Purchases were made by the Plan Organization and sold to farmers a t h a lf p ric e . Funds were used to im prove seeds, re p a ir can als, dig w ells, purchase farm machinery, and build shops to re p a ir farm equipment. A rti f i c i a l insem ination and v accin atio n of c a t t l e have in creased both m ilk production and the l i f e span of th e stock. Regional development programs included the Khuzestan Development P ro ject and i t s Mohammed Reza Shah Fahlavi Dam, those in Sis tan and B aluchistan stre ssin g a g ric u ltu re and mining, and in th e Moghan Plain along the Soviet fro n tie r where the dam on the Aras River b u il t cooperatively by Iran and the USSR w ill supply w ater f o r ir r ig a tio n of farms. ^Tffin Alfwanflg and Book of Facts. 1963. pp. 326-327. 36Ib ld . . p. 327. 151 The Second Development Plan recognized and provided fo r the Increasing number o f passenger c a rs, buses, and trucks In Iran , by a llo tln g funds fo r th e co n stru ctio n of 0 7 10,700 kilom eters of roads. Four m ajor In d u strie s received sp e c ia l a tte n tio n In th e Second Development Plan. The plan strengthened a d eclin in g te x tile industry by aiding new co n stru ctio n , m odernization, making loans a v a ila b le , and tra in in g tech n ic a l personnel. The cement Industry grew from th e s o l i ta ry Rey Cement Factory. Two p la n ts were ordered from abroad and b u ilt a t Lushan (200 tons d a ily ), and a t Dorud (600 tons d a lly ). The Plan O rganization cooperated w ith p riv a te corporations to s e t up Shemal Cement, Shiraz Cement, and Teheran Cement, and expand the Rey Cement Factory. From 1954 to 1959 cement production increased ten fo ld from 90.000 tons to 900,000 tons y early . The c re a tio n of new sugar m ills and the expansion of e x istin g m ills doubled sugar production. Other food indus tr i e s were expanded. Canneries each w ith c a p a c itie s o f 3.000 cans and 1,500 ja r s of jam and marmalades d a ily 3 7 I b id ., p . 328. / * 152 were constructed a t Meshed, Isfahan, and Azar Shahr. The cannery a t Bandar Abbas was expanded. Dried f r u i t plants were created in Maragheh and Khorramshahr. T hirty tons of m ilk can be pasteurized d a ily in th e new p la n t a t Teheran. In Rudbar the Olive O il Pressing P lant has a capacity to produce fifte e n tons of o liv e o il from seventy-two tons of o liv es d a lly . A fter the o liv e season ends, the p la n t is 38 used to process peanuts. . . . 16% of a l l th e Second Seven-Year Plan [funds] were spent on such s o c ia l p ro je c ts as the provision of w ater and e le c tr ic ity , asp h altin g of s tr e e ts , creatio n of slaughter-houses, sewage d isp o sal systems, c lin ic s , h o s p ita ls , schools and tra in in g c e n te rs. A to ta l of 700 various p ro je c ts o f th is n atu re have been com p le te d .39 . • . 53% of these funds fo r s o c ia l works went to w ater supply p ro je c ts, 18% fo r e le c tr ic ity , 17% fo r asp h altin g , and 12% to m iscellaneous p ro je c ts. Exten siv e programs o f prevention ag ain st m alaria, smallpox and tu b ercu lo sis were c a rrie d o u t. Programs fo r edu c a tio n sponsored co n stru ctio n , "p rin tin g of te x t books fo r lite ra c y campaign among tro o p s," ad u lt c la sse s, and funds fo r students In Europe and th e United S ta te s , W hv divergence? Many of the programs of the Second 38b>m- 39Jbii- 40Ib ld . . pp. 326-327. 153 Seven-Year Plan were put in to operation by fo reig n engi neers and co n su ltan ts. A number of s ig n ific a n t problems lim ited the o v e r-a ll success o f the Second Plan. When these p ro je c ts were turned over to Iran ian s, they were not able to function a t peak le v els because of the lack of train ed technicians and ad m in istrato rs. Also c r i t i c a l ly missing was necessary coordination between the c e n tra l government planners and th e lo c a l a u th o ritie s in charge o f in d u s tria l o r s o c ia l p ro je c ts. Too o ften Improvements were lim ited in a p p lic a tio n . For example, where Teheran found investment in creasin g , the n a tio n 's a g ric u ltu ra l program 41 did not advance to a sim ila r degree. The Iran ian government admits th a t the government 42 as In d u stria l entrepreneur Is not e f f ic ie n t. The execu tiv e s in charge of the Plan O rganization b eliev e th a t the weaknesses of the Iranian planning a re inadequate planning and "an almost complete absence of fin a n c ia l and adm inis tr a tiv e c o n tro l.G o v e rn m e n t o f f ic ia ls in Iran do not ^H agen, op. c i t .. pp. 233-235. ^ C e n tr a l Treaty O rganization (CENTO) Economic Committee, Report of Development Programming Conference (Murree, Pakistan: C EN TO , 1961), p. 66. 43 I b id . . p . 71. have th e personal Incentive to work a t maximum efficien cy , I n it ia tiv e co st-sav in g techniques, and take th e ris k s neces sary to earn a p r o f it. Also, government plans are often burdened w ith p o litic a lly in fla te d p a y r o lls .^ A study conducted by th e Iran ian Plan O rganization in d icated th a t i t s government-owned p ro je c ts in te x tile s , cement, and o il e x tra c tio n c o st Iran more to b u ild and operate than i t would have c o st under p riv a te e n te r p r is e .^ Government- owned in d u s tria l p lan ts s u ffe r from low s ta te o f m ainten ance, poor organization, laggardly production le v e ls, u n sk ille d workers, and in fe rio r production methods. The government has not been able to coordinate su ccessfu lly i t s proposed programs of stim u latin g th e de velopment of p riv a te in d u s tria l cap ac ity . However, some worthwhile steps have been taken in th is d ire c tio n . Tax le g is la tio n has been passed w ith a p a rtic u la r concern fo r p riv a te investment in areas o u tsid e Teheran. New firm s b u ild in g ou tsid e Teheran were not to be taxed fo r fiv e A A Richard E llio t Benedick, In d u stria l Finance in Iran (Boston: D ivision of Research, Graduate School of Business A dm inistration, Harvard U niversity, 1964), p. 30. years; those new firm s in the c a p ita l were taxed on only 50 per cen t of t h e ir income. Of the jo in t-s to c k companies, 10 per c e n t of th e p r o f its were exempted from ta x a tio n . Newly-created export in d u strie s o f products o th e r than o i l a re exempted from taxes as an e f f o r t to in c re ase foreign earn in g s. A number o f fin a n c ia l in s titu tio n s have been e sta b lish e d to a s s is t in d u stry . With the h elp of th e Agency fo r In te rn a tio n a l Development (AID), the In d u s tria l Management I n s titu te was formed in 1965 to advise p riv a te In v esto rs, and a Bureau of Standards was created as p a rt o f th e M inistry o f Commerce "to Improve com petitiveness o f export p ro d u cts." U nfortunately, n e ith e r of th e se in s titu tio n s was in flu e n tia l "due to in te rn a l ad m in istrativ e problems and the tr a d itio n a l re lu c tan ce o f businessmen to become * involved' with government. I I I . PLA N N IN G A N D OPTIMIZATION Rftftt-ttf-ynen t of th e Concent of O ptim ization O ptim ization of economic resources im plies th a t r e sources a re being u tiliz e d w ith maximum e ffic ie n c y . 156 • . . the g re a te s t e ffic ie n c y in th e use o f economic resources p re v a ils when consumer s a tis fa c tio n is maxi mized. More s p e c ific a lly , economic e ffic ie n c y p rev ails when the a llo c a tio n o f economic resources among a l t e r n a tiv e uses is such th a t no in creases in consumer s a tis fa c tio n could be obtained by fu rth e r s h if t in r e sources from one use to another—th a t is , by a r e a llo c a tio n of reso u rces.47 An optimum a llo c a tio n of economic resources w ill e x is t when th e m arginal u n it o f any resource y ield s the same economic value in a l l p o ssib le uses fo r th is r e s o u r c e . T h i s means th a t the s a tis fa c tio n people get from the goods and s e r v ices produced by th e m arginal u n it of the resource is the same in a l l the a lte rn a tiv e uses to which th e resource can be put. The ap p lic a tio n of th e m arginal p rin c ip le to the government se c to r req u ires th a t government expand the pro duction of s o c ia l goods up to th e point a t which the mar g in a l s o c ia l b e n e fits fo r a l l s o c ia l goods and serv ices a re ju s t equal to th e ir m arginal s o c ia l c o s ts . However, economic resources in our so ciety a re a llo cated to public se c to r by means o f a p o litic a l process. 47 Wallace C. Peterson, Income. Hmp^yyp^nt and Eco nomic Growth (New York: W . W . Norton and Company, In c., 1962), pp. 261-262. 48 Abba P. Lem er, The Economics of C ontrol (New York: Macmillan, 1949)» P* 61. 157 Governments o rd in a rily acquire the necessary resources £or the output of s o c ia l goods through ta x a tio n , which Involves coercion, ra th e r than through voluntary payments by In d i v id u als and business firm s. In a dem ocratic so ciety c i t i zens determ ine c o lle c tiv e ly --th ro u g h voting and le g is la tiv e re p re se n ta tiv e s--th e amount of th e ir Incomes th a t they w ill surrender In th e form of taxes fo r these serv ices. The effectiv en ess o f th is mechanism fo r optimum a llo c a tio n of economic resources w ill depend upon how s ig n ific a n tly the choices o f a llo c a tio n made by the government d epart from the p rin c ip le of marginalism . That th is Is i no easy task Is shown by the present reorganization of pro duction in R ussia. The USSR has had more experience than any o th er country in attem pting to achieve maximization of the use o f resources. I t appears th a t even there opinions and evaluations change. How Planning Can Promote QptinHr.nM on Planning deals w ith the o rg an izatio n , a c tiv a tio n , and use o f resources so as to achieve optimum re s u lts in AO the sh o rte st p o ssib le time a t minimum expense. Every 49 Design fo r P akistan. A Report on A ssistance to the Pakistan Planning Commission by th e Ford Foundation and Harvard U niversity (New York: Ford Foundation, 1965), p. 16. 158 so c ia l economy sin ce Adam and Eve's e je c tio n from the Garden of Eden has had some system of s e t of techniques fo r organizing and d ire c tin g th e making of economic decisions so as to a tta in so c ia l goals and s a tis f y human wants, th a t Is , some type o f economic p l a n n i n g . I n an e ffo rt to a tta in the g re a te s t and most rap id advances po ssib le w ithin th e lim its of th e ir scarce human, ph y sical, and fin a n c ia l resources, most o f the underdeveloped co u n tries of the world have o f f ic ia lly espoused comprehensive n a tio n a l de- i velopment plans. In the l a s t two decades in many underdeveloped coun t r i e s , governments have assumed a responsible ro le w ith resp ect to economic planning and th e w elfare of th e ir people. A ll underdeveloped co u n tries a re now attem pting to provide themselves w ith such developmental plans, except a few th a t have not yet been reached by the "g reat Awaken- ^ «51 in g ." Since th e end of World War I I , however, govern ments in o th e r p a rts of the world—L atin America, 50 E llio tt, op. c i t .. Chapter I I I , p. 2. 51Gunnar Myrdal, Economic Theory and Underdeveloped Regions (London: Gerald Duckworth and Company, L td ., 1957), p. 79. 159 A frica, th e Middle E ast, A sia, and some European coun tr i e s as w e ll—have become In creasin g ly "development m inded.” A good many o f th ese co u n tries have embarked on th e p rep aratio n and execution o f economic p lan s. ^ Underdeveloped co u n tries today o ften consider government as an Indispensable v e h ic le fo r accomplishing 53 the public in te r e s t. This is p a rtic u la rly evident in underdeveloped co u n tries such as In d ia, P akistan, A fghanis tan , Iran , United Arab Republic, e t c ., th a t a re b a s ic a lly fre e e n te rp ris e economies w ith some economic planning and p a rtic ip a tio n by th e government. In these co u n tries id e o lo g ic a l m otivation is n o t th e dominant reason fo r public e n te rp ris e . IV. S U M M A R Y In attem pting to change from a feudal to a modem in d u s tr ia l economy, Iran has most o f the problems o f most backward c o u n trie s. But i t has some advantages th a t many o th e r such co u n trie s do n o t have. In ad d itio n to th e very 52 Benjamin H iggins, Economic Development (New York: W . W . Norton and Company, In c ., 1959), p. 3. 53 Eugene S taley , The Future o f Underdeveloped Coun tr i e s (Revised e d itio n ; New York: Harper and B rothers, 1961), p. 433. 160 r e a l physical advantage o f o i l ro y a ltie s , th e re Is the equally re a l, I f In ta n g ib le , advantage o f a h is to ry o f cen t r a l government, and a concept o f the ro le o f government in th e development o f an economy. This i s in marked c o n tra s t to the alm ost anarchic co n d itio n s which p re v a il in the nomadic s o c ie tie s o f I r a n 's neighbors. This does n o t mean of course th a t everything w ill proceed smoothly in attem pting to make, in a few years, a tra n s itio n th a t has req u ired hundreds o f years in Western Europe; f a r from i t ! The b asic weaknesses o f backward co u n tries a re p resen t. There a re few capable adm inis tr a to r s and engineers both in government and o u t. I l l i t e r acy is high. What has been c a lle d th e P ro te sta n t E thic, i . e . , a d e s ire to engage in business, to become w ealthy, to ) b u ild in d u s tria l em pires, is lacking In Iran and th is o r something lik e i t must be developed. There is a g re a t need fo r execution of the land reform . Communications must be developed. As a consequence, i t appears th a t the r o le of government in th e economic development o f Iran can, and, indeed, is lik e ly to be a c o n stru c tiv e one. A glance a t th e budget o f th e Third Plan shows th a t the lessons of the 161 f i r s t two plans have been learned. The g re a te st amounts have been a llo cated to a g ric u ltu re and communications. This shows an app reciatio n o f th e fa c t th a t economies lik e armies can be said to inarch on th e ir stomachs and Iran wants to avoid the e a r lie r m istake of having in d u s tria l development o u ts trip a g ric u ltu ra l production w ith the r e s u lt th a t both a re brought to a h a lt. I t w ill be no ticed , too, th a t th e re a re plans to Improve h e a lth and lite ra c y standards by la rg e government expenditures. One item , however, should be noted. There is a notab le absence of th e s o c ia l reform proposals th a t hove been so prominent in many other underdeveloped co u n tries, p a rtic u la rly those in L atin America. There a re no provi sions fo r a M inistry of Labor w ith la rg e sums to be spent fo r unemployment compensation, pensions, e tc . There are no plans fo r minimum wages as y e t. In sh o rt th ere is em phasis on what Singer c a lls the Seeds ra th e r than th e 54 F ru its of Economic Development. Since the government In th is ro le is almost unique, the fu tu re progress o f Iran 54 Hans H. Singer, "Economic Progress in Under developed C ountries," in Arthur L. Grey and John E. E llio tt, Economic Issues and P o licies (Cambridge, M ass.: Houghton M ifflin Company, 1961), p. 328. should be o f major In te re s t to a l l who wish to discover path o f progress fo r underdeveloped c o u n trie s. CHAPTER VI TA X A TIO N A N D T A X POLICY FOR OPTIMIZATION A N D E C O N O M IC G R O W T H IN IRAN An understanding o f th e concept of f is c a l policy is e s s e n tia l to d iscu ssio n o f any ta x a tio n and ta x p o licy fo r o p tim izatio n and economic growth in Iran . I t [F isc a l Policy] is th e in te g ra te d and coordinated use o f the " fin a n c ia l powers" o f government d ire c te d to th e fin a n c ia l housekeeping o f government and b e tte r fu nctioning o f our economic system. F isc a l p o licy in clu d es: (1) ta x a tio n and tax p o licy , (2) budgetary p o licy , (3) spending and in v e stin g p o licy , (4) borrow ing p o licy , and (5) debt management p o lic y . 1 Since 1936 and Keynes' General Theory of Bnolovmant. 2 I n te r e s t and Money, rev o lu tio n ary developments have taken place in the f ie ld o f f is c a l theory and p o licy . Most of H filliam H. Anderson, Taxation and th e American Economy (New York: P ren tice-H a ll, In c ., 1951), p. 566. 2 John M . Keynes, General Theory Employment. In te re s t and Money (New York: H arcourt, Brace and Company, In c ., 1936). 163 164 th is has been w ritte n w ith referen ce to advanced co u n tries. "No system atic and In teg rated theory o f f is c a l policy ap p ro p riate fo r an underdeveloped but developing economy 3 has y et been form ulated." Knowledge and understanding o f the f is c a l p ractices and problems o f the economically underdeveloped coun tr ie s have been accumulating a t an accelerated pace sin ce th e Second World War. Both n atio n al and I n te r n a tio n a l agencies have responded to the spread o f a sp ira tio n s fo r more rapid economic development and to th e sp e c ific request o f many nations fo r tech n ical a ssista n c e In public finance. They have undertaken to examine anew the tax stru c tu re s and budgetary systems o f underdeveloped co u n tries and to analyze the ro le of f is c a l policy both In a cce leratin g development o f th e ir economic p o te n tia l and In securing economic s ta b ility . As a r e s u lt o f a l l th is endeavor and research, knowledge and understanding of public finance and f is c a l policy prob lems of underdeveloped co u n tries have increased s ig n if i can tly in recen t years. The p o te n tia l fo r the use of f is c a l policy In pro moting th e p o te n tia l economic growth of Iran w ill be considered in th is chapter and succeeding chapters w ith re sp e c t to each of the fiv e categ o ries enumerated above. 3 Raja J . C helliah, F isc a l Policy in Underdeveloped Countries (New York: Macmillan Company, 1960), p. 18. 4 United Nations, Taxes and F isc a l P o licies in Under developed Countries (New York: United Nations Technical A ssistance A dm inistration, 1954), p. v. 165 I . R O LE O F TA X A TIO N IN FISCAL POLICY FOR D E V E L O P M E N T Taxation la only one pha8e of o v e r-a ll f is c a l policy fo r economic development in underdeveloped economies. But i t is one of the most dynamic and im portant asp ects. F inancial resources are very necessary to the promo tio n of economic development of any country. When the government plays a dynamic ro le in th a t development, i t too must have fin a n c ia l resources a t i t s d isp o sal. The basic fund of such resources must n e c e ssa rily come from the tax atio n of income, property, tra n sa c tio n s, e tc ., w ithin i t s own economy. I t is questionable whe th e r a very larg e fra c tio n of any development program can be financed by tax atio n alone. N evertheless, the people and th e business u n its in the n atio n must make f a ir ly n o ticeab le co n trib u tio n s, otherw ise o th er a u x ilia ry sources of financing may not be forthcoming. In fa c t, w ithout a w ell-balanced tax program geared to the conditions in th e p a rtic u la r country, the remainder of the f is c a l policy program fo r development would not be fe a s ib le . 5 In mature and developed economies of th e world, tax atio n is widely accepted as the most s u ita b le primary source of revenue. For underdeveloped co u n tries, one of the major sources from which fin a n c ia l resources may be obtained fo r economic growth is through ta x atio n . This . W illiam H. Anderson, "F isc al P o licies fo r Under developed Economies" (unpublished Paper, U niversity of Southern C alifo rn ia, Los Angeles, n.d.), pp. 4-5. (Mimeo graphed. ) 166 source o ffe rs the maxlmim p o te n tia litie s . W ithin th e framework o f market economy, fin a n c ia l tra n s fe rs to govern ment from in d iv id u als who would spend th e funds on consump tio n o r In v est them in o u tle ts o f lim ited sig n ific a n c e fo r growth make i t p o ssib le to o b ta in resources fo r govern mental expenditures, w ithout re s o rtin g to borrowing or c re d it c re a tio n . With ta x a tio n being th e most im portant source, th ese bases can be used to g e th er to help b rin g about economic development w ith in a system of monetary s ta b i li t y . In a developing economy, ta x a tio n may be used to accomplish th e follow ing fu n ctio n s: 1. C u rta ilin g consumption and thus fre e in g r e sources fo r governmental se rv ic e s o r c a p ita l form ation. 2. R eallocating resources from investm ents regarded as having l i t t l e b e n e fic ia l e ffe c t upon economic development ( e .g ., o ffic e b u ild in g s) to those of g re a te r b e n e fit fo r growth. 3. Providing a flow of funds in to government hands to f a c i l i t a t e th e tra n s fe r o f reso u rces. 4 . Providing Incentives to a l t e r economic behavior in such a way as to f a c i l i t a t e economic growth, such as providing added in cen tiv e to save, to e n te r th e market se c to r, to work longer periods, to undertake p riv a te -a e c to r c a p ita l form ation. John F. Due, Taxation and Economic Development in T ropical A frica (Cambridge, M ass.: The M .I.T. P ress, 1963), p. 146. 167 Taxation here can be used e ffe c tiv e ly to tra n s fe r resources from consumption to investm ent, to in crease in* cen tiv es to save, to supply revenue funds fo r public Investm ent, to change the p a tte rn o f investm ent, and to a d ju st economic in e q u a litie s . By th is use of ta x a tio n , the n a tio n a l income growth w ill be a c c e le ra te d .^ In m ature and developed economies of th e world, ta x a tio n is w idely accepted as the most s u ita b le prim ary source of revenue. The a p p lic a b ility o f th is ru le to th e underdeveloped economies re q u ires c a re fu l co n sid eratio n . I ts a p p lic a tio n to Iran , w ith which th is d is s e rta tio n i s p rim arily concerned, perhaps may b e st be evaluated in th e lig h t o f p a st Iran ian experience w ith ta x atio n . Taxation in Iran Since the dawn of h is to ry , the Iran ian people have f e l t they have been extorted by ta x a tio n . The people have su ffered from heavy ta x atio n during most of th e 2,500 years of I r a n 's w ritte n h is to ry . Many re b e llio n s began w ith an opposition to tax es. In attem pting to gain popular support follow ing war o r famine, am bitious lead ers have suspended ^ C h e llia h , op. c i t . . p . 53. 168 ta x a tio n fo r a period of one o r more years. Nearly 2,000 years ago, under th e Sassanlans, th e re were th re e types of tax es: farm tax , re a l e s ta te tax, and head ta x . The farm tax v aried between on e-six th and one- th ird o f the e n tire crop. The re a l e s ta te tax was Imposed on a l l houses and oth er buildings and s tru c tu re s. The head tax was c o lle c te d from a l l non-Zoroastrian people and tr ib e s . Taxes in the provinces and o th e r regions in th e Empire were co lle c te d by lo c a l shatraoavan (governor o f a province In an cien t P e rsia ). L ater, under Islam ic ru le , th is tax system d e te rio ra te d in Iran , because the Sultan "leased" out various regions and provinces to lo c a l ru le rs , Amirs, Kahns, o r feudal lo rd s, in re tu rn fo r a sp e c ific annual ransom. Ihe lo c a l ru le rs , then, would ru th le s s ly e x tra c t from th e people sev eral times the sum of th e ra n som. N aturally, the more ty ra n n ic a l these ru le rs were, the la rg e r th e provinces they could g e t by o fferin g a la rg e r ransom to the Sultan. While he would pay a sta te d sum of tax c o lle c tio n to the Emperor, he could keep fo r h is p e r sonal use any surplus he could c o lle c t. He would spend l i t t l e o r nothing fo r public works. As a r e s u lt of th is , fo r cen tu ries th e Persian 169 people have to come to look upon taxes as a money ex to rted from them by th e sovereign. The s itu a tio n became even worse w ith the coming o f th e Shi*a su lta n s. The Shia j u r i s t s , w hile condemning taxes to the secu lar S ta te , de manded heavy"taxes by th e re lig io u s Treasury run by them. According to Islam ic law th e re were two taxes--"Khoms” and "Z akat." Khoms amounted to 20 per cent of earnings, fo r the Treasury, and Zakat, 10 per cent fo r c h a rita b le pur poses. At th is time th e ric h who had influence among the clerg y , began dodging payment of such taxes, although they paid Zakat, o r alms, which went d ire c tly to the mullahs (re lig io u s le a d e rs). Even a f te r the C o n stitu tio n al Revolu tio n of th is century, when th e government tax c o lle c tio n was stream lined, many wealthy men continued dodging payment o f tax to the S tate w hile continuing the payment of alms to g the m ullahs. However, when the modern concept of government came to Iran in the wake of the C o n stitu tio n al Revolution, the g His Im perial M ajesty Mohammed Reza Shah Pahlavi Shahanshah of Iran, M ission fo r M v Country (New York: McGraw-Hill Book Company, In c ., 1961), pp. 161-194. 170 people were given cui added reason fo r d is lik in g ta x a tio n . This time th e people d islik e d paying taxes because they could see th a t th e ir money was not spent fo r th e ir w elfare Q but disappeared in a co rru p t ad m in istratio n . The common aim of th e p ro v in cial governor-general o r the m unicipal governor was to e x to rt a l l the taxes he could from the poor and to use most of h is revenues fo r h is own enjoyment and th a t of h is re tin u e . Often spe c ia l strong-arm squads would be organized to te rro riz e th e common people and keep the revenues coming in . The governor-general and governors, along w ith th e ir se c re ta rie s and sc rib e s, were lik e ly to end as owners of most o f th e land in th e ir areas. Needless to say, th e whole system bred la rg e -sc a le co rru p tio n ; farm ers, tradesmen, and landowners a lik e would b rib e ta x c o l le c to rs and strong-arm men in order to escape w ith a lig h te r tax levy or to re ta in ownership o f whatever belongings they had. 10 Gradually the government of Iran began to place more emphasis on in d ire c t taxes because i t was much e a s ie r to c o lle c t in d ire c t taxes from th e people. Also because d ire c t taxes could n o t meet th e government expenses as th e ric h continued to dodge payment d e sp ite many an occasion when th e government had to send troops to th e areas held by lo c a l feudal lords or khans to back up the tax co llecto r* s ^The Problem of Tax C ollection. Echo's Economic Reports, No. 105, June 1964, p. 2. ^ S h a h , o p. c i t . . pp. 1 6 7 -1 6 8 . demands. However, the increased use o f in d ire c t taxes contributed to the widening of th e g u lf between the ric h and the poor.** Income Tax Law_ in_Iran The new Iranian Income Tax Act was approved by Par liam ent on A pril 5, 1956, w ith re tro sp e c tiv e e ffe c t from March 21, 1956. In i t s clauses aspects of tra d itio n a l p ra c tic e are interm ingled w ith th e graduated scales of ta x atio n in fo rce in many o th er c o u n trie s. The following 12 is a b r ie f o u tlin e o f th is Act. Persons (re a l or le g a l) (1) Salary and wage earners (except government, m unicipal, railw ay and Plan O rganisation em ployees and labour and Members o f Parliam ent). (2) Tradesmen and a rtis a n s . Rate o f tax atio n (1) Salary and wage up to 4,000 R ials per month exempt. In resp ect of any amount in excess, a 6 per cent tax w ill be payable. (2) Basis o f tax: th ree times the monthly re n ta l of th e ir prem ises, o r one th ird o f the to t a l f in a l ised tax fo r the la s t th re e years, whichever is th e g re a te r. 11 The Problem of Tax C o llectio n , p. 2. 12 An Economic Survey of Iran (London: The Iranian Bnbassy, 1957), pp. 48-49* 172 (3) Merchants. (4) Persons o£ lib e r a l professions such as: (a) physicians; (b) b a r r is te r s ; (c) public n o ta rie s; (d) engineers, e tc . (3) Companies. (3) B asis: 12 p er cent o f th e ir n e t re c e ip ts fo r the previous y ear. (4) (a) The M edical profession is divided in to six cate* g o ries and th e ir l i a b i l i tie s fo r ta x a tio n per annum range from 80,000 R ials to 2,500 R ia ls. (b) Taxes w ill be received from b a r r is te rs by a f f ix ing stamps on th e ir power o f atto rn ey . The r a te fo r cases Involving property i s 6 per cen t of 50 per cen t o f b a rriste rs* fees. For o th er cases th e re are d iffe re n t b asic r a te s . (c) Basic r a te fo r Public N otaries is 12 per cent of 60 per cen t o f th e ir re g is tra tio n fees. (d) Basic r a te fo r engi neers is 12 per cent of 60 per cent of th e ir to t a l annual income. (5) The r a te of ta x atio n of jo in t-s to c k companies w ith a paid-up c a p ita l up to 5 m illio n R ials is 12 per cen t of th e ir net annual income. For companies w ith c a p ita l over 5 m il lio n R ials the r a te w ill be increased proportion a te ly up to 50 per cen t of th e ir n et income. D ivi dends o f the above com panies w ith a c a p ita l up 173 (6) (a) Owners of re a l e s ta te . (b) Owners of c u l t i vated land and market gardens. (7) C ontractors and le a se hold o p erato rs. (8) Persons d eriv in g in come from mortgages, hypothecs, loans, tra n sa c tio n s, e tc . to 5 m illio n R ials are exempt. I f th e c a p ita l exceeds th e above fig u re , th e re w ill be a 6 per cent tax on dividends. Foreign airways companies in Iran s h a ll be exempt from ta x a tio n on a re c ip ro c a l b a s is . Foreign shipping companies w ill pay 4 per cent o f a l l th e ir annual re c e ip ts in Iran (whether th e sums are a c tu a lly r e ceived in Iran o r a t the d e stin a tio n o r en ro u te ). (6) (a) Basic r a te 10 per cent o f th e ir n e t annual in come. (b) Basic r a te 10 per cent o f p ro p rieto ry n et income. (7) Basic Rate: (a) on co n tra cts o r re n ts up to R ials 2,500,000. . 2% (b) from R ials 2,500,001 to R ials 5,000,000 . . . . 3Z (c) from 5,000,000 R ials upwards. 4% o f th e to t a l amount of co n tra c t o r re n t. (8) In general a l l discount tran sactio n s w ill pay a minimum r a te o f 12 per cen t and a maximum of 18 per cent o f th e in te re s t accruing on the c a p ita l. 174 Other c la sse s of taxpayers are: (9) Any person re sid in g in Iran and deriving an income from abroad. (10) Person deriving any s o rt o f permanent o r temporary income In Iran, whether they a re re sid in g In Iran o r abroad. I I . TA X A TIO N A N D T A X POLICY TO STIM U LA TE E C O N O M IC G R O W T H \ In th e advanced and developed co u n tries o f the world, income ta x a tio n Is widely accepted as the most s u i t able primary source o f revenue fo r government expenditures. I ts a p p lic a tio n to th e underdeveloped co u n tries o f the world although advantageous, has lim ita tio n s, because the m ajority of the people in the underdeveloped countries liv e a t o r even below the bare subsistence le v e l; secondly, many liv e outside the money-income economy; and th ird ly , th ere is a general lack o f lite ra c y w ith which to comprehend and use th e income tax and i t s tax forms. But n ev erth eless, 13 th e re is a place fo r a modest and in c ip ie n t income tax. 13 W illiam H. Anderson, "Taxation and Tax P o licies fo r Economic Development" (unpublished Paper, U niversity of Southern C alifo rn ia, Los Angeles, n.d.), pp. 3-4. (Mimeo graphed.) 175 Income Tax U nfortunately, the general tax environment o f the Iran ian economy is unsuited to a high degree o f p erfectio n of th e tax s tru c tu re . With i t s lim ita tio n s, the income tax can have g re a t m erit as an element o f f is c a l policy in th e tax s tru c tu re o f an underdeveloped economy. I t can be used advanta geously in th e tax s tru c tu re o f the Iran ian economy. To meet th e problems of Iran, i t s f is c a l p o lic ie s must be " ta ilo r made." Canons of ta x a tio n Which have become com monplace in advanced co u n tries may be Inapplicable in 14 Iran . A modest income tax may be s e t up w ith f a ir ly high personal exemptions and middle progressive ra te s in order to confine th e income tax to middle and higher income l e v e l s . ^ This would exclude the ty p ic a l fam ily from the tax, and lim it the degree o f progression to the r a te s tru c tu re . Thus th e y ie ld income would be lim ited to middle and higher income groups. ^Benjam in Higgins, Economic Development (New York: W . W . Norton and Company, In c ., 1959), P* 475. ^A nderson, "Taxation and Tax P o licies fo r Economic Development," p. 4. ^ Jo h n F. Due, Government Finance (Homewood, I ll in o is : Richard D. Irwin, In c ., 1963), pp. 596-597. 176 In th e e a rly stages of development the ra te s must remain re la tiv e ly low so as n o t to In te rfe re w ith le g itim a te Investment In cen tiv es. Then gradually as the economy develops and the r e a l n a tio n a l income r is e s , the exemptions might be lowered and the prog- re a s iv ity of th e ra te s Increased l i t t l e by l i t t l e over tim e. This has been th e p a tte rn of experience even in th e more highly developed economies. So th a t in the long run (a generation o r so) (1) the income ta x may grow in to an im portant source of revenue, (2) stre n g then the concepts of equity and a b ility to pay, and (3) a lso become a more potent weapon w ith which to combat in fla tio n in expanding economies. Income tax atio n has sev eral advantages. The income tax is th e most e ffe c tiv e way to reach the above-subsistence income of those groups which have a ttain e d such le v e ls, the tax being adjusted in terms of th e amount o f such excess and made progressive r e la tiv e to i t . No o th e r tax can be adjusted in such a p recise fashion. A la rg e portio n of the tax under such conditions in Iran w ill be obtained from c i v i l serv an ts, business executives, employees, and p ro fes sio n a l men. Taxation of these persons w ill lik e ly have few harmful e ffe c ts on economic development sin ce they a re not engaged in undertaking s ig n ific a n t business investm ent. The tax w ill recover a portion of th e gains made from economic growth and p a rtic u la rly w ill catch th e ^A nderson, "Taxation and Tax P o licies fo r Economic Development," p. 4. 177 "unearned income" sp ecu lativ e g ain s, increases in land values, e tc ., ta x a tio n of which presumably has l i t t l e e ffe c t on economic growth. The d ire c t burden o f the tax makes persons cognizant o f th e ir re s p o n s ib ilitie s toward government. The y ie ld is more s ta b le than th a t o f the major a lte rn a tiv e sources. The ta x conforms w ith widely accepted standards o f equity. I t can be used to brin g about a re d is trib u tio n of income. U nfortunately, e ffe c tiv e ad m in istratio n of an income tax w ith a broad coverage is extrem ely d if f i c u lt under the present ty p ic a l conditions of Ira n . Accurate rep o rtin g of Income fo r a la rg e secto r o f the population is im possible to a tta in . Various s ig n ific a n t featu re s of the Iran ian economy include low le v e ls o f lite ra c y and record keeping; inade quate numbers of tra in e d ta x ad m inistrators and au d ito rs; u n sa tisfa c to ry land t i t l e s itu a tio n s ; lim ited use o f bank accounts. A pplication of th e tax to subsistence farming income is p a rtic u la rly d if f ic u lt because of the problems of determ ining the amounts and values of th is income. Even in the advanced co u n tries of th e world, the assessment o f in come is much more d i f f i c u lt In a g ric u ltu ra l areas, where 178 records are seldom complete, than I t Is In urban In d u stria l ized areas. The ad m in istrativ e problems associated w ith a la rg e ru ra l population a re aggravated In underdeveloped co u n tries by a low le v e l o£ general education, widespread I llite r a c y , and by the re la tiv e ly sm all number of people w ith tra in in g and experience in public ad m in istratio n . A re la te d problem is th e re la tiv e ly high proportion o f income th a t is earned in mind, ra th e r than in money, which c le a rly 18 c a lls fo r sp e c ia l monetary and f is c a l devices. The w rite r recognizes the problems of ad m in istrativ e personnel, and advocates a maximum degree of sim p lific a tio n c o n siste n t w ith eq u ity . Review of th e income taxes in Iran in d icate s conform ity w ith these observations in consider able measure. In th e m atter o f sim p lic ity , the taxes have l e f t much to be d esired . Apart from th e question of th e d e s ir a b ility of the use o f income ta x atio n is th a t of the b e st income tax stru c tu re . P a rtic u la r featu re s o f such ta x a tio n th a t are regarded as most s u ita b le in a developed economy may be com pletely u n sa tisfa c to ry in an underdeveloped economy 18 Higgins, op. c l t .. p. 475. 179 lik e Ira n . For example, the system of c re d its fo r depend en ts most s u ita b le fo r a w estern so c ie ty may be com pletely u n su ita b le fo r Ira n . With m u ltip le wives and "extended fam ilie s" in th e form of a harem of concubines, the tempo ra ry m arriages, th e u su al system breaks dow n.^ The w rite r fe e ls th a t the government should lim it the nunber of allow ances fo r ch ild re n and wives, and to r e s t r i c t the number of o th e r e lig ib le dependents. Business P ro fits In an underdeveloped economy th e tax p o te n tia l from business e n te rp rise s u su ally exceeds th a t from in d iv id u als 20 a t ty p ic a l r a te s . The government must n e c e ssa rily draw some revenue from th is source on the grounds o f equity and to r a is e some revenue. However, . . • care must be exercised not to in te r f e r e w ith new investm ent and c a p ita l form ation. . . . Under th e rig h t circum stances tax p o licy must give co n sid eratio n to g ran tin g p o sitiv e tax inducements to encourage new IQ Temporary m arriages a re p rev alen t in Ira n . In a temporary m arriage a man takes a woman fo r h is w ife, and she becomes h is le g a l w ife. The period o f m arriage is sp e c ifie d to l a s t anywhere from fiv e minutes to fifty y e a rs• 20 Due, Taxation and Economic Development in T ropical A frica, p. 151. Investm ent. This i s ad v isab le because new investm ent c o n trib u te s to th e c re a tio n o£ new jobs and increased n a tio n a l income. The whole n a tio n b e n e fits when th ese r e s u lts occur. 21 Heavy business ta x a tio n can in te r f e r e w ith economic growth, both by tak in g funds, which would be used fo r expan sion and by lessen in g th e In cen tiv es to expand. The magni tude o f th e adverse e f f e c t cannot be defined, but th e dangers a re such as to re q u ire cau tio n in th e use o f the ta x es. On th e o th e r hand, however, th e re is th e p o ssi b i l i t y th a t ap p ro p riate adjustm ents in business ta x a tio n may be h e lp fu l in a tta in in g b e tte r use o f resources in 22 economic development. In o rd er to avoid the impact of business taxes on p riv a te business investm ent, i t is advo cated th a t various concessions be made to business in the developing economy. These may tak e th e form of "tax h o li days," o r "pioneer companies" le g is la tio n . Under th is type o f program, complete tax exemption is given fo r new firm s fo r th e f i r s t few years o f th e ir operation, provided th e ir a p p licatio n s' a re approved by the ap p ro p riate government 21 Anderson, "Taxation and Tax P o lic ie s fo r Economic Development," p. 4. 22 Due, Taxation and Economic Development in T ropical A frica, p. 152. 181 23 agency as e s s e n tia l fo r economic development. Iran has already been experim enting w ith th is . W ithin th e p ast sev eral years favorable new tax le g is la tio n has been passed. To stim u late new productive investm ent, p a rtic u la rly in the provinces o f Iran , a complete fiv e -y e a r tax holiday is offered to new firm s o u tsid e th e Teheran area. Those w ith in the Teheran area are taxed on only 50 per cen t o f th e ir income. Another in cen tiv e to jo in t stock com panies is a provision exempting 10 per cen t o f p ro fits from 24 ta x a tio n . The above concessions may be fu rth e r augmented w ith generous and lib e r a l "carry-forw ard of lo s s ” p rovisions, and accelerated d ep re c ia tio n , as in the mature economies. F in ally , as a p a rt of the o v e r-a ll e f f o r t to o p ti mize resources, and to augment fo reig n exchange earnings, export in d u strie s, when they come in to ex isten ce, may be com pletely exempted from ta x atio n on th e ir export business. To encourage reinvestm ent o f business p r o f its , ^D ue, Government Finance, pp. 597-598. 24 Richard E llio t Benedick, In d u s tria l Finance in Iran (Boston: D ivision o f Research, Graduate School of Business A dm inistration, Harvard U niversity, 1964), p. 31. 182 p a r tia l o r f u ll exemption may be given to these reinvested earnings. Such exemptions may be given only to those in d u strie s Which the le g is la tu re regards most s ig n ific a n t 25 to the country’s economic development. Tax Incentive to Foreign C apital P o litic a l s ta b i lity and maintenance of s ta b le government are p re re q u isite s to any form of tax in cen tiv e to foreign c a p ita l. U nstable conditions c o n trib u te to a general aura of in se c u rity th a t Influences fo reig n business d ecisio n s. Breach o f c o n tra c ts and n a tio n a liz a tio n of fo reig n companies discourage fo reig n c a p ita l from en terin g the country. Assurance of a degree of consistency in ad m in istra tio n of the law is an e s s e n tia l precondition to s ig n ific a n t long-term investm ent. A fter providing the p re re q u isite s, then th e tax incentives of the country can a ttr a c t and re ta in foreign c a p ita l in order to stim u late economic growth. A ll the fo re ig n -c a p ita l-c re a te d p ro fits should be prevented from being exported w ithout b e n e fits to the country o fferin g 25 Anderson, "Taxation and Tax P o licies fo r Economic Development," p. 5. 183 26 th e opportunity to produce the p r o f its . Iran Is th e only country In th e Middle E ast th a t has enjoyed r e la tiv e p o litic a l s t a b i lit y sin ce the Second World War. As such I t provides th e p re re q u isite s fo r in cen tiv es to fo reig n c a p ita l. The Foreign Investment Act of 1955 gives concessions and p riv ile g e s to fo reig n in v esto rs and guarantees them c e rta in exemptions. I t provides adequate se c u rity , equi ta b le tax treatm ent, p r o f it rem ittance, c a p ita l r e p a tr i a tio n , income export, favorable le g is la tio n , and fre e advisory cen ters which o ffe r a v a rie ty of serv ices to po- 27 te n tia l and c u rre n t in v e sto rs. But d e s p ite the favorable le g is la tio n , foreign in vestm ent has not been very heartening in recen t y ears. I t is widely held th a t g re a te r confidence in the c o u n try 's laws and re g u la tio n s and i t s economic and p o litic a l s t a b i l i t y w ill see an in flu x of foreign c a p ita l investm ent in ^ I b i d . . p. 6. 27 Iran Review (Ira n ia n Embassy, Washington), Decem b er, 1960, pp. 6-7. 28 T t» H n Alumnae and Book of F acta. 1965 (Teheran: Echo of Iran, 1965), p. 381. 184 A new an aly sis by th e F ir s t N ational C ity Bank of New York underscores the point th a t Iran has . . . one of the b est p o te n tia ls fo r advancement among th e developing c o u n trie s. Iran is picking up strong support from U.S. investors looking fo r expan sion in the Middle E a st.29 ^ U.S. News and World Report. November 15, 1965, p. 121. "A big ste p : The N ational Petrochemical Company of Iran, a Government agency, and A llied Chemical Corporation a re to form a 50-50 jo in t venture to c re a te a major p e tro chemical complex. The c o st o f the p ro je c t's i n i t i a l phase alone is expected to h i t the equivalent o f 100 m illio n d o l la r s . I ts product: chemical f e r t i l i z e r from o ilf ie ld 's o u r' gas. " E a rlie r th is autumn, Standard O il of C a lifo rn ia , a member of th e Iranian o il consortium, disclosed plans fo r a new consortium a f f i l i a t e to generate jo in t ventures among Iranian and foreign in v e sto rs. C alled Iran ian Investm ents, L td ., i t w ill aim a t marine Investm ents, petrochem ical a c tiv itie s , s te e r c le a r o f b asic o il o p eratio n s. However, sev eral U.S. o il firm s have joined the N ational Iranian O il Company in new o ffshore d r illin g in the Persian Gulf. "B. F. Goodrich Company, a pioneering American non o il in v e sto r in Iran , has been followed by a com petitor, General T ire In te rn a tio n a l. K aiser Jeep, American Motors and an Iran ian p artn er in 1966 w ill begin production of autos and u t i l i t y v eh icles in Iran, a step-up fo r the coun t r y 's v eh icle import and assembly operations. E le c tric Storage B attery Company is e sta b lish in g a battery-m aking venture. "Pan-A lliance Corporation, a New York Investment company, and the In d u stria l and Mining Development Bank of Iran in September signed an agreement to b u ild a 2.5 m il lio n -d o lla r window-glass facto ry a t Ghazvin. A d iv isio n of M inerals & Chemicals P hilipp Corporation is p a rt owner o f a s te e l ro llin g m ill now under co n stru ctio n in Iran . "Drug producers—American Cyanamid, P fizer, Olin Mathieson Chemical, other firm s in fie ld s from paper to detergent m anufacture--have p ro jec ts in operation or under study." I I I . SU M K A R Y 185 Revenue from taxes can supplement th e o i l revenue to be spent on developmental p ro je c ts , capable o f providing a s ig n ific a n t amount o f employment and o f in creasin g produc t i v i t y . E ffe c tiv e c o lle c tio n o f f a i r and j u s t tax es is e s s e n tia l to th e running o f a modem s ta te . Some people b i t t e r l y alle& e th a t my government has n o t been c o lle c tin g a l l the taxes i t should, and u nfor tu n a te ly th e ir com plaint is w ell-founded. Adminis tr a t iv e confusion and in e ffic ie n c y , and e sp e c ia lly c a re le ss handling o f tax f i l e s , has accounted fo r many o f our ta x -c o lle c tio n d i f f i c u l t i e s . 30 Another d if f ic u lty in u tiliz in g taxes c o lle c te d is th a t perhaps only one out o f every th re e r i a l s c o lle c te d a c tu a lly reaches the tre a su ry . This problem e x is ts in la rg e p a rt because of th e confusion o f tax laws and the d isc re tio n a ry power accorded to minor o f f ic i a ls . Bargain ing a t th e bazaar is im itated in the process o f tax c o lle c - 31 tlo n . Furtherm ore, the p ressu re to avoid taxes is r e in forced by common b e lie f th a t revenues c o lle c te d may be used up by squandering o f f ic ia ls . This is understandable in Iran as in so many o th er 30 Shah, on. c i t .. p. 141. 31 B enedick , o p. c i t . . p . 3 9 . feudal s o c ie tie s . The c itiz e n s u n til re c e n tly have known the government prim arily through th e tax c o lle c to r o r m em bers of the p o lice o r the m ilita ry . In e a r lie r years the tax c o lle c to r commonly extorted a l l he could. I t is not su rp risin g th a t the peasants looked askance a t government a c tiv itie s in th e ir d a lly l i v e s . ^ But, on the o th er hand, i f th e s ta te b uilds a fre e school to which the peasant can send h is ch ild ren , sprays h is house w ith D D T to co n tro l in fectio u s d iseases, d r i l l s a w ell from which he and o th er v illa g e rs can get pure w ater, and opens a c lin ic th a t serves him and h is fam ily, the peasant can see the new and b e n e fic ia l ro le of the govern ment in h is d a lly l i f e . The people have been so accustomed to the government taking something from them, th a t they fin d i t d if f i c u lt to believe th a t now the government is actin g w ith hum anitarian in te r e s t. One can see the g re a t ta sk th a t faces the government in changing i t s Image w ith the people. I t was seen as one th a t only took away. Now i t needs be seen as a benefactor. 32 Shah, o p. c i t . . p. 177. CHAPTER V II PUBLIC EXPENDITURE POLICY FOR G R O W T H A N D OPTIMIZATION In the preceding ch ap ter co n sid eratio n was given mainly to the p rin c ip le s , p ra c tic e s , and problems involved in th e ra is in g o£ governmental revenues. In th is chapter an attem pt w ill be made to analyze th e p rin c ip le s , p rac tic e s , and problems involved in government spending th ese revenues fo r growth and o p tim izatio n . This ch ap ter w ill p resen t a few s a lie n t observations concerning expenditures as a whole. I. G O V E R N M E N T EXPENDITURES Government expenditures make up perhaps the most im portant sin g le to o l of f is c a l p o licy fo r economic growth. Whether intended o r n o t, government expenditures a re c e r ta in to produce a number o f e ffe c ts on th e le v e l of n a tio n al 187 1 8 8 Income and i t s d is trib u tio n , and on th e consumption, in vestm ent, and employment of th e n atio n . The extent of Increase In the n a tio n al Income depends upon the type of expenditures governments make, fo r example, fa c to r purchase expenditures or tra n s fe r payments. Factor-Purchase Expenditures The term factor-purchase expenditures re fe rs to goods and serv ices purchased by governmental u n its . Such expenditures are "exhaustive" because they use up resources in the same manner as do p riv a te purchases of e ith e r in vestment goods o r consumption goods and services.^* The goods and serv ices purchased by the government se c to r con s ti t u te the Input of resources necessary fo r the output o f 2 so c ia l goods and serv ices. The factor-purchase expenditures of th e government d ire c tly provide ^ploym ent fo r m illio n s of workers. The payment of public money to the p riv a te se c to r of the economy enhances the n e t retu rn s accruing to the fa c to rs of production--w hether i t be wages o f the ^Wallace C. Peterson, Income. Employment and Eco nomic Growth (New York: W . W . Norton and Company, In c ., 1962), p. 248. 2 Richard A. Musgrave, The Theory of Public Finance (New York: McGraw-Hill Book Company, In c ., 1959), pp. 3-24. 189 lab o rer, p ro fits o f the entrepreneur, In te re s t to the lender, or re n t to th e landlord. Hence, the n a tio n a l income of th e economy w ill be d ire c tly increased to the ex ten t th a t facto r-p u rch ase expenditures c re a te a d d itio n a l employment. 3 Therefore, th e primary e ffe c t o f government expendi tu re w ill be to c re a te an equal amount of new incom e--in the form of wages, re n ts , in te r e s t, and p r o f its —which w ill accrue to the resource owners. According to Keynes, when ever Income increases th e re w ill be a strong tendency fo r i the b e n e fic ia rie s of such increases to step up th e ir ex penditures. This causes secondary, or induced, e ffe c ts . Over the ensuing income-expenditure periods, th erefo re, th e re is generated a m u ltip lie r e ffe c t from the sum of the i n i t i a l and induced changes in expenditure upon the n a tio n a l income. The extent and the magnitude of the e ffe c t o f an i n i t i a l public expenditure on th e n a tio n a l income w ill depend upon the p ro p en sities to consume and 4 save of the various income re c ip ie n ts . T ransfer Payments T ransfer expenditures of government a re mainly q William H. Anderson, "The F isc a l Economics of Pub li c Expenditure" (unpublished Paper, U niversity of Southern C a lifo rn ia , Los Angeles, n .d .) , p. 1. (Mimeographed.) 4 P eterso n , on . c i t . . p . 169. 190 concerned w ith th e re d is trib u tiv e function o f government. They a re non-exhaustive because they do not absorb r e sources; ra th e r th e ir c h ie f e ffe c t is th a t o f re d istrib u tin g income among in d iv id u als, s o c ia l and economic groups, or geographical reg io n s. T ransfer expenditures a re d i s t i n guished from fa c to r purchase expenditures by th e f a c t th a t the government receiv es no equivalent value in e ith e r goods 5 ' or serv ices from the re c ip ie n t o f th e expenditure. The tra n s fe r expenditures o f government are n o t com pensation fo r th e production of goods and serv ices in the period, and as such do not d ir e c tly in flu en ce employment, o r th e n a tio n a l income. The e ffe c t o f the tra n s fe r payment of th e n a tio n a l income is secondary. The tra n s fe r o f the funds increases th e a b ility of those receiv in g th e money to enlarge th e ir consumption p a tte rn s . • . . The p o rtio n of tra n s fe r expenditure used fo r consumption purposes w ill have a m u ltip lie r e ffe c t upon th e n a tio n a l income in the ensuing Income- expenditure p erio d s. So th a t i t is the spending o f the " tra n s fe r funds" by th e re c ip ie n ts which produces the expansionary e ffe c t on th e n a tio n a l income.” T ran sfer payments norm ally can be c la s s ifie d in one 5Ib id .. p. 249. ^Anderson, op . c i t .. pp. 1-2. 191 o f th ree major c a te g o rie s.^ F ir s t, Is the tra n s fe r of money Income th a t goes to persons, th a t may be linked to w elfare concepts and programs. Payments fo r so c ia l w elfare and so c ia l se c u rity , such as unemployment compensation, old age retirem en t b e n e fits, aid to dependent ch ild ren , and r e l i e f payments, a re examples. These a re the kinds of tra n sfe rs th a t have the most d ire c t e ffe c t upon the d i s t r i bution of money Income In a so ciety . Secondly, tra n s fe r payment may take th e form of subsidies to business firm s o r resource owners. Often the aim and purpose of these su b sid ies are to bring about a g re a te r reduction o f a p a rtic u la r commodity than would be forthcoming i f the reg u latio n of production was l e f t ex c lu siv e ly to market fo rces. Sometimes subsidies may be designed to supply goods and serv ices to p a rtic u la r groups a t a c o st below the market p ric e , o r they may be used in the form of p ric e supports fo r various goods and se rv ices. Subsidies to business firm s and resource owners may a l te r th e d is trib u tio n o f income in much the same man ner as tra n s fe r payments going to persons, although u su ally they a re not so c le a rly rooted in e q u a lita ria n w elfare concepts. ^This sectio n is drawn heav ily from Peterson, op. c i t . . p. 250. 8 Ib id . 192 T hirdly, tra n s fe r expenditures can be In the form o f In te re s t on th e public debt. In te re s t on debt is not r e garded as a payment fo r th e serv ices of economic resources c u rre n tly employed in productive a c tiv ity . As such th is In te re s t payment is another form of tra n s fe r expenditure. Therefore, as can be seen, a l l such nonfactor payments to people th a t do not r e f le c t a cu rren t co n trib u tio n to the processes of production a re c a lle d tra n s fe r payments. 0 I t is th e spending of th e " tra n s fe r funds" by the Income re c ip ie n ts which produces the expansionary e ffe c t on the economy. However, the end r e s u lt o f public expenditures as they a ffe c t the n a tio n a l income, depends upon th e w illin g ness o f the public to respend i t s income. This is tru e whether the i n i t i a l expenditure is a factor-purchase o r tra n s fe r type. 2 ,0 I I . G O V E R N M E N T EX PEND ITURES A N D E C O N O M IC G R O W T H Government expenditures have assumed growing impor tance as a p o ssib le source of public investment in the Q Daniel Hamberg, P rin cip les of a Growing Economy (New York: W . W . Norton and Company, In c ., 1961), p. 115. ^ A n d erso n , o p. c i t . . p . 2 . developing co u n tries of the world. Sincb the end o£ the War, public investm ent has been steppedVup n early every where. 3,1 There a re a number o f areas of government a c tiv ity which c o n trib u te d a ily to g re a te r p ro d u ctiv ity in the long run. I t is not p o ssib le to analyze in g re a t de t a i l th e various government a c tiv ity and expenditure pro grams designed to bring rap id economic growth. Some o f the major areas of government a c tiv ity a re general and sp e c ific types of education, various types of research, conserva tio n , and development of n a tu ra l resources, as w ell as tra n sp o rta tio n f a c i l i t i e s , public h ealth and sa fe ty , and aids and encouragement to industry and a g ric u ltu re .1^ I t should be emphasized, however, th a t in th is resp ect th e present s itu a tio n is q u ite d iffe re n t from th a t which prevailed in the advanced countries a t th e beginning o f th e ir economic transform ation. In these "old co u n tries” the main emphasis was on increased production, and s ta te re s p o n s ib ilitie s w ith regard to s o c ia l w elfare and so c ia l c a p ita l in general came much la te r . Even in Japan in the 13,Antonin Basch, Financing Economic Development (New York: The Macmillan Company, 1964), p. 9* 12 Anderson, on . c i t .„ pp. 1 -2 . 194 n in eteen th century and early tw en tieth century th e s ta te concentrated I ts resources on In d u s tria liz a tio n , expansion, and power; I t assumed no re s p o n s ib ility fo r Individual and 13 fam ily welfare* In th e "old c o u n trie s," government savings, i f they ex isted , were spent m ostly on public con struction* However, a d iffe re n t s itu a tio n e x is ts a t present* Because o f changed s o c ia l and p o litic a l co nditions, i t is p o stu lated th a t expansion of various functions o f a s o c ia l w elfare s ta te proceeds p a ri passu w ith economic develop ment. I t is then assumed th a t budget revenue should be ample enough to finance th e expanding recu rren t expenditure on so c ia l c a p ita l and expanding government adm in istratio n , and provide a surplus th a t would be a v a ila b le to help f i - 14 nance investment* In general, a secu la r trend o f in creasing cu rren t government expenditures has p revailed throughout the developing n atio n s, ex ertin g a long-term upward p res sure on government spending. 15 13 Irene B * Tauber, "Japan's Population—M iracle, Model, or Case Study?" Foreign A ffa irs, Ju ly , 1962, p. 597. 14 Basch, o p . c i t *. p. 11. 15 A. R. P re st, Public Finance in Underdeveloped Countries (New York: Prager, 1963), p. 15. 195 Education and Efonanie Progress People a re an im portant p a rt o£ the w ealth of 16 n atio n s. Education promotes the b e s t long-run u t i l i z a tio n of th e human resources o f a n atio n . The maximum production a n atio n may o b tain from i t s n a tu ra l resources and i t s stock o f c a p ita l, th erefo re, depends not merely on the siz e of i t s population, nor even on the number w illin g and ab le to jo in i t s labor fo rce. Q uality i s e s s e n tia l. And q u a lity in tu rn is a function of ed u catio n .* ' Educated people have Increased knowledge, mental a b ility , and re c e p tiv ity and w ill work u sefu lly in govern ment serv ice, industry, or a g ric u ltu re . They w ill adapt th e ir s k ill s to d iffe rin g s itu a tio n s and th in k c re a tiv e ly to fin is h work ex p ertly and economically. Formal education in high schools and co lleg es can be supplemented by r e search in government la b o ra to ries and w ith government- sponsored programs in u n iv e rs itie s and industry.*® Investment in human beings has been a major source Theodore W . Schultz, " Investment in Human Capi t a l ," in The Goals of Economic Growth, ed. Edmund S. Phelps (New York: W . W . Norton and Company, In c ., 1962), p. 106. 17 M elville J . Ulmer, Economics: Theory and P ractice (Boston: Houghton M ifflin Company, 1959), p. 99* 18 Anderson, on . c i t . . p . 7. 196 o f growth In advanced co u n tries o f the world. Economic development plans of the underdeveloped countries u su ally place a much g re a te r emphasis on physical Investment than upon human Investm ent. As such th is has co n trib u ted l i t t l e to extend the cap acity o f the people to meet the challenge o f accelerated development. This Is re fle c te d In sev eral forms, fo r example, In low lab o r e ffic ie n c y , fa c to r immo b i l i t y , lim ited sp e c ia liz a tio n In occupations and in trad e , a d e fic ie n t supply of entrepreneurship, and customary values and tra d itio n a l so c ia l in s titu tio n s th a t minimize 19 the incentives fo r economic change. I t is m ostly through in creasing th e p ro d u ctiv ity of workers, by investing in them and not merely in c a p ita l to be used w ith them, th a t in d iv id u al consumption lev els are increased in the long run. Human c a p ita l may prove to be th e most im portant investment o f a l l fo r the public sec- to r . 20 The a b ility of a country to absorb c a p ita l funds, by 19 Hla Myint, "An In te rp re ta tio n of Economic Back w ardness," Oxford Economic Papers (Oxford: The Clarendon Press, June, 1954), pp. 132-163. 20 Stephen Enke, Economics fo r Development (Englewood C liffs , New Jersey : P ren tice-H all, In c ., 1963), p. 385. 197 using than pro d u ctiv ely enough to pay a re tu rn , la c lo se ly linked to advancing general education. 21 As such I t has become evident th a t a high p r io r ity must be given to in vestm ent in human c a p ita l. Many stu d ie s o f economic growth in advanced coun- 22 tr i e s confirm th e importance o f non-m aterial Investm ent. One of the stu d ie s a ttr ib u te s some 23 per cen t of the growth in r e a l n a tio n a l income in th e United S tates between 1929 and 1957 to the increased education o f th e lab o r force and another c o n trib u tio n of approxim ately 20 per cen t of to t a l growth to the advance o f "technological" knowledge and "m anagerial" knowledge which perm itted more to be pro- 23 duced w ith a given q u a lity of reso u rces. The s o rt of education th a t can be considered as investm ent is th a t which r e s u lts in a person having an in creased value In th e lab o r m arket. A u se fu lly tra in e d and educated person is one who can command a higher wage o r 21Ib id . . p. 396. 22 T. W . S chultz, "Investm ent in Human C a p ita l," American Economic Review. March, 1961, pp. 6-11. 23 See fo r example: Edward F. Denison, The Sources of Economic Growth in the United S tates and the A ltern a tiv e s Before Us (New York: Committee fo r Economic Develop ment, 1962). 198 salary because he Is more productive in supplying the goods 24 and serv ices th a t so ciety wants. Expenditures on education and tra in in g and in r e search co n trib u te to p ro d u ctiv ity by ra is in g th e q u a lity of human c a p ita l, and these outlays y ield a continuing re tu rn 25 in the fu tu re . Simon Kuznets, who propounds th is point of view, suggests th a t i t may w ell be th a t in stead o f a d iffe re n c e in n e t c a p ita l form ation in th e proportions of 10 per cent in the ric h and, say, 3 per cent in poor coun t r i e s , the tru e d iffe re n c e is c lo se r to 30 per cent or over 26 and 3 per cen t. The slow growth in knowledge is an espe- 27 c ia lly severe r e s tr a in t on progress. 24 Enke, on. c i t .. p. 389. 25 Gerald M . Meier, Leading Issues in Development Rpnnnm<r« (New York: Oxford U niversity Press, 1964), pp. 267-268. 26 Simon Kuznets, "Toward a Theory of Economic Growth," n atio n al Policy fo r Economic Welfare a t Home and Abroad, ed. Robert Leckachman (Garden C ity, New York: Doubleday, 1955), pp. 39-40. 27 See fo r example: David C. McClelland, The Achiev ing Society (Princeton, New Jersey : Van Nostrand, 1961); George M . F oster, T ra d itio n a l C ultures and th e Impact of Technological Change (New York: Harper and Row, 1962); E. E. Hagen, On the Theory of Social Change (Homewood, I llin o is : The Dorsey Press, In c ., 1962); Theodore W . Schultz, "Investment in Human C ap ital in Poor C ountries," 199 An in a b ility to read and w rite is an enormous handi cap fo r anyone who w ill not be working in a g ric u ltu re a l l 28 h is l i f e . One o f the most u rg en tly needed programs in Iran is increased education; 87.2 per cent of the popula- 29 tio n is i l l i t e r a t e . Although Iran has made g re a t s trid e s in recen t years, i t s t i l l has a long way to go. The shortage of teachers is a serious b o ttlen eck in Iran . There is a lso a g re a t shortage of books and li b r a r ie s . The most pressing lib ra ry problems are repeatedly id e n tifie d as inadequate fin a n c ia l support, not enough books, not enough tra in e d personnel, locked cases o f books, the low p e r-c a p ita c irc u la tio n , the absence of referen ce serv ices, the paucity of b ib lio g rap h ic al c o n tro ls, the In e ffic ie n t te ch n ical operations, and fragm entation of in Foreign Trade an* * Htmn C ap ital, ed. Paul D. Zook (D allas: Southern M ethodist U niversity Press, 1962), pp. 3- 4, 11-12; W . A rthur Lewis, "Education and Economic Develop m ent," In te rn a tio n a l S ocial Science Journal. XIV (1962), 685-699; F redrick H. Harbison, "Hunan Resources Development Planning in Modernizing Economics," In te rn a tio n a l Labor Review. L X X X V (May, 1962), 2-5, 7-8, 20-24. 28 Enke, on. c i t . . pp. 386-387. With present use of technology in a g ric u ltu re , even here education is needed. 2Q United Nations S ta tis tic a l Yearbook. 1964 (New York: Department o f Economics and S ocial A ffa irs, 1965), p. 695. 200 30 c o lle c tio n s . In regard to book c o lle c tio n s and access to them, I t must be s ta te d th a t In Iran , l i t t l e publishing y et e x is ts . This means th a t books must be purchased from abroad. Pur chases from abroad c re a te many problems. There Is the problem of tra n s la tio n Into n ativ e F a rsi. There Is the problem of b ib lio g rap h ic al to o ls. There Is the problem of lim ited fin a n c ia l support. This study advocates th a t the follow ing actio n s be taken In regard to the fie ld of education: 1. The Iran ian government should a tta c h g reat im portance to the spread of education in the e n tire country, p a rtic u la rly in th e ru ra l areas. The c re a tio n of educational in s titu tio n s and a supervision of them should be an im portant re s p o n s ib ility of the government. 2. Free and compulsory education w ill have to be provided fo r a l l primary school ch ild ren . 3. The government should encourage the e s ta b lis h ment of p riv a te schools and educational 30 L ester E. Asheim, "U niversity L ib raries in De veloping C ountries," American Llhr^rv A ssociation B u lletin . October, 1965, p. 795. 201 in s titu tio n s in urban areas. 4 . The government w ill also have to e s ta b lis h f a c i l i t i e s fo r hig h er and advanced education w ithin the country to elim inate th e need to a la rg e ex ten t fo r sending the students to 31 fo reig n co u n tries. 5. The Education Corps program should be s tre n g th ened and c a re fu lly pursued. 6* F in a lly , the public education system must strengthen the kinds of lo y a ltie s and values th a t a re necessary fo r a sp ecia lize d and imper sonal economy to op erate. Narrow lo y a ltie s , recourse to violence, and d isreg ard fo r the rig h ts of others may be removed through educa tio n . Since education means change and change is always re s is te d , the above must be in s titu te d slowly and c a re fu lly i f th ere is to be general acceptance o f the plan. Mexico o ffe rs an example of the need to "make h aste slow ly." When 31 There is a tremendous d rain on Ira n 's educated manpower. Most of the students a f te r the completion of th e ir stu d ie s do not re tu rn to Iran. 202 the law req u irin g compulsory fre e education up to th e age o f e ig h t years was passed, th e re was g reat opposition from the farmer and peasant p aren ts. They f e l t th a t ch ild ren eig h t years old should be working and helping th e ir p ar e n ts. Sim ilar opposition may be an tic ip a te d on th e p a rt o f parents in Iran. One of the major obstacles to increased production in many countries is the prevalence o f endemic d iseases, which g re a tly reduce work cap acity . What more valuable resource can a country develop than i t s human one? The preservation and improvement of the physical and mental c a p a c itie s of human beings is very basic to the productive capacity of any economic system. Human labor (physical and m ental) is th e activ e fa c to r in production. Without human resources, n a tu ra l resources would in larg e measure be an in e rt mass o f m a terial in no condition fo r human use. The sig n ifican ce of the human agent in producing goods and serv ices is e v i denced by th e fa c t th a t on the average about tw o-thirds o f the^national income is a ttrib u ta b le to i t s s e r v ic e s.^ ” Governmental h ealth expenditures should be made prim arily to provide medical serv ices and h ea lth f a c i lit i e s to those who need them but a re too poor to affo rd them. 32 Anderson, o p. c i t . . p . 9 203 A dditional suns should be spent on such programs as w ater o r a i r p o llu tio n c o n tro l because o£ the pervasive 33 so c ia l b e n e fits th a t a ris e from these a c tiv itie s * Therefore, one o f the areas of public re s p o n s ib ility which w ill re q u ire more resources in the fu tu re is the con tinued improvement in both th e q u an tity and q u a lity o f h e a lth serv ices, including medical research . Health in th e broadest sense of th e term, plays a v a st p a rt in d e te r mining how much, and how w ell, we produce. People in good physical and mental h e a lth a re g en erally of b e tte r q u a lity fo r economic l i f e than those who are sic k ly . H ealth, in tu rn , p a rtly depends upon economic co n d itio n s. A community, by ra is in g h e a lth le v e ls, can expand the average working l i f e of i t s members, reducing time lo s t fo r sickness, postponing retirem en t, and improving work on the jo b . Reduction of accid en ts, on and o ff the job, could in crease average working liv e s , as w ell as reduce the r e sources absorbed in treatm ent. The provision of re a lly enough medical personnel and h o sp ita l f a c i l i t i e s fo r a 33 Comnittee on Public Finance, Public Finance (New York: Pitman Publishing Corp., 1959), p. 110. 204 growing population w ill be expensive, yet highly reward- lng. The h e a lth s itu a tio n o£ the country Is s t i l l fa r from satisfac to ry * This Is c h ie fly due to the Ignorance of the people about the p rin c ip le s o f h e a lth , the general poverty and shortage o f do cto rs, nurses, and medical f a c i l i t i e s . Although much Is being done by the Iranian government to ensure and promote the h ealth o f the people in the e n tire country, the v a st area of the country, th e g re a t d istan ces between the v illa g e s , and the backwardness of the country have made the job of the government ex- 35 trem ely d if f i c u lt In th is re sp e c t. The most p revalent d iseases are tracoma and eye in fe c tio n s (th e commonest of a l l ) ; dysentery and stomach In fectio n s (n ex t); also frequent a re d ip h th e ria , whooping cough, m easles, typhus, m alaria, ra b ie s, s y p h ilis , tu b e r c u lo sis, and tetan u s. There is considerable su fferin g from m a ln u tritio n . In fan t m o rta lity is high and so is accident m o rta lity . 34 C. Lowell H arriss, The American Economy (Homewood, I llin o is : Richard D. Irwin, In c ., 1959), p. 783. 35 Iran M fgnfly ynd Book of Facta. 1965 (Teheran: Echo of Iran , 1965), p. 137. 205 The M inistry of H ealth c o n tro ls the h e a lth of the country through th e Department o f H ealth S ervices. Medical f a c i l i t i e s are very inadequate. H ospital f a c i l i t i e s are no b e tte r . In a country w ith a population of over twenty- one m illio n people, the follow ing h o sp ita l f a c i l i t i e s are a v a ila b le :^ No. of Area Population H ospital Beds Bed/ Person E n tire country 21,368,672 17,256 1,267 Urban regions 6,294,902 16,389 384 Rural regions 15,573,770 867 17,962 From the above fig u re s the need fo r more and g re a te r medi c a l and h e a lth f a c i l i t i e s is apparent. G reater government expenditure in th is area is e s s e n tia l. T ransportation F a c ilitie s and Economic Growth There is no question about the sig n ific a n c e o f th e ro le th a t tra n sp o rta tio n plays in a n a tio n 's economy. A ll segments o f the economy depend upon tra n sp o rta tio n fo r the conduct of th e ir d a ily a c tiv itie s . The achievement of 36 I b ld . . p . 497 206 rap id economic development In th e United S ta te s and o th e r advanced co u n tries can be tra c e d in g re a t measure to the a v a ila b ility o f a modern and e f f ic ie n t tra n sp o rta tio n system. T ransportation o f both m a te ria ls and persons is a form o f productive a c tiv ity . I t c re a te s place u t i l i t y . I t b rin g s raw m a te ria ls and goods to th e places where they a re wanted f o r production and consumption pur poses. In fa c t, in a broad sense the production pro cess is n o t completed u n ti l th e goods a re d eliv ered to th e consumer. 7 Reduced c o sts and improved q u a lity o f tra n sp o rta tio n enlarge the economic scope o f m arkets, because th e more cheaply products can be tran sp o rte d , th e la rg e r th e market fo r them. Reductions in tra n sp o rt c o sts a re thus no le ss s ig n ific a n t than reductions in m anufacturing c o s ts .''9 I t is estim ated th a t before the ra ilro a d s and th e E rie Canal the p ric e o f wheat doubled w ith a haul o f 120 m iles, and th a t o f corn doubled w ith a haul of 80 m iles, in th e United S ta te s. Therefore, development o f a good tra n sp o rta tio n system—can als, ra ilro a d s , highways, merchant m arine, a i r tra n s p o rt, e t c .- - i s necessary to f a c i l i t a t e economic Anderson, o p . c i t .. p . 8 . 38 "H am berg, o p . c i t . . p . 163. 207 development and In teg ratio n o£ th e regions of the develop- 39 lng economies. T ransportation f a c i l i t i e s c re a te “place u t i l i t y . " They can provide the means to b rin g men and m aterials to places where they can be used fo r production or consump tio n . The government must in su re th a t th e needed r a i l roads, highways, and waterways e x is t. Airways can lin k d is ta n t and in accessib le regions; government can supervise the c re a tio n and management of a irp o rts and attendant se rv ices. The lack of adequate tra n sp o rta tio n f a c i l i t i e s ~ is one o f the main reasons th a t economic growth is held down, ftib lic expenditures can be ju d icio u sly scheduled to speed up movement of people and fre ig h t and thereby aid in the b e tte rin g o f the le v e ls of p ro d u c tiv ity . As such these a c tiv itie s must be in government hands because: The very roadbeds and channels o f some types of tra n sp o rta tio n are o f such a c h arac ter th a t they a re n o t e a sijy to p riv a te ownership or the production of p riv a te p r o f its . This is e sp e c ia lly tru e of s tr e e ts and highways, and waterways.^0 The development o f improved tra n sp o rt and communica tions systems is v it a l fo r the general economic development “ ^ P u b lic Finance, pp. 210-235. 40 a Anderson, op. c i t .. pp. 8-9. 208 o f Iran . To achieve th is end, the government must imple ment a la rg e sc a le program to b u ild new roads, feeder roads, railw ay lin e s , seap o rts, a irp o rts , and complete modem communication f a c i l i t i e s to serve e f f ic ie n tly both the economic and s o c ia l development needs of the country. Feeder road b u ild in g in ru ra l areas should receiv e sp e c ia l a tte n tio n of th e government. Good roads w ill stim u late both the in te rn a l and fo reig n tra d e and commerce, w ill a t tr a c t a g re a te r number of to u r is ts to Iran, and decrease the c o st of tra n sp o rta tio n . N atural Resource Development and Economic Progress N atural resources r e f e r to those raw m a terials and energy sources provided by n atu re , such as m ineral de p o sits, f e r t i l e s o il, and waterways. They include a m u lti tude of things asso ciated w ith land, ranging from the f e r t i l i t y of the s o il to the rich n ess o f m ineral d ep o sits and th e a v a ila b ility o f w ater fo r power and tra n sp o rta tio n . A ll of these in th e ir d iv erse ways influence the produc- 41 tiv ity of a n a tio n 's economy. 41 Hamberg, o p. c i t . . p . 169* 209 Both th e conservation and development of n a tu ra l resources add to economic growth. Conservation of tim ber, o i l , w ater, and s o il resources prevents waste and d e stru c tio n , and preserves resources fo r time of g re a te r need. I t thereby co n trib u tes to long run p ro d u ctiv ity . The la rg e Investment In dams and a l l th e In d u s tria l accesso ries fo r th e m u ltip le purpose riv e r v a lle y p ro je c ts Is p a te n tly a step in the d ire c tio n of economic growth.42 However, many of n a tu re 's c reatio n s do n o t became " re sources" in th e sense o f being u sefu l to man u n til he has exerted e f f o r t. Although in a sense th e q u an tity of the n a tu ra l resources o f a n atio n is fixed, men can and do expand th e ir e ffe c tiv e command over n a tu ra l resources by th e ir e f f o r ts . For example, exploration and discovery rev eal things which a country might not have been using before. New ways and techniques o f using resources can 43 increase th e ir economic value. Development of n a tu ra l resources and conservation adds to economic growth. Since so much of the development planning has depended upon revenue from o il, i t is obvious th a t o i l resources should n o t be wasted. The co nstruction of dams not only provides e le c tr ic power but also makes 42 Anderson, op. c i t .. p. 8. 43 H a r r iss, o p. c i t . , p . 4 1 . 210 the b e st use and c o n tro l o£ scarce w ater supply fo r I r r ig a tio n and general consumption. Both s o il and tim ber re q u ire conservation programs to p ro te c t valuable land from d estro c- 44 tlo n . A b asic aspect o f the In d u s tria l Revolution, fo r example, was the rev o lu tio n in power u tiliz a tio n th a t accompanied i t . This development, fo r example, placed a premium on ric h and e a s ily ac c e ssib le co al resources and, la te r on, w ater power. The importance of fu e l co sts in th e modern in d u s tria l complex has meant th a t nations ric h ly endowed w ith fu e l could obtain power re la tiv e ly cheaply. Cheap fu el and power meant g re a te r p ro d u ctiv ity o f labor and enabled the fo rtu n a te nations to advance much more rap id ly than those le ss w ell endowed. The m ultitude of oth er n a tu ra l resources th a t e n te r in to modem in d u s tria l production a ffe c t p ro d u ctiv ity and economic growth in sim i- i 45 la r ways. I t has been indicated th a t where resources a re of good q u a lity , e a sily ac c e ssib le , and abundant, output 44 Anderson, op. c i t .. p. 8. 45 See, e .g ., Arnold Toynbee, The In d u stria l Revolu tio n (Boston: Beacon Press, 1956). 2 1 1 per man hour of th e workers d ire c tly Involved In these in d u strie s w ill tend to be higher than output where r e sources a re le ss abundant and of poor q u a lity . The produc tio n c o sts of the raw m a te ria ls, including power, w ill tend to be lower. The policy of the government in making n a tu ra l resources a v a ila b le fo r p riv a te e x p lo ita tio n can g re a tly a ffe c t the n a tio n 's d is trib u tio n of w ealth and Income and the effic ie n c y w ith which i t s n a tu ra l resources a re u t i liz e d . Government must also a c tiv e ly aid in developing new procedures and techniques fo r u tiliz in g the n a tio n 's re - 46 sources. Aids to A griculture and Industry Many forms of government expenditures can have stim u latin g e ffe c ts upon p riv a te investment in a g ric u ltu re and in d u stry . Most a g ric u ltu ra l production in these coun tr i e s is operated on a sm all-scale, p rim itiv e b a sis. Im provements can be brought about prim arily only by govern mental assista n c e , in the form of a g ric u ltu ra l extension work, era d ic a tio n of the sources of liv esto ck d isease. Public Finance, pp. 184-185. 2 1 2 research fo r improved crops s u ita b le to the areas, Improved land tenure systems, and In some instances establishm ent o f farm c o o p e ra tiv e s .^ Even in the United S tates, where a g ric u ltu re is con sidered p riv a te e n te rp rise as co n trasted w ith the "c o lle c tiv e s" of communist Russia and China, th e government plays an im portant ro le . A g ricu ltu ral sta tio n s and schools develop new s tra in s and crops. Students and a c tiv e farmers are taught b e tte r farm procedures such as contour plowing and plan tin g to prevent g u llie s and erosion. The govern ment experiments w ith f e r ti liz e r s and has even developed mechanical picking machinery. A ll th is is in ad d itio n to the major e f f o r t o f supplying w ater to a rid areas by b u ild ing dams. In regard to encouragement of in d u s tria l develop ment, government might undertake d ire c t establishm ent of major in d u s tria l e n te rp rise s, p a rtic u la rly those which w ill convey im portant secondary b e n e fits to the economy but are not d ire c tly p ro fita b le to p riv a te e n te rp rise . Many under developed co u n tries, fo r example, India and Pakistan, have 47 John F. Due, Government Finance (Homewood, I llin o is : Richard D. Irwin, In c ., 1963), p. 594. 2 1 3 e sta b lish e d development co rp o ratio n s which d ir e c tly or in d ire c tly undertake in d u s tria l a c tiv ity . Or th e govern ment may In d ire c tly encourage the establishm ent o f ind u stry in th e p riv a te s e c to r o f th e economy through various in d ir e c t d ev ices. These may take th e form o f g ran tin g o f tax concessions, o u trig h t su b sid ie s, and t a r i f f p ro te c tio n . The d ecisio n on th e r e la tiv e ro le of governmental production and government encouragement to p riv a te e n te rp ris e cannot be made on any d o c trin a ire b a s is , b u t must be made in lig h t o f th e r e la tiv e advantages. . . . I t is im portant fo r governments to keep in mind, however, th a t i f p riv a te investm ent is to be encour aged, a l l step s must be taken to provide safeguards fo r th ese investm ents. 48 As such, in d u s tria l development is necessary to provide employment o p p o rtu n itie s commensurate w ith growing educa tio n a l le v e ls . Government expenditure may do th is in two ways: (1) by s o c ia l overhead expenditures which supply roads, b rid g es, e le c tr ic power, w ater reso u rces, education, h e a lth and o th e rs. These expenditures in e ffe c t supply and a s s is t p riv a te business w ith c e rta in b asic physical c a p ita l goods which i t can use in production, as w ell as b e tte r and more productive human reso u rces. These in crease the p r o f ita b ility o f p riv a te investm ent and thereby induce a g re a te r volume o f p riv a te c a p ita l form ation; (2 ) in th e second place many types o f gov ernment expenditure c re a te a demand fo r p riv a te ly - produced goods because governments must buy th in g s which they need and use from p riv a te business u n its . ® 48Ib id .. p. 595. 4 9 A nderson, o p. c i t . . p . 9 214 The government elds Industry and a g ric u ltu re In a number of oth er ways to Increase p ro d u ctiv ity . I t estab lish ed the laws and s ta b ilit y th a t perm it successful pro ductive a c tiv ity . Property and c o n tra ct rig h ts a re Insured, trad e regulated, a monetary system created and put Into operation, standard weights and measures s e t, and copy rig h ts and patents p ro tected . Other government services such as th e p rep aratio n and d is trib u tio n of re p o rts, pam p h le ts, and o th er inform ative m aterials a l l improve the r a te of economic progress w ithin the la n d .^ I I I . S U M M A R Y The government has a larg e and c r i t i c a l ro le in p ar tic ip a tin g w ith the p riv a te secto r toward achieving the economic development o f an underdeveloped n atio n . I f the public s e c to r's a c tiv ity is g en erally confined to in v e st ments In the form of c a p ita l form ation, ra th e r than extend ing in to the area of a g ric u ltu ra l and in d u s tria l commodity production, i t w ill be responsible fo r about 50 per cent of, the co u n try 's to ta l investm ents. In th is s itu a tio n , the 50 JQjid. 215 public se c to r w ill be p rlm erlly Involved In In fre stru c tu re Investment In such fie ld s es tra n sp o rta tio n , power, public bu ild in g s, u t i l i t i e s , education, and public h e a lth . On the o th er hand, i f the government In a developing economy is engaged a d d itio n a lly in d ir e c t commodity production In basic o r even non-basic in d u strie s (sugar, cement, e t c .) , i t w ill assume about 60 to 70 per cen t of to ta l n a tio n a l investm ent. The pace and ex ten t o f the public s e c to r 's ro le in tu rn determ ine the degree of p riv a te Investm ent. Rather than merely follow ing what may be a passive market, th e government by i t s investment provides the necessary p re conditions fo r p riv a te investm ent. Not only is the public se c to r d ecisiv e in terms of determ ining p riv a te investm ent, but i t is a t the same time making cu rre n t expenditures which become p a rt o f the n a tio n a l income. These cu rren t expenditures w ill amount to 10 to 20 per cent o r more of the to t a l n a tio n a l income. I t is v i t a l th a t these expendi tu re s minimize the non-developmental a c tiv itie s . Instead i t is d e sira b le to maximize the developmental a c tiv itie s which would Include cu rren t expenditures in the areas of h e a lth and education. This can only be achieved by methods 216 of e f f ic ie n t planning and a llo c a tio n . The public se c to r is the e s s e n tia l Instrument fo r the c re a tio n o f In s titu tio n s such as trad e unions, cooper a tiv e s , a g ric u ltu ra l extension serv ices, banking systems, savings d u b s , and n a tio n a l planning a u th o ritie s . The pub l i c se c to r must draw and enact p o lic ie s which are conducive to economic development. This includes a monetary policy which avoids both in fla tio n and d e fla tio n , and which sees th a t c re d it is av a ila b le fo r p riv a te in v e sto rs. The f is c a l policy must c o lle c t th e needed revenues, but do so w ithout discouraging p riv a te investm ent o r savings. Other areas in which th e ro le of the public se c to r helps determine eco nomic a c tiv ity include the form ation of tra d e p o lic ie s and a ttitu d e s toward foreign investm ent, reg u la tio n of p aten ts, monopolies, in d u s tria l a rb itra tio n , and wages. A major p a rt of government policy is to increase a g ric u ltu ra l prod u c tiv ity . A p re re q u isite here is providing fo r orderly reform of a g ric u ltu ra l landholdings. The government must almost exclusively provide many "prelim inary serv ices" w ithout which growth w ill be r e tarded o r uneven. Public agencies must c o lle c t survey inform ation in regard to geology, tra n sp o rta tio n , and public u t i l i t i e s . They must gather s t a t i s t i c s and form them in to usable knowledge. The public se c to r should e sta b lis h management advisory serv ices, tra in in g programs £or workers, and q u a lity c o n tro l standards and enforcement. Among underdeveloped n atio n s Iran is p a rtic u la rly fo rtu n ate in having a cash export good—o i l —which enables the country to have money to spend along the lin e s d ic ta te d by modem planning and f is c a l policy techniques. CHAPTER V III B U D G ETIN G A N D B O R R O W IN G FOR G R O W T H A N D OPTIMIZATION IN IRAN I . B U D G E T POLICY FOR G R O W T H A N D OPTIMIZATION IN IRA N Any system of fin a n c ia l planning must involve con sid e ra tio n s of revenue as w ell as expenditures. Budgets a re necessary to provide an o v e r-a ll view o f public f i nances and to f a c i l i t a t e th e process o f ratio n in g involved in ra is in g and spending public revenues. As such, budget ing plays a v i t a l ro le in th e development of the nation*s economy. D efin itio n o f a Budget A budget may be b e st defined and explained by th e follow ing: A budget, in the general sense of the term, is a fin a n c ia l plan fo r a sp ecified period of tim e. A governmental budget, th e re fo re , is a statem ent of 2 1 8 proposed expenditures end expected revenues fo r the coning period, to g eth er w ith d a te of a c tu a l expend!' tu res and revenues fo r c u rre n t and p ast p erio d s.* Therefore, a budget is an e s s e n tia l element in th e sound fin a n c ia l ad m in istratio n of a n atio n . The function of the budget is to make f is c a l co n tro l and planning p o ssib le. As such, the more comprehensive the budget, th e more i t brings in to one u n ified p ic tu re p ast f is c a l performance and fu tu re f is c a l plans, th e b e tte r i t w ill perform i t s 2 function of c o n tro l. BnlanrM v s. Unbalanced Budgets Should a government function w ithin th e lim its of i t s c u rre n t income the same as in d iv id u al households gener a lly do? A budget is balanced i f during th e budget period revenue re c e ip ts a re exactly equal to c o st o f payments. I f revenue re c e ip ts fo r th e budget period are g re a te r than c o st payments, the d iffe re n c e is budget su rp lu s. I f revenue re c e ip ts fo r th e budget period a re le ss than c o st payments, the d iffe re n c e is budget d e f ic it.^ ^John F. Due, Government Finance (Homewood, I llin o is : Richard D. Irwin, In c ., 1963), p. 56. 2 P h ilip E. Taylor, The Economics of Public Finance (New York: The Macmillan Company, 1961), p. 36. 3 I b id . . p . 35. Mtich has been w ritte n on th is im portant question. The c la s s ic a l view is th a t £ isc a l to o ls should be used £or f is c a l purposes only; spending and taxing should be d e te r mined only by the revenue requirem ents of necessary, m ini m um government. The modern view is th a t spending and taxing should be geared p rim arily and s p e c ific a lly to non f is c a l functions; th a t i s , the use made of f is c a l to o ls should be determined only by s o c ia l and economic needs. The aim of one is to provide revenue to support th e govern ment, the aim of the o th e r, to provide employment to sup- p o rt th e economy. The c la s s ic a l balanced budget ru le and th e objectio n to government debt was a n a tu ra l re a c tio n to the conse quences of government extravagance during th e seventeenth and eighteenth c e n tu rie s. The requirement, of a balanced budget was and is s t i l l th e sim plest and c le a re s t ru le to impose " f is c a l d is c ip lin e " and to hold government functions and expenditures to a minimum.'* 4 N ational A ssociation o f M anufacturers, "The Case fo r a Balanced Budget," in Readings in Current Economics. ed. Morton C. Grossman (Homewood, I llin o is : Richard D. Irwin, In c ., 1961), p. 51. ^Alvin H. Hansen, F isc a l Policy and Business Cycles (New York: W . W . Norton and Company, 1941), pp. 112-116. 2 2 1 On th e o th e r hand, many contemporary economists have p ro tested a g a in st the dogma th a t the annually balanced budget is the path of fin a n c ia l v ir tu e . They f e e l th a t an attem pt to balance the budget on an annual b a sis is in c o n siste n t w ith sh o rt-ru n g o als of f u l l employment and p ric e s ta b i lit y , and the long-range c h a ra c te r o f many government programs. Research, development, and in f r a s tru c tu re c a p ita l outlays involve a c tiv itie s extending over a number o f y ears. A balanced budget has the a b ilit y to achieve a v a rie ty o f economic p o licy o b je c tiv e s. . . . the requirem ent o f balance may leave the government w ith fewer instrum ents than i t has ta rg e ts ; and consequently may mean th a t o b jectiv es more impor ta n t than balance must be Ignored o r th a t new in s tr u ments must be discovered.® The manner in which government ra is e s funds, the q u an tity o f funds ra ise d by ta x e s, th e q u an tity of borrow ings, the q u an tity o f expenditures, and the purpose fo r which funds are spent, can be ad ju sted to compensate fo r the d iseq u ilib riu m which may develop from the investm ent -- and consumption d ecisio n s made by p riv a te in d iv id u als and a sso c ia tio n s. The government's budget can thus be u tiliz e d ^Jan T inbergen's p ro p o sitio n , c ite d in Grossman, op. c i t .. p. 69. 2 2 2 to balance th e e n tir e economy and prevent the w aste o f resources through depression o r the In e q u itie s and d is to r tio n s o f In fla tio n . In developing f is c a l p o licy and th e budget, th e re fo re , the government ought to co n sid er th e adjustm ents which should be made to enable the p riv a te and public se c to rs of th e economy to u t i l i z e most e f f ic ie n tly the human and p h y sical resources o f th e n atio n . ^ Aspects o f Budgetary Manflfl?TllA r> t' fo r Economic Development For an underdeveloped country which is seeking to fo s te r economic development, budgetary management has two major asp ects: ( 1) budgeting fo r the ordinary expenditures of government o p eration and se rv ic e s, and (2) budgeting and planning fo r long-run economic growth. The concept o f a tr a d itio n a l annual budget should c o n tro l the form er asp ect. A ll ordinary government expenditures fo r o p eration and serv ices should be paid fo r out o f taxes on a c u rre n t b a s is . In th e second asp ect, th e budgeting and planning must be of a long-term c h a ra c te r because many o f the ^Committee on Public Finance, Public Finance (New York: Pitman Publishing C orporation, 1959), p. 596. 223 developmental p ro je c ts are not completed w ithin the con fin e s of one f is c a l year. I t might be w ell fo r such co u n tries to s e t up de velopm ental budgets so th a t they can plan w isely what th e ir resources w ill perm it them to do each year, and y et also perm it them to plan fo r long-run economic development over a period of y ears. Such a develop mental budget would make i t p o ssib le to appraise needs, s e t up p r io r itie s , and b u ild l i t t l e by l i t t l e toward th e d esired goals which l i e reasonably w ithin th e capacity o f the given economy. A ll in a l l , c a re fu l budgeting and a llo c a tin g of resources is the very essence of e ffe c tiv e planning fo r economic develop ment. By sep aratin g c a p ita l expenditures from cu rren t ones, emphasis upon balance may be d irec ted to the cu rren t budget alone, and a d e f ic it in th e o v e r-a ll budget j u s t i fie d on the grounds th a t the d e f ic it incurred fo r c a p ita l o u tlay is o ffs e t by th e in crease value of the government's a s s e ts . Many types o f lo c a l c a p ita l outlays cannot be estab lish ed on a y ear-to -y ear b a sis, but re q u ire c a re fu l long-range planning. Many s e lf-liq u id a tin g p ro jec ts can be Q highly productive in th e long run. W illiam H. Anderson, "F iscal P o licies fo r Under developed Economies" (unpublished Paper, U niversity of Southern C alifo rn ia. Los Angeles. n * d .). p. 13. ^The Scandinavian c o u n trie s, p a rtic u la rly Sweden, have s e t up sep arate c a p ita l budgets. Today i t is also p racticed in many American c i t i e s . 224 The budget o f th e government can be said to be an embodiment of i t s f is c a l policy.*® As such, i t has a d ire c t Impact upon the e n tire economy, public and p riv a te . I t not only rep resen ts the government's d ecisio n s as to how much i t w ill spend and how i t w ill obtain th e funds to pay fo r th e goods and serv ices i t buys, i t also influences the q u an tity of investm ent and consumption expenditures in th e p riv a te se c to r of the economy. Budgetary Policy in Iran The Iran ian n a tio n a l budget. The Iran ian s ta te budget up to now has been prepared unsystem atically. There has never been a coordinated budget. Each government agency has followed i t s own ru le s and reg u latio n s in p re paring i t s budget. Foreign te c h n ic a l advisors to Iran have repeatedly complained about the antiquated system of budgeting in Iran , but up to now nothing has been done about i t . In d i v id u al m in istrie s and government departments have shunned the very idea of budgeting. 10Public Finance, p. 596 225 The o f f ic ia ls a re so notorious fo r th e ir complete d isreg ard of fa c ts and fig u re s th a t the Prime M inister complained to th e M ajlis th a t when he took over, he received a phone c a l l from th e chairman o f the Budget Coumission asking: "What kind of budget would you lik e S ir? With a reasonable d e f ic it, a balanced one, or even with a su rp lu s?"11. The government budget is an e s s e n tia l element in the sound fin a n c ia l ad m in istratio n of a n a tio n . The develop ment o f e ffic ie n t procedures fo r the ad m in istratio n of th e government's budget has been very slow in Iran . As the government expenditures and revenues Increase and as th e ir impact on the p riv a te economy becomes more in ten se, the n e c e ssity of e sta b lish in g s c ie n tif ic procedures of adm inis te rin g th e budget becomes more urgent. This is tru e be cause an adequate budget cannot be obtained through pro cedures th a t were designed to cope w ith public expenditures and revenues which were only a fra c tio n of the amounts 12 involved in present-day budgets. F ir s t 1343 (1964-19651 Budget. Since 1964 an attem pt has been made in Iran to prepare a "planned budget" Alnmnac and Book of F acts. 1965 (Teheran: Echo o f Iran, 1965), p. 353. ^ R iblic Finance, p. 581. 226 on a modem s c ie n tif ic b a s is . With th e form ation of the Budgeting Bureau in 1964, th e re is hope th a t a t le a s t th e f i r s t step has been taken in th is long-needed d ire c tio n . In a way th e d if f ic u ltie s o f drawing up a budget epitomize many of the problems of an underdeveloped country. Accurate data a re not a v a ila b le . There a re not enough tra in e d and honest c i v i l serv an ts to c o lle c t the d ata. There is no money to tr a in o r even pay such c iv il servants. Indeed, i t would seem necessary to s e t up a budget to determ ine how much money must be s e t asid e to prepare an o v e r-a ll budget. Contrary to the p ast p ra c tic e , now every department w ill have to plan i t s expenditures ahead, and keep w ithin i t s a llo c a tio n . Every department w ill have to show, a t the end of th e year, what i t has achieved fo r a l l the money i t has sp en t. 13 The aim of the Bureau is to prepare a planned budget under which every government department and agency would know what p ro jec ts and programs i t should carry out every year. Every department o r agency would have i t s own 13 Iran Almanac and Book of F acts. 1965. p. 353. 227 budgeting o f f ic e Which would master-mind i t s p ro je c ts . In th is way i t i s expected th a t th e e n tir e expenses o f every government o ffic e and agency would be planned and known in advance. The prim ary purpose of th e Bureau o f the Budget is to review and re v ise th e departm ent and agency estim ates o f expenditures. In th e p a st th is ta sk was performed as a sep arate bargaining process among th e m in is trie s . But the establishm ent of the Budget Bureau w ill be in stru m en tal^ in improving co o rd in atio n in i t s f is c a l and management fu n ctio n s. Furtherm ore development o f the coordination o f the B ureau's a c t iv itie s would undoubtedly in c re ase the e ffic ie n c y o f th e b u d g et's procedure considerably, p a rtic u la r ly in the areas o f review ing departm ent and agency r e q u e sts. Evaluation o f the 1964-65 budget. I t should be noted, however, th a t th e s itu a tio n has improved remarkably sin ce th e establishm ent o f th e Budget Bureau in Ira n — perhaps not so much in executing a budget plan as in e sta b lish in g some p re re q u is ite s fo r executing a budget. A number o f improvements have been Introduced in th e f ie ld o f budgetary a d m in istratio n , which, when con sidered to g e th e r, give promise o f th e p o s s ib ility of 228 developing an e ffe c tiv e budget system. E ffo rts have been made to improve the accounting system of govern m ent's In d u s tria l and commercial e n te rp rise s w ith a view to making i t p o ssib le to prepare operating s ta t e ments such as statem ents of income* statem ents of costs* statem ents o f a sse ts and U t i l i t i e s . The accounting procedures o f the m in istrie s a re being gradually improved.*^ However* i t is too e a rly a t th is stag e to evaluate th e work of the Budget Bureau. According to Dr. Majldi* the Iran ian budget d irector* i t would be sev eral years before th e o b jectiv es o f the Budget Bureau could be a c h ie v e d .^ A number of d if f ic u ltie s and problems a ris e when one considers the p ra c tic a l aspects o f the budget and th e ways of a tta in in g i t s aims. The f i r s t aim is the reg u la tio n of th e "growth of the n a tio n a l economy." The growth of the economy Is u su ally reg u lated by the S ta te in i t s annual budget through taxes and wise expenditures. Today in many o f th e advanced democratic co u n tries of the world* tax atio n and expenditure by the government make up the most impor ta n t sin g le fa c to r used by the government to a c c e le ra te 14 P. Bjom Olsen and P. Norregaard Rasmussen* "An Attempt a t Planning in a T ra d itio n a l S ta te : Iran*" ed. E verett E. Hagen* Planning Economic Development (Home wood* I llin o is : Richard D. Irwin* Inc.* 1963)* pp. 246-247. ^T he Supplementary Budget 1343. Echo's Economic Reports* August* 1964* p. 2. 229 economic growth. At presen t in Iran th e re has been no e££ort to plan the amount of taxes to be c o lle c te d , o r to base i t on any policy fo r the economic growth. As can be re a d ily appreciated, a sound budget which d e ta ils income and outlay is ab so lu tely an e s s e n tia l f i r s t ste p in sound f is c a l p o licy . A budget, however, is more than fig u res on a piece of paper, ic is a course of a c tio n which must be followed to be su ccessfu l. The maintenance o f maximum e ffic ie n c y in government operation, to insure th a t the b e st r e s u lts may be m aintained fo r th e outlay made, is a task req u irin g constant v ig ila n c e and improvement. As such i t is one of the most d if f i c u lt fo r underdeveloped co u n tries to handle, and Iran is no exception. I I . B O R R O W IN G FOR G R O W T H A N D OPTIMIZATION IN IR A N The f in a l Instrum ent o f government f is c a l policy to be considered is the n a tio n a l debt and i t s management. One of the primary sources to supplement inadequate rev e nues from taxes and o il ro y a ltie s fo r Iran is through government borrowing, in order to finance the budget 1 6 Due, o p. c i t . . p . 73. 230 d e f ic its and development programs* As such i t may play a s ig n ific a n t p a rt in shaping th e o v e r-a ll f is c a l p o lic ie s of the government. Government debt a ris e s out of borrowing by the Treasury from banks, business org an izatio n s, and in d iv id u a ls. The debt is in th e form of promises by th e Treasury to pay to the holders o f these promises a p rin c ip a l sum and in most instances In te re s t on th a t p rin c ip a l. Borrowing as such, as a source o f revenue, is a provisional one, because i t s use gives r is e to o b lig atio n s which must be met from taxes or o th er cu rren t sources, in th e fu tu re . The d istin g u ish in g c h a ra c te ris tic s of borrowing is i t s voluntary n atu re as co n trasted to the compulsory fe a tu re of ta x a tio n . The government o ffe rs i t s s e c u ritie s to the public . . . and persons a re fre e to purchase them or n o t, as they w ish. I f they do so, they s u ffe r no n e t diminu tio n in th e ir w ealth, as occurs when they pay taxes; in exchange fo r th e ir money they receive bonds or other s e c u ritie s which bear in te r e s t and which w ill u l t i m ately be paid o f f . The government, in tu rn , receives money fo r use in meeting i t s o b lig atio n s but incurs a l i a b i l i t y fo r the payment o f in te r e s t and the repay ment of p rin c ip a l in th e fu tu re . The public debt can occupy a s ig n ific a n t place in th e economy o f a n a tio n . In ad d itio n to the enormous power *^Taylor, on. c i t .. p. 178 18Due, op. c i t .. p. 479. 231 which i t g ives the government as a f is c a l to o l to Influence the fu n ctio n in g o f th e economy, I t a lso provides a ready market fo r th e Investment o f the government tr u s t funds, Id le savings of In d iv id u als, and la rg e cash balances of fin a n c ia l I n s titu tio n s such as banks and Insurance com panies . As Indicated e a r lie r , u n lik e o th er co u n trie s o f the world, th e Iran ian government has been In a fo rtu n a te p o sitio n . I t receives over $400 m illio n In o i l ro y a ltie s annually, w ith a g re a t p o te n tia l to Increase In the 19 fu tu re . There Is no need fo r Iran to r e s o r t to any sub s ta n tia l amount of borrowing e ith e r In te rn a lly or e x te r n a lly . The problem of Iran as an underdeveloped country Is one o f u tiliz in g more e ffe c tiv e ly th e p o te n tia l resources a v a ila b le to th e country. This study, a f te r having made a c a re fu l assessm ent 19 O il Is the major source o f government income and fo reig n exchange earnings. Ira n 's o i l income is clim bing ra p id ly due both to re v isio n of ro y a lty agreements and re c e n t la rg e premium payments fo r o ffsh o re d r illin g conces sio n s. O rdinary petroleum revenues amounted to $480 m il lio n in 1964. According to some estim ates, Ira n 's annual income from o i l could reach $1 b illio n by 1970. Foreign Inform ation Service, Iran —A Nation Moving Ahead (New York: F ir s t N ational City Bank, October, 1965), p. 1. 232 of resources a v a ila b le to Iran , in d ic a te s th a t the vicious c ir c le o f poverty and the low r a te o f economic growth in Iran can be broken through a w ell-coordinated program of development which would d ire c t th e Iran ian resources along th e channels which maximize the economic growth and w elfare of the country. This study reveals th a t Iran has substan t i a l unused p o te n tia l resources. As such th is study does n o t advocate a larg e borrowing by the government of Iran . I n t e r n a l Ppyggw jtiR Borrowing by th e Iran ian government has always been sm all. Table XXII shows the s iz e of th e in te rn a l and ex te rn a l public debt in Iran. As the ta b le in d ic a te s, in 1961, fo r example, th e to ta l public debt (in te rn a l and ex tern al) was about o n e-six th of the Iranian Gross N ational Product. Only once have bonds been issued and they were redeemed a t par in 1948. For the most p a rt the in te rn a l debt rep resen ts borrowings from the c e n tra l bank (Bank M elli and now Bank Markezi) and is not bonded. The problems o f attem pting to finance a major in vestment p ro je c t through in te rn a l government borrowing are numerous. In the f i r s t place, th e Persian people d is tr u s t TABLE XXII PU BLIC DEBT: D O M E ST IC A N D FO REIG N (M illion R ials) Public Debt (March 20) 1953 1958 1959 1961 1962 1963 Domestic 12,530 16,594 18,562 16,967 ; 15,230 32,277 Foreign 24,975 27,635 28,170 30,142 31,597 31,322 Total 37,505 44,229 56,733 47,110 46,827 63,599 SO U R C E: United Nations S ta tis tic a l Yearbook. 1964 (New York: United Nations, 1964), p. 611. 233 234 the bonds of th e ir own government. Before one can fu lly understand th is issu e, one must understand the re le v a n t c h a ra c te ris tic s of P ersian so ciety th a t have produced these c o n d itio n s. I t must be recognized, however, th a t such an analysis involves g en eralizatio n s on behavior p a tte rn s of a group of people which, lik e any group, is composed of a h e te ro geneous mass o f in d iv id u als possessing an in f in ite v a rie ty of personal d is s im ila r itie s . N evertheless th e re is an id e n tifia b le p a tte rn of c u ltu ra l t r a i t s which can be u se fu lly studied fo r i t s im plications on in v estin g d ecisio n s. Influence of H istory The h isto ry of Iran shows th a t w ith the d e stru c tio n of P ersepolis by Alexander the G reat, the empire of Cyrus and Darius crumbled. The succeeding ce n tu rie s brought s t r i f e , m isery, w arfare, and in s ta b ility . Iran has been su b ject to almost co n tin u al invasion by Arabs, the nomads of C entral Asia, the Mongols and Seljuks, Turks and Afghans. An understanding of the sweep of Persian h isto ry c la r if ie s many aspects o f tw entieth century P ersia. These so c ia l c h a ra c te ris tic s have im portant economic im plications th a t cannot be ignored. This d iscu ssio n attem pts to id e n tify 235 some examples o f th e ir economic e ffe c ts and the influence of these tendencies on th e investm ent and development in Iran . Secondly, the main motives fo r holding savings in the form of physical a sse ts in Iran a re precautionary, ag ain st economic d is a s te r. The advantages th a t such liq u id ity gives them in such an environment outweighs the mere fa c t th a t they y ield no re tu rn (other than In tan g ib le income re s u ltin g from a fe e lin g of s e c u rity ). The inade quacy of the Iran ian banking system and fin a n c ia l in s ti tu tio n s w ill be discussed a t length in Chapter IX. The w rite r fe e ls th a t i t is th e re s p o n s ib ility of the government to try every means to convince th e savers th a t a piece of paper (government bond) rep resen ts l e g i t i mate and recognizable claim s. Once th is is done, then the saver is bound to become more in te re ste d in y ie ld , under the s ta b le and dem ocratic ru le r of Iran, His Im perial M ajesty the Shah en Shah. F in ally , a t present the financing o f long-term de velopment programs is handicapped by the extremely lim ited government f a c i l i t i e s fo r borrowing. In Iran th e re is no organized money market fo r s e c u ritie s . The fin a n c ia l 236 stru c tu re of th e economy is p rim itiv e. The p o s s ib ility o f government m obilizing voluntary savings in th is respect tends to be lim ited . Voluntary savings cannot be re lie d upon to finance th e necessary investm ents* e sp e c ia lly during th e e a rly stag es o f develop ment where la rg e amounts o f fin a n c ia l resources a re needed. At present the financing of long-term development programs is handicapped by the lim ited government f a c i l i tie s fo r borrowing. The w rite r fe e ls th is i s not a m atter of pessimism. He fe e ls th is is purely an in s titu tio n a l m atter and as soon as Iran can develop a fu lly -fled g ed s e c u ritie s m arket, the problem w ill be overcome.^® The w r ite r *8 sentim ents a re b e s t expressed by A. R. P rest: A ll in a l l , i t seems f a ir to conclude th a t conven tio n a l monetary and debt policy can only play a lim ited p a rt in th ese c o u n trie s. . . . In many cases th e i n s t i tu tio n a l arrangements do not lend themselves to such p o lic ie s . And irre sp e c tiv e o f whether th ere a re i n s t i tu tio n a l bottlenecks o r not, in te rn a l Government bor rowing may have undesirable rep ercu ssio n s. 1 20 For an ex cellen t treatm ent o f th is su b ject, see £. T. Nevin, C ap ital Funds in Underdeveloped Countries (London: Macmillan, 1961), p. 90. 21 A. R. P rest, Public Finance in Underdeveloped Countries (New York: F redrick A. Prager, 1963), p. 110. 237 E xternal Borrowing Foreign borrowing by government may be another source to supplement I ts Inadequate revenues, In order to finance I ts d e f ic it budgets and development programs. I f th e government of an underdeveloped country can borrow e a s ily from abroad, the lim ita tio n s on in te rn a l borrowing may be le ss Im portant. However, As f a r as th e economy as a whole Is concerned, such borrowing re s u lts in immediate accretio n to r e a l resources, even though th e re may be longer term repercussions on the balance of payments.* * Ira n 's problem Is not to get money but to fin d and tr a in , quickly, people who can and w ill spend the money p roductively. E xternal debt can be a s u b s titu te method of laying down th e foundation of a co u n try 's economic development in th e form of s o c ia l overhead c a p ita l and public se rv ices. I t gives th e country the ad d itio n al power to use these resources in accordance w ith an o v e r-a ll development pro- 23 gram. ^R agnar Nurkse, Q f Caplfrf1 *v>n"* tio n in Underdeveloped C ountries (Oxford: B asil Blackwell, 1953), p. 91. 238 In an age of general economic expansion th e t h i r s t fo r c a p ita l is such th a t underdeveloped co u n tries have to compete fo r i t w ith many o th e r p ro jec ts in many o th e r coun tr ie s . Unless the former can o ffe r both a r a te o f re tu rn commensurate w ith th a t a v a ila b le elsewhere, and a s u f f i c ie n tly popular type o f investment opportunity (such as raw m aterials development), they w ill simply not be in th e p ic tu re . In o th er words, i t is the co u n tries which are developing f a s t, in th e sense of making investm ents showing high ra te s of re tu rn , th a t a re most lik e ly to a ttr a c t ex tern al c a p ita l.2^ Another fa c to r determ ining th e ex tern al c re d it w orthiness of a country is th e r a te of in fla tio n in the country. The ra te o f in fla tio n in a country may w ell have adverse repercussions on a c o u n try 's a b ility to n eg o tiate foreign loans. I t has been argued th a t once the r a tio of debt serv ice payments to export earnings reaches a fig u re in the region of 10 to 20 p er cen t, a country w ill find i t r— ■ d if f ic u lt to borrow c a p ita l from th e in te rn a tio n a l cen ters of the w orld.2^ 2L P rest, op. c i t .. pp. 113-114. 25 A. Shonfield, The A ttack on World Poverty (London: Chatto and Windus, 1960), p. 90. The e x te rn a l debt of Iran c o n sists m ostly of loans from th e United S tates Agency fo r In te rn a tio n a l Develop ment, the Export-Import Bank, and th e In te rn a tio n a l Bank fo r R econstruction and Development. None of th e se Is lik e ly to press Iran fo r repayment. That Iran is remark ably so lv en t is shown by the fa c t th a t to ta l debt, both in te rn a l and ex tern al, amounts to le ss than tw ice 1962-1963 excess o f exports over im ports. This is a f a r cry from co u n tries such as the United S tates and G reat B rita in , and so p h istic a te d borrowing techniques a re not yet needed. The debt management s itu a tio n is th e same. With so l i t t l e debt to manage, so p h istic a te d techniques o f debt management have not developed. In view o f the record of in s ta b ility , and general u n rest which p rev ails in the southern and eastern M editer ranean areas, i t is indeed fo rtu n a te th a t Iran is not dependent on loans from fo reig n in d iv id u als and governments in order to obtain needed c a p ita l investm ent. However, a primary o b stacle to c a p ita l growth is 26 In te rn a tio n a l Economic Survey: Ira n . No. 141 (New York: Chemical Bank, New York T rust Company, A p ril, 1964), pp. 9“10. 240 inadequacy of In s titu tio n s and techniques fo r tra n s la tin g domestic resources and p o te n tia l foreign aid in to produc tiv e investm ents. P o litic a l and economic u n c e rta in tie s tend to discourage commitment of funds fo r long periods o f time. Domestic fin a n c ia l in s titu tio n s a re inexperienced i in an aly sis and ad m in istratio n o f long term c r e d it. Com m ercial banks, wealthy fam ilies, and bazaar moneylenders commonly do not lend s u ffic ie n t funds fo r productive pur poses. L iq u id ity and p r o f it a re found in tr a d itio n a l sh o rt-term o u tle ts - - r e a l e s ta te , commodity speculation, foreign tra d e . ^ I I I . S U M M A R Y A sound budget which d e ta ils income and expenditure is an e s s e n tia l f i r s t ste p in sound f is c a l p o licy . A budget, however, is more than fig u res on a piece o f paper. I t is a course o f actio n which must be followed to be su ccessfu l. Budgets are necessary to provide an o v e r-a ll view of government finances and to f a c i l i t a t e the process of ^R ich ard E. Benedick, In d u s tria l Finance in Iran (Boston: Graduate School of Business A dm inistration, Harvard U niversity, 1964), pp. 5-6. 241 ra tio n in g Involved in ra is in g and spending public revenues. As such, budgeting plays a v i t a l ro le in th e development of the n a tio n 's economy. The budget systems perm it an o rd erly review o f expenditures fo r various purposes. Budgets a lso f a c i l i t a t e a more ra tio n a l review o f proposed le v e ls of a c tiv itie s and a more s a tis fa c to ry balancing o f needs fo r a d d itio n a l expenditures fo r various purposes by the government. A budget is an e s s e n tia l element in the sound fin a n c i a l ad m in istratio n of a n atio n . The function of the budget is to make f is c a l c o n tro l and planning p o ssib le. The more comprehensive the budget, th e more i t brings in to one u n ified p ic tu re p a st f is c a l performance and fu tu re f is c a l plans, the b e tte r i t w ill perform i t s function of c o n tro l. Likewise, i t f a c ilit a te s review o f effic ie n c y o f operation. Another instrum ent of government f is c a l policy con sidered is the n a tio n a l debt and i t s management. One of the primary sources to supplement inadequate revenues from taxes and o il ro y a ltie s fo r Iran is through government borrowing, in order to finance the budget d e f ic its and development programs. As such i t may play an im portant 242 p art in shaping th e o v e r-a ll f is c a l p o lic ie s o f the^govem - ment. However, borrowing as a source of revenue is a provisional one, because i t s use gives r i s e to o b lig atio n s which must be met from taxes o r o th e r cu rren t sources in the fu tu re . This study rev eals th a t Iran has su b sta n tia l unused p o te n tia l reso u rces. The problem o f Iran as an under developed country i s one of u tiliz in g more e ffe c tiv e ly th e p o te n tia l resources av a ila b le to th e country. As such th is study does n o t advocate a la rg e borrowing by the government of Iran . ^ CHAPTER D C M O N E T A R Y POLICY FOR G R O W T H A N D OPTIMIZATION IN IRAN I. M O N E T A R Y POLICY IN IRAN The p o s s ib ilitie s o f using monetary p o licy fo r eco nomic development have not gone unnoticed. During the p a st decade th e re has been a liv e ly in te r e s t in the underdeveloped co u n tries in monetary p o licy as an instrum ent of economic p o licy , e sp e c ia lly in i t s p o te n tia litie s as a means o f promoting a rap id economic growth and development. One of th e major reasons fo r th is i s the re a liz a tio n th a t economic development must depend in c re asin g ly on en larg in g , m obilizing, and channeling dom estic r e a l reso u rces. Monetary p o licy has th e re fo re assumed increased im portance. * • In gen eral, B loom field's d e sc rip tio n o f th e in c re a s ing in te r e s t in monetary policy in underdeveloped co u n tries can be said to be tru e a lso fo r th e case of Ira n . U n til ^Arthur I. Bloomfield, "Some Problems o f C en tral Banking in Underdeveloped C ountries," The Journal of Finance. XII (May, 1957), 190. 243 244 a few years ago, Iran did n o t have a c e n tra l bank. For many years the Bank M elll Iran , the c o u n try 's la rg e s t com m ercial bank, was the Issu e r of currency and performed th e functions of a c e n tra l bank. As a f i r s t ste p , In 1960 th e Bank M elll Iran was reorganized In to two banks: the Bank M elll Iran which Is th e N ational Bank o f Iran , and the Bank Markezl Iran , which Is th e C entral Bank o f Ira n . The Bank M elll now performs i t s commercial fu n ctio n s, and i t s o th e r fu n ctio n s were tra n sfe rre d to th e Bank M arkezl. The Bank Markezl, in ad d itio n to Issu in g currency and c o n tro llin g fo reig n ex change, re g u la te s the o p eratio n o f the commercial banks and in general performs a l l th e usual functions o f a c e n tra l 2 bank. In th e more advanced co u n tries a gradual evolution of c e n tra l banking has taken place over a period of y ears, and consequently a system atic and c o n siste n t theory o f monetary economics and monetary p o licy has already been developed and form ulated. A c le a rly defined concept o f c e n tra l banking has 2 TVpn Almanac and Book of F acts. 1963 (Teheran: Echo of Iran, 1963), p. 358. 245 been evolved. In fa c t, c e n tra l banking has become an en t i r e l y sep arate branch o f banking, as d is tin c t from the functions and o p eratio n s of commercial banks, in d u s tria l banks, a g ric u ltu ra l banks, savings banks, investm ent banks, and o th e rs. C entral banks have th e ir own code o f ru le s and p ra c tic e s , which can be described as "th e a r t o f c e n tra l banking,” but which, in a changing world, i s s t i l l in th e process o f evolution and su b je c t to p e rio d ic a l adjustm ent. However, since monetary theory is form ulated in terms o f economics, th e o b tain in g a c e n tra l banking tech nique in a f u lly developed economy is based upon sp e c ific in s titu tio n a l and s tru c tu ra l fa c to rs o f such c o u n trie s. T herefore i t s conclusions and a p p lic a b ility are v a lid only fo r such c o u n trie s. This b rin g s w ith i t c e rta in d i f f i c u ltie s sin ce alm ost a l l c e n tra l banks in underdeveloped co u n tries come in to ex isten ce alm ost overnight and no system atic and c o n siste n t theory o f monetary banking appro p r ia te fo r a backward economy has y et been developed and form ulated. The tem ptation i s g re a t to p rescrib e monetary p o lic ie s o r monetary remedies ap p licab le p rim arily to H. DeKock, C en tral Banking (London: S taples P ress, L td ., 1954), pp. 21-22. 246 advanced economies. Such p o lic ie s, although highly e ffe c tiv e in economically developed c o u n trie s, are le s s appro p ria te to underdeveloped n a tio n s. This, however, should not be in te rp re te d as in d ic a tin g th a t the problems of monetary theory in underdeveloped co u n tries have not been receiv in g a tte n tio n . On the co n trary , many in s titu tio n a l Impediments to the e ffe c tiv e implementation o f monetary policy in these co u n tries, such as the thinness of th e ir organized money and c a p ita l market, are being gradually overcome, but e f f o r ts have been made to speed the adoption of new techniques and instrum ents o f c e n tra l bank c o n tro l.^ C ertain functions have been assigned to the c e n tra l bank w ith th e idea o f promoting higher le v e ls of income, employment, and production. In th is regard the m obiliza tio n of voluntary savings fo r productive purposes—an e s s e n tia l fa c to r fo r an expanding economy—is considered one of the proper functions of monetary po licy . More spe c if ic a lly , the Economic Commission fo r Asia and the Far East emphasized th a t 4 Peter G. Fousek, Foreign C entral Banking: The of Monetary Policy (New York: Federal Reserve Bank of New York, November, 1957), p. 10. 247 . . . the f i r s t and, perhaps, th e o v errid in g task o f present-day f is c a l and monetary p o lic ie s in the c o u n trie s o f th e region Is to secure an In crease in th e t o t a l of p riv a te and p u b lic saving in o rd er to match th e t o t a l of p riv a te and public Investment* There is a growing re a liz a tio n th a t under modem conditions o f banking and commerce the establishm ent o f a c e n tra l bank is a g re a t advantage to any country, espe c ia lly sin ce bank c r e d it f a c i l i t i e s and co n tro l over the supply of money a re considered, among o th e rs, as th e most Im portant in g red ien ts o f economic development. To achieve these o b je c tiv e s, the c e n tra l bank should help to m obilize and d iv e rt dom estic c a p ita l fo r th e n a tio n 's economic development by e sta b lish in g s u ita b le fin a n c ia l in s titu tio n s and fo s te rin g th e growth of the banking se c to r and by m iti g atin g undue swings in n a tio n a l money Incomes as w ell as in domestic p ric e s. Perhaps even more im portant than th e bank's a c tu a l performance a t th is tim e, however, is the increased aware ness th a t no sturdy economic growth is p o ssib le w ithout adequate c re d it f a c i l i t i e s and th e m obilization o f re a l reso u rces• ^Economic Survey o f Asia and the F ar East. 1960. Economic B u lle tin fo r A sia and th e Far E ast (New York: United N ations, 1961), p . 58. 248 I I . THE IN STR U M EN TS O F C EN TR A L B A N K C O N T R O L To the advanced co u n tries o f the world, th ere a re b a s ic a lly two techniques o f monetary re g u la tio n av a ila b le , the q u a n tita tiv e and q u a lita tiv e . The general q u a n tita tiv e instrum ents o f c o n tro l and reg u la tio n a re the open market operation, changing th e discount r a te , and changing th e reserv e requirem ents. The s e le c tiv e q u a lita tiv e co n tro ls are the stock market c re d it co n tro l, consumer c re d it con tr o l, mortgage c re d it co n tro l, and moral suasion. Not a l l the c e n tra l banks in underdeveloped coun- tru e s, however, employ the same instrum ents of co n tro l o r possess the same powers to make th e ir p o lic ie s e ffe c tiv e . Some have unusually wide and fle x ib le powers, w hile o th ers have only a lim ited re s p o n s ib ility in pursuing i t s monetary policy. Ira n ' 8 c e n tra l bank, fo r example, which has been equipped with the tr a d itio n a l instrum ents of c e n tra l bank c o n tro l—rediscount po licy , open market operations, and reserve requirem ents--has n o t always been able to u ti liz e i t s powers to the co u n try 's b e n e fit. This has prim arily been a ttrib u te d to th e p rim itiv e s tru c tu re of the fin a n c ia l system o f the country, and th e almost non-existence 249 o f a fin a n c ia l market in terms o f money markets in th e developed and advanced c o u n trie s o f the world. Discount Rate Policy Discount r a te operations by th e c e n tra l bank w ill p a rtic u la rly be e ffe c tiv e i f th e re a re s u f f ic ie n t holdings o f e lig ib le paper fo r red isco u n tin g o r borrowing, and i f th e money m arket is s u f f ic ie n tly developed to r e f le c t changes in the bank r a te . As th ese conditions a re not f u lly s a tis f ie d in Iran , the scope fo r red isco u n t p o lic ie s by th e Bank Markezl is to th a t ex ten t lim ite d . In th e face o f th e foregoing a n a ly sis th e re seems h ard ly any reason to ju s tif y th e employment o f discount r a te op eratio n s as an instrum ent o f c r e d it c o n tro l in a le s s developed country such as Iran , where the co n d itio n s fo r i t s e ffe c tiv e op eratio n s a re h ard ly a v a ila b le . In th is connection i t is m aintained th a t in under developed c o u n trie s, where organized and unorganized se c to rs o f th e money market e x is t sid e by sid e , changes in c e n tra l bank discount r a te a re lik e ly to be re fle c te d in the former c re d it market only and, in most cases, may not in flu en ce th e l a t t e r a t a l l . ^ This can be explained by ^ B lo o m field , o p. c i t . . pp. 1 9 0 -2 0 4 . 250 the fa c t th a t bank r a te changes a re n o t lik e ly to be transm itted throughout o th er segments o f the in te r e s t r a te s tru c tu re because o f the pronounced spread between in te r e s t ra te s in th e organized and the unorganized se c to rs of th e money market. Open Market Operations In view o f the shortcomings of discount r a te oper a tio n s as an instrum ent o f c e n tra l bank co n tro l, open market o p eratio n s—defined as the purchase and sa le of government s e c u ritie s and o th er c re d it instrum ents in the open m arket--began to develop as an a lte rn a tiv e method o f c o n tro llin g the market. Open market operations in government s e c u ritie s b ring th e c e n tra l bank in to contact not only w ith the volume of av ailab le bank reserv es, b u t also w ith the p o rt- 7 fo lio s of a l l classes of len d ers. Thus i f th e c e n tra l bank wants to s tif f e n and r e s t r i c t the growth of bank c re d it expansion, i t can do so by o ffe rin g s e c u ritie s fo r sa le to the public and the commercial banks. By absorbing ^Robert V. Rosa, " In te re s t Rates and th e C entral Bank," Konev. Trade, and Economic Growth (New York: Macmillan Company, 1951), p. 280. 251 the reserv es o f the banks I t can fu rth e r. I f banks re ly on c e n tra l bank c re d it, make the discount r a te effective* The use o f open market o p erations, however, p re supposes two th in g s: (1) th a t the c e n tra l bank has the necessary holdings of bonds, b i l l s , o r o th e r s e c u ritie s ; and (2) th a t the public and th e commercial banks acquire th e h a b it o f holding such s e c u ritie s . In o th er words, open market operations re q u ire the ex isten ce o f a w ell-developed and s u ffic ie n tly broad se c u rity market. The c e n tra l bank of Iran (Bank Markezl Iran) has the power to engage in open market o p erations. But i t has not as y et been in a p o sitio n to ex ercise i t . The main o b stacles toward a more e ffe c tiv e use of open market operations in Iran are, f i r s t , the in s ig n if i cant n atu re o f the market; second, the lim ited a v a ila b ility o f th e necessary s e c u ritie s ; and fin a lly , th e conm ercial banks* h a b it o f holding su b sta n tia l cash reserv es. Conmercial Bank Reserve Under th is form of reg u la tio n , conm ercial banks are required to m aintain minimum cash reserves re la te d by p re scribed r a tio s to th e ir d ep o sit l i a b i l i t i e s . The c e n tra l bank may also be given the a u th o rity to ra is e or lower 252 the le g a l minimum reserv e r a tio s i£ i t deems necessary. Keynes, in h is T re a tise on Money, commented on the method o£ reserv e requirem ent as a supplement to o th er instrum ents o f c r e d it c o n tro l: The p o s s ib ility o£ an inadequacy o f ammunition ln te r£ e rin g in exceptional circum stances w ith th e e££lclency of open market operations makes i t worth w hile to mention a fu rth e r expedient which has never y et been put u ito p ra c tic e , namely, a .d isc re tio n to the c e n tra l bank to vary w ith due n o tic e and by sm all degrees th e proportion o f le g a l reserv es which the member banks a re required to h o ld . 8 Keynes suggested th a t the c r e d it and loan p o lic ie s o f the banks might be guided toward expansion o r co n tra c tio n , depending on th e v a ria tio n s of th e required re se rv e s. Compared to open market o p eratio n s, Increasing reserv e requirem ents have the same tig h ten in g e ffe c t on bank reserv es as th e sa le s o f s e c u ritie s to the banking in s titu tio n s . But unlike open market operations o r d is count ra te policy, v a ria tio n s in reserv e requirem ents have a d ire c t, ra th e r than in d ire c t, e ffe c t on the reserv es of th e bank. In recen t years th e re has been a r is in g trend in 8J . M. Keynes, A T re a tis e on Money. Vol. I I (New York: H areourt, Brace and Company, 1930), pp. 260-261. 253 the use o£ commercial bank reserv e requirem ents as an Instrum ent o f c e n tra l bank c o n tro l In underdeveloped coun t r i e s , p a rtic u la rly because o f th e lim ita tio n s In scope and e ffe c tiv e n e ss of o th e r q u a n tita tiv e Instrum ents o f c o n tro l. V ariable reserv e requirem ents have a lso more appeal In underdeveloped co u n tries because o f th e ir d ir e c t e ffe c t on th e a v a ila b ility o f bank re se rv e s. I t has th e a d d itio n a l advantage In th a t th e technique i s simple and th e method of o p eratio n f le x ib le —c h a r a c te r is tic s which are in g re a t demand by newly e sta b lish e d c e n tra l banks. S ele ctiv e C redit C ontrol S ele ctiv e c r e d it c o n tro l re f e r s to any a c tio n by the monetary a u th o rity to in flu en ce the d ire c tio n of c r e d it by c o n tro llin g th e terms and co n d itio n s on which c r e d it i s granted fo r s p e c ific purposes. S e le c tiv e c o n tro ls occupy an im portant p o sitio n among the instrum ents o f c e n tra l bank Q c o n tro l. In co u n tries where q u a n tita tiv e instrum ents o f c e n tra l bank c o n tro l are Inadequate and the ap p ro p riate in s titu tio n s to f a c i l i t a t e th e ir use lacking, s e le c tiv e o Paul B. T re sc o tt, Money. Banking, and Economic W elfare (New York: McGraw-Hill, 1965), p. 84. 254 measures of c o n tro l have been employed and freq u en tly adapted to the economic s itu a tio n of the in d iv id u al coun t r i e s . Q u an titativ e and s e le c tiv e co n tro ls d if f e r in th a t th e former a ffe c ts th e supply of c re d it in general, whereas the l a t t e r a ffe c ts the demand fo r c re d it fo r p a rtic u la r purposes. Because s e le c tiv e c o n tro ls work on the demand sid e o f c re d it, th e ir im position w ill be p a rtic u la rly e ffe c tiv e in s itu a tio n s where the use o f c re d it in c e rta in secto rs of the economy is to be encouraged, or where excessive use is to be discouraged. Methods of se le c tiv e c re d it co n tro l include, to men- tlo n only a few, d if f e r e n tia l discount ra te s , se le c tiv e reserv e requirem ents, margin requirem ents on loans, margin requirem ents on le tte r s of c re d it or import pre-deposit requirem ents, consumer in stallm en t c re d it, and several o th e rs . In the awakening world of today, Ira n 's economy must expand quickly, the productive powers of the country must *®Fousek, op. c i t . . pp. 6 9 “81. 255 be developed, and the standard of liv in g and w elfare must be ra ise d . Rigid I n s titu tio n a l fa c to rs w ill have to be overcome in order to use su ccessfu lly the above mentioned instrum ents. There can be no steady and balanced growth w ithout a sound monetary p o licy . Development of a sound monetary policy req u ires a strong and independent c e n tra l bank. N ow th a t a c e n tra l bank has been created in Iran — Bank Markezl Iran —i t is believed th a t w ith the support of the public, the cooperation of o th er banks and the a s s is t ance of government departments and agencies, Bank Markezl Iran w ill play i t s p a rt in buidlng th e monetary and eco nomic policy of the country e ffe c tiv e ly . Savinas and Investments in Iran The accumulation o f physical items as a form of savings has always ex isted in comparative abundance in Iran . Sheep, feudal v illa g e s , underground w ater systems, ca rp e ts, tre e s , jew elry, and re a l e s ta te are common examples. There is a g re a t hoarding, m ostly of gold. Richard E. Benedick, In d u s tria l Finance in Iran (Boston: Graduate School o f Business A dm inistration, Harvard U niversity, 1964), pp. 45-51. The Lower Income Groupa and Investment The m otivation leading to the purchase of gold orna ments or expensive carp ets by households whose income is ju s t above subsistence is q u ite d iffe re n t from the motiva tio n th a t leads to the purchase of food, clo th in g , and housing. I t is the same m otivation th a t prompts the more so p h isticated in d iv id u al liv in g in a country w ith a highly developed c a p ita l market to buy a bond or an equity. The physical a s s e ts , p a rtly because they serve the function of saving instrum ents, have a degree of liq u id ity th a t is s ig n ific a n tly g re a te r than th e same o b ject in o th er coun- 12 t r i e s . To understand the motives behind such a c tiv itie s , one has to look not too fa r back in to the Iran ian h isto ry . In Iran, in the p ast where th e re has been a g re a t deal o f p o litic a l u n rest as in many o th er underdeveloped co u n tries, people have become used to sto rin g th e ir w ealth in forms th a t can be "clo sely guarded, e a s ily hidden, and re a d ily c a rrie d elsew here." This explains th e g reat demand in Iran 12 Henry J . Bruton, P rin cip les o f Development Eco nomics (Englewood C liffs , New Jersey : P rentice-H all, 1965), p. 322. 257 and o th e r m iddle ea ste rn , A sia tic , and A frican co u n tries 13 fo r precious stones and gold b u llio n . A ll th is is ty p ic a l of an economy which has n o t a rriv e d a t th e re la tiv e ly so p h istic a te d and more e f f ic ie n t stag e of using money in stead o f b a r te r. I t must be remem bered, however, th a t fo r money to be used th e re must be confidence, and the f i r s t e s s e n tia l fo r confidence is s ta b i lity . In Iran , as in many underdeveloped c o u n trie s, th is has been lacking in th e p a st. The Upper Income Groups and Investment The outlook on l i f e of th e wealthy c la s s in Iran is in most cases q u ite d iffe re n t from th a t p re v a ilin g among the P uritan entrepreneurs o f eig h teen th -cen tu ry England, who abstained from a l l n o n essen tial, conspicuous consump tio n and plowed most o f th e ir p r o f its back in to th e ir b u sin esses. In Iran , the tr a d itio n a l upper c la s s e s --th e la rg e landow ners--are s t i l l mainly conscious o f s ta tu s . They use th e ir surplus income in ways most lik e ly to enhance p re stig e , e ith e r fo r tr a d itio n a l conspicuous 13 Stephen Enke, Rrnnnmies fo r Development (Engle wood C liffs , New Jersey : P ren tice-H a ll, 1963), p. 214. o 258 consumption o r fo r investm ents in luxury residences end jew elry, o r In im ita tio n o f Western consumption p a tte rn s , in luxury autom obiles and gadgets. Buying more land is an a d d itio n a l way to enhance power and p re stig e through spend ing, b u t sin ce th e re is no corresponding e f f o r t to In crease th e p ro d u c tiv ity of th e land, such purchases merely r e s u lt in d riv in g up land p ric e s and aggravating th e co n d itio n of the la n d less t e n a n t s .^ I f any surplus s t i l l rem ains, i t is lik e ly to be in d isguised bank accounts in Zurich, New York, and Hanover. ^ In th e absence o f a sto ck m arket, in d u s tr ia lis ts have l i t t l e in cen tiv e to re in v e st earnings in order to aug ment th e v alu e o f eq u ity shares fo r eventual s a le . More over, they a re commonly unw illing to share ownership w ith o u tsid e rs even I f they could make siz a b le c a p ita l g ain s. The people know l i t t l e and c are le s s about in v e s t ment o p p o rtu n itie s managed by some stra n g e rs. Savings and investm ent a re considered as personal tra n sa c tio n s. There is a g re a t re lu c ta n c e to in v e st o u tsid e fam ily 14 Paul A lpert, Economic Development (London: C ollier-M acm illan, L td ., 1964), p. 137. ^B enedick, on. c i t . . p. 51. 259 concerns and a lso a p reju d ice a g a in st h irin g anyone not a r e la tiv e £or a resp o n sib le p o sitio n . Hence, £ew fam ilies w ith savings a re lik e ly to lend money to stran g e fam ilie s or unknown I n s titu tio n s . As long as th is a ttitu d e con tin u e s, p riv a te savings w ill n o t flow re a d ily in to In d ire c t investm ent, and development w ill be r e s tr ic te d accordingly. "The In a b ility to channel c u rre n t and p o te n tia l savings in to productive investm ent, ra th e r than the a v a ila b ility of savings, may f r u s tr a te developm ent."^ L im itations o f Voluntary Savings However, economists agree th a t w ith re sp e c t to the problem "of c a p ita l form ation by means o f voluntary savings m obilized by fin a n c ia l In s titu tio n s th is p o s s ib ility has been found to be lim ite d . K lndleberger, fo r in stan ce, m aintains th a t voluntary savings cannot be re lie d upon to finance th e necessary investm ents, e sp e c ia lly during th e e a rly stages o f development where enormous amounts of fin a n c ia l resources are required fo r th e form ation of A. P ep elasis, L. Means, and I . Adelman, Economic npmonf (New York: McGraw-Hill Book Company, 1958), p. 48. 260 c a p ita l . ^ K lndleberger b eliev es th a t . . . p o s s ib ilitie s o f c a p ita l form ation by means of In fla tio n and by voluntary savings In d ire c tly a v a ila b le have been found to be lim ited . Equally lim ited Is the p o s s ib ility of mopping up p riv a te savings by s e llin g s e c u ritie s to in v e sto rs. C ap ital markets fo r the most p a rt are undeveloped. P rivate demand fo r savings fo r Investment is in e la s tic w ith resp ect to increases In the In te re s t r a te which might shrink com petitive demand. The p riv a te supply sched u le of savings is equally in e la s tic w ith re sp e c t to in te r e s t r a te changes. 18 Because of the inadequate supply of savings and the many d if f ic u ltie s in a ttr a c tin g them in to fin a n c ia l i n s t i tu tio n s th e re is a strong tendency to overlook i t s impor tance and many underdeveloped co u n tries are e a s ily tempted to look fo r re la tiv e ly le ss p ain fu l methods o f obtaining fin a n c ia l means. In th e face o f an equally d i f f i c u lt prob lem of ra is in g governmental revenue by f is c a l measures in underdeveloped co u n tries, the C entral Bank is considered as a source o f v ir tu a lly in f in ite funds fo r p riv a te fin an - i g c ia l in s titu tio n s and the government. ^ C h a rle s P. K lndleberger, Economic Development (New York: McGraw-Hill Book Company, 1958), pp. 197-198. 18Ib ld . . p. 198. Jav ier Marquez, "F inancial In s titu tio n s and Economic Development," in Economic Development fo r L atin ed. Howard S. E llis (New York: S t. M artin 's Press, 1961), p. 174. 261 That th e employment of th is resource can e a s ily lead to , and in p ra c tic e has Indeed brought about, In fla tio n a ry s itu a tio n s Is not hard to understand. The fa c t th a t volun ta ry savings cannot go far. toward co n trib u tin g th e fin an c ia l means fo r economic development can c e rta in ly not be used as a convenient excuse to force p riv a te savings by In fla tio n . On the co n trary , the ex isten ce o f in fla tio n w ill in e v itab ly dim inish the p o s s ib ilitie s o f increasing voluntary savings in the country. Causes o f Low Levels o f Savings in Iran Many fa c to rs have contributed to the circum stances th a t determ ine the low le v e l of savings in Iran . The most obvious fa c to r is th e low le v e l o f incomes. In countries where the population liv e a t, or in many cases even below, subsistence le v e l, savings are undoubtedly low because people have to spend a l l they earn to m aintain th e absolute necessary le v e l of consumption. F ortunately, however, not a l l income le v e ls a re low in Iran . Savings may s t i l l be forthcoming from the wealthy in d iv id u als, p ro fits of the business groups, or from the government. Moreover, in the a g ric u ltu ra l se c to r o f the economy saving u su ally takes place in kind. In th e second place, consumption h a b its o f the higher Income groups in underdeveloped co u n trie s a re said to be e n tire ly out o f lin e w ith sim ila r Income groups in more developed c o u n trie s. "Upper-income groups o ften assig n considerable p re stig e value to conspicuous consump tio n ," said H iggins, and " th is propensity seems to be rein fo rced by what Ragnar Nurkse c a lls th e 'dem onstration e f f e c t '; people a t a l l le v e ls o f income tr y to emulate standards o f consumption in econom ically advanced so cie- 20 t i e s . ” In th is connection i t i s in te re s tin g to note th a t Dr. Roberto de O liv e ira Campos b eliev es th a t the demonstra tio n e ffe c t had q u ite possibly reduced th e m arginal r a te of savings in many underdeveloped co u n tries to the le v e l 21 of th e average. He recognizes th a t th e dem onstration e ff e c t has i t s impact on production techniques also but he is o f the opinion th a t consumption H abits a re more e a s ily 22 tran sm itted than production techniques. 20 Benjamin Higgins, Economic Development. P rin c ip le s . Prnhlflmn and P o lic ie s (New York: W . W . Norton and Company, 1959), pp. 480-481. 21 Roberto de O liv e ira Campos, " In fla tio n and B al anced Growth," in Economic Development in A nu^ra. ed. Howard S. E llis (New\York:^5t. M a rtin 's P ress, 1961), p. 107. ' 22Ibid. . p. 83. 263 Another Impediment to in creasin g the volume o f savings a v a ila b le fo r c a p ita l form ation is due to th e higher ra te s o f re tu rn on nondevelopmental investm ents such as sh o rt-term loans to consumers, farm ers, tra d e rs and loans fo r sp ecu la tiv e a c t iv it ie s . The in h eren t shortage in th e supply o f savings combined w ith a v ir tu a lly u n s a tis fie d demand fo r c r e d it in th e underdeveloped c o u n trie s, e sp e c ia lly fo r consumption purposes, explains th e w illin g ness o f th e consumers o r o th e r spenders to pay ra te s of 23 re tu rn as high as 50 to 180 per cen t per annum. The high ra te s o f re tu rn have, th e re fo re , a ttra c te d surplus funds more e a s ily in to th ese channels ra th e r than to longer-term investm ent a c tiv it ie s where y ie ld s a re u su ally considerably le s s . I t is sometimes sa id th a t a v ic io u s c ir c le confronts underdeveloped c o u n trie s in th e ir attem pts to ra is e th e ir low le v e l o f c a p ita l: a low n a tio n a l Income means a n e g li g ib le r a te o f saving and c a p ita l form ation. There a re elements o f tr u th in th is statem ent, but i t is a severe and m isleading o v e r-slm p llflc a tlo n . ^ H ig g in s , o p. c i t . . p. 4 8 1 . A ll the co u n trie s which today a re econom ically and te c h n ic a lly advanced began as co u n tries which were as poor as some of the underdeveloped co u n tries a re today. Yet c a p ita l accum ulation took p lace as p a rt o f a process of economic development and change; however low th e Income per head may have been a t one tim e, p a rt of c u rre n t Income was s e t a sid e to c re a te and augment a stock o f c a p ita l. "The v ic io u s c ir c le has been broken In th e p a st, provided th e general circum stances and o p p o rtu n ities were favourable fo r 24 economic grow th." In examining th e prospects fo r eco nomic development In any country, th e presence o r absence o f such circum stances and o p p o rtu n ities Is as im portant as . the le v e l of the n a tio n a l income p er head. The Bazaar as a F in an cial I n s titu tio n - - Sources o f Bazaar Funds Sources o f bazaar funds are tra d in g , re a l e s ta te , and money-lending p r o f its , and commercial bank c r e d it. Bazaar moneylenders, taking advantage o f banks' In d iffe r ence to loan purposes, discount th e ir own (or someone 24 P eter T. Bauer and B asil S. Yamey, The Economics of Underdeveloped C ountries (Chicago: The U n iv ersity of Chicago Press, 1957), p. 132. 265 e l s e '8) paper a t 8 to 12 per cen t and relend a t about tr ip le th e r a te . Since bank d ep o sits pay 2 to 6 per cent (the higher fig u re Is fo r re la tiv e ly I lliq u id time de p o s its ), savings a re also drawn to the bazaar. Merchants w ith surplus cash tem porarily released from inventories tu rn to moneylending as an a lte rn a tiv e earning p o s s ib ility fo r liq u id funds. In fa c t, most la rg e bazaar money lenders are also merchants. The so fta h . The so ftah is an unsecured promissory note exchanged between two (or more) people which, d is counted in a bazaar o r commercial bank, becomes money. To the lender the most im portant element of the so ftah is n e ith e r the lo a n 's purpose nor even tan g ib le se c u rity , but ra th e r th e sig n a tu re (s) on the b i l l . The Persian c re d it stru c tu re is based on su b jectiv e personal fa c to rs ra th e r than on o b jectiv e, system atic a n a ly sis. In fa c t, a weak borrower can improve the s a la b ility of h is softah by buying the co-sig n atu re of someone w ith a b e tte r c re d it rep u ta tio n . Behind an acceptable sig n atu re may l i e a fe e lin g a t le a s t on the le n d e r's p a rt, th a t th ere e x is ts re la tiv e ly more or le ss v illa g e s , land, inventory, jew elry, v eh icles, as w ell as an im pression of p ast repayments. There is actu a lly 266 no way to check on i t . This system Is im perfect, and Is u su a lly based on rumor. The fa c t remains th a t no s p e c ific item of s e c u rity is in v e stig a te d ; th e sig n e r of a so ftah is tra d in g on h is general c re d it re p u ta tio n . Since i t is never c le a r how much or what a sse ts l i e behind a sig n atu re, i t is not d i f f i c u l t fo r a borrower to "overtrade” on h is c r e d it standing by discounting so ftah s a t d iffe re n t p laces. Indeed, because of im perfection and time lags in the bazaar rumor system and the usual absence o f sp e c ific In q u irie s on any given tra n sa c tio n , i t is p o ssib le fo r a tra d e r to obtain c re d it when he is , in e ffe c t, bankrupt. Softahs can be w ritte n fo r any period of tim e. The most common is n in e ty days. There is a ten-day grace period b efo re th e b i l l can be o f f ic ia lly re g iste re d as d is honored; th e e ffe c tiv e term loan is n in ety -n in e days. I f the note is not paid by any co -sig n ato ry , th e holder o f the so fta h p resen ts i t in co u rt fo r r e g is tra tio n as a "pro te ste d b i l l ” ; follow ing th is , le g a l a c tio n can be taken ag ain st th e n o te 's sig n er and/or any of th e g u a ra n to rs .^ The stu d en t o f monetary h isto ry w ill a t once recog n iz e the s im ila rity o f the so ftah and the notes Issued 25 B en ed ick , o p. c i t . . pp. 6 6 -6 7 . 267 by p riv a te banks p rio r to th e fe d e ra l tax o f 1866 Which elim inated th is type of inform al money in the United S ta te s . The bazaar and c o st o f c a p ita l. Unlike the commer c i a l banks, th e bazaar does n o t provide any se rv ic e o th er than discounting. I t has been an invaluable o u tle t when banks a re loaned-up, or when fo r any reason they re fu se a loan. Unlike commercial banks, th e bazaar does n o t re q u ire a debtor to be a "custom er," i . e . , to have cash ly in g id le in deposits* Through establishm ents o f personal r e la tio n sh ip s, borrowers can receiv e quick se rv ic e on th e b a sis of re p u ta tio n , avoiding the passing of papers through a bank's loan committee. The b a z a a r's continued ex isten ce as a potent fin a n c ia l fo rce is a ttr ib u ta b le to two re la te d fa c to rs . Considered from the demand-for-funds sid e , i t is r e so rted to because banks alone cannot fu rn ish a l l financing demanded by th e economy. Considered from th e supply sid e , the bazaar draws liq u id funds because o f high re tu rn s which can be earned in money lending. However, i t is obvious th a t th ese fa c to rs a re con nected. The b azaar*8 very ex isten ce discourages poten t i a l d ep o sits in th e banks which, w ith b e tte r ra te s from a borrow er's standpoint, a re unable to a t t r a c t s u ffic ie n t savings to perm it inroads on th e b a z a a r.26 2 6 I b id . . pp. 6 9 -7 0 . 268 To understand th e problem b e tte r, I t would be h elp fu l to examine some causes of these bazaar charges. A su b sta n tia l r is k premium Is Involved. I t Is s ig n ific a n t th a t th e re a re d is tin c t schedules fo r " firs t,* ' "second," and " th ird " c la s s borrowers. The bazaar continues to be able to o ffe r high r e turns fo r cash and draw ln v estab le funds from more worth w hile a lte rn a tiv e s . The re s u lta n t g re a te r loan co sts to fa c to rie s financing working c a p ita l needs are passed on to consumers In higher p ric e s. This ad d itio n al consumer bur den, ra th e r than tending to reinvestm ent in productive c a p ita l stock, Is thus div erted to moneylending p ro fits and 27 continued m ultiplying of c re d it w ith in the bazaar. Although th e bazaar can provide funds to an in d i v id u al company in a working c a p ita l bind, i t has severe lim ita tio n s in time of general c r is i s o r strong business u n certain ty . I ts very method of operations and non s u s c e p tib ility to Influence by monetary a u th o ritie s tends to encourage irresp o n sib le c a p ita l c re a tio n and w asteful employment of savings. Moreover, i t s services are a t 2 7 I b ld . . p. 71 269 a p ric e th a t Is probably too high fo r the economy: i t s ex isten ce c o n trib u te s to ra is in g th e c o st o f c a p ita l to productive u se rs. The bazaar is a fin a n c ia l encumbrance to in d u s tria l development and an atavism in a tw en tieth 28 century economy. Banking P ra c tic e and C ontrol in Iran With re sp e c t to standards o f c re d it in v e stig a tio n , loan ad m in istratio n , and general fin a n c ia l re s p o n s ib ility , the g re a t m ajo rity of I r a n 's banks stand c lo se r to bazaar moneylenders than to th e ir Western co u n terp arts. Due to the general inexperience o f banking personnel, standards o f p ra c tic e have v arie d considerably. O utside o f banks w ith fo reig n p a rtic ip a tio n , account ing is a p rim itiv e le v e l, and th e abacus is th e primary aid In c a lc u la tio n . Such to o ls of fin a n c ia l an aly sis as cash flow p ro je c tio n s, r a tio s , and pro forma s ta t e ments a re unknown. C red it in v e stig a tio n by most banks is as unsystem atic and has th e same weaknesses as the bazaar, and alm ost never includes co n sid eratio n of te c h n ic a l o r m arketing fa c to rs which might a ff e c t a borrow er's c re d itw o rth in e ss.2? The c e n tra l bank has no means of v e rify in g accuracy of statem ents and re p o rts o r rep o rts o f c r e d it a c tiv itie s 2 9 I b id . . p . 76. 270 issued by o th e r banks. Bank in spection a t present is la rg e ly in e ffe c tu a l, both because o f lack of train ed accounting personnel and because o f th e s u s c e p tib ility of Thus, lik e th e bazaar, the banking system has a tendency, as w ell as re q u is ite to o ls, to extend c re d it a t a f a s te r r a te than expanding p ro d u ctiv ity can absorb. Like the bazaar, most com nercial banks a re excessively p re occupied w ith sh o rt-ru n p r o f its , and the types o f financing they extend r e f le c t th is in c lin a tio n . Banks do not par tic ip a te in In d u s tria l finance, avoiding even working c a p ita l loans in favor of short-term , f a s t turnover oper- 31 atlo n 8 . Before ind u stry can be m a te ria lly a s s is te d , th ere / must be an evolution of p rev ailin g banking a ttitu d e s toward types and terms of loans, p ro jec ts in v e stig a tio n , loan ad m in istratio n , and the banks' ro le in o v e r-a ll economic development. The re a l o b stacle to the establishm ent of respon s ib le banking in Iran is not any lack of e ffe c tiv e 30 in spectors to baksheesh. / 30I b id . . p. 77. 31I b id . . p. 78. 271 le g is la tio n , b u t ra th e r an e n tir e c u ltu ra l m ilie u which discourages honesty, open re p o rtin g , and fin a n - c i a l planning. Hampered by inexperience, inadequate a n a ly tic a l to o ls , and a p e rs is te n t relu ctan ce on th e p a rt o f entrepreneurs £ u lly to re v e a l co n d itio n s and plans to an o u tsid e r, th e modem P ersian bank has been content to pursue c re d it business in th e t r a d i tio n a l manner.32 The G reat Need fo r EBta^n«hpM»n«- o f F in an cial In s titu tio n s In Iran i t is not th e shortage o f c a p ita l, but ra th e r th e r e la tiv e a ttra c tiv e n e s s o f a lte rn a tiv e o u tle ts fo r funds th a t is a major o b stacle to the c a p ita l form ation 33 and economic development. There is an absence o f a m u ltip le s e t of in s titu tio n s which would otherw ise channel the liq u id a s s e ts in to productive investm ents. There is no form of organized money market to channel th e n a tio n 's liq u id a sse ts in to productive investm ents. In underdeveloped co u n tries . . . development is held back p rim arily by th e d if f ic u ltie s of channeling e x istin g o r p o te n tia lly e x istin g savings in to a v a il able productive investm ent o p p o rtu n itie s, i . e . , by a shortage of the a b ility to make and ca rry out de velopment d e c isio n s .3^ 32Ib id . 33Ib id . . p. 50. 34 A lbert Hirschman, The S trategy of Economic Develop ment (New Haven: Yale U niversity P ress, 1958), p. 37. Ill In the developed co u n tries o£ the world, the a llo c a - tio n a l function of a c a p ita l market is u su ally performed by the stock exchanges, and o th er arrangements fo r marketing shares and bonds: by the commercial banks in th e ir capacity of m obilizing cu rren t savings and making s e c u ritie s mar k ets; by sp ecialized banking in s titu tio n s , public and p riv a te ; and by o th er in s titu tio n a l sources o f c a p ita l such as insurance companies, pension funds, and mortgage banks. The non-bank in s titu tio n s in th e developed countries function as fin a n c ia l middlemen, fo r example, fam ilies may deposit savings w ith some building and loan a sso c ia tio n and receive in te r e s t on th e ir accounts, w hile the a sso c ia tio n relends these funds a t a s lig h tly higher in te r e s t r a te to persons acquiring qhop premises, apartment buildings, homes, and the lik e . L ife insurance companies, obtaining funds from policy premiums, lend to industry in ad d itio n . In a l l these cases the physical investm ent is made by th e borrower. The fin a n c ia l saving is done by depositors and policy holders who never meet th e in v esto rs, and most of 35 the loans are long-term . 35 h ik e , o p. c i t . . p . 264. 273 In a general way, what the development of a fin a n c ia l system can c o n trib u te is the lin k in g to g eth er of p o te n tia l su p p liers of in v e stib le resources w ith p o te n tia l demanders o f such resources in a much more e ffe c tiv e way than is p o ssib le w ithout such a system. This means th a t the fin a n c ia l middlemen's job is exactly to provide the lin k th a t would help to take advantage of the p o te n tia l slack in the system. In th is sense, the fin a n c ia l middle- 36 man a c ts on both th e saver and the in v esto r. In Iran th ere is also an absence of environment in which en trep ren eu rial a c tiv ity could r e s u lt in productive a c tiv ity . P art of th is environmental d if f ic u lty is the absence of e ffe c tiv e lending in s titu tio n s . The observation th a t i t is o ften e a sie r to borrow S O m illio n d o lla rs to b u ild a s te e l m ill than i t is to borrow $1,000 to build a machine shop is a rele v an t p a rt of the explanation of the sluggishness o f p riv a te investm ent. J u st as the fin a n c ia l interm ediary seems more lik e ly to help the in d iv id u al whose income allows ju s t a l i t t l e saving than the extremely ric h groups, so a lso i t seems th a t such in s titu tio n s may be 36 B ruton, op . c i t . . p . 325. expected to help the sm all firm to a g re a te r degree than the larg e, w ell estab lish ed firm w ith access to retain ed 37 earnings and fo reig n c a p ita l m arkets. The ro le of the fin a n c ia l in s titu tio n s is p a rtly th a t of buying s e c u ritie s of one type from borrowers and s e llin g s e c u ritie s of another type to lenders, and thereby co n trib u tin g to an Increase in the w illingness to save and the Inducement to in v e st. Also, and more Im portantly, th e ir job includes fin d in g investment o p p o rtu n ities and f a c ilita tin g th e ir e x p lo ita tio n . This l a t t e r task is espe c ia lly relev an t w ith resp ect to sm all, new e n te rp rise s in 38 the developing country. Banking. Savings, and C redit In s titu tio n s Increased savings by a l l c lasses o f the population and u tiliz a tio n of these savings fo r productive investm ents req u ire the establishm ent of an appropriate network of savings, c re d it in s titu tio n s , and, in p a rtic u la r, an e f f i c ie n t banking system. 275 Commercial banks c o n s titu te th e most im portant p a rt o£ any banking system. T heir fu n ctio n and o rg an izatio n a re m atters o f fundamental im portance. In Iran they a re espe c ia lly needed to accumulate vo lu n tary savings o f the economy, to supply the loanable funds, to channel them in to productive uses, and a lso c re a te c r e d it as new money. F in an cial in s titu tio n s , th e re fo re , through th e ir cap acity to in flu en ce th e r a te o f investm ents, can d ir e c tly a ffe c t th e r a te o f economic development. Iran c e rta in ly needs such fin a n c ia l and non-bank in s titu tio n s to channel the savings o f one group in to long term Investm ent by another group. But such in s titu tio n s cannot e x is t u n less they can a t tr a c t savings. There a re not s u ffic ie n t fin a n c ia l in s titu tio n s in number a t p resen t to meet th e needs o f the country in providing the necessary funds. This problem, however, cannot be solved by simply c re a tin g new banks o r new c r e d it in s titu tio n s . On th e con tra ry , th e growth of fin a n c ia l in s titu tio n s is to some ex ten t a lso determ ined by the needs o f a growing economy. Many economists contend th a t during the process o f growth these fin a n c ia l in s titu tio n s become a fu n ctio n o f economic development. They argue th a t a r is e in th e le v e l o f income 276 per c a p ita w ill bring about, c e te ris p arib u s. an in crease in the q u a n tita tiv e importance o f fin a n c ia l tran sactio n s 39 per u n it of gross n a tio n a l product. Also as income per c a p ita r is e s , the lik elih o o d becomes g re a te r th a t c e rta in earning u n its w ill be able to accumulate surpluses th a t can be mobilized by the fin a n c ia l in term ed iaries. Few Bank Depositors The low r a tio of bank d ep o sits to to ta l money supply is an in d icatio n also of the lim ited development of the banking h ab its of the people. Only a sm all se c tio n of the community, p ra c tic a lly only the larg e business se c to r, is w illin g to .accept bank deposits as a means of payments whereas the la rg e r p a rt p refer to s e tt le th e ir fin a n c ia l o b lig atio n s o u tsid e the banking sphere. Few people and not many firm s in underdeveloped countries have yet become accustomed to paying wages and b il l s w ith bank checks. The use of demand d ep o sits as money is taken fo r granted in advanced n atio n s--o v er 95 per cent of a l l d o lla r payments in the United S tates are made 39 Jorge Ahumada, "Comments on Dr. Marquez's Paper," in Economic Development fo r L atin America, ed. Howard S. E llis (New York: S t. M artin 's Press, 1961), p. 188. 277 in th is way. Government should encourage and extend the banking “h ab it" among th e p u b lic. In Iran commercial banks provide th e public w ith f a c i l i t i e s fo r the d ep o sit o f savings. In th is way, they s u b s titu te fo r the t h r i f t in s titu tio n s which in co u n tries w ith w ell developed c a p ita l market mechanism play the ro le of channeling funds from savers to in v e sto rs. The accum ulation o f savings in th e form o f savings d e p o sits serves no s o c ia l need unless they are channeled in to productive investm ent. The commercial banks in Iran u su ally in v e st th e ir depositors* money in sp ecu la tiv e sh o rt-ru n a c tiv itie s such as tra d e and inventory accumula tio n . S pecialized fin a n c ia l in s titu tio n s must be e sta b lish e d which w ill channel savings in to long-run investm ent w ith due care as to d iv e rs ific a tio n and p r o f ita b ility . However, th e development o f fin a n c ia l in s titu tio n s and th e co rp o rate form o f savings and investm ent depends on th e s ta te o f public confidence in such in s titu tio n s . To generate confidence in co rp o rate in s titu tio n s , though a slow and d i f f i c u l t ta sk , is one of the most im portant o b jectiv es th a t have to be a c tiv e ly prompted in a develop ing economy. 278 Other programs geared to a t tr a c t savings, p a rtic u la r ly sm all savings, include various m u tu alizatio n schemes, th e establishm ent of tr u s ts th a t would d iv e rs ify r is k (fo r example, u n it tr u s ts ) , th e in s titu tio n of sm all savings d ep o sit insurance schemes, and also a v ig ila n t cen t r a l bank. Indeed, i t is one o f the im portant tasks o f monetary and banking a u th o ritie s to devise schemes th a t would encourage the growth of sm all in s titu tio n a l savings. The promotion of branch banking programmes so as to b u ild the banking re q u is ite in fra -s tru c tu re needed fo r making f a c i l i t i e s a v a ila b le fo r rem ittance, safe-keeping and o th er sim ila r needs o f c re d it in s titu tio n s , is e s s e n tia l fo r the growth of a cooperative network and p o sto ffic e saving , . 40 banks. There a re some things government can do to popular iz e th e "banking h a b it." I t might guarantee a l l p riv a te d ep o sits in commercial banks up to some maximum value per d ep o sito r. The banks should be so organized as to pool a maxi m um of savings from th e public and re d is trib u te them in ^B ank Markezi Iran B u lle tin (Teheran), I I I (Harch A p ril, 1965), 867-868. 279 c re d its , e sp e c ia lly to farm ers and sm all businessmen, who s u ffe r p a rtic u la rly sev erely from a lack of c r e d it f a c i l i tie s . At th e same tim e, however, g re a t care should be taken to avoid th e danger o f an in fla tio n a ry c r e d it expan sion by th e p riv a te banks th a t might jeo p ard ize th e Imple m entation o f government development p o licies* Government Development C orporations 4 The m o b ilizatio n and, even more im portant, th e u t i liz a tio n of domestic savings fo r productive Investm ent can a lso be f a c ilita te d through th e establishm ent o f public development co rp o ratio n s. Such agencies can a t tr a c t p riv a te c a p ita l by d if f e r e n t methods and a sso c ia te p riv a te c a p ita l in a l l kinds o f jo in t productive v en tu res. Public development corporations a re a u sefu l to o l fo r d ire c tin g resources toward e s s e n tia l a c tiv itie s w ith maximum chances of success. They can a ffo rd the serv ices o f competent tech n ical s ta f f s , including in many in stan ces those of fo reig n experts and co n su lta n ts, much more e a s ily than p riv a te domestic e n te rp ris e . They can more e a s ily obtain fo reig n loans o r e n te r in to p a rtn e rsh ip s w ith fo reig n co r p o ratio n s. As a ru le , development co rp o ratio n s u t i liz e 280 th e ir resources as a revolving fund. They s t a r t ventures th a t p riv a te c a p ita l would be unable or unw illing to under take by I t s e l f . Such development corporations have made an im portant co n trib u tio n to development In sev eral co u n tries. More re c e n tly , such corporations have been estab lish ed in a g re a t number of co u n tries In Asia and A frica, notably in 41 Pakistan, Malaya, and N igeria. The development corporations would in tu rn f a c i l i ta te the establishm ent o f an organized c a p ita l market by c re a tin g and broadening th e demand fo r s e c u ritie s . The lack of organized c a p ita l markets in most underdeveloped co u n tries has im portant repercussions on both the r a te and the d ire c tio n of economic development. I t e ith e r precludes o r a t any ra te reduces the p o s s ib ility o f m obilizing domes- 4 2 ti c c a p ita l fo r la rg e sc a le p riv a te p ro je c ts. C apital Market Development The growth of a c a p ita l market in Iran is a long term problem of education and evolution of tr u s t, which in tu rn depends on c re a tio n of an adequate framework of law 4 1 A lpert, op. c i t . . pp. 139-142. 281 and adm in istratio n and a change In In v e sto rs' s ta te o f mind such th a t they become In creasingly w illin g to r is k c a p ita l fo r fu tu re p ro fits in an e n te rp rise managed by stra n g e rs. U n til th is occurs, in d u s tria l shares w ill continue to be fo r sm all and medium-sized savers a re la tiv e ly le ss a ttr a c tiv e o u tle t than re a l e s ta te , c a rp e ts, or gold. The goal is not im possible; neighboring Pakistan and India both have functioning c a p ita l markets th a t play im portant p a rt in 43 in d u s tria l finance. The development of fin a n c ia l in te rm e d ia rie s--fo r example, savings banks, insurance companies, and so on— may increase the w illingness of a household to hold down i t s consumption, or a t le a s t to hold down the r a te of in crease in i t s consumption. S im ilarly, the ex isten ce of such interm ediaries may encourage households to hold fin an c ia l a s s e ts , in stead of resource-using physical a s s e ts . But the required in s titu tio n a l changes are, of course, deeper and more su b tle than merely esta b lish in g savings banks. Changes in the a ttitu d e s o f most households toward the government and th e government development program are ^ B e n e d ic k , on . c i t .. p. 217. 282 a lso required. Perhaps the key monetary policy im plication is to seek to make sure th a t th e sw itch in the composition o£ the a s s e t p o rtfo lio does not r e s u lt in losses th a t would n o t have occurred had o th er (physical) a sse ts been held, and th is o b jectiv e may possibly be in c o n flic t w ith other o b jectiv es o f monetary policy. A change in in s titu tio n a l arrangement is paramount in bringing about such a switch in the type of a ss e t, but th e more conventional considerations a re also re le v an t. The main motives fo r holding physical a sse ts a re precau tio n ary , not w ith resp ect to changing in te r e s t ra te s or p ric e le v els but ag ain st economic d is a s te r. The advantages o f liq u id ity th a t such a sse ts have in a p a rtic u la r environ ment outweigh the mere fa c t th a t they y ie ld no re tu rn (o th er than physic income re s u ltin g from a feelin g of s e c u rity ). But once the saver is convinced th a t a piece o f paper rep resen ts le g itim ate and recognisable claim , he A /. may become more in te re ste d in y ie ld . Only the government can provide the leg al p ro tectio n required by m inority shareholders. Laws ag ain st improper ^ B r u to n , op. c i t . . pp. 3 2 3 -3 2 5 . 283 and u n eth ic a l p ra c tic e s by managers and d ire c to rs need to be sim p lifie d and enforced. In ad d itio n , a development finance in s titu tio n can by a v a rie ty o f p o lic ie s and Instrum ents a ffe c t a ttitu d e s and broaden the ex ten t o f public p a rtic ip a tio n in in d u stry . U nderwriting a c t iv it ie s , ranging from a s sista n c e in designing a c o rp o ra tio n 's c a p ita l s tru c tu re to d is trib u tin g i t s s e c u ritie s , a re another im portant to o l of in d u s tria l fin an ce. In c o n tra st w ith th e West, where th e o b ject is u su ally to dispose of an issu e as quickly as p o ssib le, in Iran underw riting w ill probably be as much an investm ent process as a m arketing one.^5 The young h is to ry o f in d u stry in Iran has demon s tra te d co n clu siv ely th a t progress req u ires more than c a p ita l. A statem ent by the p resid en t o f the In te rn a tio n a l Bank fo r R econstruction and Development before the United Nations in 1954 may w ell be applied to Iran: . . . I t is the c h a ra c te r and in i tia tiv e o f th e people, the confidence they have in themselves and in the fu tu re of th e ir country, the honesty and the e f f i ciency of the government ad m in istratio n , the n atu re of the country'8 s o c ia l in s titu tio n s —i t is these and 45 B enedick , op. c i t .. p. 218* 284 many sim ila r fa c to rs , q u ite as much as c a p ita l, which determ ine the r a te of economic growth. With in d iv id u al o r communal in itia tiv e , properly d ire c te d , sm all funds can work m iracles. Without in itia tiv e or d ire c tio n , no amount o f investm ent is lik e ly to prove e ffe c tiv e . I I I . S U M M A R Y There can be no steady and balanced economic growth w ithout a sound monetary po licy . Development of a sound $ monetary policy req u ires a strong and independent c e n tra l bank. U n til a few years ago, Iran did not have a c e n tra l bank. For many years the Bank M elli Iran, the co u n try 's la rg e s t commercial bank, was the issu e r of currency and performed the functions of a c e n tra l bank. As a f i r s t step , in 1960 the Bank M elli Iran was reorganized in to two banks: the Bank M elli Iran which is the N ational Bank of Iran , and the Bank Markezi Iran, which is the c e n tra l bank of Iran. The Bank M elli now p e r forms i t s commercial functions, and i t s o th er functions are tra n sfe rre d to the Bank Markezi. The Bank Markezi, in ad d itio n to issu in g currency and c o n tro llin g foreign Cited in K. Grunwald and J . 0. Ronall, In d u s tria l iz a tio n in the Middle East (New York: Council fo r Middle E astern A ffairs Press, 1960), p. 124. 285 exchange, reg u lates th e operation of the com nercial bank, and in general performs a l l the usual functions of a c e n tra l bank. To achieve economic development, th e c e n tra l bank i t Is hoped w ill help to m obilize and d iv e rt domestic c ap i t a l fo r the n a tio n 's economic development by e sta b lish in g su ita b le fin a n c ia l in s titu tio n s and fo ste rin g th e growth of th e banking se c to r and by m itig atin g undue swings in n a tio n a l money Incomes as w ell as in domestic p ric e s. Perhaps even more Important than th e bank's actu al performance a t th is time, however, is the increased aware ness th a t no sturdy economic growth is p o ssib le w ithout adequate c re d it f a c i l i t i e s and the m obilization of re a l resources. I t is hoped th a t w ith the support of the public, the cooperation of o th er banks and the a ssista n c e o f government departments and agencies, Bank Markezi Iran w ill play i t s p a rt in guiding th e monetary and economic policy o f the country e ffe c tiv e ly . CHAPTER X S U M M A R Y A N D C O N C LU SIO N S I. S U M M A R Y Iran la in many ways a ty p ic a l underdeveloped country. The bulk of her population is dependent on a g r i c u ltu re and has a standard o f liv in g not fa r above sub siste n c e . In the case of Iran, however, the outlook is o p ti m istic ra th e r than gloomy. The problem is to u tiliz e the w ealth of n a tu ra l resources a v a ila b le in the country. With her g re a t supplies of o il, w ater, and arab le land, Iran is p o te n tia lly one of the ric h e s t countries in the Middle East, and conceivably could in tim e achieve a standard o f liv in g comparable to th a t of the more prosperous Western n a tio n s. The preceding chapters have discussed in d e ta il the major issues involved in optim ization of economic resources 286 287 fo r economic growth in Iran . This study has attem pted to look not only a t the th e o ries of economic growth, but also th e ir ap p licatio n to Iran and the Iran ian in s titu tio n s — to reco n cile theory and r e a l l i f e . This study s e t fo rth the a u th o r's c r i t i c a l observations and recommendations, addressed prim arily to the policymaker who is a c tiv e ly con cerned w ith the growth of p riv a te e n te rp rise and i t s f i nancing in Iran. While the an aly sis was intended to extend over as wide an area of the f ie ld (planning, f is c a l and monetary) as p o ssib le, i t c e rta in ly has not covered a l l of the e x is t ing problems. This has been due to th e fa c t th a t planning, f is c a l, and monetary p o lic ie s cover so wide an area of economics th a t an a n a ly tic a l study of each of the fie ld s would have extended fa r beyond the scope of th is p ro je c t. Inasmuch as the sp e c ific problem studied here are concerned a t th is p o in t, the study, on the b asis o f the fin d in g s, w ill make p o licy recommendations. Due to the inadequacy of the d ata needed fo r planning, th is study can not specify q u a n tita tiv e goals and measures. N evertheless, the recommendations present a path along which development can proceed through optim isation of economic resources. 288 This concluding chapter is designed to co n so lid ate the main strands o£ d iscu ssio n in the body o£ th e study. In each o£ these broad areas, c e rta in conclusions and observations have already been made; i t remains now to amplify some of these on the b a sis of the o v e r-a ll p ic tu re of the Iran ian economy th a t has emerged from the preceding ch ap ters. For the purpose of c la r ity , the problems and recommendations w ill follow the c la s s ific a tio n given in the study. T heoretical Paths to Progress Economists have tr ie d to c la s s ify the fa c to rs on which economic growth depends in d iffe re n t ways. I t is evident from th e preceding d iscu ssio n th a t th e re is no hard and f a s t s e t of ru le s fo r economic development. The prob lem of growth is a highly com plicated phenomenon. The whole process is not c le a rly understood. I t i s not c le a r why economic growth began in some c o u n trie s, continued rap id ly , and u ltim a te ly slowed down. Nor is i t c le a r why in some co u n tries i t never began as a continuous s e lf rein fo rcin g process. Many things remain unknown about the long-run a c c e le ra tio n , re ta rd a tio n , and constancy of the 289 ra te s o£ growth. In th is f ie ld o f economics "circum stances a l t e r c a se s." However, as has been pointed out, th e re Is g en erally a ta k e -o ff in to economic development. The events precedent to th e ta k e -o ff have been com pletely d issim ila r in th e case of seventeenth and eighteenth century Great B rita in , n in e teen th century Japan, and tw entieth century Canada. Also th e re is no reason to b eliev e th a t the paths to be f o l lowed in th e fu tu re w ill o r must be those of the p a st. A fter analyzing balanced growth th eo ries and the "big-push" th e o ries o f economic growth, and a number of th eo ries o f growth, and an examination of th e in d u s tria l iz a tio n versus a g ric u ltu ra l debate, i t is th e contention o f the w rite r th a t Iran should choose to follow the path of s e le c tiv e growth. The w rite r advocates th a t one way to achieve th is and thus in d ire c tly stim u late oth er forms of investm ents, is fo r the Iran ian government to co n stru ct many forms of "so c ia l overhead c a p ita l." These would in clude p ro je c ts such as tra n sp o rta tio n investm ents ( a i r p o rts, harbors, ro llin g sto ck ), public u t i l i t i e s (water, power, and lig h t) , communications (telephone, radiography, and e f f ic ie n t p o sta l se rv ic e s), h e a lth , and education. 290 « The w rite r b eliev es th a t a la rg e investm ent now in s o c ia l overhead c a p ita l w ill encourage p riv a te investm ents (both lo c a l and fo reig n ) l a te r . For example, Improved highways may stim u late tru c k farm ing; cheaper e le c tr ic power may encourage lig h t in d u stry , e tc . The b asic idea is always th a t by tem porarily in v estin g w isely in substan t i a l overhead c a p ita l cap ac ity , the c o sts o f many d ir e c tly productive a c tiv itie s can be reduced and, th e re fo re , in vestm ents in th ese e n te rp rise s encouraged and stim u lated . A g ric u ltu ra l S ector of the Economy Iran is predom inantly an a g ric u ltu ra l country. Nearly 80 per cen t o f th e population is engaged in some form of a g ric u ltu ra l production.. A la rg e p o rtio n of the urban population a lso depends on th e production o r process ing o f food, anim al, and d a iry products fo r i t s liv in g . In s p ite o f th is Iran does n o t produce enough to feed i t s e lf , and in recen t years has had to Import larg e q u a n ti ti e s of food. The study in d ic a te s th a t Iran should norm ally be s e lf - s u f f ic ie n t in most foods. Iran has an area o f 31,500,000 h ectares o f p o te n tia lly c u ltiv a b le land. Secondly, because o f v a ria tio n s in reg io n a l clim ate and s o il co n d itio n s, i t has an as y e t unrealized p o te n tia l to produce exportable surpluses of a wide range o f products. The most serio u s o b stacle to increased a g ric u ltu ra l produc t i v i ty had been the d isin c e n tiv e e ffe c t of a land tenure system ch aracterized by sharecropping and absentee land lo rd s. P rim itive methods, outmoded equipment, nongeneral iz a tio n of mechanized farming, in s u ffic ie n t u tiliz a tio n of chemical f e r t i l i z e r s , overgrazing of p astu re lands, de fo re s ta tio n , lack o f access to m arkets, and a shortage of c a p ita l have continued to re ta rd the progress of a g ric u l tu re . Furthermore, s c a rc ity of w ater in most p a rts o f Iran produces a s itu a tio n in which, out of six m illio n hectares of c u ltiv a te d land, only o n e-th ird is irrig a te d , and th e r e s t is fallow . To optim ize a g ric u ltu ra l output and p ro d u ctiv ity in Iran, the w rite r fe e ls th a t the follow ing actio n s should be taken a t once w ithout any delay: 1. Changes in the present land-tenure system—not only on paper, but the government should see th a t the land reform is c a rrie d out in practice* Here a study of the p ra c tic e s obtaining in England, where e f f ic ie n t tenant farming is th e ru le , might be of g re a t value. 292 2. T raining and te c h n ic a l advice on farming and p rogressive techniques of cropping and husbandry p ra c tic e s should be provided* The w rite r fe e ls i t almost necessary to send abroad fo r tra in in g farm ers (from th e r u r a l a reas) and n o t c i ty dw ellers who a re not in te re s te d in farm ing. 3. Land reform by i t s e l f cannot be su ccessfu l un le s s adequate amounts o f a g ric u ltu ra l c re d it a t reasonable in te r e s t ra te s a re a lso provided. 4. The Ira n ia n government should seek fo reig n expert advice on hydrology to prevent the m isuse o f w a te r.* Iran has in s u ffic ie n t w ater o f the r ig h t kind, a t th e r ig h t tim es, and p laces. 5. F a c ilitie s fo r sto rin g and processing a g ric u l tu r a l produce should be provided. P riv ate e n te rp rise should be encouraged to e s ta b lis h th ese types o f f a c i l i t i e s in Ira n . The experiences o f Russia and China have shown th a t as y e t S ta te C o llectiv es cannot produce as e f f ic ie n tly as p riv a te firm s. 6 . Because o f the lack of r u r a l tra n sp o rta tio n f a c i l i t i e s , most o f the produce cannot be taken to the *See "H ater: Worldwide Use and .Misuse," Time. October 1, 1965, pp. 70-79. 293 neighboring towns and c i t i e s . Most o f the produce is con sumed by the farm ers; the surplus e ith e r ro ts o r is fed to 2 anim als. M obility is Impeded by lack of tra n sp o rta tio n f a c i l i t i e s . A s t a r t should be made w ith cheap o il-s u rfa c e roads, to be followed when c a p ita l is av a ila b le by highways and ra ilro a d s . Iran is a b ig country, w ith an area of 628,000 square m iles. Obviously i f such a la rg e area w ith p ra c tic a lly no sea coast is to develop, a network of in te rn a l means of tra n sp o rta tio n is e s s e n tia l. 7. Farmers should be given more tra in in g —extension of modem techniques of a g ric u ltu re and guidance of th e farm ers to use new methods o f farming. The unemployed hianan resources In the v illa g e s should be m obilized to in crease the production le v e l and m odernization of ru ra l areas. 8. Improvement in th e q u a lity of seed and saplings should be fu rth e r expanded. 9* Because th e re is a shortage of meat and d airy products in Iran, ad d itio n a l measures should be taken to 2 I t is not an uncommon sig h t in Iranian ru ra l v i l lages to see horses and donkeys being fed w ith generous portions of apples, grapes, peaches, pears, e tc . 294 Improve the q u a lity of n ativ e breeds by using pure-bred b u lls fo r a r t i f i c i a l insem ination to produce a strong and healthy breed su ite d to Ira n 's clim a tic conditions and r e s is ta n t to lo c a l d iseases. 10. Government should take every step to encourage farm m echanization. The w rite r advocates th a t th e Plan O rganization should provide the f a c i l i t i e s to help farmers buy tra c to rs , combines, and oth er a g ric u ltu ra l machinery on th e Installm ent plan. 11. A g ricu ltu ral C redits and Rural Development Banks should be estab lish ed throughout the ru ra l areas to in crease c re d it f a c i l i t i e s fo r farm ers, and to encourage them to g re a te r economic a c tiv ity . 12. The Plan O rganization should a llo c a te funds to f a c i l i t a t e and subsidize the purchase and d is trib u tio n of ad d itio n a l chemical f e r t i l i z e r s . At present chemical f e r t i l iz e r s have to be imported. Due to the high co st, th e ir use in Iran has been in s ig n ific a n t. The farmers use human waste and animal manure. Due to in su fficien cy of manure, the farmers have been compelled to leave p a rt of th e ir land in fallow , thus reducing th e area of c u ltiv a te d land. 295 13. Since th e most p rev alen t method Is dry farming In Ira n , the crops a re destroyed when ra in s a re I n s u f f i c ie n t. The w rite r recommends th a t a d d itio n a l dams should be co n stru cted to overcome th e problem. Also c r e d it should be made a v a ila b le to fanners fo r Independent digging o f w ells and c o n stru ctio n of quanats. 14. Every y ear huge clouds o f lo c u sts a tta c k farms in Ira n . Every year Iran lo ses a co n sid erab le p a r t o f i t s crop due to lo c u st invasion. Iran should seek a ssista n c e from th e United S tates and o th e r advanced c o u n trie s of the world to a tta c k lo c u st invasions, by establishm ent of a n ti-lo c u s t c e n te rs. The w rite r b eliev es th a t the f a c i l it a t io n and use of th e se recommendations w ill go a long way toward achiev ing th e f u ll p o te n tia l and o p tim izatio n o f the a g ric u ltu ra l se c to r of the economy o f Ira n . In d u s tria l S ecto r o f th e Economy In d u s tria l development is in an e a rly stag e and s t i l l sm all in Iran. However, the study in d ic a te s th a t th e re seems to be a g re a t p o te n tia l to in crease i t s impor tance in the n a tio n 's economy both by modernizing and reorganizing e x istin g fa c to rie s and by broadening the 296 p resen t range o f m anufactures. S im ilarly , mining i s s t i l l in i t s infancy but Iran possesses a ric h v a rie ty o f m iner a ls and, given modem equipment and good tra n sp o rta tio n , mining can play a v alu ab le p a rt in developing th e indus t r i a l s e c to r o f I r a n 's economy. This study makes the follow ing s p e c ific recoumenda- « . . . tio n s: 1. There is no fundamental c a p ita l shortage in Iran in re la tio n to o p p o rtu n itie s fo r sound investm ent In in d u stry . Any apparent d eficien cy is tra c e a b le to p re v a ilin g a ttitu d e s toward consumption, sp ecu latio n , and planning, and a g en eral atmosphere of d is tr u s t and fa ta lism r e in forced by cap ricio u s a c tio n o f public o f f ic i a ls . A ll in cen tiv es and aid s to in creasin g in d u s tria l p ro fits w ill be In vain i f s o c ia l customs continue to discourage re in v e s t ment o f such earnings by th e ir expenditure on lu x u ries and r e a l e s ta te . Luxury im ports a re a s ig n ific a n t element in the fo reig n exchange outflow . In Iran i t would be m is leading to d e p ic t in d u s tria l a c tiv ity supplanting a g ric u l tu re as the c o u n try 's prim ary economic a c tiv ity . R ather, i t has a d e f in ite ro le as an im portant complement, meeting many consumer demands and thereby re lie v in g fo reig n 297 exchange p ressures, supplying implements fo r modern farm technology, processing and packaging increased food output, and providing productive employment fo r growing urban masses and workers freed from th e land by labor-saving devices. 2. In th e in d u s tria l f ie ld i t should be th e govern m ent's policy to give a reasonable p ro tec tio n to in fa n t in d u strie s a t home in order to encourage c a p ita l owners to in v est in various productive e n te rp rise s. 3. The government should make continued investment In th e in fra s tru c tu re o f the economy and provide some of the ex tern al economies to the p riv a te se c to r o f the economy. 4. The Plan O rganization should guide and advise in d u s tr ia lis ts so th a t they become acquainted w ith modem in d u strie s, investment o p p o rtu n ities, and modem management techniques. 5. The government should encourage fu rth e r the estab lish n en t of co ttag e in d u strie s in the ru ra l areas by studying every po ssib le way of Improving these in d u strie s and providing a d d itio n a l jobs in these co ttag e in d u strie s fo r the farmers during th e o ff season. 6 . One of the main obstacles to th e in d u s tria l 298 growth of th e country is the lack of cheap and r e lia b le supply of e le c tric ity * Steps should be taken to provide a d d itio n a l cheap power and e le c tr ic ity to meet the demands of the e x istin g and fu tu re in d u strie s and also the ru ra l areas. 7. The continued development and expansion o f the tra n sp o rt and communications f a c i l i t i e s a re v i t a l needs fo r th e general economic development o f the country. A larg e sc a le program to b u ild new roads, feeder roads, and railw ay lin e s , new seap o rts, a irp o rts , and a complete modem communications system to serve e f f ic ie n tly both the economic and in d u s tria l needs of th e country should be developed. Feeder road bu ild in g should receiv e s o c ia l a tte n tio n of the government. Good roads w ill stim u late both the in te rn a l and fo reig n tra d e and decrease the c o st of tra n sp o rta tio n . 8. The petroleum in d u stry of Iran has a g re a t p o te n tia l fo r growth and expansion. Iran has la rg e un tapped o i l reserv es. One way to Increase th e o i l revenue is to e x p lo it the o i l resources e ith e r through i t s own f a c i l i t i e s , or through leasin g arrangements w ith o th er foreign companies. 299 9. At p resen t only a very sm all p o rtio n o f the n a tu ra l gas is used. The p o s s ib ility o f in creasin g the consumption of n a tu ra l gas in Iran, both as household and in d u s tr ia l fu e l, i s g re a t. Plan O rganization In an e f f o r t to a tta in the g re a te s t and most rap id advances p o ssib le w ith in th e lim its o f th e ir scarce human, p h y sical, and fin a n c ia l reso u rces, most o f the under* developed co u n tries of the world have o f f ic ia ll y espoused comprehensive n a tio n a l development p la n s. Underdeveloped » co u n tries today o fte n consider government as an indispens able v e h ic le fo r accom plishing th e p u b lic I n te r e s t. This is p a rtic u la rly evident in co u n tries such as In d ia, P akis tan , A fghanistan, Iran , and United Arab Republic. These co u n tries are b a s ic a lly fre e e n te rp rise economies w ith some economic planning and p a rtic ip a tio n by the government. For Iran to attem pt to change from a feu d al to modem in d u s tria l economy, the adoption of a n a tio n a l plan fo r the public se c to r of th e economy i s a v i t a l n e c e ssity . Planning d e a ls w ith the o rg an izatio n o f reso u rces; th e a c tiv a tio n and use of them so as to achieve the optimum r e s u lts in the s h o rte s t p o ssib le time a t minimum expense. 300 A plan should be d ra fte d In such a way th a t I t w ill respond to the r e a l needs and s o c ia l development o f the country. By using th e e x istin g and p o te n tia l resources f u lly , i t should in crease the economic a c tiv itie s and the employ ment in the country to th e maximum e x te n t. I t should pro vide the h ig h est economic p ro sp e rity fo r the n a tio n . To achieve th is goal which is o f v i t a l importance to th e development of Iran, the w rite r recommends an im portant change. The e n tire income from the o i l ro y al tie s should be given to the Plan O rganization, to carry out the development p ro je c ts w ithin the public se c to r. At p resen t a su b sta n tia l p o rtio n of the o i l ro y a ltie s goes fo r financing budget d e f ic its . Plan O rganization gets only 55 per cent of th e o i l income. The w rite r b eliev es th a t budget d e f ic it should be taken c are of through th e f is c a l p o lic ie s which w ill be recommended la te r . The policy of th e Iran ian government and th e Plan O rganization should be to encourage continued expansion of domestic p riv a te ind u stry and to pioneer i t s e l f in p a rtic u la r areas to show p riv a te in v e sto rs the p r o f it p o te n tia l of fe a s ib le but c u rre n tly unfam iliar Indus** 3 tr i e s . Iran has most o f th e problems of backward co u n tries, but i t has some advantages th a t many other such co u n tries do not have. In ad d itio n to the r e a l physical advantages o f o il ro y a ltie s , th ere is the equally r e a l, i f in tan g ib le, advantage of a h is to ry o f c e n tra l government, and a concept o f the ro le of the government in th e development of an i economy. This is in marked c o n tra st to the almost anarchic conditions which p re v a il in the nomadic s o c ie tie s of Ira n 's neighbors. This does not mean o f course th a t everything w ill proceed smoothly in attem pting to make, in a few years, a tra n s itio n th a t has required hundreds of years in Western Europe. Far from i t ! The b asic weaknesses of backward co u n tries are p resen t. -Shelfe are~ f ew capable adm inis tra to rs and engineers e ith e r in government or o u t. I l l i t e r acy is high. Communications a re inadequate. As a conse quence, i t appears th a t the ro le o f government in the 3 While in Europe and in th e United S ta te s, the w rite r has v is ite d various p lan ts and in d u strie s fo r the purpose of assaying th e f e a s ib ility of th e ir establishm ent in Iran . On th e b asis of h is observations, the w rite r w ill soon publish a handbook fo r Iran ian in v e sto rs. /i' 302 economic development o f Iran can and, Indeed, la lik e ly to be a c o n stru c tiv e one. Public Finance and F isc a l Policy fo r fo fflw m iy .. ffgatth-Jfl,. Jop The g re a t im portance o f f is c a l policy in an under developed country can be seen from the fa c t th a t in these co u n tries th e s ta te is c a lle d upon In creasin g ly to play an a c tiv e ro le In promoting economic growth and development under a fre e e n te rp ris e system. However, th e under developed economies o f the world presen t a sp e c ia l problem when i t comes to th e a p p lic a tio n of f is c a l p o licy to the s o c ia l, economic, p o litic a l, and c u ltu ra l co n d itio n s which u su ally p re v a il. In a developed economy, the main problem is th a t o f s t a b i l i t y to avoid c y c lic a l flu c tu a tio n s and o s c illa tio n s ; whereas s tr u c tu ra l changes and rap id eco nomic growth a re th e b asic needs o f an underdeveloped economy. There is no s in g le f is c a l p o licy th a t is u n iv e rsa lly ap p licab le to underdeveloped n a tio n s. F isc a l p o licy fo r each country must be custom-made fo r th e country under co n sid eratio n in o rd er to c o n trib u te to optimum economic 303 growth. Each economy must be judged on i t s own p o te n ti a l it y . I t is now w ell-recognized among economists th a t i t is p o ssib le fo r f is c a l policy (when in te llig e n tly formu la te d ) to make "p o sitiv e co n trib u tio n s" to th e needs of the underdeveloped economy. Good policy in th is area must guard ag a in st producing negative and in ju rio u s e ffe c ts upon the developmental program. In Iran , fo r example, the c h ie f o b stacles a ris e , not from functions r e la tiv e to the In te re s t r a te or aggregate demand, but ra th e r from sc a rc ity of investm ent. Modern economic and fin a n c ia l in s titu tio n s are not w ell-developed. R ig id itie s are embedded so deep and wide th a t the market economy has hardly any freedom. Taxation and Tax Policy 1. Taxation is only one phase of o v e r-a ll f is c a l policy fo r economic development. But i t is one of the most dynamic and Im portant asp ects. In Iran one of the major sources from which fin a n c ia l resources may be obtained fo r economic growth is through ta x a tio n . This source o ffe rs the maximum p o te n tia litie s . W ithin the framework of market economy, fin a n c ia l tra n sfe rs to government from individuals 304 who would spend th e funds on consumption o r in v e st them In o u tle ts o f lim ited sig n ific a n c e f o r growth, make i t pos s ib le to o b tain the resources fo r governm ental expenditures, w ithout re s o rtin g to borrowing or ex tensive c r e d it c re a tio n . 2. U nfortunately, th e g en eral tax environment of the Iran ian economy is unsuited to a high degree o f p erfec tio n o f the ta x s tru c tu re . However, d e sp ite i t s lim ita tio n s, the income ta x may prove to have g re a t m erit as an element of f is c a l p o licy in th e tax s tru c tu re of th e Iran ian economy. 3. A modest income tax may b e s e t up w ith f a ir l y high personal exemptions and modestly progressive ra te s in the m iddle brack ets in o rd er to co n fin e th e Income ta x to m iddle and hig h er income le v e ls . This would exclude the ty p ic a l fam ily from th e ta x , and lim it the progression of the r a te s tru c tu re to the middle and upper income groups. 4. The income tax i s the most e ffe c tiv e way to reach th e above-subsistence income o f those groups which have a tta in e d such le v e ls, th e tax being ad ju sted in terms of th e amount of such excess and made progressive r e la tiv e to i t . No o th e r tax can be adjusted in such a p re c ise fash io n . A la rg e p o rtio n o f the ta x under such conditions 305 In Iran w ill be obtained from c i v il serv an ts, business executives, employees, and p ro fe ssio n a l men. Taxation of these persons w ill lik e ly have few harmful e ffe c ts on economic development sin ce they are n o t engaged In under taking s ig n ific a n t Investm ent. 5. The d ir e c t burden o f the ta x w ill make people cognizant o f th e ir re s p o n s ib ilitie s toward government. 6. The y ie ld from Income tax i s more sta b le than th a t of o th e r major a lte rn a tiv e sources. 7. The income tax conforms w ith w idely accepted standards equity. 8 . Due to the low le v e ls of lite r a c y and record keeping, Inadequate numbers o f train ed tax ad m inistrators and au d ito rs, u n sa tisfa c to ry land t i t l e s itu a tio n s , lim ited use of bank accounts, the assessment o f income in a g r i c u ltu ra l areas, the w rite r advocates a maximum degree o f sim p lific a tio n in ta x atio n procedure. 9* The w rite r fe e ls th a t the government should lim it the number o f allowances fo r c h ild ren and wives, and r e s t r i c t the number of e lig ib le dependents. 10. A ll n a tio n a l revenues from taxes should be cen tra liz e d in the trea su ry departm ent. The m in istry of 306 finance w ill have to ex ercise a s t r i c t supervision over a l l revenues and expenditures. 11; Taxes should be s ta b iliz e d on long-term b a s is . This w ill give g re a te r confidence to taxpayers and a c c e le r a te th e r a te o f economic development. 12. In Iran, as in many o th e r underdeveloped coun t r i e s , a tax p o te n tia l from business e n te rp rise s also e x is ts . The government must n e c e ssa rily draw some revenue from th is source on th e grounds o f equity and to r a is e some revenue. 13. The w rite r advocates vario u s tax concessions to business in th e form o f "tax holiday" o r "pioneer com panies" le g is la tio n . Under th is type of program, complete tax exemption w ill be given fo r th e f i r s t few years of operation to new firm s involved in a c tiv itie s e s s e n tia l fo r economic development, provided th e ir ap p lic a tio n s a re approved by th e ap p ro p riate government agency. 14. To stim u late new productive investm ents, p ar tic u la r ly in th e provinces of Ira n , a complete fiv e -y e a r tax holiday should be o ffered to a l l new firm s o u tsid e th e Teheran area. 15. The above concessions may be fu rth e r augmented 307 w ith generous and lib e r a l "carry forward o f lo ss" p ro v i sions and accelerated d ep reciatio n allowances, as is done in th e mature economies. 16. As a p a rt o f the o v e r-a ll e f f o r t to optim ize resources and to augment fo reig n exchange earnings, export in d u s trie s , when they come in to ex isten ce, may be com p le te ly exempted from ta x a tio n . 17* To encourage reinvestm ent of business p r o f its , p a r tia l o r f u ll exemptions may be given to those rein v ested earnings. Such exemptions may be given only to those in d u strie s which th e le g is la tu re regards most s ig n ific a n t to the c o u n try 's economic development. 18. Assurance of-a-degree o f consistency in ad m in istra tio n of th e law is an e s s e n tia l precondition to s ig n ific a n t long-term investm ent. 19. To encourage foreign c a p ita l and investm ent in Iran , the government should provide foreign in v esto rs ade quate se c u rity , eq u itab le tax treatm ent, p r o f it rem ittance, c a p ita l re p a tria tio n , and favorable le g is la tio n . 20. The Iran ian embassies and consulates throughout th e world should p u b licize th e o p p o rtu n ities o f investment in Iran, and provide a v a rie ty of serv ices to p o te n tia l and 308 cu rre n t in v e sto rs. Public Expenditure Policy fo r Growth A nd Government expenditures make up perhaps the most im portant sin g le to o l o f f is c a l p o licy . Government ex penditures a re c e rta in to produce a number of e ffe c ts on th e le v e l of n a tio n a l income and i t s d is trib u tio n , and on th e consumption, investm ent, and employment of the n a tio n . The ex ten t o f in c re ase in the n a tio n a l income depends upon the type o f expenditures governments make, fo r example, fa c to r purchase expenditures o r tra n s fe r payments. There a re a number o f areas o f government a c tiv ity which c o n trib u te d a ily to g re a te r p ro d u c tiv ity of the country in the long run. Some of th e major areas o f government a c tiv ity a re g en eral and s p e c ific types o f edu c a tio n , various types o f research, conservation and de velopment o f n a tu ra l reso u rces, as w ell as tra n sp o rta tio n f a c i l i t i e s , public h ea lth and sa fe ty , and aid s and en couragement to in d u stry and a g ric u ltu re . Education. This study advocates th e follow ing a c tio n to be taken in regard to th e f ie ld o f education: 309 1. The Iran ian government should a tta c h g re a t im portance to the spread o£ education in the e n tire country, p a rtic u la rly in the ru ra l areas. The c re a tio n of educa tio n a l in s titu tio n s and supervision o f them should be an im portant re s p o n s ib ility o f the government* 2. Free and compulsory education w ill have to be provided fo r a l l primary school ch ild ren . 3. The government should encourage the e s ta b lis h ment of p riv a te schools and educational in s titu tio n s in urban areas. 4. The Iran ian government w ill also have to e sta b lis h f a c i l i t i e s fo r higher and advanced education w ithin the country to elim inate th e need to a la rg e ex ten t fo r sending the students to fo reig n c o u n trie s. At present th ere is a tremendous d rain on Ira n 's educated manpower. Most o f the students a f te r the completion o f th e ir stu d ies do n o t re tu rn to Iran . 5. The Education Corps program should be s tre n g th ened and c a re fu lly pursued. 6 . F in a lly , the public education must strengthen the kinds o f lo y a ltie s and values th a t are necessary fo r a sp ecialized and impersonal economy to operate. Narrow 310 lo y a ltie s , recourse to violence, and d isreg ard fo r the rig h ts of oth ers nay be removed through education. Public h e a lth expenditures. One o f the major o b stacles to increased production i s the prevalence of e p i demic d iseases which g re a tly reduce human p ro d u ctiv ity and work cap acity . What more valuable resource can a country develop than i t s human one? 1. Governmental h e a lth expenditures should be made ■ p rim arily to provide m edical serv ices and h ea lth f a c i l i t i e s to those who need them but a re too poor to affo rd them. 2. A dditional sums should be spent on such programs as w ater o r a i r p o llu tio n c o n tro l because of the pervasive s o c ia l b e n e fits th a t a ris e from th ese a c tiv itie s . 3. One of the areas of public re s p o n s ib ility which w ill req u ire more resources in the fu tu re is th e continued improvement in both the q u an tity and q u a lity of h e a lth serv ices, including medical research and h o sp ita ls. 4. The community by ra is in g h e a lth le v els can ex pand the average working l i f e of i t s members, reduce time lo s t as a r e s u lt of sickness, and Improve the w orkers' p ro d u ctiv ity . Reduction of accid en ts, on and o ff th e job, could a lso increase average working liv e s , as w ell as 311 reduce th e resources absorbed In treatm en t. 5. The Ignorance o f people about th e p rin c ip le s o f 4 h e a lth , th e g en eral poverty and shortage o f doctors and nurses aggravates the s itu a tio n . Although much Is being done by th e Iran ian govern- i ment to ensure and promote the h e a lth o f the people In the e n tir e country, the v a s t area o f th e country, the g re a t d ista n c e s between the v illa g e s , and th e backwardness o f th e country have made the job o f the government extrem ely d i f f ic u l t In th is re sp e c t. Expenditures on tra n s p o rta tio n . T ran sp o rtatio n plays a s ig n ific a n t ro le in a n a tio n 's economy. A ll seg ments o f the economy depend upon tra n sp o rta tio n fo r the conduct o f th e ir d a ily a c t iv it ie s . The achievement of rap id economic development in th e United S tates and o th er advanced c o u n trie s can be trac ed in g re a t measure to the a v a ila b ility o f a modem and e f f ic ie n t tra n sp o rta tio n system. 1. Development of a good tra n sp o rta tio n system -- can als, ra ilro a d s , highways, merchant m arine, a i r tra n s p o rt, e t c . —is necessary to f a c i l i t a t e in te g ra tio n of the regions of th e developing economies. 312 2. Reduced c o sts and Improved q u a lity of tra n s p o rta tio n enlarge th e economic scope o£ m arkets, because the more cheaply products can be tran sp o rted , the la rg e r the market £or them. Reductions in tra n sp o rt co sts a re no le s s s ig n ific a n t than reductions in manufacturing c o sts. 3. Furthermore, tra n sp o rta tio n f a c i l i t i e s c re a te "place u t i l i t y . " They can provide th e means to brin g men and m aterials to places where they can be used fo r produc tio n or consumption. 4. Public expenditures can be ju d ic io u sly scheduled to speed up movement o f people and fre ig h t and thereby aid in th e b e tte rin g of le v e ls o f p ro d u ctiv ity . 5. The very roadbeds and channels of some types of tra n sp o rta tio n are o f such a ch arac ter th a t they are not e a sily amenable to p riv a te ownership o r the production of p riv a te p r o f its . This is p a rtic u la rly tru e of s tr e e ts and highways, and waterways. 6 . The development o f improved tra n sp o rt and com m unications system is v i t a l fo r the general economic de velopment of Iran . To achieve th is end, the government must in s titu te a la rg e sc a le program to b u ild new roads, feeder roads, railw ay lin e s , seap o rts, a irp o rts , and / 313 complete modem comnunlcatlon f a c i l i t i e s to serve e f f i c ie n tly both the economic and s o c ia l development needs of the country. Feeder road b u ild in g in ru ra l areas should receive sp e c ia l a tte n tio n of the government. 7. Good roads w ill stim u late both the in te rn a l and foreign tra d e and commerce, w ill a ttr a c t a g re a te r number of to u r is ts to Iran , and decrease the c o st of tra n sp o rta tio n . N atural resource development and economic N atural resources re fe r to those raw m aterials and energy sources provided by n atu re, such as m ineral d ep o sits, f e r t i l e s o il, and waterways. A ll of these resources in th e ir d iv erse ways influence th e p ro d u ctiv ity of a n a tio n 's economy. 1. Development o f n a tu ra l resources and conserva tio n adds to economic growth. Conservation of tim ber, o il, w ater, and s o il resources prevents waste and d e stru c tio n , and preserves resources fo r time of g re a te r need. I t thereby c o n trib u tes to long run p ro d u ctiv ity . 2. The la rg e investment in dams and a l l the indus t r i a l accessories fo r the m u ltip le purpose riv e r v a lle y p ro je c ts is p a te n tly a step in the d ire c tio n of economic 314 growth. 3 . Many o f n a tu re 's cre a tio n s do not become " re sources" In th e sense o f being u sefu l to man u n til he has exerted e f f o r t. Although in a sense th e q u an tity of the n a tu ra l resources of a n atio n is fix ed , men can and do expand th e ir e ffe c tiv e command over n a tu ra l resources by th e ir e f f o r ts . For example, ex p lo ratio n and discovery rev eal things which a country might n o t have been using before. N ew ways and techniques of using resources can in crease th e ir economic value. 4. Since so much o f the development planning has depended upon revenue from o il, i t is obvious th a t o il resources should not be wasted. 5. The c o n stru ctio n of dams not only provides e le c tr i c power, but also makes the b e st use and c o n tro l of scarce water supply fo r ir r ig a tio n and general consumption. 6 . Both s o il and timber re q u ire conservation pro grams to p ro te c t valuable land from d e stru c tio n . 7. A b a sic aspect of the In d u stria l Revolution was the rev o lu tio n in power u tiliz a tio n . The importance of fu el c o sts in th e modern in d u s tria l complex has meant th a t nations ric h ly endowed w ith fu e l could obtain power 315 r e la tiv e ly cheaply. Cheap fu e l and power meant g re a te r p ro d u c tiv ity of labor and enabled the fo rtu n a te n atio n s to advance much more ra p id ly than those le s s well-endowed. The m u ltitu d e of o th e r n a tu ra l resources th a t e n te r in to modem in d u s tria l production a ffe c t p ro d u c tiv ity and eco nomic growth in sim ila r ways. 8 . Where resources a re of good q u a lity , e a s ily a c c e ssib le , and abundant, output per man hour o f the workers d ir e c tly involved In th ese in d u strie s w ill tend to be higher than they a re where resources are le s s abundant t t and of poor q u a lity . The production c o sts o f the raw m a te ria ls, including power, w ill tend to be lower. 9. The policy o f government in making n a tu ra l re - i sources a v a ila b le fo r p riv a te e x p lo ita tio n can g re a tly ’3 a ffe c t th e n a tio n 's d is tr ib u tio n of w ealth and income and th e efficiency! w ith which i t s n a tu ra l resources are u t i liz e d . Govemjnent must also a c tiv e ly a id in developing new peocedurer* and techniques fo r u tiliz in g th e n a tio n 's reso u rces. .i Aid8 to a g ric u ltu re and in d u stry . Many forms of government expenditures can have stim u latin g e ffe c ts upon p riv a te investm ent in a g ric u ltu re and in d u stry . 316 1. Improvements can be brought about p rim arily only by governmental a ssista n c e , in th e form of a g ric u ltu ra l extension work, era d ic a tio n of th e sources of liv esto ck j d isease, research fo r improved crops s u ita b le to th e areas, improved land tenure system, and in some instances e sta b lishm ent of farm cooperatives. 2. In regard to the encouragement of in d u s tria l development, the government might undertake d ire c t e sta b lishm ent of major in d u s tria l e n te rp rise s, p a rtic u la rly those which w ill convey Im portant secondary b e n e fits to the economy but are n o t d ire c tly p ro fita b le to p riv a te e n te r p ris e . 3. Government should e s ta b lis h developmental c o r porations to be financed 50 per cent by th e public and 50 per cent by th e p riv a te . 4. The government may in d ire c tly encourage th e establishm ent of in d u stry in the p riv a te se c to r of th e economy through various in d ire c t devices. These may take the form of granting the tax concessions, o u trig h t su b si d ie s, and t a r i f f p ro te c tio n . 5. The Iran ian government can aid industry and a g ric u ltu re in a number o f o th er ways to increase produc ti v ity . Establishm ent o f laws and order perm its su ccessfu l 317 productive a c tiv ity . Property and co n tra ct rig h ts a re Insured, tra d e regulated, a monetary system created and put In to operation, standard weights and measures s e t, and copyrights and paten ts p ro tected . Other government s e r v ices such as the p rep aratio n and d is trib u tio n o£ re p o rts, pamphlets, and o th er inform ative m aterials a l l improve the ra te o£ economic progress w ithin the land. Budgeting and Borrowing fo r Growth flnd Opsonization 1. Any system of fin a n c ia l planning must involve consideration of both revenue as w ell as expenditures. Bud s are necessary to provide an o v e r-a ll view of public finances and to f a c i l i t a t e the process o f ratio n in g in volved in ra is in g and spending public revenues. Budgeting w ill play a v i t a l ro le in the development of the n a tio n 's economy. 2. The function o f the budget is to make f is c a l co n tro l and planning p o ssib le. The more comprehensive the budget, the more i t brings in to one u n ified p ic tu re past f is c a l performance and fu tu re f is c a l plans, and the b e tte r I t w ill perform i t s fu n ctio n of c o n tro l. 3. An attem pt to balance th e budget on an annual b a sis i s in c o n siste n t w ith the long-range c h a ra c te r o f many government programs. Research, development, and in f r a s tru c tu re c a p ita l o u tlay s Involve a c t iv itie s extending over a number o f y ears. 4 . The governm ent's budget can be u tiliz e d to b a l ance the e n tir e economy and prevent th e w aste o f resources through e ith e r d e fla tio n o r in fla tio n . 5. In developing f is c a l p o licy and the budget, th e government ought to co n sid er the adjustm ents which should be made to enable th e p riv a te and public se c to rs of th e economy to u t i l i z e most e f f ic ie n tly the human and physical resources of th e n a tio n . 6 . I n te llig e n t advance planning o f government expenditures w ill depend upon accu rate fo re c a stin g o f eco nomic co n d itio n s. 7. For Iran, which i s seeking to f o s te r economic growth and development, budgetary management has two major asp e c ts: budgeting fo r the ordinary expenditures of govern ment operation and se rv ic e s, and budgeting and planning fo r long-run economic growth. 319 8 . A ll ordinary government expenditures fo r oper a tio n and serv ices should be paid fo r out o f taxes on a cu rren t b a s is . 9. Developmental budgets must be s e t up so th a t Iran may plan w isely what i t s resources w ill perm it her to do each year, and yet also perm it her to plan fo r long-run economic development over a period of years. 10. Such a developmental budget would make i t pos s ib le to appraise needs, s e t up p r io r itie s , and build l i t t l e by l i t t l e toward the desired goals which l i e reason ably w ithin th e cap acity of the Iran ian economy. 11. The c a p ita l budget o f Iran should be financed e n tire ly by the o i l income of th e government. 12. C areful budgeting and a llo c a tin g of resources is the very essence o f e ffe c tiv e planning fo r economic development• 13. By separating the c a p ita l expenditures from c u r re n t ones, emphasis upon balance may be d irec ted to the cu rren t budget alone, and a d e f ic it in the o v e r-a ll budget ju s tif ie d on the grounds th a t th e d e f ic it incurred fo r c a p ita l outlay is o ffs e t by th e in crease value of the government's a s s e ts . 320 14. Many types of lo c a l c a p ita l o u tlay s cannot be estab lish ed on a y e a r-to -y e a r b a sis, but re q u ire c a re fu l long-range planning. Many s e lf-liq u id a tin g p ro je c ts can be h ig h ly productive in th e long run. 15. The budget o f th e government is an embodiment of i t s f is c a l p o licy . I t has d ire c t impact upon th e e n tire economy, public and p riv a te . I t not only re p re se n ts the government's d ecisio n s as to how much i t w ill spend and how i t w ill o b ta in the funds to pay fo r the goods and se rv ic e s, but i t a lso influences the q u an tity o f investm ent and con sumption expenditures in th e p riv a te se c to r o f the economy. Borrowing. 1. Government borrowing would be one source to supplement inadequate revenues from taxes and o i l ro y a ltie s needed to finance budget d e f ic its and development programs. 2. Borrowing may play a s ig n ific a n t p a rt in shaping the o v e r-a ll f is c a l p o lic ie s o f the government. 3. However, borrowing as a source o f revenue is a p ro v isio n al one, because i t s use gives r is e to o b lig atio n s which must be met from taxes o r o th er c u rre n t sources, in the fu tu re . 4 . The public debt can occupy a s ig n ific a n t place 321 in th e economy o f a n atio n . In a d d itio n to the enormous power which i t gives th e government as a f is c a l to o l to in flu en ce the fu nctioning o f the economy, i t also provides a ready market fo r th e Investm ent o f the government tr u s t funds, Id le savings o f in d iv id u a ls, and la rg e cash balances of fin a n c ia l I n s titu tio n s such as banks and insurance com panies. 5. The problems of attem pting to finance a major investm ent p ro je c t through government borrowing a re numer ous. In th e f i r s t place, the P ersian people d is tr u s t the bonds of th e ir own government. 6. Furtherm ore, a t p resen t, th e financing of long term development programs is handicapped by the extrem ely lim ited government f a c i l i t i e s fo r borrowing. In Iran th ere is no organized money market fo r s e c u r itie s . The fin a n c ia l s tru c tu re o f the economy is p rim itiv e . The w rite r fe e ls th is is n o t a m atter fo r pessimism. He fe e ls th is is purely an in s titu tio n a l m atter and as soon as Iran can develop a fu ll-fle d g e d s e c u ritie s m arket, the problem w ill be overcome. 7. This study, a f te r having made a c a re fu l a sse ss ment of resources a v a ila b le to Iran , in d ic a te s th a t Iran 322 has su b sta n tia l unused p o te n tia l resources which can be used more e ffe c tiv e ly . This study does not advocate larg e borrowing by the government o f Iran a t th is time. tfongfcgraJPoJLtey. There is a g re a t p o te n tia l fo r using monetary policy fo r economic development. In Iran th is has not gone un noticed. U ntil a few years ago, Iran never had a c e n tra l bank. For many years the Bank M elll Iran, the co u n try 's la rg e st commercial bank, performed the functions of a cen t r a l bank. 1. As a f i r s t step , in 1960 the Bank M elli Iran was reorganised in to two banks: the Bank N e lli Iran which is the N ational Bank of Iran, and the Bank Markezi Iran, which is the C entral Bank of Iran . The Bank M elll now performs i t s commercial functions, and i t s o th er functions were tra n sfe rre d to the Bank Markezi. The Bank Markezi, in ad d itio n to Issuing currency and c o n tro llin g foreign ex change, reg u la tes the operation o f the commercial banks and in general is equipped to perform a l l the usual functions of a c e n tra l bank. 2. The c e n tra l bank should help to m obilize and 323 d iv e rt domestic c a p ita l fo r the n a tio n 's economic develop ment by e sta b lish in g s u ita b le fin a n c ia l In s titu tio n s and fo ste rin g the growth o f the banking se c to r and to m itig a te undue swings In n a tio n a l money Incomes as w ell as In domestic p ric e s. 3. No sturdy economic growth Is p o ssib le w ithout adequate c re d it f a c i l i t i e s and the m o b ilisatio n of r e a l resources• 4. At p resen t, although the c e n tra l bank of Iran Is equipped w ith the tra d itio n a l instrum ents of c e n tra l bank c o n tro l—rediscount policy, open market operation, and the reserve requirem ents—i t has not always been ab le to ex p lo it i t s powers to the co u n try 's b e n e fit. This' is p r i m arily due to the p rim itiv e stru c tu re o f the fin a n c ia l system o f the country, and th e almost n o n -ex isten t fin a n c ia l market in terms o f money markets in the developed and advanced co u n tries o f the world. 5. With re sp e c t to standards o f c re d it in v e stig a tio n , loan ad m in istratio n , and general fin a n c ia l resp o n si b ility , the g re a t m ajority o f Ira n 's banks stand c lo se r to bazaar moneylenders than to th e ir Western co u n terp arts. C redit in v e stig a tio n by most banks is unsystem atic and 324 almost never Includes consideration of tech n ical or m arket ing fa c to rs which might a ffe c t a borrow er's cred itw o rth i ness. 6 . Outside of banks with fo reig n p a rtic ip a tio n , accounting is a t a p rim itiv e le v e l, and the abacus is the primary aid in c a lc u la tio n . Such to o ls o f fin a n c ia l an aly sis as cash flow p ro jectio n s, r a tio s , and pro forma statem ents a re unknown. 7. In Iran i t is not the shortage of c a p ita l, but ra th e r the r e la tiv e a ttra c tiv e n e ss of a lte rn a tiv e o u tle ts fo r funds th a t is a major o b stacle to the c a p ita l formation and economic development o f Iran. 8 . The development o f a fin a n c ia l system can con tr ib u te and brin g together p o te n tia l su p p liers of in - v e s tlb le resources w ith p o te n tia l demanders of such r e sources in an e ffe c tiv e way. 9. Savings by the people and the u tiliz a tio n o f these savings fo r productive investments req u ire the estab lishm ent o f an appropriate network of savings, c re d it in s titu tio n s , and, in p a rtic u la r, an e ffic ie n t banking system. 10. Commercial banks c o n stitu te th e most im portant 325 p a rt of a banking system* T heir function and organization are m atters o f fundamental importance* In Iran they are e sp e c ia lly needed to accumulate voluntary savings o f the economy, to supply the loanable funds, to channel them in to productive uses, and a lso c re a te c re d it as new money. F inancial in s titu tio n s , th e re fo re , through th e ir capacity to influence the r a te of Investm ents, can d ire c tly a ffe c t the r a te of economic development. 11. The low r a tio o f bank d ep o sits to to ta l money supply is an in d ic a tio n also of the lim ited development of the banking h a b its o f the Iran ian people. Only a sm all t sectio n of th e community, p ra c tic a lly only the larg e b u si ness se c to r, is w illin g to accept bank d ep o sits as a means of payments whereas the la rg e r p a rt p re fe r to s e tt le th e ir fin a n c ia l o b lig atio n ou tsid e the banking sphere* Govern ment should encourage and extend th e banking h ab it among the public. 12. The development o f fin a n c ia l in s titu tio n s and the corporate form o f savings and investm ent depends on the s ta te o f public confidence in such in s titu tio n s . To generate confidence in corporate in s titu tio n s , although a 8low and d if f i c u lt ta sk , is one of the most im portant 326 o b je ctiv e s th a t has to be a c tiv e ly prompted in a developing economy. 13. Other programs geared to a t tr a c t savings, p a r tic u la r ly sm all savings, include various m u tu alisatio n schemes, th e establishm ent o f tr u s ts th a t would d iv e rs ify r is k (fo r example, u n it tr u s ts ) and the in s titu tio n of sm all savings d ep o sit Insurance schemes. Indeed, i t i s one of th e im portant ta sk s o f monetary and banking a u th o ritie s to devise schemes th a t would encourage th e growth of sm all r in s titu tio n a l savings. 14. The promotion o f branch banking programs so as to b u ild th e banking re q u is ite in fra -s tru c tu re needed fo r making f a c i l i t i e s a v a ila b le fo r rem ittance, safe-keeping, and o th e r sim ila r needs o f c r e d it in s titu tio n s , is essen t i a l fo r the growth of a cooperative network and p o sto ffic e savings banks. 15. There a re some things government can do to p o p u larise the "banking h a b it." I t might guarantee a l l p riv a te d ep o sits in c o m e rc ia l banks up to some maximum i value per d ep o sito r. 16. The banks should be so organized as to pool a maximum o f savings from the public and re d is trib u te them 327 in c r e d its , e sp e c ia lly to farm ers and sm all businessmen, who s u ffe r p a rtic u la rly sev erely from a lack o f c re d it f a c i l i t i e s . 17. The m o b ilizatio n and, even more im portant, the u tiliz a tio n o f domestic savings fo r productive investm ent can a lso be f a c ilita te d through the establishm ent of public development co rp o ratio n s. Such agencies could a t tr a c t p riv a te c a p ita l by d iffe re n t methods and a sso c ia te p riv a te c a p ita l in a l l kinds o f jo in t v en tu res. Public development corporations a re a u se fu l to o l fo r d ire c tin g resources toward e s s e n tia l a c tiv itie s w ith maximum chances o f success. They can a ffo rd the serv ices o f competent te c h n ic a l s ta f f , including in many instan ces those of fo reig n ex p erts and co n su lta n ts, much more e a s ily than p riv a te domestic e n te r p ris e . They can more e a s ily o b tain fo reig n loans o r en ter in to p artn ersh ip s w ith fo reig n co rp o ratio n s. 18. The Iran ian government should f a c i l i t a t e th e establishm ent o f an organized c a p ita l m arket. The lack o f organized c a p ita l markets in Iran has im portant repercus sions on both th e r a te and the d ire c tio n of economic development. I t e ith e r precludes or a t any r a te reduces the p o s s ib ility o f m obilizing domestic c a p ita l fo r la rg e 328 scale p riv a te p ro je c ts. 19. However, the growth o£ a c a p ita l market in Iran is a long-term problem of education and evolution of tr u s t, which in tu rn depends on c re a tio n of an adequate framework of law and adm inistration and a change in investors* s ta te of mind such th a t they become in creasin g ly w illin g to r is k c a p ita l fo r fu tu re p ro fits in an e n te rp rise managed by stran g ers. U n til th is occurs, In d u s tria l shares w ill con tinue to be fo r sm all and medium-sized savers a re la tiv e ly less a ttr a c tiv e o u tle t than r e a l e s ta te , c a rp e ts, o r gold* This goal i s not im possible. Neighboring Pakistan and India both have functioning c a p ita l markets th a t play im p ortant p a rts in in d u s tria l finance. 20. Furthermore, the development of fin a n c ia l in term ed iaries--sav in g s banks, insurance companies, and so on—may increase the w illingness o f a household to hold down i t s consumption, o r a t le a s t to hold down the r a te of in crease in i t s consumption. S im ilarly , the existence of such interm ediaries may encourage households to hold fin a n c ia l a s s e ts , instead o f resource using physical a s s e ts . But the required in s titu tio n a l changes tr e , of course, deeper and more su b tle than merely e sta b lish in g 329 savings banks. Changes in th e a ttitu d e s o f most households toward the government and th e government development pro grams are a lso req u ired . Perhaps th e key monetary p o licy im p licatio n is to seek to make sure th a t th e sw itch in th e com position o f the a sse t p o rtfo lio does not r e s u lt in lo sses th a t would n o t have occurred had o th e r (physical) a sse ts been held, and th is o b je c tiv e may p o ssib ly be in c o n flic t w ith o th er o b je ctiv e s o f monetary p o licy . 21. Only government can provide the le g a l p ro te c tio n required by m inority sh areh o ld ers. Laws ag a in st improper and u n e th ic a l p ra c tic e s by managers and d ire c to rs need to be sim p lifie d and enforced. In ad d itio n , a develop ment finance in s titu tio n can by a v a rie ty o f p o lic ie s and instrum ents a ffe c t a ttitu d e s and broaden the ex ten t of public p a rtic ip a tio n in in d u stry . 22. U nderwriting a c tiv itie s , ranging from a s s i s t ance in designing a c o rp o ra tio n 's c a p ita l s tru c tu re to d is trib u tin g i t s ,s e c u r i tie s , c o n s titu te another im portant - to o l of in d u s tria l fin an ce. In c o n tra st w ith the West, where th e o b je c t is u su ally to dispose of an issu e as quickly as p o ssib le , in Iran underw riting w ill probably be as much an investm ent process as a m arketing one. 330 . . . i t is the c h e re c te r and in itia tiv e o£ th e people, the confidence they have in themselves in th e fu tu re o f th e ir country, th e honesty and the e f f i ciency o f the government ad m in istratio n , the n atu re of the c o u n try 's so c ia l in s titu tio n s —i t is these and many sim ila r fa c to rs, q u ite as much as c a p ita l, which determ ine th e ra te o f economic growth. With in d iv id u al o r communal in i tia tiv e , properly d ire c te d , sm all funds can work m iracles. Without in itia tiv e or d ire c tio n , no amount o f investm ent is lik e ly to prove e ffe c tiv e . I I . C O N C LU SIO N S In th e previous sectio n s of th is f in a l chapter con sid e ra b le emphasis has been la id on the ro le of government in the p o te n tia l economic development of Iran . The w rite r recognizes th a t the ta sk o f l i f t i n g the Iran ian economy from i t s p resen t low le v e l, and the changes necessary to break the v icio u s c ir c le o f poverty are too fundamental and d ra s tic to be performed by the time-consuming process of fre e market forces alone. I t is here th a t we must recog n ize the ro le of the s ta te as in i t i a t o r o f economic growth and development. F ir s t, in giving proper d ire c tio n to the course o f economic a c tiv ity , mainly through th e use of f is c a l and monetary p o lic ie s . These p o lic ie s should 4 Cited in K. Grunwald and J . 0. Ronall, In d u stria l iz a tlo n in the Middle East (New York: Council fo r Middle Eastern A ffa irs Press, I960), p. 124. 331 i n i t i a t e and stim u late th e in cen tiv e of the p riv a te se c to r o f the economy to work, save, in v e st, consume, and r is k ta k e. Second, the s ta te should take p a rt In th e process of development I t s e l f in areas only which are beyond the capacity of th e p riv a te se c to r. These w ill Include s o c ia l overhead co sts lik e roads, education, h e a lth , conservation of n a tu ra l resources, and o th e rs. Exclusive re lia n c e on th e p riv a te se c to r w ill not be adequate in these areas. Government investm ents in these areas can provide many of the ex tern al economies needed to ra is e ra te s of re tu rn to the le v e l which w ill make p riv a te investment p ro jec ts more p ro fita b le . These government expenditures can have a s ig n ific a n t e ffe c t upon the ra te o f economic growth and development. I f a country can affo rd to depend on a purely c la s s ic a l fre e e n te rp rise system, o r i f the in s titu tio n a l and economic environment is such th a t the p ric e system could produce the d esired end, no argunent fo r governmental actio n would be e s s e n tia l. In other words, government p a rtic ip a tio n is defended on th e ground of n ecessity , not of i t s inherent m erit. ^ » •» The w rite r has mentioned throughout th is study th a t 332 he f e l t th e fu tu re o f Iran looked prom ising and th a t he was o p tim istic about i t . Possessing s u b s ta n tia l human and ric h productive m ineral reso u rces, Iran has one o f the b e st p o te n tia ls fo r advancement among th e developing c o u n trie s. The fa c to rs in i t s favor a re im pressive: With proven o i l reserv es estim ated in excess o f fiv e b illio n m etric tons (37 b illio n b a r r e ls ) , i t s petroleum in d u stry is one o f the la rg e s t in th e world, providing ra p id ly growing revenues to finance th e c o u n try 's develop ment program. Second, th e re are a lso s u b s ta n tia l n a tu ra l gas A » • - - reserv es which, to g e th er w ith o i l , w ill provide th e power fo r new in d u stry and th e raw m a te ria l fo r a modem p e tro chem ical complex. Third, mining is in i t s infancy, but th e re are in d ic a tio n s o f considerable w ealth here to o . Likewise, the r ic h fish in g resources of the P ersian Gulf a re la rg e ly untapped. Fourth, Iran has no population growth problem, o r lik elih o o d of fu tu re pressu re on th e land. I ts 23 m illio n people, expected to reach 30 m illio n by 1975, can e a s ily be su stain ed , fo r th e re is f e r t i l e land and s u ita b le clim ate 333 fo r a g ric u ltu re . Water is the c r i t i c a l fa c to r, but the problem is one o f d is trib u tio n ra th e r than supply. Through h is research th e w rite r fin d s th a t the amount of c u ltiv a te d land could be doubled, even tr ip le d , i f the Iranian riv e rs were damned and th e ir flow regulated. F ifth , su b sta n tia l revenue can be obtained from taxes by reform ing th e tax s tru c tu re of Iran. Revenue from taxes can supplement the o i l ro y a ltie s to be spent on developmental p ro je c ts. F in a lly , and c e rta in ly not the le a s t, Iran has a dem ocratic, progressive, and fa r-sig h te d leader in Reza Shah. Under the strong lead ersh ip of th e Shah, Iran can make so lid advances toward i t s goal of a modem economy. 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"Iran ian Aid S tory," N ation. C C (May 24, 1965), 550-556. "Depressed," Economist. CCVIII (August 24, 1963), 659-660. Dobb, M aurice. "Economic Theory and S o c ia lis t Economy," Review o f Economic Studies. February, 1935, pp. 137- 151. "Doctors of Development," Time. LXXXIII (June 26, 1964), 86. Drumnond, Ian. "The Stages o f Economic Growth: A Non- Communist M anifesto," Canadian Journal of Economics and P o litic a l Science. February, 1961, pp. 112-113. F isch er, J . "Shah and His Exasperating Subjects: A Report from Ira n ," Harper*s. C C X X X (A pril, 1965), 24. Gable, Richard W . "C ulture and A dm inistration In Ira n ," The Middle East Journal. Autumn, 1959. G albraith, John K. "Economic Change in Underdeveloped C ountries," Journal of Farm Economics. XXXIII (Novem b er, 1951), 691. Harbison, F redrick H. "Human Resources Development Plan ning in Modernizing Economics," In te rn a tio n a l Labor Review. L X X X V (May, 1962), 2-5, 7-8, 20-24. 345 t Hamack, C. "P ersian Lions, Persian Lambs," Nation. C G (February, 1965), 178-180. "Iran S t i l l Looking fo r Upturn to V ita liz e Sluggish Economy," In te rn a tio n a l Commerce, L X X (September, 1964), 19-20. Ja b o ri, M. "Dilemma in Ira n ," C urrent H istory. XLVIII (May, 1965), 277-280. Keman, H. S. "F orest Conservation fo r Ira n ," Foreign A g ricu ltu re. XVII (May, 1953), 91. K ristjanson, Baldur H. "The Agrarian-Based Development of Ira n ," Land Economies. XXXVI (February, 1960), 4. Lewis, W . A rthur. "Education and Economic Development," In te rn a tio n a l S ocial Science Jo u rn a l. XIV (1962), 685-699. "Middle East in 1962—An Economic Survey," Middle East A ffa irs. XIV (May, 1963), 139-141. Minsky, Hyman P. "In d ic a to rs of th e Development S tatu s o f an Economy," Economic Development and C u ltu ral Change. VII (January, 1959), 151. Panos, J . "Ira n Promoting Varied In d u strie s To End R eliance on O il Revenues," In te rn a tio n a l Commerce. IXXI (February, 1965), 16-17. " P e rs ia 's Gamble A gainst the Clock," Economist. CCVIII (February, 1962), 538. Prebish, Raul. "Economic Development and P rice S ta b ility : The F alse Dilemma," Economic B u lle tin fo r L atin America. VI (March, 1961), 13. "Premier Amini and Ir a n 's Problems," Middle East A ffa irs. X III (August, 1962), 194-198. Schultz, T. W . "Investment in Human C a p ita l," American Economic Review. March, 1961, pp. 6-11. 346 Scitovsky, Tibor. "Two Concepts o f E xternal Economics/' The Journal of P o litic a l Economy. LXII (A pril, 1954), 143. "Shah's Proclamation on Reform," Middle East Journal. XVI (W inter, 1962), 86-92. "Shah's R evolution," Economist. CCVII (June 8, 1963), 1000. Singer, Hans W . "Economic Progress in Underdeveloped C ountries," S ocial Research. March, 1949, pp. 1-11. "Spreading th e Blame," Economist. CCVII (June 22, 1963), 1246. Tauber, Irene B. "Japan's Population—M iracle, Model, or Case Study?" Foreign A ffa irs. Ju ly , 1962, p. 597. "Water: Worldwide Use and M isuse,” Time. October 1, 1965, pp. 79-79. W estley, D. E. "World Trade Outlook: Ira n ," In te rn a tio n a l Commerce. LXXI (January, 1965), 44. "Yet Another New Broom," Economist. C C X (March 14, 1964), 984. C. PUBLICATIONS O F G O V E R N M E N T A N D O T H E R O RG A N IZA TIO N S Bank Markezi Iran. Annual Report. 1340. Teheran: Bank M elli Iran Press, 1341. . Bank Markezi Iran B u lle tin . Teheran: Bank M elli Iran Press, 1964-1965. Bank M elli Iran . Annual Report. 1955-1956. Teheran: Bank M elli Iran Press, 1956. 347 C entral T reaty O rganization (CENTO) Economic Comnittee. Report o f Development Pmflftaraming Conference. Murree, P akistan: CENTO, 1961. Chemical Bank New York T rust Company. In te rn e t to n a l Survey: Ira n . New York: Chemical Bank New York T rust Company, 1964. F ir s t N ational C ity Bank, Foreign Inform ation Service. Iran —A N ation Moving Ahead. New York: F ir s t N ational C ity Bank, October, 1965. Ford Foundation. Design fo r P ak istan . A Report on A s s is t ance to the P akistan Planning Commission by the Ford Foundation and Harvard U niversity. New York: Ford Foundation, 1965* Government of Ira n . Budget Act of 1339. Teheran: M inistry of Finance, March 17, 1960. . Development o f Industry and Mines in Ira n . Teheran: M inistry o f Industry and Mines, 1959* _______ . Economic Report. 1340. Teheran: Plan Organiza tio n , 1340. . Economic Report. 1341. Teheran: Plan Organiza tio n , 1341. _______ . Ira n —Land of Investment O p p o rtu n ities. Teheran: 1960. . . Iran Plans fo r the F u tu re. Teheran: Plan Organ iz a tio n , D ivision of Economic A ffa irs. . O utline o f th e Third Plan. Teheran: Plan Organ iz a tio n , 1340. _______ . Review o f the Second Seven-Year Plan Program of Ira n . Teheran: Plan O rganization, I960. . The Seven-Year Development Plan A ct. Teheran: September, 1948. 348 In te rn a tio n a l Bank fo r R econstruction and Development. Economic S itu atio n and Prospects o f Iran ; Washington: In te rn a tio n a l Bank fo r R econstruction and Development, 1958. In te rn a tio n a l Monetary Fund. In te rn a tio n a l F inancial S ta t is ti c s . Washington: In te rn a tio n a l Monetary Fund, 1962. M inistry of Customs and Monopolies. S ta t is tic a l Yearbook fo r 1338 (1959*60). Teheran: M inistry of Customs and Monopolies, 1339. Overseas C onsultants, Inc. Report on Seven-Year Develop ment Plan fo r the O rganization of th e Im perial Govern ment in Ira n . New York: Overseas C onsultants, In c ., 1949. United N ations• Economic Survey of Asia and th e Far E ast. 1960. Economic B u lle tin fo r Asia and the Far East. New York: United N ations, 1961. . Measures fo r Economic Development of Under- developed C ountries. New York: United N ations, 1951. . Planning fo r Economic Development. Vol. 2, Studies of N ational Planning Experience. New York: United N ations, 1965. _______ . Processes and Problems o f In d u s tria liz a tio n in Underdeveloped C ountries. New York: United Nations, 1955. . Taxes and F isc a l P o licies in Underdeveloped C ountries. New York: U nited'N ations Technical Assist** ance A dm inistration, 1954. . United Nations S ta tis tic a l Yearbook. 1964. New York: United N ations, 1965. . Department of Economics and S ocial A ffa irs. Economic Development in the Middle East. 1945-1954. New York: United Nations, 1955. 349 United N ations. Department o f Economics and S ocial A ffa irs • Water D esalination: Proposals fo r a Costing Procedure and R elated Technical and Economic C onsider a tio n s . New York: United N ations, 1965. . Department o f Public A ffa irs. Land Reforms. New York: United N ations, 1951. United S ta te s . Economic Report o f th e P re sid e n t. Washing to n : U.S. Government P rin tin g O ffice, 1965. _______ . S ta t is tic a l A bstract o f th e United S ta te s. 1965. U.S. Department of Commerce, Bureau o f th e Census. 86th e d itio n . Washington: U.S. Government P rin tin g O ffice, 1965. _______ . Department of th e I n te r io r , Bureau pf Mines. The Petroleum In d u stry . Inform ation C irc u la r 8203. Washington: U.S. Government P rin tin g O ffice, 1963. _______ . Department o f Labor, Bureau of Labor S ta tis tic s . Tjifin-r T jiw and P ractices in Ira n . Washington: U.S. Government P rin tin g O ffice, May, 1964. _______ . World Trade Inform ation Service, Department of Commerce. Basic Data on th e Economy of Ira n . Washington: U.S. Government P rin tin g O ffice, 1962. D. N E W S SERIES A N D PRESS RELEASES E tte la * a t (Teheran), various issu e s. The Export-Import Bank o f Washington. Press R elease. Washington, D.C., various issu e s. In te rn a tio n a l Bank fo r R econstruction and Development. Press R elease, various issu e s. In te rn a tio n a l Monetary Fund. Press R elease. Washington, D.C., various issu e s. Kavhan In te rn a tio n a l (Teheran), various issu e s. 350 Teheran Economist (Teheran Weekly), various Issu es. Teheran Journal (D ally), vario u s Issu es. U.S. News and World Report, various Issu es. E. UNPU BLISHED M A TER IA LS Anderson, W illiam H. "The F isc a l Economics o f Public Expenditure." Unpublished Paper, U niversity of South* e m C alifo rn ia, Los Angeles, n.d. (Mimeographed.) . "F isc al P o licies fo r Underdeveloped Economies." Unpublished Paper, U niversity of Southern C alifo rn ia, Los Angeles, n .d . (Mimeographed.) . "Taxation and Tax P o licies fo r Economic Develop m ent." Unpublished Paper, U niversity of Southern C a lifo rn ia , Los Angeles, n .d . (Mimeographed.) E llio tt, John E. "C apitalism , Socialism , and Economic Planning." Unpublished Paper, U niversity of Southern C a lifo rn ia , Los Angeles, n .d . (Mimeographed.) "The Supplementary Budget 1343." Echo's Economic Reports, August, 1964.

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Creator Ispahani, Ahmed Saboonchi (author)

Core Title The Optimization Of Economic Resources For Economic Growth In Iran

Degree Doctor of Philosophy

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag economics, general,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Elliott, John E. (committee chair), Anderson, William H. (committee member), McDonagh, Edward C. (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c18-205991

Unique identifier UC11359945

Identifier 6608791.pdf (filename),usctheses-c18-205991 (legacy record id)

Legacy Identifier 6608791.pdf

Dmrecord 205991

Document Type Dissertation

Rights Ispahani, Ahmed Saboonchi

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus, Los Angeles, California 90089, USA