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An Analysis Of The Feasibility Of The Use Of Fiscal Policy To Stimulate Economic Growth In Iran

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An Analysis Of The Feasibility Of The Use Of Fiscal Policy To Stimulate Economic Growth In Iran

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Content This dissertation has been 65-8930 microfilmed exactly as received ZEKAVAT, Seid Mansoor, 1929- AN ANALYSIS OF THE FEASIBILITY OF THE USE OF FISCAL POLICY TO STIMULATE ECONOMIC GROWTH IN IRAN. University of Southern California, Ph. D ., 1965 Economics, finance University Microfilms, Inc., Ann Arbor, Michigan AN ANALYSIS OF THE FEASIBILITY OF THE USE OF FISCAL POLICY TO STIMULATE ECONOMIC GROWTH IN IRAN by Seid Mansoor Zekavat A Dissertation Presented to the FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements for the Degree DOCTOR OF PHILOSOPHY (Economics) JANUARY 19 6 5 UNIVERSITY O F SO UTH ERN CALIFORNIA T H E GRADUATE SC H O O L UNIVERSITY PARK LOS ANG ELES, C A LIFOR N IA 9 0 0 0 7 This dissertation, written by ....... under the direction of h%3.....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 O F P H I L O S O P H Y s'" Dean Date....Jan.uar-y.-l? D! [SSERTATION COMMITTEE . c A J L i ~ i s ^ \ e i s X - - PLEASE NOTE: Figure pages are not original copy. They tend to "curl". Filmed in the best possible way. University Microfilms, Inc. TABLE OF CONTENTS Page LIST OF TABLES.................................... iv LIST OF FIGURES......... .......................... vi Chapter I, INTRODUCTION....................... * . . . 1 The Problem Objectives of the Study Basic Definitions Statement of Sources Methodology Organization of the Dissertation II. AN ANALYSIS OF IRAN'S ECONOMIC GROWTH POTENTIAL. ............................ 16 Geography and Climate Agriculture Natural Resources Human Resources Transportation Communication Conclusion III. NATIONAL INCOME AND ECONOMIC GROWTH IN IRAN.................................. 48 The Estimate of National Income in Iran's Economic Growth The Recent Trend of Private Investment in Iran Conclusion IV. IRAN'S ECONOMIC DEVELOPMENT PLANS AND FISCAL POLICY........................... 81 Plans for Economic Development Iran Chapter Page . Fiscal Policy Aspects of the Development Plans Development Problems Conclusion V. FISCAL POLICY FOR ECONOMIC GROWTH: SOURCES OF FUNDS...................... The Role of Government in Promoting Economic Growth Growth Tax Policies Government Borrowing to Finance Growth Projects Conclusion VI. GROWTH EXPENDITURE POLICIES.............. Allocation of Government Investment Expenditures Noneconomic Impediments to Growth in Iran Conclusion VIIo SUMMARY AND CONCLUSIONS.................. Summary- Cone lusions and Recommendations BIBLIOGRAPHY.................................... iii 129 161 193 21$ LIST OF TABLES Table Page 1. Distribution of Land Use (I960) . ....... 19 2. Production, Imports, and Exports of Agri cultural Commodities, Crop Tears 1960-1961 22 3. Production of Livestock in I960 ............ 24 4. Internal Sales of Refined Products in i960* • 26 5. Distribution of the Population Among Cities Having More Than 100,000 Inhabitants (1956 Census)......................... 35 6. Distribution of the Population Among Industrial Employments. .......... 34 7. Iran's Nonmilitary Motor Vehicles (1959)* • * 4-1 8. Personal Consumption Expenditures in Urban Areas (1959-1960)..................... 52 9. Reclassified General Government Expenditures (1959-1960)........................... 55 10. Total Government Ejqpenditure of Goods and Services (1959-1960)................... 56 11. Investment in Capital Goods in Iran (1950-1960)........................... 57 12. Investment in New Construction (1959-1969). . 59 13* Iran's Gross Domestic Capital Formation (1959-1960)........................ . . . 61 14. Iran's Net Foreign Investment (1959-1960) . . 62 15. Indirect National and Local Taxes, Surplus and Deficit of Government Monopolies (1959-1960)........................... 64 iv Table Page 16. Provisional Estimate of Iran's Gross National Product and National Income (1959-196O)................................ 65 17. Iran's Price Index (Year Ending March 1955 * 100)................................ 68 18. Iran's Sources of Foreign Exchange Earnings (1955-1962) .................... 73 19. Estimated Money Supply and Change in Public and Private Credit During 1955-1962. . „ . 77 20. A Summary of Road Construction Projects of the Plan Organization Completed in 1962, » 87 21. The Original and Revised Industrial Program Iran's Second Plan (i960)................ 90 22. Production of Selected Commodities (1957-1959).............................. 92 23* Appropriation for Public Health Program By Iran's Plan Organization for the Period 1956-1963. , , 94- 24-. Appropriation for School Development By Iran's Plan Organization (1959-1963) ... 97 25. Summary of Allocations in the Third Plan . . 100 26. Allocation of Total Direct Revenues Accord ing to the Second Plan Act............. 108 27. Receipts of Oil Revenues and Total Expendi tures By the Plan Organization During the Second Plan........................110 28. Plan Organization Expenditures During the Second Seven Year Plan................112 29. Source and Total of Foreign Loans Obtained By the Plan Organization in the Period 1957-1961 . 117 30. Fall in Agricultural Production in Iran. . . 125 31. Estimated Level of Domestic Saving in 1956-1960............... . 156 v LIST OF FIGURES Figure Page 1. Map of Iran ................ 17 2. Iran: Road Program of the Second Seven Year Plan........................ 86 3. Iran: Dez River Project. ............ 103 CHAPTER I INTRODUCTION In the last two decades Iranians have become acutely aware of the possibilities and prospects of eco nomic growth. Although Reza Shah Pahlavi (the present Shah's father) launched a series of drastic modernization programs in the thirties, actual economic planning in re sponse to public awareness began in 194-7 when the First Eight-Year Development Plan went into operation. The development and modernization activities of the government, initiated and carried out during the 1930fs by the former Shah, had been the greatest in the history of Modem Iran. Yet, it is hardly accurate to state that the period was the beginning of the Iranian movement for social, political, and economic progress. The main reason is that the Iranian people in that period were not ready to accept drastic social changes which were often in contrast with their long established religious beliefs and their way of living. The programs were delayed when the dynamic leader fell in World War II. Obviously, the state of immaturity and the existence of numerous obstacles were the major reasons for the collapse of the programs. 2 However, the seeds he planted in the community did not go to waste. His Europeanized education programs which were met with bitter opposition from the common peo ple at the beginning began to bear fruit in all major cit ies only a few years after his death. The awareness of Iranians of their economic growth problem today is a sign of maturity. Several factors are responsible for the movement: lo The poverty of a great number of discontented Iranians . 2. The knowledge of Iranians of the material advan tages enjoyed by the advanced Western nations. 3* The ever-increasing Iranian witnesses abroad as tourists, travelers, students, and government officials who personally observe and experience the American and European way of life. 4. The three-times-a-day Radio Moscow programs in the Iranian language broadcasting the social and economic progress of the communist countries claimed to have been achieved within a short period of time. 5. Finally, the pride of Iranians for their glorious history known as the Persian history, with a leading civ ilization in the humanities, politics, public finance, architecture, art, and literature. I. THE PROBLEM The main purpose of this dissertation is to study the use of fiscal policy as an effective means to promote economic growth in Iran. This goal is sought as a partial solution to Iran’s problem of economic backwardness with which the present work is concerned. To many foreign observers, low per capita income is the main problem responsible for Iran’s slow economic progress. They argue that the mass of Iranian people fall in the low real income bracket with an important conse quence— a lack of savings. When income is low, relative to the minimum of subsistence, attention will necessarily be directed toward providing for consumption rather than saving. Thus, these observers conclude, there is little domestic investment since investment depends on the exist ence of a surplus over and above present consumption needs. This statement, while it has merit, is too general and somewhat superficial. If a lack of savings due to a low per capita real income were the main cause of Iran's economic problem, then sufficient funds equal to the re quired savings for a desired rate of economic growth could easily resolve the question. On the contrary, even extra billions of dollars would not bring a permanent economic growth and prosperity to Iran as long as the barriers to growth, the unwilling ness of both the people and government to help themselves, and wasteful government expenditures continue to exist. As will be seen later, the sources of government finance are sufficient for achieving a sustained economic growth* It is clear, therefore, that low per capita income and, thus, low savings alone cannot be blamed for the economic backwardness of Iran, though it is one of the important reasons* The following elements also share the respon sibility for the lack of adequate economic growth: 1. A lack of economic leadership and deliberate plan ning* 2* The fixed religious and political obstacles* 3* The huge bureaucratic ministries and administra tive agencies of the Iranian government with thousands of unproductive employees* 4. The prevalence of a large number of private and government business monopolies operating with ineffi ciency and a lack of interest in rapid economic progress. 5* The deficit balance of payments resulting from the imports of such foreign goods the domestic production of which might contribute to the promotion of employment and growth* 6* The chronic inflation characterized by a constant rise in the cost of living (and at the same time, unem ployment ) c 7* The steady addition to the ■unemployed college graduates seeking employment often unrelated to their fields of interest and specialization. 5 8* The loss of public confidence in the government as a result of the prevalence of political and administrative corruption, social injustice, discrimination, favoritism, a spoils system, and the adverse influence of the powerful communist propaganda. II. OBJECTIVES OE THE STUDY The central problem of this dissertation is to study the employment of the tools of fiscal policy (tax ing, borrowing, and spending) as a means to achieve long- run economic growth in Iran. Thus, the concern here is with one facet of growth policy as a segment of economic policy. It must be kept in mind that there is no univer sally applicable fiscal policy that may be used without adjustment in every situation. Furthermore, each under developed country, including Iran, has its own peculiar problems and institutional environment. Therefore, a fis cal measure applicable to Iran must be a tailor-made pol icy. However, at this introductory stage, it seems appropriate to set forth in general the objectives of the study as a guideline for detailed discussions to follow. 1. To define the extension of the government's eco nomic activity. Since the formation and operation of fis cal policy for the growth of Iran's economy may imply direct government participation in the economic affairs of the nation, this study intends to draw a demarcation line limiting the government controlling functions and to specify the areas of its economic pursuits. 2. To base the growth programs on a long-run budget ary system distinct from the non-developmental government budget. The growth category excludes such traditional government services as defense, security, the administra tion of justice, outlays for fiscal administration, and a great bulk of traditional social services. The subdivi sion of growth expenditures will then include education and research, public health, housing and slum clearance, agriculture, transport and communications, and industry and commerce. On the revenue side, the oil revenues and external borrowing constitute the two major sources of funds, whereas tax revenues and duties furnish funds for ordinary government expenditures. Classification of both revenues and expenditures according to growth and nongrowth out lays calls for a dual budget system. 3. To lay a heavier emphasis on developmental pro grams concerning the promotion of agriculture, transpor tation, and education than that of industries. While this study does not minimize the importance of industrial ization of the economy, it gives priority to improvements in areas where development seems prerequisite to a rapid industrialization, 4-. To call the attention of the Iranian government to the indispensability of a series of long-run social, political, and administrative reforms. Generally stated, these reforms may include (a) a vigorous enforcement of compulsory universal education, (b) correction of the political and administrative faults and evils, (c) popular election of central and local in fluential political figures according to a democratic procedure, (d) reorganization of the present wasteful and defective administrative system, (e) breaking down the business monopolies, and (g) revision of the present tax system, III. BASIC DEFINITIONS In order to prevent possible confusion, funda mental concepts and tools used in the study are defined here. The concept of underdevelopment In general, underdevelopment may be defined in terms of six major criteria: a low per capita real in come; a lack of sufficient national resources or national resources not exploited for local benefits; a traditional rather than a market economy; production based on labor rather than capital; structural unemployment; and an unbalanced economy* In the case of Iran, illiteracy and business monopoly, protected by influential military and political interests, must be added to the list* This broad definition does not seem very practical for present purposes. Measurement of economic backward ness will become extremely difficult when several measur ing rods are to be used and when the trend of each element is to be compared with that of economically advanced coun tries. However, every one of these factors will be con sidered in full under the proper topics. To minimize measurement problems, the real gross national product per capita is selected as a measuring stick. Heal output per capita The real output of a country is determined by con verting its money gross national product (the total market value of all final goods and services produced in one year) into real gross national product. This is done by adjusting money gross national product data for changes in the value of money or changes in the market prices of goods and services. Population changes must also be considered. In order to determine whether the gross national product is increasing or decreasing faster or slower than the popula tion, per capita measures are used. Economic growth The above measuring rod provides a basis for a more refined concept of economic growth. The commonly- offered definition calls for a steady increase in the real per capita output. This definition, especially when applied to Iran, suffers from a significant limitation for it is quite pos sible for Iran, or any of the underdeveloped countries, to raise the level of its real per capita output with little or no improvement in the standards of living. This is possible by increasing the output of luxury goods and services enjoyed by the few; production of primitive prod ucts; military equipment, often bearing high social costs; decorative symbols, such as statues, tombs, palaces, and showcase projects; and conspicuous public consumption. "Growth fiscal policy1 1 The term, "growth fiscal policy," used in this study, refers to the coordinated uses of the fiscal powers of government to promote the economy. This definition needs some clarification. First, the fiscal powers of government refer to government taxing, borrowing and spending policies. Second, fiscal policy must be designed in such a way so that its tools operate harmoniously and function in coordination with the instruments of other economic policies. Third, it is concerned with improving the standard of living and gross national product, rather than with stability alone# 10 IV. STATEMENT OP SOURCES As one might suspect, sources of statistical in formation on Iran*s economy are either absent or have not yet fully developed* Reasons for inadequacy of data Despite noticeable improvements, one cannot claim the existence of a broad and sound statistical system which is necessary for aggregate economic analysis. Per haps the major stumbling block is the very small number of experienced economists and statisticians available. The second major reason is the lack of apprecia tion of the value of statistics, including some echelons of government. There is a wealth of information arising out of regular administrative or regular enforcement activities of a number of agencies scattered throughout the government. But, this information is buried, untab ulated, or unpublished, simply because of the lack of ap preciation as to its usefulness. Available sources The major primary sources of statistical data available to this study are as follows: 1. The World Trade Information Service (WTIS) of the United States Department of Commerce, now known as the 11 Overseas Business Reports (OBR). 2. The reports of the Four Point Program related in clusively to its own affairs. 5. Publications of the International Monetary Fund, Press Release in particular, issued irregularly in connec tion with the use of its loans in Iran. 4. The area studies of the International Finance Cor poration. 5. Economic reports of the United Nations Social and Economic Affairs. 6. Publications of the International Bank for Recon struction and Development. 7. Reports of the Iranian Plan Organization. 8. Statistical Year Book of the Ministry of Indus tries and Mines. 9* Statistical reports of the Bank Markazi Iran, the central bank. 10. Bank Melli Iran Bulletin. 11. The reports of the United States Operation Mission in Iran (USOM). Books and articles written by eminent experts and renowned economists in the fields of public finance and economic development have also been of great value to this study. 7. METHODOLOGY A brief mention of methodology seems helpful in 12 the introductory stage. The method used in the study con sists of three orderly arrangements: descriptive, diag nostic, and policy recommendations. The descriptive analysis of Iran's economy gives special consideration to the pertinent facts required to make a diagnosis of the economic ailments of the country* Having both the facts and diagnosis on hand, the writer then endeavors to establish a workable fiscal policy. Personal observations of the author, a native Iranian, is of great importance in this connection. This factor makes it possible to avoid making any unrealistic assumptions and to shy away from the formation of im practicable policies* VI. ORGANIZATION OP THE DISSERTATION At the expense of repetition, the present work is a study of the feasibility of using the instruments of fiscal policy to promote the economy of Iran* The organ ization of this study has developed on the basis of sev eral simple but "logical” questions pertinent to the sub ject. The more important of these questions are as fol lows: 1. How strong is Iran's economic growth potential in terms of natural and human resources and accumulated physical and human capital? (Chapter II)* 2. What is the present rate of economic activity as 13 reflected in the level of Iran's gross national product and its components? (Chapter III). 3* What efforts have been made so far, and by what means, to stimulate the economy? (Chapter IV)* 4. If the present achievements by the present devel opmental agency are not satisfactory, how, through fiscal policy, may a long-run sustained growth be achieved? (Chapters V and VI)* 5* What noneconomic impediments would hamper the effectiveness of fiscal policy and stand in the way of Iran's economic progress? How can they be removed? (Chapter VI). In response to these questions, this study is divided into seven chapters. Chapter II provides statis tical data regarding Iran's economic resource base. Fac tual information presented in this chapter serves not only as a basis for an evaluation of Iran's potential in economic progress but also as a source of statistical reference throughout the study* Chapter III analyzes Iran's national income and product. The aim is to estimate the levels of the gross national product components and compute an average per capita real income. The information obtained in this chapter will also be used in later analysis. Here, a sec tion of the chapter is devoted to problems of determining the actual rate of economic growth. 14 To discuss the Iranian experience in the struggle for development and to furnish a ground to appraise the nation's achievements, Ghapter IV examines the develop mental plans and their accomplishments since 1947. A special emphasis is placed on the fiscal policy aspects of the programs. In this relation, some of the major problems overlooked by the planning authority are viewed critically. The essence of the present work is concentrated in the remaining chapters. Specifically, Chapter V dem onstrates, on the one hand, the availability of adequate oil receipts to finance prospective growth projects and, on the other hand, the sufficiency of the tax re^mues, if properly administered, to meet traditional ordinary government expenditures. Chapter VI presents an analytical discussion of the areas in which growth investment expenditures are to be allocated. The chapter recognizes the significant roles of improved agriculture, transportation, and educa tion in Iran's efforts for industrialization of the econ omy. Here, priority of industrialization to improvements in these areas at the present time is rejected. Sociocultural, political, and administrative bar riers to the process of economic growth in Iran are also included in Chapter VI. This portion is a most signifi cant reality in the sense that it reveals real adverse forces which, if not eliminated, would offset the effec tiveness of fiscal policy or any public policy for eco nomic growth. Chapter YII is a summary and conclusion where most of the evaluation takes place, and where the need for coordinated use of other economic policies is recognized. CHAPTER II AN ANALYSIS OP IRAN'S ECONOMIC GROWTH POTENTIAL A brief description of the geography and natural resources of Iran and a survey of the main factors con tributing to its economic growth provide a factual basis for the analysis to follow,, I, GEOGRAPHY AND CLIMATE The kingdom of Iran, formerly known as Persia, is located in the western part of Asia between latitudes 25° and 40° N. and longitudes 44° and 63° E. It is bounded on the north by the Soviet Union and the Caspian Sea, on the east by Afghanistan and Pakistan, on the south by the Arabian Sea (Gulf of Oman) and the Persian Gulf, and on the west by Iraq and Turkey. Iran, whose total area is about 628,000 square miles, is four times the size of the State of California and about one-fifth the size of the 1 continental United States. The only river used for navigation is the Karun ^Jc S, , Department of Commerce, "Basic Data on the Economy of Iran," World Trade Information Service. No0 62- 48 (Washington, D. Ce: U. S. Government Printing Office, May, 1962), p. 1. 16 | Boundariwt at* no I f ta ita r ifr thoi by th* Lf'S. Gor*trrmwr X h i l u s Katai K DABrACH£H'YE V NAMAK & , . ! ? n e u t r a l / . Z O N E ' PAKISTAN IRAN In tern a tio n al boundary N ational cap ital S e le cte d railroad Principal road O ther se lec te d road o r trail B A H R E I N Source: U. S., Department of Commerce, "Basic Data on the Economy of Iran World Trade Information Service, Wo. 62-4-8 (Washington, D. C.: U. S. Government Printing Office, May, 1^62), p. 2. 18 which, flows through Khuzistan, the location of a famous oil region, and reaches the Persian Gulf at a delta formed "below the confluence of the Tigris and Euphrates Rivers. The navigable section of the Karun extends for only about 63 miles. Except for a few large rivers that flow from the Elburz range northward to the Caspian, most of the other rivers flow into the interior, gradually dwindling and finally emptying into salt lakes and mires. The climate is mainly arid and semiarid, with temperatures ranging between hot summers and subzero win ters* The Caspian littoral has a comparatively mild cli mate— 55° to 85° F0 The humidity of the littoral is op pressive and rainfall is abundant, totaling as much as 60 inches a year. From this area, rainfall decreases rapidly beyond the Elbors and Zabros barriers to the south and east. The Persian Gulf littoral has mild winters but sum mers are oppressively hot and humid, with temperatures of 120° F. and more. Little rain falls, and only in the winter months. II. AGRICULTURE Of Iran*s total area, about 11 per cent, or 18 million hectares (2.471 acres equal 1 hectare), are cul tivated, but only one-third of this is actually planted in any one year; the remainder lies fallow. Land use in Iran is summarized in Table 1. Iran's agriculture is generally based on 19 TABLE la DISTRIBUT ION OF LAUD USE (I960) (Millions of Hectares) Land Use Acres Cultivated 18.0 Forest and Scabland 19.1 Pasture and Range 41.7 Cities, towns, roads 31.2 Wasteland 81.6 Data from: U. S., Department of Commerce, "Basic Data on the Economy of Iran,'1 World Trade Information Service„ No. 62-48 (Washington, £>. 0. : U. S. Government Printing Office, May, 1962), pp. 4-5* v Only one-third of this is actually planted in any year, the remainder lying fallow. 20 irrigation or is a type of "dry farming" depending on the seasonal rainfall where a grain crop, often with low yield, is grown one year and the land is allowed to lie fallow. Near the Caspian Sea, however, rainfall is suf ficient for intensive farming. Irrigation is carried out chiefly through the use of ghanats— wells, connected by underground canals. This method permits gravity to feed underground water to the area under irrigation. Of a total of 6 million hectares annually under cultivation, about 2.5 million are irrigated. Before enforcement of the recent land reform, most cultivators did not own their land but worked on it on a share basis. More than 80 per cent of the cultivated land was owned by absentee landlords and religious endow ments, or was public or royal domain. Distribution of public domain and the recent land reform dilemma will be discussed later. Primitive cultivation techniques and implements, lack of fertilizers, irrigation difficulties, overgrazing, deforestation, and a shortage of capital have been some of the major problems of agricultural development in Iran. Wheat, the main food item, is Iran's most impor tant farm product, followed by barley, rice, fresh and dried fruits and vegetables, pulses, oilseeds, sugarbeets, cotton, and tobacco. Rice, also an important food crop, 21 is the primary crop in the Caspian Sea provinces while wheat along with barley, which is used primarily as feed for livestock, are the main crops elsewhere. The princi pal cash crop is cotton. Table 2 shows production, im ports, and exports of agricultural commodities in the crop year, 1960-1961. The production of livestock, especially sheep, cattle, and goats, is important to the economy. The total production of livestock in I960 is presented in Table 3» III. NATURAL RESOURCES A survey of the chief types of natural resources is a helpful preliminary to study Iran's potential for economic growth. Mining Mineral resources of importance to the economy include petroleum, natural gas, iron, red oxide of iron, chromite, copper, lead, zinc, and sulfur, as well as coal, gypsum, limestone, barite, and salt. Except petroleum, other known mineral deposits are relatively small, how ever, and the mineral resources have not yet been compre hensively surveyed. Oil resources.— The most important natural re source in Iran is petroleum. The proven reserves are es timated at 35 billion barrels. 22 (TABLE 2a PRODUCTION, IMPORTS, AND EXPORTS OF AGRICULTURAL COMMODITIES, CROP TEARS 1960-1961 (Metric Tons) Item Production Imports Exports Wheat 2,600,000 330,000 — Rice, milled 325,000 — 2,000 Barley 900,000 20,000 — Other grains 58,000 — — Pulses 125,000 neg — Sesame, Cottonseed and flaxseed 196,000 « . . . 5,000 Vegetable oil 27,600 10,230 — Tobacco 10,600 — 300 Sugar, refined 83,000 270,000 — Tea 7,000 12,250 500 Vegetable and melons 800,000 neg b Cotton 80,000 — 40,000 Apricots, dried 7,000 — 7,000 Oranges and tangerines 40,000 1,000 — Other citrus 60,000 — — Dates 140,000 600 35,000 Other fruits, fresh and dried 900,000 1,000 15,000 Raisins 60,000 — 31,000 Almonds, shelled 4,500 — 3,500 Pistachios, unshelled 5,000 — 2,700 Walnuts, shelled 2,000 — 600 Other nuts, unshelled 12,000 — 500 TABLE 2— Continued 23 Item Production Imports Exports Meat0 290,000 600e l,500f Milkd 1,600,000 neg — Wool, clean 16,000 600 5,000 Animal fat 22,600 3,000 — Source: U. S., Department of Commerce, "Basic Data on the Economy in Iran," World Trade Information Service. No. 62-48 (Washington, D. C.: tl, £>. Government Printing Office, May, 1962;, p. 5* No figures available on vegetables shipped to the sheikdoms of the Persian Gulf. cIncluding poultry. ^Total milk equivalent of fluid milk, cheese, and butter. Includes that from live sheep coming from Afghan- istan. f Estimate of amount exported as live animals. 24 TABLE 3 PRODUCTION OP LIVESTOCK IN I960 (In Thousands) Cattle 5,250 Buffalo 250 Sheep 24,000 Goats 14,000 Hogs 57 Poultry 27,000 Horses 470 Mules 82 Asses 1,400 Camels 49 Data from: U* S., Department of Commerce, "Basic Data on the Economy of Iran," World Trade Information Service, No. 62-48 (Washington, D. C.: U. S. Government Printing Office, May, 1962), p. 5. 25 Net output of crude oil reached a peak of 585*7 million barrels in I960, of which the Consortium accounted for 583*4- and the National Iranian Oil Company accounted p for 2.5 million barrels. The Consortium is composed of sixteen international oil companies which have undertaken the management and operation of the exploration and the production of oil within a specified 100,000-square-mile area in southern Iran for a maximum period of forty years. The Consortium operates Iran's largest refinery at Abadan which has a total capacity of 184.3 million barrels. The Kermansha Refinery, operated by the National Iranian Oil Company, had a gross production of 1,000,000 barrels in 1961. The National Iranian Oil Company has three basic functions: exploration of new fields outside the agreement area; internal distribution of petroleum products; and administration of activities in the agree ment area not concerned with oil exploration, production, or refining. Crude oil deliveries to Abadan for conversion into products for export amounted to 356*3 million barrels in i960. Total internal sales of refined products in I960 amounted to 24.4 million barrels. Table 4 represents the separate figures for the converted products sold within the country. Ibid., p. 6 26 TABLE 4 INTERNAL SALES OF REFINED PRODUCTS IN I960 Refined Products Barrels in Millions Fuel Oil 7.2 Kerosene 6.1 Gasoline 3.9 Gas Oil 5.4 Other 1.8 Data from: U. S., Department of Commerce, f 'Basic Data on the Economy of Iran," World Trade Information Service, No. 62-48 (Washington, D. C.: U0 S. Government Printing Office, May, 1962), p. 6* 27 Natural gas.— Iran also lias substantial reserves of natural gas. Production in I960 amounted to 266,454.2 million cubic feet. Most of this gas is not utilized, but is flared. Coal,— Most of the known coal deposits occur in steeply dipping rock formations so strongly deformed and distorted that mining becomes uneconomical. In the Elburz mountain range, there are five regions where coal is mined by the Plan Organization, and the total product in ±959 amounted to 231,000 tons. In South Central Iran, the Hodjeak mine offers some prospects of providing a coking coal. The reserves are estimated to be about 40 million tons, but at present, only 50 tons per day are being 3 mined. Iron ore,--Two major deposits of iron ore are known to exist; one at Shamsabad, and one at Bafq. Re serves at the former are estimated to be 160 million tons of low-grade hematite ore, averaging 40 per cent iron. The Bafq magnetite deposits are still being esqjlored and may prove to be considerable; 20 million tons are believed to exist above a visible base, and the total reserves may ^International Finance Corporation, Potentiali ties for Private Investment in the Chemical Industry in Iran (Washington, b. : U. S. Government Printing Of fice, 1961), p. 41. 28 be at least 100 million tons. The only iron ore now being exploited is at Semnan where magnetite exists in vein de posits. About 30,000 tons per year are being exported to Czechoslovakia. Lead-zinc.— Some three dozen lead-zinc mines oper ate in a small way in Iran, producing about 30,000 tons of ore per year. The mines, however, are not efficiently operated. By far, the most important is the Shahkuh mine, fifteen miles south of Isfahan. It is considered that if the maximum economic benefit is to be obtained from this mine, the mining methods must be improved considerably. The ore has been estimated to amount to 3 million tons, but an adequate survey may be required to get more factual data concerning these deposits. It is possible that they 5 may be exploitable on a large scale. Chromite.— Chromite was first discovered in Iran in 194-0, but was worked on a small scale for a few years. Since this ore was required in the Korean war, increasing quantities have been extracted. In I960, the yield amounted to 4-5,000 tons. While conducted on a small scale, the industry is now beginning to show a trend to ward systematic methods of extraction and limited mechan ization. This transition is particularly important in 4Ibid., p. 12. ^Ibid., p. 42. 29 Southern Iran, where significant new discoveries have been made notably in the Faryab district near Bandar Abbas (Abbas Harbor), With the installation of favorable load ing facilities at this harbor, and given favorable market conditions, production can be expected to increase con siderably,^ Copper,— All crude copper ore production is con trolled by the Army, It is won in low tonnages by "hand- cobbing," The crude ore is sold to the smelter at Ghani- abad, which has an annual capacity of 1,000 tons of elec trolytic copper. The plant operates at a lower actual output, however. Sulphur,— There are sulphur-containing strata in Iran, A preliminary survey indicates that a deposit of some 15 million tons of rock exists about six miles west of Shiraz, Since it contains undesirable elements, the recovery of basic sulphur requires distillation equipmentc It would be economically more feasible to obtain sulphur from petroleum sources. Forests Forests are estimated to comprise 44-,5 million acres, or 11 per cent of the total area of the country. 6Ibid,, p, 42. 30 The Caspian forests in northern Iran amount to about two- thirds of the total; much of it consists of oak, ash, elm, beech, poplar, pine, box cypress, maple, walnut, and honey locust trees. This area supplies most of the country's timber and is the main source of raw materials for the lumber industry. The industry includes sawmills, wood- treating installations, and factories turning out ply wood, barrels, furniture, and railway ties. Much of the wood cut annually is converted into charcoal. Production of plywood in 1938 was 34-5*600 sheets.*^ Certain wild plants, shrubs, and their saps or raisins, are collected and form an important item of ex port. These include gum tragacanth, gum arabic, gum asa- fetida, galbanum, colocynth, and licorice. Colors for the carpet industries come from indigo, saffron, and walnuts. Fisheries The most important commercial fish found in the Caspian Sea are sturgeon, white salmon, white fish, carp, bream, pike, catfish, and herring. Those found in the Persian Gulf include sardines, tuna, bream, snappers, mackeral, and shrimp. Fishing is a minor industry in Iran employing some 12,000 persons and is, to a great extent, carrieu on by independent entrepreneurs utilizing primitive equipment ^Ibid., p. 6. 51 and techniques. The average annual catch is estimated at 20,000-25*000 metric tons.® Iran is a major source of the world’s caviar. Production in 1957-1958 was 162.5 metric tons. The major countries buying Iran's caviar are Soviet Russia, Prance, United States, and Germany. IV. HUMAN RESOURCES The productive capacity of a nation depends not only upon the size of its labor force but also upon its quality. The size of any nation's labor force is determined primarily by the over-all size of its pop ulation. The quality of the labor force depends upon its education and training, its personal health and1 -- vigor, its morale, and its attitude towards work.9 Quantitative aspects of Iran's human resources Based upon the November 1958 census, Iran's pop ulation numbered 18,94-5,704- persons. Since then, the pop ulation has increased to about 22,000,000. This indicates an annual rate of increase of approximately 2.5 per cent Geographical distribution.— The west central area ®U. S., Department of Commerce, op. cit. , p. 5* ^Campbell R. McConnell, Elementary Economics: Principles. Problems and Policies (New York: McGraw-Hill f$ook Company, Inc., i960), p. 364. 10 U. S., Department of Commerce, op. cit., p. 5. 32 is less densely populated but is important for agricul ture. The east central and southwest regions, mainly deserts, are sparsely populated. A large portion of the rural population consists of nomad tribes; the principle groups are the Kurds, Bakhtiaris, Ghaskgais, and Tukomen. Urban population represents 51 per cent of the total in 1956, or approximately 6 million. Table 5 pre sents cities having more than 100,000 inhabitants* Occupational distribution*— Between 75 said 80 per cent of the people are directly or indirectly dependent upon agriculture for their livelihood. Total industrial employment is estimated at about 200,000, including petro leum, 60,000; textile, 40,000; railways, 36,000; and food stuffs, 21,000* In addition, more than a million persons are estimated to be employed in various cottage indus tries, including more than 200,000 in carpet manufacture* Table 6 shows an approximate distribution of the popula tion in industrial employment. Quality of Iran’s human resources In general, the Iranian labor force is qualita tively inferior to that of economically advanced nations. Illiteracy, poor health and physical weakness, lack of proper training, poor attitude toward physical work, mis- allocation of skills and talents of individuals who seek high-paid, "soft" political and administrative positions 33 TABLE 5 DISTRIBUTION OF THE POPULATION AMONG CITIES HAVING MORE THAN 100,000 INHABITANTS (1956 Census) Cities Inhabitants Tehran 1,513 Tabris 290 Isfahan 225 Mashhad 242 Abadan 226 Shiraz 169 Hermanshah 125 Ahvas 120 Rasht 110 Hamedan 100 Data from: U. S., Department of Commerce, "Basic Data on the Economy of Iran," World Trade Information Service, No, 62-48 (Washington ' y D. C,: U. S, Government Printing Office, May, 1962), pp* 3-4-e 34- TABLE 6 DISTRIBUTION OF THE POPULATION AMONG INDUSTRIAL EMPLOYMENT S Industries Employment Petroleum 60,000 Textile 40,000 Railways $6,000 Foodstuff 21,000 Carpet 20,000 Others 57,000 Data from: U. S., Department of Commerce, ’ ’Basic Data on the Economy of Iran,” World Trade Information Service, No. 62-48 (Washington, IB. C.: tJ. S . Government Printing Office, May, 1962), pc 48 35 in government bureaucracy, are the major factors respon sible for the poor quality of the Iranian labor force.3" * ' Education»— A rough indication of the quality of Iran's human resources is reflected in the educational 12 statistics* Based on I960 data, of 2,84- million school age children only 40 per cent enrolled in elementary schools. Despite the fact that elementary education is compulsory, 1,7040 million, or 60 per cent of the children were, for some reason, unable to attend schools. Accord ing to the same source, only 11 per cent of 2*09 million teen-agers entered high schoolsIt is clear, there fore, that schooling in Iran is not within the reach of all Iranian children. Factors contributing to this unpleasant situation are numerous. In rural areas where villages are separated by many miles, provision of primary schools for peasants' children cannot be achieved without costly means of 11 The term "labor force" is used here in its broadest sense, so as to include entrepreneurs, 12 Data are taken from a report prepared in the Iranian language by the Plan Organization, Department of Economic Affairs, A Progress Report on the Second Seven- Year Development Plan (.Tehran: Plan Organization, I960)* pp. 126-154. 13 ^In Iran, all levels of education are financed by the government. At the college level, however, students pay admission fees. 56 transportation and great sacrifice on the part of young teachers. Moreover, landlords, fearing the possible awakening of the peasantry, have had a hostile attitude toward education in their villages. The presence of nomad tribes in Iran aggravates the situation. Introduction of elementary education to these tribes who migrate constantly has been considered impractical. Tribal chiefs who have visited this country and most European countries have not, surprisingly, shown any enthusiasm, nor have they offered any cooperation in establishing mobile primary schools0 Having in mind that the number of children in ru ral areas exceeds that of urban children by three times, one can visualize the great loss of potential talent and waste of Iranian human resources. Cities do not enjoy sufficient educational faci lities either. A shortage of schools, teachers, and edu cational equipment has been a major problem in Iran, Since 194-7» enrollment has increased by 500 per cent. Funds appropriated annually to meet the shortage do not keep pace with the rapid increase in the number of school age children. Vocational schools.— In 1954-, there were only twelve vocational schools in Iran with 1,200 students. In i960, these schools numbered thirty-four, providing 37 vocational training for 6,400 students, or an approximate increase by five times during a six-year period. Tile above increase, however, is much less than the amount of vocational skills needed in the country. Fur thermore, the schools are not distributed evenly in vari ous regions. As a result, certain large cities lack vo cational institutions. A lack of experienced vocational instructors con stitutes another major problem. Graduate students often find themselves unprepared to handle their vocational as signments. On the other hand, outside these schools, a desirable skill which can be acquired within three years, may take fifteen years. All this suggests that if the present shortcomings and limitations are overcome, the quantity and quality of vocational graduate students will be improved considerably. Institutes of higher technical and vocational learning in Iran include the Institute of Technology, which trains instructors of vocational schools; the School of Engineering of the University of Tehran; and the Poly technic, a newly established institution which produces engineers for industrial projects. Agricultural schools .— Unlike vocational schools, agricultural schools are experimental institutions. 14Ibid.« p. 129. 38 Attempts have been made to put the experiments into prac tice; however, the efforts to execute a practical program of advanced methods of cultivation in agricultural schools have been unsuccessful. In order to provide sufficient agricultural engi neers, mechanicians, and economists, Iran must secure qualified agricultural instructors and experts. Today, partly due to the land reform program which transfers the ownership of farm land to backward peasants, this need is, and will continue to be, a grave problem in Iranian agri culture. Public health.— Within recent years, few newly developing nations have made such strides in public health as Iran. National campaigns against major diseases--ma- laria, smallpox, typhoid, diptheria, tuberculosis, sexual disease, Bilharzia— and campaigns for pure water supplies and sanitation have resulted in greatly reduced incidences of disease and more effective manpower.^ Less than a decade ago, not a single city in Iran had a piped water system. They now have been installed in Tehran and in a number of other cities. Village health education programs have resulted in %• S., Department of State, "Aid in Action," Fact Sheet Series 68 (Washington, D. C.: U. S. Government Printing Office, 1961), pp. 1-12. 39 village cleanup programs and in the installation of thou sands of sanitary toilets* Public health centers have been established throughout the nation. Hygiene courses have been developed in the schools* Health information also is being disseminated through publications, radio, and films. There is, however, a great shortage of doctors, nurses, dietitians, and medical technicians. A shortage is also felt greatly in hospitals, and in medical equip ment and facilities. The United States technical coop eration mission, Department of Public Health in the Iran ian Ministry of Health, and the Plan Organization have been cooperating to relieve the shortage. V. TRANSPORTATION Iran's major means of transportation includes railways, highways, air transport, and ocean shipping. Railways The total route mileage of the Iranian railway system is approximately 2,300 miles. Rolling stock avail able to the Iranian State Railways in 1959 comprised 120 steam and 252 diesel locomotives, 378 passenger coaches, 27 dining cars, and 5»762 freight cars of all types. A total of 38,14-1 people are employed by the rail way industry. In 1959» the latest year for which data are available, the Iranian State Railways carried 334-,000 tons 40 1 of freight and 4*6 million passengers. The heaviest rail traffic is carried between the Persian Gulf ports and Tehran, with a general pattern con sisting of loaded cars going north and empty cars return ing south. Construction of oil pipelines along this route has caused a general loss of revenue for the railways,, Highways The lack of an adequate highway system has seri ously retarded Iran9s economic development. The country has approximately 15»500 miles of roads, ranging from ca ravan trails to a small number of paved all-weather roads„ In 1959* about 1,500 miles of the road system were as phalted* Most roads were originally built to standards not suited to heavy motor traffic, and they have suffered further deterioration from a lack of effective mainte nance. All types of nonmilitary motor vehicles operating in Iran totaled an estimated 110,090 in 1959* Various types of motor vehicles composing this figure are shown in Table 7* Air transport There are two airlines operating in the country: 16 TJ. S., Department of Commerce, op. cit* * pp. 9-10. 41 TABLE 7 IRAN'S NONMILITARY MOTOR VEHICLES (1959) Type Estimate Passenger cars 67,070 Trucks 28,510 Buses 7,057 Motorcycles 7,463 Total 110,000 Source: U. S, Department of Commerce, "Basic Data on the Economy of Iran," World Trade Information Service. No, 62-48 (Washington, D, C.: tf. Government ^Printing Office, May, 1962;, p, 9# 42 the Iranian Airways, with a fleet of twenty-two aircraft; and the Pars Air Service, operating three aircraft with passenger and freight flights. The Mehrabad Airport near Tehran, Iran's main air port, is on the crossroads of international air routes. Air service between Tehran and other points in the Middle East and Europe is provided through connections by Pan American World Airways, Air Prance, Royal Dutch Airlines, Scandinavian Airlines System, British Overseas Airways Corporation, Middle East Airlines, Iraqi Airways, Sabena Airlines, Lebanese International Airlines, Pakistan Inter national Airlines, Afghan Ariana Airways, Swissair, El Al, and Qantas Airlines. Other airports of entry are at Abadan, Tabris, Meshad, Isfahan, Shiraz, Ahwas, Kermanshah, and Zahedan. In addition, there is a network of smaller airports which services domestic traffic. Passenger traffic rose from 11,000 passengers in 1953, to 90,000 in 1957, and 100,000 in I960.17 Ocean shipping The major ports of Iran are Khorramshahr, Bandar, Shahpur, Bushire, Bandar Abbas, and Banda Pahlavi. The first four are located on the Persian Gulf, and Bandar 17Ibid.. p. 10. 4 - 3 Pahlavi is on the Caspian Sea* The principal port (excluding oil shipments) is Khorramshahr— connected by rail to northern Iran and Teh ran* Improved highways also link Khorramshahr to many parts of the country. At present, the port can accomodate 800,000 tons of merchandise, and facilities are being ex panded to allow direct loading onto freight trains for distribution inland* The only significant privately-operated Iranian company is the Iranian Shipping Lines Company, which op erates six ships in foreign trade. Ports of call are Bremen, Hamburg, Rotterdam, Antwerp, London, Leixoes, Port Said, Port Sudan, Khorramshahr, Basra, and Kuwait. Per sian Gulf ports are also served by several foreign ship ping companies while cargo on the Caspian Sea is carried almost entirely by a U*S,S*R* shipping corporation which utilizes chiefly the port facilities of Bandar Pahlavi„ Petroleum products are handled principally from Abadan. VI COMMUNICATION Domestic telegraph and telephone facilities in Iran are controlled by the Ministry of Posts, Telegraphs, and Telephones (PTT), which also controls postal services. Radiotelephone Radiotelephone facilities have been developed since World War II and connections exist with New York, 44 London, Bern, Karachi, Bombay, Beirut, Ankara, and through, these, with North and South America, Europe, and Asia* Present services are being expanded to provide coastal radiotelephone communication between towns and ships sail ing in waters adjacent to Iran in the Persian Gulf. Radiotelegraph Radiotelegraph facilities are linked with London, Paris, New York, floscow, Istanbul, Baghdad, Beirut, Kara chi, Frankfort, and Tokyo. A telex system has been in stalled in Tehran which provides written communication via Germany and London with some 60,000 subscribers in fifty-five countries.18 Telephone system Telephones are installed and maintained by the Na tional Iranian Telephone Company, a division of the Min istry of Posts, Telegraphs, and Telephones* About 67*000 telephones are in use in Iran; the oil installations in the south have an automatic system of about 1,000 tele phones. Internal facilities are generally set up to op erate on a limited local basis. However, there are two trunklines which connect Tehran with Basrah and Baghdad. Domestic telegraph system 18Ibid.. pp. 12-13. 45 The domestic telegraph system, with lines totaling about 20,000 kilometers, reaches nearly every part of the country. The combined telephone-telegraph lines were built during World War II; the first going along the rail road from Tehran to Bandar Shahpur, and the second follow ing the highway from Tehran to Kermanshah. The Indo-Euro pean telegraph line extends from the Soviet border at Jolfa to the Afghanistan border near Zahedan. A branch of this line extends from Ardestan to the Persian Gulf. Badio Radio Tehran is the magor broadcasting station in Iran. It operates on both medium and short waves. Other broadcasting stations are located in Tabriz, Isfahan, Shi raz, Meshad, Hamedan, Kermanshah, Basht, and Ahwas. Un official 1961 estimates place the total number of radio receivers at about one million, and the average listening 19 audience at approximately 10 million. y All radio broad casting systems are owned and controlled by the govern ment . Television Limited television facilities exist in Tehran and Abadan. Television, which began operations in Tehran in 1958, is privately owned and telecasts five to six hours ^Ibid. , p. 15. 46 daily to an estimated (I960) 30,000 receivers and 250,000 viewers* In addition, the United States Armed Forces Ra dio and Television Service, also located in Tehran, tele casts daily programs of American origin. A third televi sion station, established at Abadan in 1959» furnishes service for the Abadan area and for outlying cities such as Khorramshahr, Ahwas, and Basra, as well as the Persian Gulf Ports in the Arab sheikdoms. It is estimated that in I960 there were approximately 70,000 television re ceivers and 400,000 viewers in Iran. VII. CONCLUSION The factual information presented in this chapter manifests Iran's economic growth potential. Iran is eco nomically one of the most favored countries of Asia. Its varied substantial natural and material resources need only adequate capital and skilled manpower to be exploited for constructing a relatively modest but reasonably di versified economy. The human resources in Iran are more developed than many other underdeveloped countries. The unusual manual and artistic skills of Iranians, and their known ability in various fields of literature, attest that here is a highly intelligent people. In order to stimulate economic development and build a diversified growing economy, Iran must solve sev eral problems. Of utmost importance to achieve the above 4-7 goal is the development of education in greater quantity and quality; especially, a better balance in the kind of education seems required. Another problem is associated with insufficiency of experienced managerial talent, trained technicians, and highly skilled labor. This is true in both industry and agriculture* The economy also needs adequate and re liable entrepreneurial talent, within both private and public sector, to marshal and coordinate the available productive resources. Presently, there is a woeful waste of both material and human resources that can be used ef fectively. CHAPTER III NATIONAL INCOME AND ECONOMIC GROWTH IN IRAN National income accounting permits an appraisal of possible growth rates. The accounts are bench marks by which common growth programs can be assessed to determine whether they are realistic, and to determine by how much per capita output can be raised, annually and over a per iod of years. This serves to eliminate the more gran diose and emphasize the more feasible.1 This chapter attempts to discuss Iran's national income and economic growth. An aggregate analysis of the components of the national income will serve several pur poses. First, it will reveal the difficulties involved in computing Iran's national income and product with little data available. Second, it will furnish some factual in formation, though based on estimates, to determine per capita real income of the Iranian people. Third, it will help diagnose the present economic conditions of the coun try. Determination of a relatively accurate rate of economic growth requires measurement of the national in come for several preceding years. Unfortunately, ■^Jesse Burkhead, Government Budgeting (New York: John Wiley & Sons, Inc.J 1955)', p . W " . ---- 48 4-9 computation of national income and product is a new de velopment in Iran. Therefore, an annual growth rate esti mated by the Plan Organization, Iranian development agency, will be used in this chapter. I. THE ESTIMATE OE NATIONAL INCOME IN IRAN The most recent estimate of Iran's national in come was made in I960 by the Bank Markazi Iran, the Cen tral Bank of the country. Because of the lack of data, the Bank has avoided the income share as well as the value added approach. Its initial efforts have been made from the expenditure method. According to the expenditure method used by the 2 bank, the composition of accounts is as follows: Gross National Product = Private and government con sumption expenditures + Gross domestic capital formation + Net foreign investment. Gross Domestic Product = Gross national product - Net factor income payments from the rest of the world. Net National Product = Gross national product - Capi tal consumption allowances. National Income = Net national product - Indirect business taxes - Government monopolies surplus + Subsi dies . 2 Bank Markazi Iran, Experience in Estimating Na- tional Income and Product of Iran (Murray, Pakistan: "Tlay, lybz), p. 4. 50 Private consumption expenditures Private consumption expenditures comprise the value of final expenditures of households and non-profit institutions on current goods and services. The Bank has estimated the aggregate consumption expenditures at 204,209 million rials ($2,686 billion)*^ This constitutes /L 74 per cent of the gross national product* Excluded items: urban areas*— All outlays, in cluding net capital expenditures for the purchase of new houses and land, and additions to existing housing, and transfer payments such as taxes paid, gifts, and contri butions, are excluded. Other excluded items include the owner costs of house mortgage interest, insurance, and taxes and charges in connection with purchase and sale of owner-occupied housing* No data on consumption expenditures of non-profit institutions are available. However, the Bank has incor porated such an estimate in the final figures* Included items: urban areas.— To the money 2 "The legal ratio of the U. S. dollar to the rial (Iranian monetary unit) is $1 to 75®75» However, since *75 rial is insignificant in Iran and is equal to about 9/10 of 10, a ratio of $1 to 76 rials is used in convert ing Iranian monetary figures into U. S. dollars. ^Bank Markazi Iran, op* cit•, p. 6* 51 outlays the Bank has added the rental value of owned hous ing, the rental value of housing received rent free, dwel ling repairs value received free, value of fuel gathered by family members, the value of food received free or in lieu of wages, the value of home-grown food consumed, and also the value of medical care received free. Table 8 presents personal consumption expenditures in the urban areas in 1959* Rural estimate.— A tentative estimate is macte oy the Bank with regard to rural family expenditures. This estimate is based on the assumption that the ratio of tobacco expenditures to total family consumption expendi tures in the five smallest urban areas covered in the ur ban expenditure survey, is the same as the ratio in rural areas. Since tobacco is a state of monopoly, the Bank has felt that there are fairly good estimates of total to bacco production for the country as a whole. Having obtained an estimated rural tobacco expend iture, the Bank has estimated total rural consumption ex penditures by dividing this figure by the ratio of to- 5 bacco to total consumption expenditures* Total rural ^Estimated total rural consumption expenditures = rural tobacco expenditures v ratio of tobacco to total consumption expenditure — — - 89.8 billion rials. 52 TABLE 8a PERSONAL CONSUMPTION EXPENDITURES IN URBAN AREAS (1959-1960) Group Million Rials Per Cent Foodb 59,506 52.0 Housing0 13,503 11.8 House furnishings 12,244 10.7 Clothing 11,329 9*9 Personal cared 4,463 3»9 Medical caree 3,662 3.2 Education and reading matter 1,030 0.9 Travel and transportation 4,005 3.5 Recreation and tobacco 3,776 3.3 Miscellaneous 916 0.8 Total 114,434 100.0 Q Source: Bank Markazi Iran, Experience in Esti mating National Income and Product of Iran (hurray, L’ a- kis-fcan: May, 1962 ) • bFood purchased to eat at home and food purchased in eating places* housing includes rents plus imputed rent of owner-occupied dwellings and rent-free dwellings, cost of construction materials, and unpaid labor for house repair* ^Personal care, such as bath and barber expenses. eMedical care including insurance premiums, hospi tal charges and the cost of free medical care. 53 consumption expenditures, computed in this manner, amount to 89*8 billion rials, or approximately $1*181 billion for 1959-1960. Government consumption of goods and services The Bank has treated general government as all governmental bodies in charge of public administration, education, defense, health, and all other ministrieso Consumption expenditures by the Plan Organization and mu nicipalities are included. Because of a lack of statisti cal information, the Bank excludes the workers* insurance organization* Purchases of public corporations and gov ernment enterprises are not classified under general gov ernment o In order to use Iranian government accounts in the estimate, the Bank has reclassified them into (a) wages and salaries, (b) allowances, (c) administration expendi tures, and (d) non-current expenditures. The accounts for (a) and (b) also include pension payments (covering pen sions to survivors)* Similarly, administrative expendi tures, covering the purchases of goods, also includes pay ments for grants and subsidies as well as secret and spe cial funds for which no details are given. The non- current expenditure account, in addition to investment ex penditure, includes purchases of land and existing housing interest on government debt, and repayment of debt. 54 The reclassified general government accounts are given in Table 9* Table 10 summarizes total government expenditure for goods and services* Gross domestic capital formation In order to determine gross domestic capital for mation * the Bank has estimated the value of (1) capital goods investment, (2) investment in construction, and (3) changes in inventory* Capital goods investment,— This represents the value of durable goods which has been added to the na tional stock such as machinery, plant, and other producing equipment* Most capital equipment is imported. The im porters of capital goods are (a) private enterprises, sub ject to all duties, and (b) general government, some pub lic corporations, and the oil consortium, which are ex empted from duties and taxes on imported capital goods* The estimate for domestically produced capital goods is based on reports of quantities of goods produced by mechanized industries in Iran as reported by the Min istry of Industries and Mines, Table 11 indicates invest ment in capital goods in Iran. Investment in construction.— This item includes the value of new housing and public buildings and other construction works, such as roads, tunnels, bridges, and 55 TABUS 9 EEC LASS IjjTED GENERAL GOVERNMENT EXPENDITURES (1959-1960) Item Millions of Rials Wages, salaries and allowances 17,487 Transportat ion 464 Post and telegraph, charges 49 Vehicle maintenance 314 Rent in cash 241 Puels and water 250 Publications 6? Office supplies 609 Pood and feed 1,826 Clothing 827 Banking charges 3 Secret and special 835 Ceremonial 352 Building repair and maintenance 1,138 Estimate for non-reporting agencies 1,947 Verification and evaluation of real estate 8 Iranian Economic Agency in the U. S. A. 2 Military equipment 763 Paid liabilities 56 Total 27,234 Source: Baiik Markazi Iran, Experience in Esti mating National Income and Product of Iran (Murray, Paki stan: May, 1^62), p. 16. 56 TABLE 10 TOTAL GOVERNMENT EXPENDITURE OB GOODS AND SERVICES (1959-1960) Item Million Rials General government (from Table 8) 27,234 Plan Organization 1,239 Municipalities 371 Total 28,844 Source: Bank Markazi Iran, Experience in Esti mating National Income and Product oi Iran (Murray, Pakis tan; May, 1962), p. 9. 57 TABLE) 11 INVESTMENT IN CAPITAL GOODS IN IRAN (1950-1960) Millions Item of Rials Imports: Industrial machinery and plant equipment 8,484 Other non-installed equipment and materials 5,099 Automobiles, trucks, railway & other vehicles 5,686 Office equipment 174 Agricultural machinery 924 Total imports: 20,367 Domestically produced goods: 1,106 Total capital goods: 21,473 Source: Bank Markazi Iran, Experience in Esti mating National Income and Product of Iran (Murray, Pakis tan: May, 1962), p. 110 58 urban development. The Bank1s provisional estimate is based on the assumption that total private investment in new buildings outside of Tehran is equal to the total private investment in Tehran. The estimate value of new construction in the Tehran area amounts to 5?950 million rials. To this is added the 1,000 million rials of loans granted by the gov ernment's mortgage bank for alterations, additions, and repairs to provide a total estimate of 6,950 million rials. The estimate of public investment in all construc tion is on the basis of government expenditure accounts, Plan Organization appropriations, and municipality spend ing. In 1959-1960, the general government spent 1,450 million rials, Plan Organization spent 11,710 rials, and municipalities spent 1,239 million rials, for a grand to tal of public investment in construction of 14,399 million rials. Public and private investment in new construction is shown in Table 12. Changes in inventory.— Since there is no published data on changes in government stock of goods and no in formation on change in stocks for the balance of the pri vate sector, the Bank assumed no change in inventories in its provisional estimate. Gross domestic capital formation, therefore, can be determined by adding the estimates of capital goods 59 TABLE 12 INVESTMENT IN NEW CONSTRUCTION (1959-1969) Item Millions of Rials A. Public: Government 1*4-50 Plan Organization 11,710 Municipalities 1,259 Total 14,399 B. Private: Investment in new construction in Tehran area 6,930 Estimated investment in new construction in provinces 6,930 Loan to farmers for non-residential construction 1,100 Total 14,960 Grand Total (A + B) 29,359 Source: Bank Markazi Iran, Experience in Esti mating National Income and Product of Iran (hurray, Paki stan: May, 1962), p. 12* 60 investment and investment in construction. Table 13 sum marizes Iran’s gross domestic capital formation. Net foreign investment This account represents (1) the net imports of goods and services and (2) the net factor income payments with the rest of the world. In compiling this account, the Bank has followed the International Monetary Fund's concepts and procedures. Iran's net foreign investment in 1959-1960 is presented in Table 14-. Depreciation With a few exceptions, the practice of taking into account the consumption of capital goods in Iran is non existent. Therefore, procedures adopted by the Bank for this estimate cannot reflect prevailing practices. For this reason, the procedure is based on some consumption rate valued at current prices. At present, no quantita tive data exist to help in the calculation, nor are any data available on the amount of capital losses through ac cident, fire, and other hazards. The estimate presented here is, therefore, based upon the observed ratios of depreciation allowances to total gross national product in countries thought to be similar to Iran: namely, Turkey, Korea, Cuba, Brazil, and Chile. These rates averaged around 5 per cent. If the capital resources to gross national product capital output 61 TABLE 13 IRAN'S GROSS DOMESTIC CAPITAL FORMATION (1959-1960) Item Millions of Rials Capital goods 21,473 Private investment in construction 14,960 Public investment in construction 14,399 Changes in inventories Total 50,832 Source: Bank Markazi Iran, Experience in Esti mating National Income and Product of Iran (Murray, Paki stan: May, 1962), p. 12, 62 TABLE 14 IRAN'S NET FOREIGN INVESTMENT (1959-1960) Item Millions of Rials Net import of goods and services 11,665 Net factor income payment from the rest of the world -20,080 Total - 8,415 Source: Bank Markaai Iran, Experience in Esti mating National Income and Product of Iran (.Murray* Pa kistan: hay, I9&2), p. 12* 63 ratio of Iran to 2;1, this would imply a 2,3 per cent ca pital consumption loss, or an average useful life of forty 6 years. Indirect business taxes Indirect business taxes consist primarily of sales and excise taxes, custom duties on imported goods, and business property taxes. In Iran, the surplus of govern ment monopolies accounts are also treated as indirect taxes, whereas their deficit represents a subsidy to those enterprises. Table 15 shows indirect national and local taxes with surplus and deficit of government monopolies in 1959-1960, A provisional estimate of Iran's gross national product Combining all the component accounts presented above, the Bank makes a provisional estimate of Iran's gross national product and income for 1959-1960. Table 16 summarizes the Bank's provisional estimate. II. ECONOMIC GROWTH The question of economic growth in Iran deserves special attention. Throughout this study economic growth refers to a sustained rise in per capita real income which may result in an ultimate improvement of the standard of Bank Markazi Iran, op, cit,, p. 12. 64 TABLE 15 INDIRECT NATIONAL AND LOCAL TAXES, SURPLUS AND DEFICIT OF GOVERNMENT MONOPOLIES (1959-1960) Item Millions of Rials Indirect Tax: Stamp duties on bills of exchange and lading 455 Customs revenues regarding warehousing and transportation charges 651 Custom taxes and duties 9,090 Tax on petroleum products 1,756 Receipts from sales of securities 11 Government's share of difference between buying and selling rates of foreign exchange for commercial purposes 450 Tax on alcoholic beverages 533 Tehran's municipalities local duties 450 Estimated local duties for other municipali ties of the country 450 Surplus and Deficit of Government Monopolies: Tobacco 2,402 Sugar 1,281 Bread and cereal - 420 Total 17,089 Source: Bank Markazi Iran, Experience in Esti mating; National Income and Product of Iran (Murray Paki stan: May, 1962), p<> l20 65 TABLE 16a PROVISIONAL ESTIMATE OP IRAN'S GROSS NATIONAL PRODUCT AND NATIONAL INCOME (1959-1960) Item Millions of Rials Per Cent Personal consumption expenditures 204,209 74.0 Government purchase of goods and services 28,844 10.5 Gross Domestic Capital formation 50,852 18.5 Net exports of goods and services 11,665 4.2 Gross Domestic Product 295,550 Plus: Net factor income payments from the rest of the world -20,080 -7.2 Gross National Product 275,470 100.0 Less: Provision for fixed capital consumption 15,770 Net National Product 261,700 Less: Indirect taxes and government monopolies surplus 17,089 National Income 244,611 aCompiled from: Tables 7 through 14® living. On the basis of the above definition, growth of the economy can improve the material well-being of the Iranian people. Improved means of living can also meet the ideological challenge and constant threat of Soviet Russia, Iran's northern neighbor* Moreover, the environ ment of economic growth can effectively resolve the social and political tensions resulting from poverty, income in equality, and economic insecurity. Iran's real per capita income An accurate assessment of the growth of Iran's economy is very difficult. Since there is no comparable estimate of national income for years previous to 1959- I960, findings have to be developed from scattered esti mates. In order to determine the real per capita income, three questions must be resolved: (1) changes in the purchasing power of the rial, (2) changes in population, and (3) changes in the monetary value of the gross na tional producto Inflationary pressure.— She inflation process in Iran is worth a note for its importance in measuring the real output. Since the national income measures all of its components and reduces them to the inflated rial, the decline in the value of the purchasing power of the rial 67 is reflected in Iran's national income figure. Thus, def inition of Iranian money national income in terms of the rial of constant purchasing power is necessary to give a true picture of the relative magnitude of production* By how much has the purchasing power of the rial fallen during recent years? The available index numbers for the period 1955-1960 reveal that the general price level has risen by 27 per cent, and a fall in the purchas ing power of the rial by 22 per cent in this period. Table 17 presents Iran's price index. It is believed that the major reason for this inflationary pressure has been the monetary expansion*1 ' 7 In order to obtain a better approximation of the economic welfare of the Iranian people, money national in come must be converted into real national income. This can be achieved by dividing the former by the index num ber of the same year and multiplying by 100. Thus, Iran's real national income for 1959-1960 amounted to $2542 million against the money national income of $3*228*53 million for the same year*® Population trend.— Another problem in measuring economic well-being arises from the fact that population ^See Table 19* ®See footnote 6, Table 14. 68 TABLE 1? IRAN'S PRICE INDEX (Year Ending March 1955 = 100) Year Ending March Price Index 1955 100. 1956 101.7 1957 IIO06 1958 115.4 1959 116.6 I960 126o 7 Source: Bank Melli Iran* Bank Melli Iran Bulletin (Tehran: December, i960), p. 539. 69 changes , . ' S well as price changes occur. In 1955-1956, the population in Iran numbered 18,954,704- persons. It has increased at an annual rate of approximately 2.5 per cent. In 1960-61, it totaled approximately 22,000,000*^ In order to determine whether Iran's national in come has been increasing or decreasing faster or slower than population, per capita measures must be used. The procedure employed in computing real output per capita is to divide real national income by the total population figure for each year. Thus, real income per capita for the year 1959-1960, with an estimate of 21.5 million popu lation, approximated $118. Hate of economic growth in Iran The Plan Organization has estimated that the an nual growth rate of Iran's gross national product has been somewhat over 6 per cent during the period 1955-1961 There is no other reliable estimate available to verify this rate. On the other hand, a reasonable observer of the prevailing economic conditions in Iran would regard a q 7U. S., Department of Commerce, "Basic Data on the Economy of Iran," World Trade Information Service. No. 62- 48 (Washington D. <371 tJT S. Government Printing"0ffice, May, 1962), p. 4* ^Plan Organization, Division of Economic Affairs, Outline of the Third Plan. 1341-1546 (Tehran: July, l96l), pp. 8-16. 70 6 per cent annual rate of economic growth as an exag gerated estimate though the latter statement is equally difficult to substantiate* However, two comments may be made in this connec tion: 1. The Plan Organization has referred only to the period between 1955-1960 in which the inflationary pres sures raised the price index to 12?. Therefore, the na tional income of the period from which the rate has been computed can hardly be a representative level* 2* It is doubtful as to whether the living standard of the Iranian people has also been rising at the same rate. Unless growth has been taking place in areas which would provide grounds for a "take-off," such an increase should be reflected in the living conditions and living standard of the Iranian people* The latter comment entails a study of government spending for the preliminary development of the economy. This question, which ties government fiscal policy with "take-off" expenditures, is reserved for the next chapter. III. THE REGENT TREND OP PRIVATE INVESTMENT IN IRAN The pace of economic growth depends significantly upon the volume of investment. All investment, however, is not equally productive of growth. A brief examination 71 of the level and nature of private investment in Iran seems helpful to a better understanding of this topic* According to a recent survey by the Plan Organiza tion, Iran's fixed investment in agriculture, industry, construction, and transport amounted to approximately #65*9 million in the year ending March, 1955* By early I960, it had reached #404*3 million*^ This increase within five years indicates that there has been a remark able upsurge in private investment* Reasons for the upsurge There are several factors responsible for the re cent increase in private investment. These are Iran's import policy, foreign exchange position, considerable rise in public spending, and new sources of cheap external and internal loans. Of these factors, foreign exchange and loans deserve some consideration. Abundant foreign exchange*— Prom the oil industry, Iran receives foreign exchange equal to one-half the Con sortium's "profits" plus rial costs of operations and in vestment. The Consortium must meet virtually all its lo cal currency costs by purchase from the Iranian Rational Bank, Bank Melli. These purchases amounted to about #70 ^Sharif Adib-Soltani, Private Fixed Investment in Iran 1561-1358 (Tehran: Plan Organization, April, 1962;, P* 6. million in 1959 Table 18 summarizes Iran's foreign exchange re ceipts from the oil industry. In 1958, Iran also received #25 million from Iran Pan-American Oil Company for area exploration and production rights. Availability of foreign loans for development pro ject So— Total inflow of foreign loans during 1955-1982 ] 7 amounted to #586.50 million. v All of these foreign loans were tied to specific development projects and, hence, were sources of funds for public development expenditures» These loans exclude budgetary assistances and non-economic aid to the Iranian government. The availability of such development loans was one of the major factors in in creased private investment expenditures. Establishment of the Industrial and Mining Devel opment Bank.— Another cause of the boom in private invest ment expenditures was the establishment of the Industrial and Mining Development Bank of Iran. In order to stimulate private industrial develop ment in Iran, private investors from Iran, the United States, the United Kingdom, Prance, Belgium, Germany, Hol land, and Italy formed the Industrial and Mining ^Edith Penrose, "Profit Sharing Between Produc ing Countries in the Middle East," Economic Journal (June, 1959), IXIX, pp. 240-241. 73 TABLE 18 IRAN'S SOURCES OF FOREIGN EXCHANGE EARNINGS (1955-1962) (Millions of Dollars) Yean Exports Other Transfer Ending Oil of Current Payments March Sector Goods Earnings & Capital Totals 1955 151.0 89.9 14.5 95.1 350.5 1956 187.2 121.9 21.0 129.8 459.9 1957 262.5 131.6 35.9 123.0 553.0 1958 322.5 125.9 61.5 124.0 633.9 1959 349.5 132.4 65.5 137.3 684.7 I960 355.7 142.4 61.5 130.0 689.6 1961 386.5 126.6 64.9 174.5 752.5 Totals 2,014.9 870.7 324.8 913.7 4,124.1 Compiled from: International Monetary Fund, Bal ance of Payments Yearbooks, XII, XIV (Washington, D. 377 March, l96l, and May, 1963;• 74- Development Bank of Iran (IMDBI) in ±959* The IMDBI has made medium and long-term loans and invested in share ca pital. It has promoted and helped to develop a capital market, guaranteed loans and commitments of other inves tors, and provided technical and managerial assistance to Iranian industry. The origin of the IMDBI goes "back to late 1957 when hazard Freses and Company of New York and Chase In ternational Investment Corporation of New York agreed, at the request of the Iranian Government, to sponsor a private industrial credit and investment bank in Iran* The World Bank advised the government of Iran and the sponsors on the establishment of the new institution. Subsequently, foreign private investors agreed to join with Iranian and American private investors to pro vide equity capital for the bank, and in August, 1959* the World Bank announced that it would make a loan of $5«2 million to the IMDBI after it had been established. The IMDBI started operations with resources equiv alent to $4204- million. This fund was made up of $5*3 million of which 60 per cent was subscribed by Iranian in vestors and the balance by the foreign investors; $8 mil lion from the government of Iran; an existing loan port folio of $18.7 million which the government had turned over to IMBDI for management; a loan of $5*2 million from the United States Development Loan Fund; and the loan of 75 $5 <>2 million from the World Baak.1^ Credit expansion of the banking system.— Another factor responsible for the rapid expansion of private in vestments, especially during 1958-1960, was an expansion of credit to the private and public sectors at low inter est rates. The estimated expansion of net private and public credit during these three years amounted to $405 million. Wet credit to the private sector approximated $284 million as compared with $100 million during the three preceding years (1955 to 1957)* This means that net credit to the private sector increased by 184 per cent. The net advance of the banking system to the public sector was about $124 million, as compared to $2 million net pub lic credit during 1955-1957* The establishment of new commercial banks consti tuted another base for the general expansion of credit. Until 1950, only five publicly owned banks operated in Iran. By 1961, the number had increased to twenty-seven, thirteen of which were private banks. The new commercial banks established during only four years increased the banking capital by about $27 million, accounting for about 55 per cent of the total commercial banking capital of the 14 International Bank for Reconstruction and Dev elopment, "Loan to Iranian Development Bank Signed,” Press Release. Wo. 611 (Washington D. C., November 25, 1959) , pp“ . 1-5. country* With interest rates of 4 to 6 per cent charged by The Bank Melli Iran and 12 per cent by the commercial banks, compared with an average of 30 per cent outside of the banking system, one can conclude that easy credit and monetary expansion caused a substantial rise in the level of private investment in the period* From Table 19« which shows changes in the money supply and credit during 1955-1962, it is clear that since 1961 both private and public credit have been contracted* This has been due to monetary measures of the government to contract credit. Continuation of the credit contrac tion, together with recent drastic reforms, have given rise to a new crisis— the crisis of an economic depres sion. This development (to the extent that factual in formation allows) will be reviewed in Chapter IV, where major problems of economic development in Iran are dis cussed* IV. CONCLUSION The preceding analysis of Iran's national income and economic growth reveals the great difficulty involved in the collection of data to compute the national income for the Iranian economy. One problem, aside from inad equacy of statisticians and their limited experience, is a lack of data— the very raw material needed for the 77 TABLE 19 ESTIMATED MONEY SUPPLY AND CHANGE IN PUBLIC AND PRIVATE CREDIT DURING 1955-1962 (Millions of Dollars) Year Ending March Money Supply Amount of Change Net Credit to Private Sector Net Credit to Public Sector Total Net Credit Expansion 1955 325 26 36 -15 21 1956 384 59 20 26 46 1957 449 65 44 -9 35 1958 569 120 116 44 160 1959 657 88 108 46 156 I960 549 17 60 32 92 1961 545 57 -50 7 1962 544 -i 14 -54 -40 Totals 370 455 22 477 Compiled from: Bank Melli Iran, Bank Melli Iran Bulletin (Tehran: 1955-1959); Bank Markazi Iran, Annual Keport y“l340 (Tehran: 1963)* pp. 14-16. 78 establishment of statistical findings. Iranian statisti cians, therefore, resort to estimation. While the relia bility of their estimates is questionable, this study has utilized them to establish certain tentative, but impor tant, conclusions© By deflating the I960 national income figure and dividing it by the total population of the same year, it was found that each Iranian enjoyed approximately $118 real income. This represents the highest per capita in come figure ever recorded in comparative economic litera ture. According to the writer's personal observation, this rise in the Iranians' real income has not been re flected (or at least, has not been reflected signifi cantly) in their living standards. It can be concluded, therefore, that (1) the population increase at 2.5 per cent a year has had some offsetting effects upon the im provement of Iran's living conditions, and (2) the con centration of public expenditures on preliminary develop ment projects has withdrawn a part of the productive re sources that otherwise could be allocated for production of consumption goods. In the latter case, the Iranian people have been sacrificing, to that extent, the present consumption of few inferior goods and services for better and more abundant material means of living in the future. At this point, two comments seem pertinent. 79 First, it must be realized that the real per capita is an average. This means, while for some Iranians income may be well over the average, for many others it may be well below that level. In fact, there sire a great number of Iranians whose incomes do not exceed the subsistence level. Still, there are others who lack sufficient means to support their livelihood. On the other hand, wealthy Iranians fall into the highest income bracket at the other extreme. Second, Iran's national income should be used carefully in evaluating the performance of the economy. It is not necessarily true that since the gross national product in one period exceeds that of a previous period the economy has been performing well. Furthermore, while national income may be a record high, many resources may be unemployed, underemployed, or simply misallocated. Un fortunately, the Iranian economy is characterized by the existence of all these three elements. The upsurge in private investment in Iran is worth emphasizing. One must not overlook the significant con tribution of private investment to the national income of the period. The private sector has shown itself capable of investing private savings in production of urgently needed goods and services, hence, enlarging the flow of national income. Government, therefore, should lead the private sector by investing in areas where and when private businesses are unable to do so. The engagement of Iranian private enterprises in productive activities now performed by the government might also eliminate the waste and inefficiency in Iranian government monopolies* CHAPTER IV IRAK'S ECONOMIC DEVELOPMENT PLANS AND FISCAL POLICY Fiscal policy as a means of stimulating the econ omy has been used in Iran since the establishment of the Plan Organization. In 1947, the Iranian government was authorized by the Majless (parliament) to take measures involving government receipts, expenditures, borrowing, and repayment of debt in strenghtening the economy of the nation. This chapter will examine critically (1) the dev elopment plans and their respective achievements, (2) fiscal policy aspects of the programs, and (3) problems involved in developing the Iranian economy. I. PLANS FOR ECONOMIC DEVELOPMENT IN IRAN Iran's first formal development plan received the approval of the Majless in 1947. This plan was worked out by an Iranian economist on the basis of a report pre pared by Morrison Knudson International Company, an Amer ican consulting firm. The first two years of the period were concerned with setting up an organization to carry 81 82 out the plan, The whole undertaking collapsed with the nationalization of oil production. Although the plan per iod which extended from September, 1955* to September, 1962, was called the Second Seven-Tear Development Plan, it was for all practical purposes, the first* The Second Seven-Year Develop ment Plan The Second Seven-Year Plan was simply a list of projects on which funds were presumed to be available to be used. Neither the planning document approved by the Majless, nor the reports supporting that document, were concerned with a systematic examination of the functioning of the Iranian economy. The schedule of projects that made up the Second Plan was not based on economic analy sis. Indeed, no single theme or logic supported the se lection of projects and at least some implied objectives* Furthermore, unlike most plans current in the world today, the specific targets of the Second Plan were very vague* The opening sentence of the plan law reads: With a view to increasing production, developing exports, preparing public necessities within the econ omy, developing agriculture and industries, discover ing and exploring mines and subterranean resources, improving public health, fulfilling any operations de signed for the development of the country, raising the educational and living standard of the people, and im proving living conditions . • .1 •^"Second Seven-Year Development Plan of Iran," Bank Melli Iran Bulletin (Tehran: Bank Melli Iran Press. May-June, 195g)7' pp~ 192-202. 2 Achievements of the Second Plan 83 The Second Development Plan encompassed most of the development activities of the government including production increases, export promotion, agricultural dev elopment, exploitation of mineral resources, public health improvement, communications and electric power develop ment, and the raising of educational levels and living standards. The achievements of the plan, however, can be classified into agriculture, communications, industries and mines, and social services. Agriculture,— Since Iran’s chief economic activity has been agriculture, the Plan has been specifically con cerned with such projects as irrigation, agricultural ma chinery, roads, new farming techniques (particularly the use of fertilizer and pest control), improved animal hus bandry, agricultural extension work, reclamation of waste lands, and rural cooperatives. In this connection, it is important to note that the recent land reform program has had a depressing effect on private investment in the agricultural sector* The land reform program will be discussed later<> Dams,— Under the Second Development Plan the 2 This information is based on the Plan Organiza tion's Report cited in "Persia's Development Plan Organi zation," Asian Review, LVIII (January, 1962), pp, 64-67# 84 construction of three major dams was scheduled* They are the Kara j, the Sefid Hud, and the Dez Dams. The Karaj and Sefid Hud Dams are located in the northern and most thick ly populated part of the country. The Karaj Dam which supplies water and power to Tehran, and located twenty- five miles to the southeast, was completed in November, 1961. Sefid Hud, the second of the three major dams, was dedicated in 1962. This impressive dam, located in a rich rice-growing area 150 miles northwest of Tehran, will be completed during the Third Development Plan. The third huge dam, the great Dez Dam, and the Sefid Hud Dam will be discussed under the Third Development Plan. Communications♦— About a third of the Second Plan's capital expenditures was devoted to developing Iran's communications. They include highways, railroads, airports, seaport construction, and telephone and tele graph installations. Inadequate transportation has long been a major handicap to developing Iran. Out of a population of 22 million, some 80 per cent are engaged in agriculture and, since most of the terrain is arid and mountainous, produc tion is concentrated in widely scattered localities where soils, climate, and water offer suitable conditions for agriculture. Iran's 15,500 miles of roads (excluding the new roads built and under construction by the Development 85 Plans), carry the bulk of the country's freight and pas senger traffic# Hot many of the roads are built to stand ards adequate for motor vehicles, and most of them are greatly in need of repair# The Second Plan undertook the construction and re construction of 1,530 miles of main road to bring together producing and consuming centers and prevent the waste of produce. Iran's road program of the Second Seven-Year Plan, completed in late 1962, is shown in Figure 2# The completed roads include the Trans-Iranian Highway from the Persian Gulf to the Caspian Sea. The Plan also was en gaged in the improvement of a 270-mile road link which connects the important Shiraz Province with the Gulf of Khorramshahr and Bandar Shapur# Table 20 is a summary of the road construction completed under the Plan# Railroad development has also been a significant part of the Plan Organization program. Under the Second Plan, passenger terminal facilities in Tabriz and Mashhad were completed# Five of Iran's seaports were modernized. Four of these are located on the Persian Gulf— Khorramshahr, Ban dar Shapur, Bushehr, and Bandar Abbas. The fifth seaport, Bandar Pahlavi, borders on the Caspian Sea. Modernization of these ports has increased their total capacity and is expected to improve Iran's international trade# New airports were constructed at Isfahan, Shiraz, TT Caspian j l o y e r B u r g j i r d ' *0 * ° 'i IRAN V \ ROAD PROGRAM OF THE SECOND SEVEN YEAR PLAN Gulf Oman Source: International Bank for Reconstruction and Development, Press Release No. 588 (Washington, D. C. : May 29* 1959)* p. 4*. 03 C T i 87 TABLE 20 A SUMMARY OP ROAD CONSTRUCTION PROJECTS OP THE PLAN ORGANIZATION COMPLETED IN 1962 Road Distance in Miles Use Trans-Iranian Highway 745 Agricultural goods to the ports, passengers to and out of Tehran (500,000 tons a year)* Hamedan-Eermanshah- Khosrovi 255 Agricultural goods to markets. Malavi-Shahabad- Kermanshah-Saghez 155 Imported goods to markets. Rudehen-Amol-Babol 62 Vegetables to Tehran. Sax Bandar-Ehalafabad- Ahwaz 10 Relief of the traffic con gestion (400,000 tons a year). Shiraz-Khalafabad road link 4-5 Agricultural produce and imports from the south ern ports to the capital Total 1,252 Summarized from: International Bank for Recon struction and Development. Press Release. No0 588 (Wash ington, D. C.: May 29* 1959), PP* 3-5. 88 Yazd, and Kermanshah. These are in addition to the air ports in Tehran in the north, and Abadan in the south. Telecommunications and municipal development also played a part in the Plan Organization^ program. Industries and mines.— Prom the text of the Second Plan Law, five goals for the development of Iranian in dustry can be inferred, though not specifically stated.^ These aims are as follow: 1« To produce those products for which there is an urgent need. 2. To pave the way for industrial expansion by intro ducing a steel industry® 3. To increase the production of cement which is re garded as one of the most important construction materials in Iran. 4. To familiarize private investors with certain new mining and industrial projects. Examples are such pro jects as those for paper, plastic goods, vegetable oil, and food processing and canning industries. These prod ucts have been imported substantially from abroad. Ad vanced mining techniques have also been included in the list. X ■"Translated from Plan Organization, Division of Economic Affairs, A Progress Report on the Second Seven- Year Development Plan (Tehran: Plan Organization. 1960), pp. 126-131. 89 5. To assist private investors by providing them with technical and financial aids. To achieve the latter, the Plan Organization was permitted to establish industrial development banks. The above aims led the planning authorities to prepare a list of industries which proved later to be more extensive than the financial strength and the state of Iran’s readiness could afford to undertake. The list ex perienced several changes and revisions. The funds orig inally appropriated for programs such as exploration of mines, establishment of vocational schools, construction of an industrial city, and provision of financial assist ance for private investors, were reduced substantially. Table 21 summarizes the revisions to the Second Plan's industrial projects. Despite the aforementioned difficulties, the Se cond Plan has made substantial achievements in developing the domestic textiles, sugar, food preservation, and ce ment industries. Incomplete industrial projects have been turned over to the Third Development Plan. The pro duction of selected commodities in 1957-1959 is shown in Table 22. Social Services.— Plan organization activities in this area embrace public health, education, vocational training and municipal development. One of the achievements of the Plan Organization 90 TABLE 21 THE ORIGINAL AND REVISED INDUSTRIAL PROGRAM IRAN'S SECOND PLAN (I960) No. Industry Revision 1 Spinning and weaving (cotton) 1 Textile — 1 Sack-weaving 1 Steel Turned over to the Ministry of Industries and Mines 2 Cement — 1 Fishery — 1 Vegetable oil Omitted 1 Paper — 1 Sugar — 1 Gold mining Omitted 1 Chemical fertilizer Turned over to the Ministry of Industries and Mines 3 Food and fruit- processing Added 2 Fruit drying Added 1$ (excluding omissions) Other Associated Appropriation Industrial Projects Reduced by: Mining exploration 65 per cent Vocational school for young men in the service 80 per cent 91 TABLE 21— Continued Other Associated Appropriat ion Industrial Projects Seduced by: Industrial city of Kara^ 65 per cent Loan to private industry 35 per cent Translated and compiled from: Plan Organization, Division of Economic Affairs, A Progress Report on the Second Seven-Year Development Plan (Tehran: Plan Organi zation, I960), pp* 113-115* TABLE 22 PRODUCTION OF SELECTED COMMODITIES, 1957-1959& Item Unit 1957 1958 1959 Cement 1,000 tons1 5 224.5 313.4 410.1 Cotton cloth 1,000,000 meters 61.8 74.7 107.5 Sugar (lump & granulated) 1,000 tons 103.0 111.8 133.6 Cigarettes 1,000,000 numbers 6,616.2 6,117.4 7,158.5 Matches 1,000 boxes 317.5 383.7 401.5 Tea 1,000 tons 8.7 6.1 8.0 Soap 1,000 tons 2.5 14.4 35.0 Margarine 1,000 tons 6.7 7.6 13.7 Leather sole 1,000 tons 2.3 2.4 4.0 Leather upper 1,000 feet 6.2 7.8 7.2 Woolen cloth 1,000 meters 2.4 1.4 1.7 Silk cloth 1,000 meters 0.9 0.2 0.2 Jute cloth 1,000 meters 2.5 0.9 2.7 Glass sheets 1,000,000 square meters 0.5 0.6 0.8 Rubber shoes and galoshes 1,000,000 pair 2.9 3.0 8.2 Cardboard 1,000 tons n.a.c n.a. 0.3 Plywood 1,000 sheets n.a. n.a. 345.6 Soft drinks 1,000 bottles 128.0 138.5 127.6 Caustic soda 1,000 tons n.a. n.a. 0.6 Bricks 1,000,000 units n.a. n.a. 8,394.0 aYears ending March. 20* 1 5 All tonnage figures in metric tons. £ Not available (n.a,). \Q ro 93 work in this field has been the stamping out of ma.iaria, a disease which had been a scourge in Iran for centuries* The incidence of malaria has been reduced by 98 per cento Smallpox, tuberculosis, trachoma, diphtheria, and other contagious diseases have been attacked. The Second Plan has also built hospitals, sanatoria, clinics, and health centers in addition to training some 700 persons as tech nicians to staff these facilities. Table 23 presents the Second Plan’s financial assistance to the public health program* The Plan Organization, the Ministry of Education, and the United States Technical Cooperation have worked together to develop education in Iran. Concentration has been placed on developing the facilities needed to achieve the country’s most important goal— enrollment of all school age children in public schools by 19800 Major emphasis has been placed on teacher training since the goal will require 225,000 teachers with support ing supervisory and administrative personnel. School cur ricula are being studied, and steps are being taken to meet the demand for educational materials for the esti mated 8*1 million students by 1980* United States educators have sponsored many inno vations in Iran such as summer teacher-training schools and village schools with courses in community organiza tion, sanitation, vocational guidance, and homemaking as 94- TABLE 23a APPROPRIATION FOE PUBLIC HEALTH PROGRAM BY IRAN'S PLAN ORGANIZATION FOR THE PERIOD 1996-1963 (Thousands of Rials) Description Appropriation Campaign against: Malaria 1,312,4-59 Insects 4*7,159 Tuberculosis 97,153 Smallpox 166,395 Trachoma 31,697 Venereal diseases 91,561 Diptheria, tetanus and whooping cough 49,290 Bilharziad0 35,000 Total 1,790,615 Associated projects: Construction 4-97,14-9 Health education 48,4-11 Medical equipment 11,290 Aid to health centers and clinics 318,970 Grand Total 2,666,4-55a aTranslated and compiled from: Division of Economic Affairs„ A Progres Plan Organization, s Report on the 95 TABLE 25—-Continued Second Seven Year Development Plan (Tehran: Plan Organi zation, I960), p. 114, T . A serious communicable eyelid disease character ized by scarring of the lid and an eversion, or turning out, of the lid lining that mates the eye very ugly and causes tears to run over the face, CA genus of parasitic worms found in the veins of the human body, and especially those of the bladder and mesentery. Approximately $5,640,046, well as reading, writing and arithmetic* The Iranian Ministry of Agriculture has been as sisted in organizing mobile schools in tents to take edu cation to tribal children. These schools move with the migration of tribes* Adult literacy programs have been organized* More than 15*000 illiterate gendarmes were taught to read and write under a pilot project assisted by the mutual secu rity program. Up to the present, more than 500,000 adult villagers have learned to read and write*^ The Second Plan's appropriation in assisting Iranian educational pro grams is shown in Table 24* Under special contracts with the mutual security program, Utah State University is cooperating with Iran at Karaj Agricultural College in developing agricultural edu cation programs; the University of Southern California with the University of Tehran in the teaching of public administration; Brigham Young University with the Univer sity of Tehran in education; and Syracuse University with the Ministry of Education in audio-visual education* Iran's Third Development Plan The Third Development Plan was passed by the Law V S., Department of State, Aid in Action CWash- ington, D* C.: U. S. Government Printing Office, 1961), p. 11. 97 TABLE 24a APPROPRIATION FOR SCHOOL DEVELOPMENT BT IRAN'S PLAN ORGANIZATION (1959-1963) Description Appropriation (Millions of Rials) Per Cent Building 1,414.8 77 Materials and equipment 58.6 3 Textbooks 56.3 2 Sending students abroad 76.3 4 Educational activity 229.3 13 Total 1,812.3 99b Translated and compiled from: Plan Organization, Division of Economic Affairs, A Progress Report on the Second Seven Year Development Plan (Tehran: Plan Organi zation , I960), p. 127. bSmall fractions are omitted* 98 Council of Ministers on September 6, 1962. The operation period covers five and one-half years, beginning Septem ber, 1962, and ending in March, 1968. The original -proposal.— Financing the administra tive and organizational provisions of the original propo sal which called for #2.5 billion was promising and ambi tious. The Plan was expected to raise Iran’s national income by at least 6 per cent per year to achieve a more equitable distribution of income, and to create substan tial employment opportunities for the Iranian people. Re-education in expenditure figures.— The origi nally proposed #2.5 billion was reduced to #1.87 billion in 1962. Of this sum, #535 million is to be obtained through internal and external debt, and the remainder by the allocation of a portion of Iran’s oil revenues, in creasing from 55 per cent in the first year of the Plan to 80 per cent in the last. The 55 per cent figure was cut subsequently to 40 per cent in the first half year of the Plan by diverting oil revenues to the ordinary budget. Administration.— The Plan law provided for Third Plan projects to be administered by the ministries ^U. S., Department of Commerce, "Economic Develop ment in Iran, 1962," Overseas Business Reports. No. 63-52 (Washington, D, C.: tj. S. Government Printing Office, March, 19635* p* 3« 99 concerned, rather than by the Plan Organization itself* This move appeared to downgrade the importance of the Organization and caused administrative confusion and delay as personnel were shifted* Allocations in the Third Plan*— A total amount of 190,200 million rials was budgeted as follows (in millions of rials): agriculture, principally regional development and irrigation, 36,600; industries and mines, mainly for investment in new government enterprises, 34-,511; power and fuel, largely for developing electricity in small towns, 21,214-; transportation and communications, espe cially road development and maintenance, 48,738; educa tion, 15,736; health, 12,350; manpower, 5,346; urban dev- elopment, 9»200; and other, 6,505* Table 25 summarizes allocations in the Third Plan* Business and investment opportunities,— The Third Development Plan should present many business opportuni ties, Over its duration, the expansion of a number of existing industries is planned* Investment opportunities exist in cotton and wool textiles, food processing and canning, sugar, cement, and glass. Important new indus tries being considered include steel, paper, wallboard, synthetic fiber, and petrochemicals* 6Ibid.. p. 3 100 TABLE 25 SUMMARY OP ALLOCATIONS ITT THE THIRD PLAN (Millions of Dollars) Item Amount Per Cent 1. Agriculture 36,600 19.2 2. Industry 34,511 ' 18.2 3. Electricity 21,214 11.2 4. Transport & Communications 48,738 25.6 5. Education 15,736 8.3 6. Health 12,350 6.5 7. Manpower 5,346 2.8 8. Local Development 9,200 4.8 9. Statistics & Others 6,505 3.4 Total 190,200 100.0 Source: The Plan Organization, Introduction to the Third Plan (Tehran: The Plan Organization, division of Economic Affairs, June, 1961), p0 89. 101 Major public sector projects are in the fields of tobacco, tea, fisheries, and mineral development0 Recent projects include the construction of a $4 million beet sugar refining plant at Kermanshah, and the drawing of plans for a national beet sugar refining plant at Mama- sani. Under a contract with American International Dev elopment (AID), a six-months exploration survey of lead and zinc deposits at the BAMA mine near Isfahan has been undertaken.'7 The Industrial and Mining Development Bank of Iran has obtained a license to establish a plant for the pro duction of sheet glass. A license has also been issued for the establishment of a paper mill in Khuzestan using bagasse from a nearby cane sugar refinery. Also planned are a series of water wells and related pumping equipment O to irrigate projected beet plantations. Investment expenditures by the Third Plan and the realization of business and investment opportunities will provide grounds for further investment expenditures in the production of complementary goods and services, and the satisfaction of newly created wants. This is, of course, 7 rU. S., Department of Commerce, "Iran Looks to Development Projects Under Economic Plan to Stimulate Business," International Commerce (Washington. D. C.: U. S. Government Printing Office, May 6, 1963), p. 1. 8Ibid. 102 a provisional statement. Increase in the level of private expenditures to utilize and expand the potential capacity of the Iranian economy depends upon other factors as well. These factors will he discussed later. Development progress.— It is somewhat early to judge whether the Third Plan is making satisfactory prog ress. Judgment of this nature will he possible after the termination of the Plan period. Evaluation of the Plan's achievements is especially difficult because the Third Plan has also undertaken completion of projects left un finished by the Second Plan. During 1962, development progress included dedi cation of the impressive Sefid-Rud Dam project. Located in a rich rice-growing area 150 miles northwest of Tehran, the Dam, under construction by a French engineering syndi cate for five years, will irrigate 605*000 acres of land. The Dam, being built with the help of a loan from West Germany, has an estimated cost of $59 million. The re lated irrigation and power networks, also being built with West German financial aid, will cost an additional $4-2 million. The great Dez Dam, the third dam project, was com pleted late in 1962. This multipurpose dam on the Dez Ri ver generates electric power, irrigates productive agri cultural areas, and controls floods in the Khuzestan prov ince. Figure 5 shows the location of the Dam, power IR A N DEZ RIVER PROJECT LO CATION OF DAM, POWER F A C IL IT IE S AND IRRIGATION AREA DEZ DAM DEZfUL P ro p o s e d 3 3 KV L in e s P r o p o s e d 2 2 0 KV L in e IRRIGATION AREA**j^>‘ In te r n a tio n a l B o u n d a ry EXISTING CONSORTIUM ^-T H E R M A L PLANT ABADAN GULF PERSIAN 103 Source: International Bank for Reconstruction and Development, "$72 Million Loan to Iran," Press Release No, 388 (Washington, D. C,: IBRD, June, 195977 P» 2. 104 facilities, and irrigation areas, Khuzestan, in southwestern Iran, contains most of the country’s oil fields. In this province at Abadan, one of the world's largest oil refineries is located. It tsras also once a highly productive agricultural area and because of its many river valleys holds great possibili ties for future development. In the area of the Dez Dam, there is a population of approximately 150,000 whose chief livelihood is agri culture. Before the completion of the Dam, these people were engaged partly in dry farming and partly in run-of- the-river irrigation farming. Now the fertility of the soils, depleted from centuries of cultivation, is being restored; and the waters of its rivers, controlled and regulated, provide irrigation for a much wider expanse of land. The region also has good road and rail connections with Tehran and the Persian Gulf ports. This advantageous factor will facilitate the marketing of agricultural pro duce. Just below the dam, an underground powerhouse has been built and installed initially with two 65,000-kxlo- watt generating units. A 104-mile high volt transmission line runs from the dam site to Ahwas to serve the areas of Ahwas and the Persian Gulf towns of Khorramshahr and Aba dan; secondary transmission lines were built to serve the 105 towns of Dezful, Andimeshk, and Shush. The distribution facilities of these towns have also been rehabilitated and expanded. The total cost of the Dez Dam (excluding the power distribution facilities) amounted to the equivalent of #85 million. The means by which the construction of thd dam was financed will be reserved for the analysis of the fis cal policy aspects of the development plans. IIo FISCAL POLICY ASPECTS OP THE DEVELOPMENT PLANS The fiscal policy aspects of the development pro grams can be discussed in the light of sources and uses of funds. The funds for the development programs have been obtained through the allocation of a portion of Iran’s oil revenues and domestic and foreign borrowing. This indi cates that tax revenues have had no part in the develop ment budget. Allocation of oil revenues under the Second Plan Article 8 of the Second Plan Act of 1955 states that total financial resources for development expendi- Q tures shall be provided from the oil revenues.7 According ^"Second Seven-Year Development Plan of Iran," Bank: Melli Iran Bulletin (Tehran: Bank Melli Iran Press, May-June, 1956), PP» 192-202« 106 to the Act, the oil revenues were to be divided among the Ministry of Finance, the National Iranian Oil Company, and the Plan Organization in the following way: a) The National Iranian Oil Company will place at the disposal of the Ministry of Finance any surplus remaining from the stated payments (income received by National Iranian Oil Company from the Trading Compa nies, 12.5 per cent of the posted prices) after having converted the authorized expenditures foreseen in that company*s charter. b) The Ministry of Finance will utilize the sur plus in question plus 10 per cent of the total oil income • » • for the maintenance and management of ex isting government non-profit establishments and the like. . . . c) The balance of the total oil income shall be paid to the Plan Organization for plan operations.10 The Act also stated that in case total oil reve nues exceeded $144 million in 1956, and $188 million in each of the years 1957 and 1958, the surplus would be placed at the disposal of the Ministry of Finance in addi tion to the stated allocation.'*''*' Since, in the first three years of the period, ex pected oil income was not sufficient for the estimated to tal expenditures of the National Iranian Oil Company, the Ministry of Finance, and the Plan Organization, the Act authorized the Plan Organization to secure up to $240 mil lion loans from domestic and foreign institutions. These loans were to be paid off from the allocated oil revenues 1QIbid., p. 196. i:LIbid.. p. 197. 107 12 to the Organization by the end of the Plan period. Prom the total original allocation of #924062 mil lion for development programs, #650.72 million were sched uled for year-to-year expenditures in the following manner (in millions of dollars: for 1955, 11.88; 1956, 85*80; 1957, 162.09; 1958, 146.90; 1959, 104.72; I960, 67*68; 1961, 50*45; and 1962, 21.22. There are no indications in the Act of 1955 as to when the balance of #275*90 million (the difference be tween the original allocation of #924.62 million and the total of all year-to-year expenditures of #650.72 million) was to be spent by the Plan Organization. Table 26 shows the allocation of oil revenues ac cording to the Second Plan Act. The Plan Organization was to receive 80 per cent of the oil revenues during the five years from 1959 to 1965* The actual division of the oil revenues, however, called for #855 million, or 46 per cent of the total for the Plan Organization during the entire seven years. Reasons for this change are clear. On the one hand, actual oil revenues were below the originally esti mated figure and, on the other hand, the share of the Min istry of Pinance; that is, the share of the nondevelop ment administrative institutions, mounted constantly and 12Ibid., p. 198. 108 TABLE 26a ALLOCATION OF TOTAL DIRECT REVENUES ACCORDING TO THE SECOND PLAN ACT (Millions of Dollars) Total Direct Oil Revenue Plan Organization For the Year Ending March Amount Amount Per Cent 1955 92.2 23.5b 25.4 1956 140# 5 72.6 51.7 1957 207.8 100.3 48.2 1958 244.9 148 o4c 60.5 1959 258.7 207.0 80.0 I960 285.0 228.0 80.0 1961 290.9 232.7 80.0 1962 166.0 132.8 80.0 Totals 1,686.0 1,145.3 67 o9 aSource: Bank Markazi Iran, Annual Report. 1341 (Tehran: Bank Melli Press, 134-2), p. 36. v The last six months of the year. cThe first six months of the yearD 109 absorbed the funds which otherwise would have been allo cated to the development projects. The Second Plan expenditures.--The Second Plan called for an expenditure of $933 million divided among four general areas: agriculture (26 per cent); communica tions (33 per cent); industries and mines (51 per cent); and social affairs (26 per cent). Also, as originally planned, $117 million would be allocated from Iran's share of oil profits to carry out this expenditure sched- ule.1? During the Plan period, however, actual total ex- penditures of the Plan Organization reached about $1,215*1 million. Had it not been for the incomplete projects of the Second Plan which were carried over to the Third Plan, the program expenditures would have been exceeded by more than $100 million. Table 27 summarizes the receipts and expenditures during the Second Plan* According to the revised Plan, the above outlay of $1,215.1 million was divided into seven categories: agriculture (21.7 per cent); transport and communications (39*6 per cent); industry and mines (8.7 per cent); and 14- social affairs and regional development (14-.1 per cent). The data on expenditures of the Plan Organization during 13Ibid., p. 199* 14Ibid.. p. 202. 110 TABLE 27a RECEIPTS 0E OIL REVENUES AND TOTAL EXPENDITURES BY THE PLAN ORGANIZATION DURING THE SECOND PLAN (Millions of Dollars) Year Ending March Scheduled Expenditures Actual Expenditures Receipts of Oil Revenues Balance 1955b 51.2 32.4 23.5 8.9 1956 97.7 101 o0 72.6 28.4 1957 147.0 152.8 100.5 52.5 1958 155.6 164.9 103.6 61.3 1959° 157.2 191.7 125.9 65.8 I960 165.1 208.0 141 o 9 66.1 1961 165.7 225.6 154.0 101.6 1962d 78.8 108.7 86.3 22.4 Totals 998.3 1,215.1 808.1 407.0 Compiled from: Plan Organization, Budget Bureau, Statement of Plan Organization Disbursements (Tehran: June, 1962’ )# Data on the receipts of oil revenues are based on the source cited in Table 26. ^The last six months of the year. cProm 1959 to 1962, actual expenditures cover debt repayments including interest and service charges. a The first six months of the year. Ill the Second seven-years period, as shown in Table 28, rep resent the actual disbursements* External debt The difference between the receipts from oil and the total expenditures of the Plan Organization consti tutes the deficit which has been financed by international loans and domestic short-term credits. The sources of ex ternal borrowing have been the World Bank (the Interna tional Bank for Reconstruction and Development), the Dev elopment Loan Bund, the Export-Import Bank, the Interna tional Monetary Fund, and West Germany* Loans from the World Bank.— The World Bank made three major loans to the Plan Organization of Iran for carrying out the Second Plan Development program. They amounted to a total of 1189 million* In January, 1957* the World Bank made a loan equivalent to $75 million to Iran to provide short-term 15 financing required for Iran's Second Plan. ^ It was the Bank's first loan to Iran. The Bank of America, Irving Trust Company, and the Manufacturers Trust Company parti cipated in the loan without the World Bank's guarantee. The loan was made to enable Iran to proceed with programs ^International Bank for Reconstruction and Devel opment, $75 Million Loan to Iran," Press Release. No. 474 (Washington: IBRD, January 23* 1957)• 112 TABLE 28a PLAN ORGANIZATION EXPENDITURES DURING THE SECOND SEVEN YEAR PLAN (Millions of Dollars) Item Total 1955-1963 Per Cent Program Expenditures 998.3 100.0 Agriculture and irrigation 217.0 21.7 Transport and communications 394.6 39.6 Industries and mines 87.2 8.7 Social affairs 140.9 14.1 Regional development 158.6 15.9 Non-program expenditures 46.5 Debt repayments 170.3 Total 1,215.1 100.0 Source: Data on the expenditures of the Plan Organization are based on Plan Organization, Division of Economic Affairs, Review of the Second Seven Year Program of Iran (Tehran: March, I960). ^Includes interest and service charges. 113 and projects which otherwise had to be delayed until the later years of the Plan. The loan was for a term of less than six years. Semi-annual amortization payments com menced in September, 1959* and were scheduled to retire the loan by September, 1962. The rate of interest was 5 per cent, including the 1 per cent commission charged by the Bank. In Hay, 1959» the World Bank, with the participa tion of four private American banks (The Bank of America, the Chase Manhattan Bank, the Pirst National City Bank of New York, and the Irving Trust Company) made a loan equiv alent to $72 million to Iran for the construction and im- provement of roads included in the Second Plan. The Loan was the largest ever made by the Bank for a road project. It helped to finance the construction or reconstruction of about 1,550 miles of main roads in west ern and southern Iran, including the Trans-Iranian Highway from the Persian Gulf to the Caspian Sea; the improvement of a 270-mile road link that connected Shiraz Province with the Gulf ports of Khorramshahr and Bandar Shapur; and the planning and preliminary engineering of feeder roads in the principal agricultural areas and of main roads to be included in the Third Development Plan. 16 International Bank for Reconstruction and De velopment, '$72 Million Loan to Iran," Press Release, No. 588 (Washington: IBRD, May 29j 1959). 114 The loan was for a term of seventeen years at a rate of 6 per cent, including 1 per cent commission allo cated to the World Bank's reserve. Amortization began May 1, 1961. The World Bank also approved a loan equivalent to $42 million to Iran in February, I960, for the multipur pose project on the Dez River for electric power genera tion, irrigation, and flood control in Khuzestan Prov ince.^ The First National City Bank of New York and the Irving Trust Company participated in the loan without the World Bank1s guarantee. The loan is for a term of twenty-five years and bears interest of 6-1/4 per cent, including 1 per cent commission which is allocated to the Bank's special re serve. Amortization began August 1, 1964. Although the loan is a general obligation of Iran, arrangements have been made to service it from oil revenues especially set aside for this purpose. Loans from the United States Government and its agencies.— Early in 1961, the United States extended to Iran $41.2 million in loan assistance, consisting of an Export-Import Bank balance-of-payments loan of $15 million ^International Bank for Reconstruction and Dev elopment, "$42 Million Loan to Iran," Press Release. No. 629 (Washington: IBRD, February 19, i960)• 115 and $26,2 million from the Development Loan Fund (DLF), to facilitate continued construction of the important pri mary road network. The Development Loan Fund, supplement ing a previous loan of $25 million in 1959* was linked to procurement of materials and resources from United States sources, During I960, the United States Government, through the Development Loan Fund, had extended $47,50 million to the Plan Organization,^ With the help of advances against anticipated oil revenues, the Plan Organization was able to meet its cur rent expenses until October, 1961, when the government was again obliged to seek additional resources from abroad. Early in November, 1961, the United States agreed to pro vide assistance through a grant of $15 million, and long term loans of $12 million and $14 million, from the Dev elopment Loan Fund, Loans from West Germany,— In August, 1961, the Federal Republic of Germany agreed to loans of $12,5 mil lion toward costs of the dam which was being constructed on the Sefid Rud0 The Federal Republic of Germany also extended an additional $25*5 million for the related TJo S,, Department of Commerce, "Economic Devel opment in Iran," op, cit,, p, 4, 19 yPlan Organization, Division of Economic Affairs, Economic Statistics Handbook (Tehran: August, 1962). Stroup J1 ., Table II.-------- 116 network of irrigation and electrical power facilities of the project* These loans were in addition to Germany's previous loan of $4.30 million. The above loans from the three major sources were obtained by the Plan Organization during the period of seven years. Table 29 is a summary of the source and total external borrowing obtained by the Plan Organization. Ill* DEVELOPMENT PROBLEMS At the outset of the Second Plan, the Plan Organi zation was little more than an embryo. Since the Organi zation itself was responsible for implementation of many of the projects as well as their design and financing, this embryonic agency was faced with a huge task and com plicated problems* Even after it developed to its "full size," the Organization has not been prepared to tackle the various implementation problems* The problem of organization and management One important fact is that the supply of funds for development plans exceeds the institutional arrangements and organizational and managerial talents required to reap full reward from the resources that money can buy* The acquisition of these talents, which, in turn, requires time and experience, seems to be as important a goal to achieve as money. The above statement must be qualified to the 117 TABLE 29 SOURCE AND TOTAL OE FOREIGN LOANS OBTAINED BY THE PLAN ORGANIZATION IN THE PERIOD 1957-1961 (Millions of Dollars) Year Ending March Source Loan Purpose 1957 World Bank 75 To proceed with programs 1959 World Bank 72 Construction of road projects 1959 Development Loan 25 Procurement of materials from U. S. i960 World Bank 42 Construction of the Dez Dam I960 Development Loan Fund 47.50 General loan 1961 Export-Import 15 Balance of pay ment loan 1961 Development Loan Fund 26.20 Construction of road projects 1961 Development Loan Fund 12 To meet current expenses 1961 Development Loan Fund 14 To meet current expenses 1961 International Monetary Fund 17o50 Not available 1961 Germany 4.30 Construction of Sefid Dam 1961 Germany 12.50 Construction of Sefid Dam 1961 Germany 23.50 Irrigation and electric power facilities Totals 386.50 Sources: International Bank for Reconstruction and Development (World Bank), Press Release (Washington, D* C.: January, 1957* May, 1959* and February, I960); U. S., Department of Commerce, ’ ’ Economic Development in Iran, 1962," Overseas Business Reports (Washington, D. 0o: U. S. Government 'Printing 6ffice, March, 1963), pp. 3-4-. 118 extent that it is possible to import foreign technicians and managers. In Iran, this has been, and will continue to be done* But, such a solution to the problem, while resulting in considerable achievements in the short run, may create additional problems in the future. Imported technicians and managers cannot be con sidered the permanent source of supply of necessary skills in Iran. Such reliance on outsiders would thwart the dev elopmental process. Development projects would assume the status of being superimposed on the economy rather than being an essential part of it. Imported technicians, even those considered as trainers, perform their tasks for awhile, and then leave things in the hands of native Iran ians no better equipped than they were at the beginning* This is not to argue that foreign technicians are to. be avoided completely; rather, to f&rgue that if they are to continue in the development efforts, they must concentrate heavily on the training side of their work at the expense of operations. The problem of effective utilization of existing talent There is also the problem of effective utilization of available talent in Iran. The methods of placement are such that talent is not fully exploited, and there is only a very ineffective mechanism for channelling persons with specific talents into jobs that make use of those talents. 119 Iran also faces the unpleasant fact that many students who go abroad for training and advanced education, especially to the United States, do not return to their country to work. The problem of established routine industrial activity The growth of private industry has been largely in the form of plant expansion, or new plants built by indi viduals or concerns that already were operating similar plants; such as textiles, cement, sugar refining, leather, bricks, etc. There is little evidence that many com pletely new units owned or controlled by "new men" have come into existence during the recent years. Although these assertions rest on incomplete evi dence, they appear to be consistent with data presented in this chapter. This suggests that entrepreneurial and man agerial ability of the kind necessary to carry on the es tablished industrial routine is probably sufficient to utilize the private investable funds that are available. What apparently is lacking is the brand of entrepreneurial ability that results in new and tradition-breaking in dustrial activity. The failure of the system to generate a range of economic activity that at least suggests some thing other than the established routine is perhaps one of the major shortcomings in the private sector’s contribu tion to the Iranian development plans. 120 The problem of the present reform measures The recent economic and social reforms have re sulted in poor investment and depressed business condi tions in Iran* The reform programs, such as land reform, nationalization of forests, sale of shares in government- owned factories to finance land reform, and a profit- sharing plan for factory workers have already affected the course of the economy and will have a profound influence upon it in coming years* Since the enforcement of the re form may give present and prospective private investors serious pause, and thereby affect Iran's economic develop ment, a brief discussion of each reform measure seems per tinent to the problems of development* The land reform proRraau— The program, perhaps the most significant event of recent years in Iran, had its real start in the first month of 1962 when the Cabinet passed* and the Shah approved, a revised land reform bill* The new law restricted each landlord to one village, with the rest of the land going to the government for distribu tion among the peasants on the basis of the amount of land actually being worked by each at the time of the passage of the law. Landlords were to be reimbursed over a ten- year period while the peasants were to have fifteen years to pay for their land* The program moved forward with surprising rapidity and, although opposition developed 121 from landed and right-wing clerical forces, proved highly popular. In an unprecedented referendum held on January 26, 196$, Iranians were asked, among other proposals, to ap prove a sharp reduction in the one-village-per-landlord upper limit on land holdings and abolition of the prevail ing share-cropping system. Persons with holdings in ex cess of the stated limits could choose between selling the land to the government for distribution to the peasants, or leasing it to peasants for a thirty-year period on a renewable basis. All landowners \vere also to be required to mechanize their farms and work them with labor hired on a wage basis. The revised law is hailed by authorities as the final death of the landlord-serf regime. Financing the land reform program.— A new element was added to land reform in November, 196$, when a decree was ratified authorizing the sale of shares of government- owned factories in order to meet a part of the financing needs of the program. The government-owned sugar, tex tile, construction materials, cotton, silk, and chemical industries are to be run as a single joint stock company; all of the shares to be turned over to the Agricultural Bank by the Ministry of Industries and Mines. The Agricultural Bank is authorized to sell shares in the new corporation to landowners in exchange for land distribution payment vouchers. The Bank guarantees at 122 least a 6 per cent annual return on shares held by the landowners as long as the Bank is the majority share holder, up to a maximum of five years. Several government-owned factories are affected. They include sericulture, cotton cleaning, fruit canning, fruit drying, sugar refining, vegetable oil refining, cot ton textiles, glycerine and soap, refractory materials, and cement. hand reform and economic development.— The com plete implementation of the land reform program which began in March, 1964, has already presented difficult administrative and financial difficulties, causing an investment depression in agriculture. Since Iran's econ omy is basically agrarian, this drastic change though socially desirable has, and will have for a number of years to come, a dampening effect in the development of the economy of Iran. The land reform is justified on the grounds that it wipes out the feudal system of land holdings, a system whereby one Iranian "feudal lord" could own many villages. Prior to the land reform law, 46,000 out of an approximate 50,000 villages were privately owned; 1,600 owned by the PD Shah, 1,450 by the government, and 900 by the Mullahs. 20 Arnold Beichman, "Persian Perplexities," Spec tator (London: August 16, 1965)* CCXI, p. 194. 123 However, the planlessness with which the reform has been introduced is subject to criticism. The program ended a deplorable system which shackled sixteen million peasants, and thereby embarked upon a road from which there can be no turning back. What is missing is some thing, or someone, to replace the landlord who, however greedy he was, at least had to supply his serfs with cred it, seed, water, fertilizer, and mechanical power, and act as the marketing agency— if he were to make his profit. A few rural cooperatives have been established, but there are not enough of them to turn the peasant into an efficient producer; nor will there be enough coopera tives, without a massive educational campaign among the peasantry, plus a tremendous amount of financing. The government appears to have decided to slow down the pace of land distribution, but, having rushed into the reform programs without sufficient planning, it is now beginning to realize the shortage, both of funds and of trained 21 administrators. The question, therefore, is whether the peasant, lacking working capital— with a small number of coopera tives— will be able to keep up production. If he does, can he market the surplus? The answer is hardly positive. 21 Prom a correspondent in Tehran, "Persia De pressed," The Economist (London: August 24, 1963)* CCVIII, p. 659. 124- In many cases, if not the majority, the peasant will sim ply eat more and produce less, and production will fall accordingly. One, of course, should not generalize about what is taking place in the agricultural sector for the reform is still in its infancy. Yet, the distinct tendency for agricultural production to drop alarmingly, especially marketable surplus, cannot be overlooked. Table 30 indi cates the tendency for falling agricultural production, even before the reform became effective. Industrial profit sharing for workers.— A system of industrial profit sharing for workers has contributed to the general stagnancy of business conditions in the economy. It was first publicly announced in September, 1%2, and finally approved in January, 1963* Profit shar ing contracts were concluded between employers and workers in June, 1963 . The plan stipulates that workers can receive up to 20 per cent of the profits of factories in which they work. The plan law permits employers to use alternative methods of raising the income of workers, subject to the approval of a newly instituted labor commission. If nec essary, however, the commission has been empowered to as sess the amount of the workers1 share of net profits up to 125 TABLE 30 PALL IN AGRICULTURAL PRODUCTION IN IRAN (Thousands of Metric Tons) Agricultural LJ'ns’ i a a a . x v/uuv>P 1958 1959 I960 Wheat 5,050 2,659 2,590 Barley 1,280 1,087 684 Rice 670 550 651 Sugarbeet 805 720 588 Source: Jr'aul Johnson, "Trouble with Persia," New Statesman (London: September 20, 1963), LXVI, p. 351* 126 22 a maximum of 20 per cent. The plan is designed to foster economic stability and better labor-management relations, and to provide in centives for increased labor productivity through worker participation in industrial profits. When strictly in terpreted and implemented, however, it seems probable that the measure will discourage new local and foreign private investment in Iranian industry, thus hindering the speed of economic development, IV, CONCLUSION Economic development in Iran, during the Second and early part of the Third Plan period, has not been en couraging. With abundant oil revenues, sufficient ex ternal loans and aids, and foreign technical assistance, the Iranian economy could have achieved greater progress than that which its developmental record indicates. Very few underdeveloped nations in the world enjoy such gen erous financial sources. One way to evaluate Iran's economic progress dur ing the past seventeen years is to assume the absence of the ever-rising oil revenues and the United States foreign aids. It is doubtful whether the economy could have reached the present (however low) level of output and 22 U, S., Department of Commerce, "Economic Devel opments in Iran, 1962," op. cit.. p. 5* 12? employment without the aid of these sources* The produc tion of goods and services would not have been able to generate a sufficient purchasing power to cope with the material needs of the private and public sectors. The Iranian economy would have failed to make any progress, and would have gradually declined. The reason is not hard to understand. Iranian re sources are not only under-employed, but also attempt to provide for the unemployed and the huge number of unpro ductive salary earners in the government bureaucracy* All this leads to an unpleasant conclusion: the Iranian econ omy, despite long years of economic development, is not capable of providing better present living standards with out the constant injection of funds from oil revenues and foreign aid. Both oil revenues and foreign aid furnish foreign exchange for imported goods to make up for the de ficiency of the economy's output* This is not, by any means, to say that no economic development has taken place in Iran. On the contrary, progress has been remarkable. A fair judgment of recent economic developments requires a comparison of the Iranian economy prior to the establishment of the Plan Organiza tion and that of the present Iran. The argument, however, is whether the achievements are worth the time, efforts, and resources used for development. Based on the facts on hand, the conclusion is not encouraging. 128 It is true that one cannot, as the saying goes, expect overnight miracles in a country which has been im mobilized by unchanging backwardness for so long* Condi tions unfavorable to economic growth have been more numer ous and significant than the favorable ones. To overcome such barriers and achieve a desirable rate of progress re quires a painstaking struggle* One should expect, however, planned efforts aiming at specific targets and not a Mbits-and-piecesu approach. Furthermore, the goal of economic progress is expected to be given priority over non-developmental projects whose existence often contributes to the impairment of economic growth. Frequent changes of development plans after they have been put into operation, reduction of appropriated funds from the development budget to meet military ex penses, omission of useful projects from the program, and the like, are disappointing, A final comment on the encouraging side in Iran is unavoidable. The willingness of the Iranian people to withstand the price of progress, and their desire to help themselves, demand admiration. Despite the depressive effects of the recent social and economic reforms, the achievements of the development plans are hopeful signs for a better Iran in the future. CHAPTER V FISCAL POLICY FOR ECONOMIC GROWTH: SOURCES OF FUNDS There are few universally applicable fiscal or other public policies that may be applied in an underdev eloped country without adjustments in every situation. Iran, for example, has its own peculiar problems and in stitutional environment that make a broad policy generali zation inapplicable, and even dangerous. The task of the present chapter is to shed light on those fiscal policies which may, after adjustment to Iran's economic conditions, provide a sound basis for economic growth. More specifi cally, careful consideration is given here to tax, govern ment investment, and debt policies which may serve as a guideline in making growth policy decisions. It would be appropriate to treat the three in struments of fiscal policy in one chapter. This approach seems to conform to the overlapping nature of the tools< > Yet, for the sake of a thorough analysis, the instrument of growth expenditure (that is, the spending side of growth policy) will be discussed in the ensuing chapter. 129 150 I. THE ROLE OP GOVERNMENT IN PROMOTING ECONOMIC GROWTH The entire scheme of the present dissertation is to study the feasibility of using the financial powers of government to promote economic growth. The use of such powers entails direct intervention of government in the economy. Areas of government action Various general areas for government developmental action have been justified in this connection.^ First , government may establish new and expand existing markets. Second, government enterprise is necessary in those fields where profits are too low and/or the risks are too large to attract private enterprise. Third, government enter prise is justified in areas in which the results of public performance would be more satisfactory than those of pri vate performance. Fourth, government planned efforts are needed to promote external economies and bring about bal anced economic growth. Spengler has succinctly justified the growth pro moting role of the public sector: The government . . . offsets the lack of an ade quate entrepreneurial class by performing many of the Gerald M. Meier and Robert E. Baldwin, Economic Development (New York: John Wiley & Sons, Inc., I951 ?), p. 5^1♦ 131 functions of this class and facilitating the accom plishment of others through the use of appropriate monetary, fiscal and related policies.2 The extent of governmental economic activity Areas of governmental fiscal activity may receive common acceptance, especially when they are abstract gen eralities. Differences of opinion will arise, however, when it comes to adoption of specific policies in these areas. Some observers would restrict the role of govern ment to framework planning; others would extend the role to direct interference with the market mechanism and to some direct specific controls over private enterprise; still others would completely supplant the market mechan ism with central planning and control and have government enterprise replace the private entrepreneur» In its broadest outline, there are two different 7 . schools of thought. One group maintains that the obsta cles to development are so formidable and pervasive that they can be overcome only by an immediate and deliberate attempt of the State to industrialize the economy. The government, in order to achieve a high rate of capital 2 Joseph J. Spengler, "Economic Factors in the De velopment of Densely Populated Areas," Proceedings of the American Philosophical Society (February, 19^1), p. 4-4-♦ 5 "Tleier and Baldwin, op. cit., pp. 362-363. 132 formation, should engage in comprehensive programming and planning and assume most of the entrepreneurial activi ties. The components of this complete and immediate plan would be: (1) specific production "targets'’ representing increases in the quantitative production of desired goods; (2) a capital budget, comprising public investment pro jects; (3) a "human investment budget" covering government expenditures in education, manpower training, health, and the like; (4) regulatory measures governing the activities of private individuals, enterprises, and institutions, and guiding them towards the objectives included in the plan. The second school rejects this "all or nothing" approach. It advocates a gradual approach which places little emphasis on deliberate industrialization by the government. This approach limits the degree of specific planning, relies mainly on the market mechanism and pri vate efforts, and resolves development problems in a step- by-step fashion. The foregoing opposite views reveal that the size and nature of the role of an underdeveloped nation's gov ernment in the growth process constitute one of the most debated aspects of economic development. The question is complex, and is not susceptible to a simple answer. The circumstances of one nation may call for vigorous, wide spread, and persistent governmental action. In another, growth may best be achieved through major reliance upon 133 private enterprise and the price system. In Iran there is sufficient evidence to believe that the stage in which the more intensive program of forced and large-scale development was necessary to ini tiate development has come to an end. Now it is time to pursue a policy to maintain economic growth over the long run. The government must direct its developmental efforts to encourage industrial initiative, to confine its indus trial enterprises to schemes that private owners cannot undertake, and transfer them to the private sector through sales or other proper means as soon as private owners are capable of operating newly established industries. In Iran, the active role of the government in the economy is indispensable„ The need for government parti cipation in the economy is based on several grounds. 1. There is a need for large-scale improvements in health, education, sanitation, and training. All this would expand the production capacity of the Iranian human capital. 2. It seems required for the government to provide, along with an increase in human capacity, the necessary economic environment by investing in highways, power pro jects, irrigation, and the like. These measures provide external economies and, hence, raise rates of return to levels which will attract private investors. 3. Government initiative is also necessary in 134 industries which (a) offer opportunities for private en terprise, (b) represent new industries, the product of which would give birth to new wants and, thus, new supple mentary industries, and (c) introduce new techniques and know-how to Iranian enterprises. The author believes that the Iranian government should not permanently build, own, and operate industries in which there are opportunities for private enterprise. After a period, such industries should be sold or leased to private entrepreneurs. The merit of such operation lies in the fact that competition, together with motives for profit, leads to efficiency. The effort of the government should therefore be directed toward nurturing and developing the indigenous forces that are necessary to become self-generating and cumulative. Once these self-generating forces are cre ated, the government must relinquish its key role, assured that the private sector of the Iranian economy is capable of sustaining growth. II. GROWTH TAX POLICIES The idea of promoting economic growth by using tax instruments is not a new one. This thought goes back to Bentham who introduced the concept of forced saving into economic literature in 1804. In his essay, he argued that "forced saving" can be brought about by government 135 taxation to accelerate the growth of real wealth* He wrote; By taxes • • • government has it in its power to accelerate, to an unexpected degree- the augmentation of the mass of real wealth* By a proportionable sac rifice of present comfort, it may make any addition that it pleases to the mass of future wealth; that is, to the increase of comfort and security.4- Betham adds to this, however, a note of caution: But though it has it in its power to do this, it follows not that it ought to exercise this power to compel the community to make this sacrifice*5 A basic -problem Tax policy as an instrument to provide funds for productive investment by government faces a basic dilemma. On one hand, high levels of taxation are necessary to fi nance developmental programs and to mobilize for invest ment the private resources that might otherwise be dissi pated* On the other, the lower the taxes the greater will be the inducement to private investors to take the risks associated with investment in industrial and agricultural development.^ 4 Cited by Ragnar Nurkse, Problems of Capital Por- mation in Underdeveloped Countries (Oxford: Basil Black- weirri95£j, p . w r ------ ^Ibid. United Nations, Technical Assistance Administra tion, Taxes and Fiscal Policy in Under-Developed Countries (New York: ttni^ed Nations, 195^-) * PP© 1-16, — — — — — 156 The tax issue is further complicated by the fact that those taxes which are equitable and most effective in absorbing a large share of gains from economic development activities for further capital formation are the ones most 7 likely to affect the returns from private investment,f These taxes, which vary directly and rise progressively with the size of income, are believed to affect the risk taking and marginal effort of newly established firms. Furthermore, the motive to earn exorbitant profits, luxury living, and the implicit inequalities of income and wealth are necessary as stimulants to investment and human ef forts. Voluntary versus forced saving The use of taxation as an instrument of forced saving may have an adverse effect on incentive to provide voluntary saving. However, since the flow of voluntary saving is not considerable in most poor countries, the effect is not severe. The private incentive to save must, of course, be maintained, and even increased. Yet, the meager flow of saving in less developed nations raises the question as to whether voluntary saving can provide an adequate source for capital formation. Insufficient formation of productive capital in underdeveloped countries provides a strong reason that ^Ibid., p. 10. 137 voluntary saving cannot be considered as a reliable source upon which the formation of productive capital can be de pended. As Nurkse indicates: The appeal to spare the goose that lays the golden eggs is not very strong when the goose is not laying many eggs of any kind.a The structure of taxation In underdeveloped countries the structure of tax ation must be in accord with developmental fiscal policy. The idea of using taxation as a means of mitigating the inequality of wealth is desirable. Such measures, how ever, may not increase the proportion of national income devoted to capital formation. What types of taxation are most effective in maxi mizing productive investment? There is no complete agree ment among public finance experts on the desirability of any given measure. Nevertheless, the following tax in struments are widely recommended. Taxes on luxury.— An extensive agreement has been reached among experts in the tax field that full use should be made of tax measures which can seek out and im pound income that would otherwise be spent on lavish liv ing and luxury imports.'* Commodity taxes, in the form of ®Nurkse, op. cit., p. 145* Q 'United Nations, op, cit., p. 9* 138 high, import duties and excises on luxury items, are widely advocated. Personal income taxes with steeply progressive rates in the upper brackets are also favored as instru ments for tapping such incomes* Penalty taxes on speculative activities*— Taxes should also penalize the diversion of savings into land, buildings, inventories, and similar items held for specu lative gains or prestige purposes rather than productive use. Among the preventive tax instruments recommended are land value increment taxes, taxes on idle land, progres sive taxes on either net worth or real estate holdings, and either special capital gain taxes or inclusion of cap ital gains in part or in full, as taxable income Preferential tax treatment*— Special tax conces sions for private domestic and foreign investment have been suggested and used in some underdeveloped areas. Preferential tax treatment may be in the form of extensive tax concessions. In this case, new industrial undertak ings may be exempted from income tax for a certain per centage of the invested capital. Accelerated depreciation may also be allowed on new buildings, plant, and machin ery* Although preferential tax treatment does not enter 10Ibid*. p. 11 13.9 into the government's budget at any point, nevertheless, it is a disguised government expenditure* In effect, these allowances are subsidies granted in terms of re duced tax liabilities. Structural improvements and incentive devices.— In the field of business income taxation, several struc tural improvements and incentive devices are widely sup ported. The government may use the following measures to encourage business productive activity 1. Extensive carry-overs of net business losses in one year as offsets against net business gains in other years. This device may reduce, or even remove, the de terrent to investment that otherwise results from lack of opportunity to deduct business outlays in full from income subject to taxation. 2. Accelerated depreciation to permit a more rapid recapture of productive investment. In effect the in vestor, when this device is used, is given an interest- free loan from the government. 3. Preferential rates for reinvested business prof its, or alternatively, additional taxes on profits de clared as dividends. This measure recognizes such profits as a prime source of investment funds and seeks to dis courage their dissipation in consumption or their outflow 11Ibid., pp. 11-12 to foreign banka* 12 The tax-subsidy growth system, — A i^ore recent proposal calls for an added system of taxes and "rebates'1 (subsidies) to business firms in order to stimulate econ omic growth. According to this device, each year a new fixed-rate tax is applied to the percentage increase in a firm’s output in that year. In other words, the tax rate is constant, regardless of the percentage increases in a firm's output* At the same time, a subsidy (rebate) is imposed. The relative size of this subsidy varies direct ly with the percentage rate of growth in output* The significance of this system lies in the fact that it penalizes financially those firms whose output is below a target rate for economic growth, and rewards fi nancially any firm whose output increases above the de sired rate. The purpose of this plan, therefore, is to tie the incomes of private businesses to their contribu tions to economic growth. Application of growth tax policies to Iran It is important to note that the Iranian govern ment has not used any tax revenues in developing the econ omy. The major source of funds for development projects 12 Knorr Klaus and William J. Baumol, (eds.), What Price Economic Growth? (Englewood Cliffs, N. J.: Pren- tice-Hall, Inc. , l^SO) , pp. 34— 36. 141 during the last seventeen years has been revenues from the oil industry and foreign loans. The Iranian government has relied upon oil revenues to meet both principal and interest involved. Tax revenues, therefore, have been used to meet the ordinary administrative costs of the gov ernment. The means by which various development projects have been financed will be discussed in the next chapter. The problem.— The government's fiscal activity is characterized by deficit budgets. The causes of deficit financing in Iran must not be confused with those of eco nomically advanced countries in peacetime. Deficit finan cing in Iran is due to (1) the defective tax laws and tax administration coupled with the low morale of both tax payers and tax collectors, and (2) the excessive non- developmental government expenditures, most of which fall in the transfer payments category. Improvement of both sides of the budget is neces sary in order to bring government tax revenues and admin istrative expenditures into balance. It should be clear that even with drastic reforms in the two sides of the Iranian budget, one cannot consider the revenue side as a reliable source for financing productive capital forma tion. This can be expected only after a considerable per iod of time when, as a result of economic growth, the real national income is improved and the tax base is enlarged. The present issue, therefore, is not whether tax 142 revenues can afford any contribution to the formation of capital and an accelerated economic growth in Iran. Ra ther, the question is to improve the productivity of the tax system to cover ordinary government expenditures* If this is accomplished, the portion of the oil receipts which has been used to balance the ordinary budget can fi nance a supplemental budget for general economic develop ment. So long as the administrative budget is unbalanced, that is, so long as ordinary revenues do not cover ordi nary expenditures, it will be necessary to utilize oil revenues in order to defray current operating and unpro ductive expens es*^ Need for tax reform*— From the preceding state ment of the Iranian budgetary problem, it is evident that the tax system must be strengthened at once in order to provide income necessary to balance the ordinary budget, and to make oil revenues available.for investment to in crease the productivity of the economy, thereby stimulat ing economic growth* This cannot be accomplished without reform in the tax system* Recommendations of the Mills- paugh Mission in 1943, of the United Nations Mission in 1952, and of the United States Operation Mission in 1954 ^Philip E. Tylor, "Final Report to the Minister of Finance," United States Operation Mission to Iran (Teh ran : April 1, 1954-), p* I?* 143 to the Iranian government suggest that there are defective elements in the Iranian tax system. These defects can he found in (1) tax laws, (2) tax administration, and (3) in the morale of both taxpayers and tax collectors. Revision of the present tax laws.— Foreign tax ex perts believe that Iran needs a successful overall tax re form. They have recommended the following changes in the Iranian tax laws: 1. Changes in the income tax rates. According to the report of the United Nations Mission, the rate of income tax which is the same for salaries, wages, professional and commercial incomes should be raised. The report has called for a modification of the brackets, raising effec tive rates from 5 per cent to 6 per cent on the first tax able bracket, and from 26 per cent to 30 per cent on in come of 1 million rials. It has also recommended that salaries and wages of government employees, which are at present exempt, should be made taxable. 2. Taxation of companies. In the Iranian tax laws there is a provision according to which companies do not pay income tax when their profits are less than 5 per cent of paid-up capital. This provision should be repealed. The report suggests that companies pay an annual license fee calculated on 5 per cent of their paid-up capital, with a minimum fee of 10,000 rials. As for the bracket structure of taxation of companies, it has proposed that In effective rates be raised from 5 per cent on the first 75*000 rials to 30.5 per cent, and on the highest bracket from 800,000 rials to 1 million rials. 3. Taxation on small business and artisans. These groups are taxed on a ”forfeitaryn basis which provides for lump sum tax payments. This provision has given way to serious abuses. Instead of paying progressive income tax, the majority of businessmen have made successful ef forts to fall under this provision. It is said that in Tehran 90 per cent of the businessmen and of persons in liberal professions are taxed under this system. The Mis sion has recommended that the provision should be limited strictly to taxpayers with small incomes. Therefore, the maximum income taxable on a lump sum basis should be re duced from 118,000 rials to 64,000 rials. 4. Taxation on the basis of expenditures. In order to check fraud in the declaration of income, the following minimum incomes are assumed to have been received by tax payers: three times the rental value of the principal residence and of secondary residences, if any, plus 150,000 rials for the first household employee and 30,000 rials for each additional one, plus 20,000 rials for each ordinary car and 50,000 rials for each luxury car. The Mission goes even further to include similar expenditures made by other members of the family living with the 145 14 taxpayer during the taxable year, 5. Tax on income from urban property. The main de fect of the tax on income from urban property lies in the tax base, as rents are greatly understated. To prevent this, abnormally low rent income should be replaced by a percentage of the value of the property as established for the capital levy. It has also been recommended that rent from owner-occupied buildings become taxable. 6. Tax on income from cultivated land. The recent land reform, whereby the ownership of land has been trans ferred to peasants, has made the imposition of any tax on income from cultivated land difficult and unstable. On the other hand, the establishment of a cadaster (a public record of the extent, value, and ownership) of immovable property has made it much simpler than before the reform. Once peasants begin to enjoy stable income, the Mission's proposal of a progressive tax on incomes from cultivated land can be established with little difficulty. 7. Tax on income from contracts. Income from 14 The Mission has overlooked serious problems in volved in the enforcement of tax on household employees. In tne first place, it is not always possible to find out such employment. In the second place, household employees may work during the day only in the taxpayer's house. In the third place, in Iran, employment of a maid and/or a servant in the American standard is costless. All it re quires is to provide meals for them (often leftover foods) and seldom an insignificant amount of monthly salary. Im position of such tax would prevent the employment of maids and servants altogether. 146 construction, transport, and certain other contracts above 25,000 rials which are otherwise liable to the progressive income tax should become taxable under the latter. In such cases the Mission has felt credit should be given for the tax on contracts. 8. Death duties. It is argued that there are two ma jor weaknesses in the system of death duties in Iran: in adequate progressivity of the rate, and the existence of certain loopholes in the law. To eliminate these weak nesses, a modification of the bracket system is favored in order to increase the progressivity of the rates. Suffi cient control and elimination of the loopholes have also been proposed. Administrative reforms.— In its final report to the Iranian Minister of Finance, the United States Opera tion Mission stated: It has become increasingly apparent as this tax study has progressed that the fundamental weakness of internal revenue taxation lies in its administra tion. 15 Indeed, one cannot expect the success of any tax reform so long as the tax administration is too inefficient and un reliable. The best tax laws fail to produce revenues if the administration of such laws is in itself faulty. ^Philip E. Taylor, "Pinal Report to the Minister of Pinance," United States Operation Mission to Iran (Teh ran : July 25, 1954), p. 6. 147 Professor Taylor, a tax specialist in the United States Operation Mission to Iran in 1954, has portrayed the tax administration in Iran, In fact, his description of the tax administration is very much applicable through out government. He states that in the tax departments many executives and employees regard their positions as largely honorary. "The administrative spirit ..." to occupy a position for which something useful should be done is missing. Appointment to a position is often con sidered as "... a reward for past service, of what- 16 ever character." It is no surprise that incompetence is found in high places and has penetrated down, all along the line. Here are some of the main features of administration throughout government, and of the tax administration in particular: 1. Administrators and employees require no special technical qualification. 2. Employees hold their jobs, irrespective of the quality of their performance. 5° There is no provision for correction of incompe tence, nor is there any reward or recognition for true competence. 4. The principal purpose of employees is to draw pay. 16Ibid,. p. 9o 148 5. High positions are held at the pleasure of influ ential figures. 6. Bribery prevails, especially in internal revenue departments, offices, and custom houses. 7. Departments are overstaffed. All this indicates that the very purpose of ad ministration, namely, to carry on a function honestly and efficiently, is not understood. This type of administra tion lacks organization and entails discrimination against and injustice to Iranian taxpayers. Improving the morale of the taxpayer and tax col lector 0— The revision of the tax laws and tax administra tion does not entail improvement in tax revenues so long as the morale of both taxpayers and tax collectors remain low0 The attitude of the taxpayer toward government and his understanding of the purpose of taxation are important factors which determine the degree of his cooperation. The same applies to the tax collector who Is not only a taxpayer, but also a tax-law enforcement agent. In Iran, the morale standards of both government agents and taxpayers are extremely low. The general pub lic has the lowest respect and a most dishonorable regard for government. Indeed, government is regarded as an im posed power separate from the people. It is considered as an institution which functions only for the benefit of the 149 governing officials. The hostility, as is the case in many countries of the world, is not so much between the poor and the rich; rather, it is between government and people. Common Iranian citizens may bestow thousands of rials on charities and religious activities. But, when it comes to payment of their taxes they employ every pos sible means to delay, evade, and avoid them. The reason for the hostile and dishonorable atti tudes of the Iranian people toward the government can be found in the failure of the government itself to show the taxpaying public its responsibility and capability to function in the interest of the citizens, American tax experts, while recognizing the tax payer's militant policy of noncooperation and their dis honorable attitude toward government, have sought ways to remedy the situation. They have proposed penalties for 17 those who violate the tax laws, ( They have also sug gested penalties for incompetence, and rewards for compe tence,^® While one cannot deny the necessity of introducing ^Philip E. Taylor, "Interim Report to the Minis ter of Finance," United States Operation Mission to Iran (Tehran: April 1, 1954), pp, 13-16, "I Q Philip E. Taylor, "Final Report to the Minister of Finance," Ibid.. (July 25, 1954), p, 9o 150 penalties and rewards in the Iranian tax system, the need for improvement of the relationship between the public and and the government must not be overlooked. This requires education of the taxpayer so that he may understand the purpose of taxation. On the other hand, government should understand the fact that administration is a responsibi lity, and not a privilege. Through a sincere pursuit of promoting the public welfare and efficient performance of its tasks and duties, government can win the confidence of the people. Application of tax devices to stimulate economic growth may produce positive results whenever tax laws, tax administration, and morale standards of both the public and tax collecting agencies, are improved. It is then that one can expect an effective tax system. III. GOVERNMENT BORROWING TO FINANCE GROWTH PROJECTS One of the fundamental problems of underdeveloped countries is a lack of sufficient sources of capital to finance development projects. Preliminary development projects are the investment-consuming type and require ex tensive and reliable sources of funds. The obvious solu tion to this problem is government borrowing. Since liv ing levels in underdeveloped areas are very low, neither voluntary nor compulsory loans can meet the high cost of "general" capital formation. Internal borrowing Sinee individuals are interested, not only in their current consumption but also in the size of their asset holdings, there is a case for both voluntary loans and forced loans as an alternative to taxational Voluntary loans#-—-This type of financing involves voluntary purchase of government securities by the public* The existence of a broad and receptive market for govern ment bonds seems necessary for a successful domestic fi nance* Government may be able to tap the savings of the public* Measures should be taken to increase the breadth of the goverhment security market. The various fields for placement of government bonds are commercial banks, finan cial institutions, central banks, insurance companies, as well as the public* The sale of government bonds to the sources above have different effects on the economy. When virtually all loan funds come directly cr indirectly from the central bank, the result is highly inflationary. Selling securities to the general public is more likely to have a neutralizing effect on the inflationary tendencies of development expenditures. This is especial ly true if the securities are bought with income that 19 Nurkse, op. cit•, p. 146. 152 would otherwise be spent, whether on consumers' goods or on capital goods. On the other hand, if the government offer is safe, liquid, and yields an attractive return, it merely diverts savings from other liquid assets. In such case, government borrowing has little anti-inflation ary effect. However, the inability of government to borrow from its own people leads government to obtain credits from central banks. Virtually, in all underdeveloped countries, central banks are the only sources from which governments can borrow.^ In order to make government securities attractive to potential savers, government should attach special 21 features to its obligations. Here are several main sug gestions : 1. To pattern maturities and interest rate as much as possible in accordance with current saving habits. 2. To provide a ready market, perhaps in the central bank, so that government securities can be easily liqui dated. 3. To devise an interest system in such a way that ^Norman S. Buchanan and Howard S. Ellis, Approaches to Economic Development (New York: The Twen tieth (Jentury Fund, 1955}» p. 308. 21 Benjamin Higgins, Economic Development (New York: ¥. W. Norton & Company, Inc., 1*259), pp. 487-4-89 • 153 the rate rises as the obligation approaches maturity. This device would induce bondholders to retain the secu rities rather than cash them. 4. To attach government securities to particular projects such as that of assisting land ownership of small farmers through government. This can be a useful method of financing the capital needed for Iranian peasants who recently have been granted the right of land ownership. 5. To authorize development agencies (for example, the Plan Organization in Iran) to derive funds from public subscription to government guaranteed obligations. Forced loans.— The forced loan as a device to raise funds for development projects may be in addition to taxation or in place of taxation. The former, excdpt as an anti-inflationary policy, would be deterrent to eco nomic activities of the private sector. The latter, in effect, is a method of forced saving in form as well as substance. The problem associated with forced loans is that of administration. Government can only force its employ ees to purchase the obligation by regularly deducting a part of their salaries. In Iran, for instance, there is no practical way to promulgate forced loans. Under the present internal revenue administration, the cost of ad ministrating this form of loan may even exceed the amount 154 of forced loans incurred. If this is the case, there is no reason why the burden of forced loans should fall upon government employees whose incomes are notoriously low. On the other hand, the general public, if given a choice, would rather make compulsory loans to the govern ment than choose forced saving. From the taxpayer's point of view, a tax payment (forced saving) means a loss be cause he receives no tangible asset in return for what he pays. Whereas, in the case of forced loans, he lends a part of his income to the government and obtains in ex change an interest yielding asset. Obstacles to internal debt in Iran.— Obstacles to government domestic borrowing in Iran are numerous. The seriousness of the obstacles raises doubt as to whether any attempt to finance a mao'or investment proo'ect through internal borrowing can be successful. The prospects of government borrowing in Iran are negligible. The Iranian people distrust the bonds of their own government for the following reasons: 1. Misgivings as to the stability of the government itself. 2. The inevitable consequence of past inflations, and the fear of new inflations. 3. The unpleasant experience of the public who pur chased government bonds in 1952-53 to support Dr. Mossa degh's move for nationalization of the oil industry. 155 Besides these catastrophies, there is no organized market for securities in Iran. One may also add to the list of obstacles above the fact that even if conditions were favorable for internal borrowing and an ox'ga±iize& market did exist in Iran, internal debt could not be suf ficient to finance huge developmental projects without re sorting to foreign loans. The estimate of domestic saving during 1956-1960, as shown in Table 51» verifies this statement. Despite all this, the importance of the sales of government securities on a voluntary basis must not be overlooked. Such operation should be considered as a necessary step in providing economic education for the public, in winning the public confidence in honesty, in tegrity, and reliability of government, and in developing and organizing a broad security market for government obligations. In the near future, when the Iranian economy enjoys a sustained growth, a broad market for government bonds will play an invaluable role in both monetary and fiscal policy. External borrowing Foreign extension of credit to underdeveloped na tions permits them to import foreign goods without having to export. In fact, the low saving potential of these countries can be offset by foreign loans. External loans, when used for "general capital" formation, will expand 156 TABLE 31 ESTIMATED LEVEL OE DOMESTIC SAVING IN 1956-1960 (Billions of Rials) Tear Ending March Domestic Saving Annual Increase 1956 8.8 1957 18.1 9.3 1958 23.6 5.5 1959 53.9 10.3 I960 42.8 8.9 1956-1960 127.4 8.5 Compiled from: The Plan Organization, Introduc tion to the Third Plan (Tehran: Plan Organization, Divi sion of Economic Affairs, June, 1961), p. 77. 157 productive capacity without curtailing the current stand ard of living. Provided foreign capital is channeled into sufficiently productive uses, loan payment can be made out of increases which occur in the country's growth program. The terms of trade and external debt,— An improve ment in the terms of trade may lighten the burden of ex ternal debt upon the government. The foreign exchange, which becomes available to the country as a result of its improved terms of trade, cannot provide for a sufficient source of investment-consumibg development projects, Nevertheless, it can contribute to the gradual repayment of external loans0 This is only true where government fiscal and com mercial policy prevents an increase in foreign exchange to affect the domestic income flow and to lead to increased consumer spending on both home produced and imported goods. In other words, an improvement in the terms of trade will make no significant contribution to amortiza tion of the external debt unless the increment in export proceeds is used for this purpose. Evaluation of external borrowing.— The general statement above needs some elaboration. It is possible, to some extent, to substitute foreign loans for domestic saving so that the country's consumption remains constant. Externally financed government investment can also be a 158 substitute method of laying the foundation of a country's economic development in the form of social overhead capi- 22 tal and public services. Furthermore, external loan may leave the borrowing country free to use these resources in 23 accordance with an overall development program. ^ One must not forget, however, that if the inflow of foreign capital is accompanied by a relaxation of do mestic saving efforts, "there may be no change in the total rate of capital formation." ‘ Another problem may arise from the attraction of advanced living standards which tends to bring about international disequilibria. This "can seriously interfere not only with the harnessing of domestic saving potentials, but also with the use of external resources for economic development."2^ Vo CONCLUSION This chapter presented a brief analysis of the sources of funds to finance economic growth projects. The appraisal of the policies revealed that their applicabi lity requires (1) certain adjustment to various existing conditions in the Iranian economy, (2) improvement in the field of public administration, and (3) betterment of gov ernment-public relations. 22 23 Nurkse, 0£. cit., p. 91. -'Ibid. 24Ibid.. Po 92. 2^Ibid., p. 95. 159 Efforts of the Iranian fiscal authority must be directed to the improvement of present tax laws, tax ad ministration, and the morale of both taxpayers and tax collectors* This is a necessary step in raising tax reve nues to finance at least government non-developmental ex penditures. Consequently, the fraction of oil revenues now appropriated to ordinary expenditures will be released for growth investment projects. This, in turn, as a re sult of a rise in per capita income, will contribute to the broadening of the tax base in the future. One may wonder, however, whether the annual flow of oil revenues would be sufficient to meet growth pro moting expenditures. It seems obvious that a year-to-year allocation of the stream of oil revenues as they are pro duced to the formation of physical and human capital can not be large enough to•finance huge developmental expendi tures. This concept leads to an important conclusion: government must resort to borrowing to finance growth pro moting projects, and use oil revenues to repay its debt. In the future, when levels of employment and income rise and public debt is completely retired, the oil revenues can be used directly for further growth projects. The source for such large deficit financing cannot be internal. This is because the size of the aggregate savings is small. Moreover, the general public distrusts the government, There is, therefore, a strong case for external borrowing as a solution to the problem of deficit growth expenditures in Iran, Being aware of this fact, the Iran ian government has selected the latter alternative. As shown earlier, The World Bank, the Development Fund, the United States Export-Import Bank, and West Germany have extended loans and credits to Iran for various develop ment projects. CHAPTER VI GROWTH EXPENDITURE POLICIES The soundness of expenditure policies for economic growth depends, among other things, on the meaning or ob jective implied in the term "growth." Economic growth was defined earlier as a sustained rise in per capita output, and it is only within this definition that some of the in vestment expenditure policies to be considered can be applied. The most central phenomenon of all growth theories is increase in investment though their differences lie in relative emphasis. Prom the body of classical economics, one gathers a general impression that the mainspring of economic progress is the slow but steady accretion of cap ital through individual parsimony and thrift. Schumpeter thought that the innovating entrepreneur was the primer of economic growth, Other economists have stressed the gain in productivity, technical knowledge, and motivation springing from international trade and finance. This study, while it does not necessarily ignore or deny the importance of all these forces, lays emphasis upon public investment expenditures in those areas which, 161 162 as a result of the investment process, contribute directly and indirectly to the promotion of the Iranian economy and place favorable short-run and long-run impacts upon the level of income and employment. Since Iran, through the private sector and the Plan Organization, has inaugurated such basic industries as textile, cement, food and raw material processing, su gar, and certain essential chemicals and mining, and has constructed multipurpose water dams, no emphasis will be placed on industrial development. The author believes that the cause of the present slow rate of industrial progress is not insufficiency of investment in industries; rather, it is the backwardness of other spheres which hin ders industrial growth. Indeed, it might even be danger ous to advocate heavy concentration on industrialization of the Iranian economy before promoting such areas as agriculture, transportation, and education. Without mentioning non-economic impediments to Iran's economic growth, this study would not be complete. Attempts, therefore, will be made to bring to the fore certain social, political, and administrative obstacles which, if not removed, tend to hamper the effectiveness of growth investment expenditures. I. ALLOCATION OP GOVERNMENT INVESTMENT EXPENDITURES The problem of suitable allocation of capital to 163 particular development projects is as important as the problem of securing sources of capital. Therefore, the question of increasing productive resources involves not only the matter of availability of capital as discussed in the preceding chapter, but also the allocation of capital to its most productive uses. Like nearly all economic problems, the problem of economic growth is an effort in managing and administering scarce resources. Such man agement pertains not merely to the unpleasant endeavor in acquiring capital, but to the equally painful denial of capital to particular uses in order to achieve higher pro ductivity elsewhere. The scope of the expenditure policies to be con sidered shortly covers public expenditure measures di rected to the formation of both physical and human capi tal. With regard to physical capital, however, it in cludes only (a) improvements in agriculture, and (b) de velopment of transport facilities. On the human side of capital formation, measures to increase the efficiency and quality of workers will be elaborated. Promotion of agriculture Agriculture in Iran is rightly the industry to which most attention must be given by the government. The population of Iran is predominantly agricultura. Over 60 per cent of the population derive their livelihood from agriculture, but they produce less than 40 per cent of the 164 gross national product. In general, the soil in Iran is poor. There is usually insufficient water, but there is plenty of sun shine. Therefore, if modern methods of cultivation can be introduced, if existing irrigation methods can be improved and extended, and if the right crops are sown, there should be room for pronounced improvement in agricultural output and productivity. Solution of the water problem and improvements in the present method of cultivation, however, do not guar antee agricultural contribution to the overall economic growth. The latter can be achieved by (1) increasing food supplies, (2) expanding agricultural exports, (3) trans ferring surplus manpower from agriculture to nonagricul- tural sectors, and (4) increasing rural real purchasing power as a stimulus to industrialization. Increasing food supplies.— Growth of demand for food is of major significance in Iran for several reasons. First, the high rate of population growth of over 2.5 per cent indicates that growth of demand from this source alone is substantial. One must not neglect taking into account the recent direct measures in reducing the death rates. Combining this factor with the slow decline in birth rates, a substantial rise in the rate of natural increase in Iran's population can be expected. Food supplies have already failed to expand in 165 pace with the growth of demand. This has resulted in a substantial rise in food prices, political discomfort, pressure on wage rates, and, consequently, adverse effects on industrial profits, investment, and economic growth. Furthermore, some 60 per cent of the total consumption ex penditures of Iranians is devoted to food alone. This means that the inflationary impact of a given percentage increase in food prices is much more severe in Iran than in a high income economy where 20 to 30 per cent of the total consumption expenditure is spent on food. Domestic shortage of food, one may argue, can be offset by expanded food imports. This is not, however, a satisfactory solution. As was urged in the previous chap ter, foreign exchange must be used for imports of machin ery and other requisites for agricultural and industrial development. Secondly, the income elasticity of demand for food in Iran is considerably higher than in high income nations and, therefore, as per capita income rises, a consider able impact on the demand for agricultural products is expected. Expansion of agricultural exports.— In an agrarian country, such as Iran, expansion of agricultural exports can be a promising means of increasing income and aug menting foreign exchange earnings. A profitable crop can frequently be added to an existing cropping system with a 166 moderate capital requirement. The immediate importance of enlarging agricultural exports is the fact that the intorduction or expansion of agricultural crops can play a strategic role in providing increased supplies of foreign exchange. The latter can provide a means to purchase mod ern agricultural machinery and facilities as a substitute for primitive and worn-out tools and equipment now in use. Transfer of surplus manpower from agriculture.— Side by side with the excess of labor in agriculture, there is an acute shortage of trained manpower in other sectors of the economy. Several eminent economists have advanced theoretical solutions to this problem; among them are Arthur Lewis and Rangar Nurkse. Arthur Lewis seeks a solution through a two-sector model (acrigultural and capital sectors) with its assump tion of a perfectly elastic supply of labor. Based on his model, Lewis believes that manpower for manufacturing and other rapidly expanding sectors can be drawn easily from agriculture.1 Nurkse*s solution, on the other hand, is based on ? the concept of disguised unemployment in agriculture. 1 Arthur W. Lewis, "Economic Development with Un limited Supply of Labor," Manchester School, XXII (May, 1954), pp. 139-191o 2 Ragnar Nurkse, Problems of Capital Formation in Underdeveloped Countries (Oxford: Basil blackweli, 1953), pp. 31-56. 167 He points out that even without changes in technical methods, a large part of the population engaged in agri culture could he removed without reducing agricultural output. This statement is a portrayal of Iran's agricul tural sector where every peasant (now called farmer,) re gardless of age and sex seems to be doing something. Yet, a number of them contribute virtually nothing to output and subsist on their family's real share of income. Uurkse proposes that the surplus people should be taken off the land and be employed on capital projects such as irrigation, drainage, roads, railways, houses, factories, training schemes, and so on. To finance food and tools required for these various development projects, he believes that the means of livelihood for peasants, while furnishing the human part of the investment pro jects, must be from the same farm produce as before. As for tools, capital goods can be acquired either from abroad in exchange for current exports, or through ex- teraal borrowing* Increasing rural real purchasing power as a stim- lL ulus to industrialization. — A rise in rural purchasing ^The concept of disguised unemployment is very well applied to the Iranian government bureaucracy and business monopolies* ^Bruce E. Johnston and John W. Mellor, "The Role of Agriculture in Economic Development," American Economic 168 power can be a valuable stimulus to industrial growth. In Iran where the rural sector, comprising 60 per cent of the population, is too poor to buy any factory products, manu facturing goods cannot find a sufficient market. Unfor tunately, this problem is not understood in Iran. One important step in expanding the market for manufacturing goods is to increase rural cash income. The size of the market, that is, the volume of consumer demand, is perti nent to investment decisions in industries and justifies the construction of new firms. Agricultural development policies.— The basic re quirement of any agricultural development program is the creation of an environment in which individual peasants, or farmers, are able to recognize the need for changes and to realize the possibility of personal gain from techno logical improvements. Without execution of an effective literacy and agricultural education program, one doubts whether the recent land reform in Iran can contribute to the modification of attitudes and behavior of Iran's tra dition-bound farmers. Along with an effective literacy program, forma tion of farm cooperatives can play a significant role in Review LI (September, 1961), pp. 566-591® This article was found very inspiring in organizing and substantiating the present discussion. 169 stimulating farmers’ interest and incentives. Initiation and search for alternatives are often offsprings of strong self-interest and incentives. Once the environment of the agricultural sector is improved, a number of measures must be taken to increase its productivity. 1. Conducting agricultural research. Iranian agri cultural authority must utilize the accumulated knowledge contributed by advanced nations in such fields as soil science, plant nutrition, genetics, and the like. This funation is expected to be performed by government agen cies. Since the climate of Iran varies considerably from one area to another, local experiment stations must be established in different areas where findings are to be applied. In conducting research, the utilization of prac tical knowledge and experience of local farmers must not be neglected. 2. Introducing improved seeds, fertilizer, and pesti cides. The importance of these complementary inputs is obvious in increasing agricultural output. Needless to say, natural fertilizer, presently applied to Iran’s agri culture has been contributing to the spread of dangerous diseases.^ $15 million chemical fertilizer plant is being built at Marvdasht, Pass, and expected to fertilize a to tal of 530,000 hectares of farm land. The plant will be gin operation by 1967o 170 3. Launching a program of agricultural education. All aspects of agricultural development policy hinge on developing a broad range of educational institutions. Agricultural experts and trained teachers in the field are badly needed to remove the bottlenect to efficient utili zation of labor and land resources that are abundant in Iran. 4. Providing institutional facilities to aid agri cultural productivity. Examples of such institutional facilities for serving agricultural production are credit and marketing agencies, farm cooperatives, and construc tion of feeder roads by surplus peasants fostered by ru ral governmental bodies. 5. Employing modem farm tools and equipment. In Iran, the question is not whether to choose capital- intensive, labor-saving techniques or labor-intensive, capital-saving techniques. This is because both labor and land are abundant in Iran though the present state of technology does not permit the utilization of all the cultivable land. Except in a very few villages where landlords, prior to the land reform, introduced modem farm equipment, the use of primitive tools and methods of cultivation is prevalent everywhere. There is a strong case, therefore, for introduction of modem simple tools and equipment. A sudden mechanization of Iran's farm land with heavy tractors and equipment at this stage is neither practical nor advisable. This must be done grad ually as prerequisite conditions develop. In all these live policy areas which require sub stantial long-run investment expenditures, government ini tiation is essential. Literacy, research, extension-edu- cation programs, and construction of feeder roads must be financed by the government; whereas, seeds, pesticides, fertilizer, equipment, and transport should be purchased by individual farmers with the aid of the government's extension of credit and loans. Improvements in road and transportation system In the words of Adam Smith: Good roads, canals, and navigable rivers, by di minishing the expense of carriage, put the remote parts of the country nearly on a level with those in the neighborhood of a town; they are, upon that ac count, the greatest of all improvements.6 Iran's transport problem.— Transport over much of the Iranian plateau is primitive. The shipment of farm produce to market is possible in many areas only by em ployment of horses, donkeys, and mules due to either a lack of roads or the absence of a better means of trans portation. In other cases, the heavy transport costs do 6 °Cited by Norman S. Buchanan and Howard S. Ellis, Approaches to Economic Development (New York: The Twenti erh Century iWd, 1955)» p<> 131* 172 not allow farmers to employ modern means even where modern means are available. Iran has succeeded in connecting only big cities , either by railways or highways, though a good part of the highways stretching across the country have not yet been asphalted. The major problem, however, is the lack of "feeder roads" to link villages to one another and connect them to the main highways. One consequence of this situ ation is that the shipment of agricultural products is delayed for months because of bad weather, poor facili ties, bad alternative roads, and inadequate capacity of the transport system to meet seasonal peaks of demand. Another consequence is the separation of pro ducer and consumer. Areas of surplus and scarcity exist in close proximity because transport fails to bridge the gap between producer and the market. For example, for Tehran or Abadan, products that can be available in other areas are often imported from abroad, thousands of miles away, because transport over much shorter distances is not possible. Nature of improvements.— In general, the nature of improvements in the road system and transport facilities differs according to whether the emphasis is upon the efficiency or the spread of the present network. The brief description of Iran’s transport problem suggests that improvements in both areas seem urgent. 175 The low degree of safety and reliability, the high costs of transport services', and the slow speed in the transport of goods on muddy and rocky highways demonstrate the inefficiency of existing transportation and the need for improvements in Iran's roads and transport facilities. Besides the question of efficiency in terms of speed, cost, and reliability, there is also a pressing need for the spread of the prevailing road system to link isolated villages and towns presently dependent for their substance upon the immediately adjacent countryside. Importance of transport improvements.— The primary effects of an improved transport system upon Iran's econ omic growth are threefold: 1. Such improvements extend the areas over which pro ductive resources can be utilized in production. For ex ample , cultivable land can become usable because other factors of production can, hence, be combined with it, and because its product can move to market. Worded dif ferently, improved transport widens the market and broad ens the area over which specialization is possible. The consequences are the exploitation of absolute advantages of each locality, a rise in productivity, and hence, an increase in total output* 2. Improvements in transport facilities and construc tion of new roads stimulate economic growth. Besides the 174 fact that road construction projects require government investment, and investment expenditures entail both a rise in the level of income and employment and formation of capital stock, they also result in changing the country's markets from a host of isolated centers of trading to a complex of closely interconnected markets. The signifi cance of the latter can be explained in terms of the pos sible appreciable change, either on the side of supply or that of demand, spreading its effects over the whole econ omy through the linkage of prices. 3. Ease of transport would bring new ideas and methods of production to local producers who have been bound to traditional and outmoded techniques. Local pro ducers, because of low prices of identical goods else where, would have to improve their method, or go out of business. Government transport policy.— The urgency for ade quate transport facilities and the contribution of an im proved network to economic growth in Iran emphasize the need for a sound transport policy. Government expendi tures in transport and road construction must be an end less process. This is because gross public investment should always exceed allowances for depreciation and main tenance. The difference constitutes a continuous net addition to the capital stock of the country. This net addition to Iran's roads and transport facilities would 175 serve two basic purposes: (a) it would cope with a rising demand for more and better transportation, and (b) it would take the initiative in economic growth* In relation to the second point, Iran spends the entire amount of available capital for replacements and additional capacity to meet demands that already exist* Although this augments the nation's stock of capital, it does not, however, contribute to such transport invest ment needed to promote new economic activities* Transport investment, merely to accomodate the existing demands, should not divert attention from the fact that transport is also an important key to economic growth. Advancement in the quality of labor : Technological knowledge and skills form the com munity's 'immaterial' equipment without which physical capital cannot be productively employed. Without this immaterial equipment, or human capital, physical capi tal would not be a means of production but 'simply raw materials,' somewhat deranged and impaired through having been given the form which now makes them 'capi tal goods«'7 Problems regarding human capital formation in Iran.— Poor quality of human capital constitutes one of the major problems of economic growth in Iran. For a long ^These are the words of Yeblen, found in his arti cle "On the Nature of Capital," The Place of Science in Modern Civilization (Viking Press^, 1932), pp. 325-34-5• This interesting passage is cited by Richard B. Goode in "Adding to stock of Physical and Human Capital," American Economic Review, XLIX (May, 1959) * P» 14-9* 176 period of time, Iranian authorities placed a heavier em phasis on acquisition of tangible symbols of the advanced country’s success than upon the intangibles. The latter have, indeed, been the true foundation of Western prog ress. The most important of these intangibles include education, skills, health, aptitudes, and attitudes, all of which have contributed to the general productivity of the Western population* Employment of modern machinery seems essential for economic growth, but advancement in human capital is re quired for the successful use of modern equipment. As Richard Goode of the International Monetary Fund indi cates, the most advanced physical capital plant and equip ment has little economic significance if prerequisite con- O ditions do not exist. In relation to human capital formation, Iran has been facing several problems. Because of their negative effect upon improvements in the quality of Iran's working population, the government is expected to give these prob lems serious consideration. 1. Illiteracy of a large portion of the labor popu lation. Presently, literacy among those of ten years of age and over is about 10 to 15 per cent. 2. Out-of-date methods of education. One defect of 8Ibid., p. 149. 177 the system is that students are required to take all courses of instruction. This is true both at high school and the university levels. In other words, there are no optional courses from which the students may choose* At the pre-college or university level, candidates are given a choice of major fields. Once the major is selected, a yearly curriculum for the required number of years will be assigned to all students in the field. Another defective element in the system is that the failure of a student in one single course in a given educational year fails the student automatically in all the courses of instruction in that year. However, if his mark for the course is above failing and below the passing mark, the student is given a chance to prepare himself for another examination on that course during the following summer. He will pass all the courses of instruction if he obtains a passing mark on that very course, provided his total average point for all courses is satisfactory. Still another defective feature of the system is its formality, and its failure to deal with the problems of day-to-day living. This means the system does not familiarize the student with, and prepare him for, the real world which he is about to enter. 3. People's distrust in foreign technicians. In its struggle to solve the problem of technician shortage, Iran has accepted the services of foreign technicians. On the 178 economic side, imported technicians often lack perception of the Iranian economy, good judgment, and flexibility to see Iran's need for adopting advanced technology to the very different resources and institutional arrangements. Politically, bilateral technical assistance pre sently in practice in Iran, has aroused suspicion as to the motive and sincerity of the grantor nation. This un favorable attitude has developed from two phenomena; first, the past bitter experience of the Iranian people with the British who, for over fifty years, manipulated the nation's political affairs in their own favor. In this relation the following observation by the United Na tions is well applied to Iran: The exploitation and abuses often associated with development in the past have left a legacy of dis trust which, in some cases, hampers the introduction of new techniques into the less advanced countries.9 Secondly, the United States' $1 billion military and economic aid to Iran during the last decade has served to identify the United States with the present regime, to gether with responsibility for what the regime has done, or failed to do. For this reason, the United States is distrusted, if not, indeed, thoroughly disliked by those who distrust the regime and its policies. ^United Nations, Technical Assistance for Economic Development, (New York: May, 194-9.)? E/1327* Add. 1, p. l£. 179 4, The continuous loss of Iranian students and grad uates to Europe and the United States. Of 14,000 stu- 10 dents who have left Iran to further their studies in Europe, and particularly in the United States, only a handful has returned. Even some of the graduates who do return to Iran soon find their way hack; abroad. Among the factors responsible for this tragic loss of valuable assets most needed in Iran are (a) existence in Iran of unfavorable political and social situations being far from those to which they have become gradually accustomed; (b) students' failure in their educational careers, leading to a loss of face; (c) involvement in love and marriage; (d) pure selfishness, by giving pri ority to personal comfort and enjoyment here in the land of plenty, security, and liberty rather than facing the difficult task of combating social, economic, and politi cal evils at home; (e) negligence on the part of the Iran ian government itself to adopt a firm and definite policy which would prevent this loss. 5. The great shortage of entrepreneurs. The prevail ing class of businessmen are typically merchants and traders who confine their activities to distribution and real estate speculation. Insufficiency of the type of 10 Translated from: Office of the Supervisor of Iranian Students, "Iranian Students in the United States," 1964 Report (Washington, D. G.: March, 1964), p. 2© 180 economically motivated businessmen who have the ability to organize the other factors of production for creation of economic goods and services has resulted in the restric tion of economic activities and the monopolization of the existing industries. This, in turn, has further impaired the development of new entrepreneurs. Increase in the class of entrepreneurs is also hampered by society's rec ognition of desirable social prestige in other non-econ- omic positions found more easily in political, military, and governmental spheres« Measures to improve Iran's human capital.— Educa tion is one of the factors most conducive to the develop ment of human capital. Human capital formation by means of education includes literacy, vocational and technical training, agricultural extension services, training in supervisory skills, and administrative and managerial ability. Public health also facilitates economic growth by improving the quality of the labor force. The first requirement is to abolish illiteracy and institute nationwide compulsory free education. These are, of course, long-run objectives. Efforts in this area must go beyond routine measures to increase the degree of literacy, for literacy is only a means to education in all areas of life. Erom the standpoint of achieving rapid economic growth, the general objective of education must 181 be that of spreading change throughout the country. The program and method of education must play the role of modifying the present sociocultural environment. It is important to note that Iran needs the type of educa tion program on the basis of which new knowledge and skills may be taught, the desirability of change recog nized, and the incentive for new ways stimulated. The second requirement is to meet the immediate needs of the country by directing efforts to increase vo cational education and specialized training in the most essential activities. One unfortunate problem in Iran is that graduation from secondary school marks a person as a member of the elite. He is inclined to disdain manual work. As long as this attitude prevails, there is little hope of making productive use of Iran's educated re sources . One way to break down this prejudice against man ual work among the young educated class is to emphasize specialization, technical training, and vocational skills at all levels, including the university. Rightfully, the prestige and honor should go to occupations now disliked by the educated Iranians and not to the "doing-nothing" positions in the government bureaucracy and military forces. The third measure is to obtain technical assist ance from the United Nations. According to the principles 182 that guide the United Nations and its specialized agen cies, in extending technical assistance Iran can benefit from (a) international teams to advise the government in connection with its growth projects; (b) facilities made available to the country for training of Iranian experts abroad, (c) the training program of local technicians within the country, (d) facilities designed to assist the government to obtain technical personnel, equipment, and supplies, and (e) the organization of such services as may be appropriated in the promotion of the economy. Two advantages of such multilateral approach, as compared to the present bilateral assistance, merit atten tion* Prom the political point of view, there cannot be any string attached to aid, tying the government closely to the grantor nation. Moreover, the international approach avoids the type of loans which makes technical assistance conditional upon purchases from the assisting nation. The fourth requirement calls for the development of businessmen with skills of organization and management. Without such individuals, it is practically impossible to give concreteness to the general objectives of a growth program. To develop the skills of management and the desire to take risks involved in organizing productive resources is probably the most important, and in the same time, the 183 most difficult task of the Iranian educational system. This is due to the fact that in Iran such impeding factors as small markets, limited wants, monopolies, and great possibilities of bankruptcy would promise little monetary rewards to those students who are more entrepreneurial in spirit and aptitude. Individuals with managerial talents must be found among students through appropriate aptitude tests, and developed in schools of public and business administra tion. When followed by on-the-job training programs, such devices may contribute to a substantial increase in the class of managers and entrepreneurs. As for the dissuading element of risk, the Iran ian government must perform an initiative task by finan cing risky but essential industries, the products of which would not only satisfy the consumers' demand but also stimulate and change their tastes and wants. Once they begin to operate, these industries must through sale or lease, be turned over to the private sector. Throughout this process, growing industries would absorb newly born managers and entrepreneurs. Needless to say, the development of administrative knowledge and managerial talents is also essential for the government sector, for economic growth policies should also be intelligently framed and efficiently executed. This important point will be touched upon again. 184 The fifth requirement necessitates revision of the present program of sending students abroad. The new pro gram should require more comprehensive tests in both lan guage and major fields of interest. However, inclusion of such provisions does not prevent Iranian students from residing permanently in foreign countries. With the co operation of foreign authorities and immigration and naturalization offices, this problem can be solved. If education is one obvious sphere in which the government must undertake positive policies, another is that of public health. Public health measures facilitate growth by improving the qualitative composition of the labor force. One must not forget, however, that govern ment can go as far as to provide the essential require ments of public health. These requirements include organ ization of sanitation corps, immunization programs, elimi nation of stagnant and polluted water, provision of safe water supplies and sewage disposals, slum clearance, and better housing. The public then should be able to under stand the meaning, importance, and impacts of all of these measures. It is again education which provides this un derstanding. III. NONECONOMIC IMPEDIMENTS TO GROWTH IN IRAN Purely economic considerations are not sufficient to explain the absence of economic growth. If problems of 185 growth, were those of an economic nature, the search for a solution could "be concentrated on the economic aspects of resource utilization. The implication is that if capital were made available and new techniques were introduced, productivity would increase and real incomes would rise. Social, cultural, and political factors, however, are in terwoven with the purely economic elements. One cannot, therefore, detach one part from the rest, even for analy tical purposes, without running the risk of misconcep tion. All this suggests that social and institutional elements must also undergo changes in the growth process. Socio-cultural barriers It is extremely difficult to compare recognized sociocultural values in Iran with those in Western na tions. Whatever may be the differences, these values are reflected in the present economic achievements. Basic conceptions and principles which characterize the Western nations, including the United States in particular, can be epitomized by ... the conceptions of citizenship, of the state and of government; the principles of private property, in dividual initiative and independence; the conviction that knowledge, education and learning are valuable in their own right and open to all rather than the pre scribed privilege of a small minority; the belief that creativeness and self-expression are among the highest manifestations of man as man.H ^Buchanan and Ellis, op. cit., pp. 76-77* 186 It would be quite unfair to state that the socio cultural characteristics of the Iranian community are in sharp contrast to these basic terms. On the contrary, almost all of the principles featuring the advanced na tions are found, if not to their fullest extent, in var ious segments of Iran. It is interesting to note that from the standpoint of materialistic civilization, certain cities of Iran match the capital cities of Europe. The broadmindedness of some of the educated Iranians and their conception of political and economic liberalism are also found above those of the average Europeans or Americans. These two instances do not, obviously, represent Iran as a whole. Iran, therefore, is suffering from extremism: extreme differences in wealth and poverty, in education and illiteracy, and in tribal life and up-to-date mode of living. There exist atheism and religionism, veiled women and ladies of the latest fashion, radical communism and monarchism* It is not the task of this study to analyze and examine these social constructs. Two points, however, seem worthy of attention: (a) extremism has negative and impeding effects on economic growth for its creation of a lack of harmony and great diversion in social and economic movements; and (b) extremism in Iran indicates the ease of adaptability of the Iranian people to changes toward any 187 direction. If the latter is true, it follows that the Iranian society can he guided toward desirable changes aiming at an appropriate economic destination where pros perity and social welfare can be achieved. Political and administrative barriers In Iran, the concepts and attitudes underlying government and administration are not conducive to effi cient planning and execution of economic growth programs* The concept of sovereignty in the American sense is alien. Such concepts do not constitute the foundation of the Iranian government. In the hierarchy of authority and administration, the officials and authorities are occupied primarily in maintaining and strengthening their own in terests, rather than using their efforts in the interest of the community. The prevalence of incompetence and corruption is another unfortunate feature of the Iranian government and public administration. Cuyler Young, a celebrated author ity on Iran's social, political, and economic affairs writes that the organized corruption of the alleged kind and degree in Iran is in the highest circles and involves colossal sums. In Iran, he states: . . . corruption on high and in large sums there un doubtedly is, but to prove it is not easy when the rot is widespread, especially in top circles. Yet one suspects that these more spectacular leakages in pub lic funds, large enough though they be, are not as 188 significant absolutely as they are relatively-— as symbol and example in lowering the tone of public morality and morale.12 The unpopularity of the present political and administrative pattern, together with the scandal of cor ruption, poses a serious problem in regard to the devel opment of a new, honest, and able cadre of public servants from the swelling reservoir of educated youth. Much of the credit for the recent economic progress must go to a group of competent young men in and out of government. Within the government, this cadre of dedicated technocrats has accomplished much when given opportunity and leader ship. Their education and competence propel them upward toward posts of political importance where they find them selves facing difficult tasks. One important task is to remove the corrupt and incompetent, and set up new government agencies. Such attempts have been less successful than one may expect be cause of obstructionist tactics of the old and powerful corrupt elements who will not stand the loss of their po sitions, interests, influence, and status. A relevant question is: why should not the "top," if sincere at will, enlist the capable educated group, (especially its leadership) in the task of the necessary 12 Cuyler T. Young, "Iran in Continuing Crisis," Foreign Affairs. XL (January, 1962), p. 283. 189 governmental and administrative reforms, and in the iden tification and exposure of the inefficient, inadequate, and immoral? The answer can be found in the fear of the "top" that such partnership with the enlightened youth might involve its own toppling. In the low circles of the government bureaucracy within the ministries and government agencies, similar problems have contributed to administrative inefficiency. While some ministries are badly understaffed, others are fat with the idle and incompetent. The ablest public servants work hard for long hours, but the majority does not. Many payrolls are padded with scores of "consult ants," or those "awaiting assignments," who draw half-pay and never appear. The latter is a situation which the agency or ministry prefers to incompetent presence and meddling. Referring to the prevalence of such a condition, Young recalls an agency of the Ministry of Health in which ... the deputy for administration, who jettisoned 70 such persons as approved by the Prime Minister, complained that he had no time to get on to the next category for surgery since a large part of his time went to telephone calls from cabinet and other high officials pleading for their friends and families.^5 Seventy per cent of the national budget is al- loted to payment of salaries of these employees and of 15Ibid., p. 283. 190 members of the armed forces. Salaries of the bureaucracy range from #15 to #40 a month. Since the minimum living costs in Tehran for a family of this general social level are at least #75 a month, ... a typical civil servant must do one of three things. He may try to have his schedule so arranged that he can take a second job, he may borrow at ruin ous rates of interest, or he may resort to corrupt practices to obtain funds.^ IVo CONCLUSION The main inference to be drawn from the foregoing is that the growth expenditure policy of the Iranian gov ernment must be directed to improve the aggregate output by means of additions to be productive capital stock of the country. This aim requires an increase in physical capital as well as human capital. The heaviest emphasis must be placed on develop ment projects in agriculture and transportation- and on improvements in the quality of the labor force. The main reason for such an emphasis on these three areas is that they play important roles in Iran's struggle for economic growth. The agrarian sector embraces the largest portion of the land and population. Effective government 14. Joseph M. Upton, The History of Modern Iran (Cambridge, Mass.: Howard University Press, 1961) , p. 142. 191 agricultural policy, as outlined in the preceding pages, can minimize demands of the agrarian sector upon resources needed for industrial development, and maximize its con tribution to general economic growth. Government investment expenditures in transporta tion would equally play a significant role in the process of economic growth. Improved transportation facilities will assist agricultural development, bring literacy to remote areas, facilitate sociocultural transformation, and speed changes in the attitudes and aptitudes of Iran*s tradition-bound farmers. In Iran, the need for literacy, skill, knowledge, energy, health, and adaptability of the population, and its perceptiveness and capacity to search for new economic opportunities seem more urgent than, the need for concen tration on the formation of physical capital. Promotion of human capital is essential for economic growth in the sense that it improves productive efficiency of the popu lation and breaks up the traditional economic and social molds through the impacts of technical skills, analytical abilities, scientific knowledge, and above all, innovation and entrepreneurship. The role of the Iranian government in adopting and executing these policies means that it will have to per form its functions efficiently and effectively. Being un suitable to the task of performing economic growth 192 function, the practices of government administration must undergo further reforms and changes* The notorious backwardness manifested in all three areas of agriculture, transportation, and the labor force has, and will have for some time to come, negative effects on the process of economic growth in Iran. One can expect great economic improvements in the future only if the sug gested investment policies are carried on, and carried on only by an honest, devoted, and efficient government. A sustained economic growth, which would guarantee a steady rise in per capita income anywhere near the level enjoyed by the Western nations, requires fundamental changes with out which this aim will never be materialized. CHAPTER VII SUMMARY AND CONCLUSIONS The central idea of this dissertation is based on the relation of government fiscal operations to the work ing of the national economy. The primary objective is to indicate the possibility of achieving sustained growth through an effective utilization of fiscal powers of the government; namely, revenue raising, borrowing, and spend ing. I. SUMMARY The topic is broken down into several significant elements. For the purpose of an orderly argument, these elements are arranged in such a manner as to be able to resolve the six following questions: First, does Iran's resource base have economic growth potential? Second, is the Iranian economic structure favorable and responsive to fiscal and other economic policy measures for raising the nation's per capita income to a level presently obtainable in the more advanced coun tries of the world? Third, what is the present level of Iran's national income and its rate of economic growth? Fourth, what has Iran accomplished in its struggle for 193 194 economic development, and has fiscal policy had any place in the overall government development policy? Fifth, how can fiscal policy play an effective role in promoting the Iranian economy? Sixth, and last, what are some of the important noneconomic obstacles to economic growth in Iran? Growth potential Iran has the advantage over most other economi cally backward countries of having a great source of oil. It also has other mineral resources, though relatively of less importance, such as iron, red oxide of iron, chro mite, copper, lead, zinc, and sulfur, as well as coal and gypsum. On the disadvantage side, it faces the same problems as the rest of the underdeveloped nations— en demic and desperate poverty, overwhelming illiteracy in the rural sector, small towns, and among the working pop ulation, poor health and insanitation. Iran has been forming its stock of social over head capital consisting of facilities such as transporta tion systems, communications, water supply, and sewerage. While industrial development is still in an early stage, noticeable progress has been made in recent years largely as a result of governmental activity. Apart from petro leum production and processing, major industries include cotton and woolen textiles, flour milling, sugar, build ing materials, tires and tubes, matches, fruit processing, 195 light engineering and metal fabrication, and tobacco. The serious problem facing Iran is the shortage of business and industrial-type individuals to speed the tempo of in dustrialization through innovation and efficiency. Agri culture is the largest and most retarded sector in the economy. Determination of Iran's growth rate From the findings of the Bank Markazi Iran, the first institution to compute Iran's national income and product in the American standard, an approximate real per capita income of $118 was estimated. Although this figure is only an average and does not represent the two extreme income brackets, yet, it offers a rough indication as to the position of Iran's per capita real income in the list of developing countries* Another significant point worthy of repetition is the growth of investment expenditure in the private sector during 1955-1959• The increase in investment, while attributed to such factors as abundant foreign exchange, easy credit, and the establishment of the Industrial and Mining Development Bank of Iran, demonstrates two signi ficant facts: (a) susceptibility of Iranian economy to inflation, and (b) the readiness of the private sector to invest when and where it finds opportunity. The former is a warning to public policy makers to avoid inflation by 196 using fiscal and monetary instruments, and the latter is a hopeful sign of the growth of the entrepreneurial popula tion. Authorities in the Plan Organization and the bank ing system insist that the economy is growing at a rate of 6 per cent a year. This assertion cannot be verified factually, nor is it evident in terms of a rise in the living standard of the Iranians. Indications are, how ever, that much of the government expenditure programs has been concentrated on the formation of social overhead capital. Iran's efforts in development The Iranian struggle for economic development de serves admiration. Although the achievements, when com pared with time and resources used, have been far short of expectation, nevertheless, its accomplishments claim su periority over those of some other developing nations. One thing is certain, however. The type of social overhead capital essential to break the so-called "vicious circle of poverty" has been formed through the efforts of the Plan Organization. At present, completion of multi purpose dams, installation of high voltage electric gen erators for industrial purposes, construction of highways, improvement in transport and communications, intensive and extensive expansion of industrial projects, and advance ment in the quality of human capital are in process under 197 the Third Development Plan and various Ministries. The completion of the Third Development programs is due in 1967. Fiscal policy considerations Two basic statements form the logic of "growth fiscal policy": (a) government is a powerful financial unit capable of securing a large amount of income from various sources and incurring expenditures for different purposes, and (b) fiscal policy deals with the planned effects of government spending, revenue raising, and bor rowing upon the working of the national economy. The concept of "growth fiscal policy" is not, therefore, a remote idea. It implies manipulation of its tools to stabilize the economy. It also implies stimula tion of short-run economic activity by affecting the level of effective demand, and operation of a long-run revenue- expenditure program aimed at transforming a backward econ omy into an advanced one. The latter, which involves changes in structure of the developing economy, is the very essence of this study. The logic of this thought is further strengthened by the author's belief in the indispensability of the role of the Iranian government in providing "social overhead capital," both as a direct instrument of economic develop ment and as a prerequisite to increased participation of private capital in the growth process. There are 198 investment projects which are not inherently attractive to private investment, yet they promise large social gains and make worthwhile contributions to economic growth. Although the Iranian government has, in effect, been using the instruments of fiscal policy by borrowing funds from abroad and spending them for development pro jects, nevertheless, in the sense of modern public fi nance, it has neither been conscious of the relationship of fiscal operations to the level of income and employment nor has it been deliberate in utilizing fiscal instru ments. It is important to know that fiscal policy, as a tool for economic growth, is premised on the assumption of a deliberate and positive government policy. Tax policies.— The government has not had any positive and deliberate tax policies during the entire development period. Studies by tax specialists in Iran in recent years reveal that the government has been facing serious problems in the field of taxation. These are the problems of tax administration, low morale of both the taxpayer and tax collector, small tax base as defined by the present tax laws, and an unfriendly attitude by the general public toward their government. Unless these problems are solved, an effective growth tax policy cannot be used. Among the several roles of tax instruments in promoting economic growth are direct incentives to induce investment, increased depreciation 199 allowances, reductions in taxes on reinvested earnings, direct tax concessions, tax abatement, and penalty taxes on speculative activities. Presently, such a sophisti cated tax policy is beyond Iran's tax system. Public debt policies.— The use of internal debt to finance growth projects suffers from shortcomings similar to those of taxation. The greatest hindrance to internal borrowing from the public is the absence of people's con fidence in the government due to political instability, unpopularity of the existing political and administrative systems, and above all, the failure of the government to honor its past debt incurred by Dr. Mossadegh's government to nationalize the oil industry. Since public lending to the government is voluntary, unlike the payment of taxes, the government must gain the people's confidence. This requires political and administrative reforms and popular election on all levels of the government. The government, however, can borrow from the cen tral bank and the Bank Melli Iran where the public and businesses deposit their savings. Prom the standpoint of economic stability, this alternative lacks the advantages of direct borrowing. External debt secured by oil revenues has played a significant part in materializing Iran's development plans. The World Bank, the International Monetary Funds, the Development Fund, the Export-Import Bank, and West 200 Germany have from time to time extended substantial loans to Iran. Again, poor administration of the loans and fre quent transfer of development loan funds to nondevelop- mental activities have led these institutions to require the Iranian government to submit in advance formal and comprehensive statements of the purposes for which loans are to be used. Expenditure policies.— Investment expenditures in education, agriculture, and transportation are necessary conditions precedent to economic growth in general, and to industrialization of the economy in particular. Rea sons for giving priorities to these spheres include: (a) their extensive backwardness as compared with other fields, (b) their potential of providing external econo mies, (c) their vital part in transforming the Iranian environment into a type more conducive to growth, and (d) their aids from the political point of view in speeding up the people's readiness to struggle for, and appreciate, the value of freedom and democracy. A program for the formation of human capital covers elimination of illiteracy, expansion of formal and informal education, development of vocational training, and enlargement of the scope of research and development. In the agrarian sector where some 80 per cent of Iran's population is scattered, illiteracy, primitiveness, and tradition have taken root. This sector surely deserves 201 serious attention. Thus far, the emphasis has been in improving the farmers’ fertilizer and seeds, but not his mind. A program for further improvements in transporta tion must also be included in the government's growth ex penditure policy. Improved transportation has already been contributing to the economy. It has been (a) in creasing the safety and reliability of transport, (b) re ducing transport costs, (c) aiding mobility of resources, (d) spreading literacy, education, and new ideas in pro duction, (e) and introducing competition to producers who have had a monopoly over markets due to inadequate trans portation facilities. The overall effects of transport investment on the economy in terms of a rise in the level of national income is also evident. It provides employment, especially for surplus farm laborers, and stimulates economic activity. A continued addition to Iran's roads and trans port facilities is required to cope with rising demands for adequate transportation as other sectors experience progress. Moreover, a net accretion of transport facili ties in areas where new economic activities can be fore seen will lead the way in the economic growth process. Noneconomic obstacles The growth of Iranian economy is also impaired by the existence of sociocultural, political, and 202 administrative barriers. An effective literacy and edu cational program of the type which would modify the pre sent culture is expected to remove sociocultural barriers within a reasonable period of time. Administrative and political obstructions in the course of Iran's economic progress seem to be more serious than those of the social and cultural. Iran is charac terized by the absence of a more responsible government and a responsive administrative structure, and with a prevalence of the more obvious types of graft and corrup tion, legal and illegal. Inadequate organization and ad ministrative weaknesses have lowered the morale of gov ernment employees. The government is overcentralized and its bureaucracy is overstaffed. In this sphere, incompe tence and inefficiency have made permanent inroads. Here, members of the military and political elite exert influ ence to place their friends and relatives in well-paid "free-from-work" positions. Bribery has become one of the effective means of settlement between the public and the government agencies. One of the most difficult questions which often strikes the Observer's mind is the source from which changes should be initiated. Who, or on what level, one may ask, is one eligible to make reforms? "A revolution from the top,1 1 whose very existence depends upon the pre sent faulty political set-up, or "from the bottom," whose 203 voice is not heard? II. CONCLUSIONS AND RECOMMENDATIONS On the basis of this study, it can be concluded that Iran has just embarked on the path toward self-sus tained economic growth. Adoption and effective execution of a long-run "growth fiscal policy" suitable to Iran will aid the economy to move along the path of economic prog ress. However, no matter how successful "growth fiscal policy" may be, Iran will still be far behind the more ad vanced nations of the world. This is due to the prevail ing attitudes, institutions, and economic and political structures, and to the administrative and organizational set-up. Aiming at a desirable standard of living similar to that enjoyed in developed countries, Iran must also center its efforts in modifying the present environment. Economic growth has both its gains and its costs. For the Iranian community, it is indeed painful, though necessary. If it desires to speed up its rate of economic growth, it must change its habits, beliefs, and institu tions. Furthermore, transformation of the administration and political structure into the kind which is conducive to economic growth entails losses of rank and social and political prestige, and it requires restraint from cor ruptive activities. On the other hand, economic growth above the current level will result in substantial 204- benefits in terms of a higher material standard of living, increased knowledge, relative equality of opportunity, better health, longer life, and other indirect fruits of growth. In conclusion, it seems appropriate to recognize certain more immediate problems than the environmental, and suggest some solutions. These problems are related to budget, economic stability, government centralization, public-government relationship, and private enterprise in Iran, Not all the following recommendations concerning the problems above are immediately relevant to the subject of "growth fiscal policy," but they seem so clearly to affect the effectiveness of fiscal tools and to influence Iran's rate of economic progress that they must be briefly noted. Establishing separate budgets In Iran there are two budgets: one is referred to as the Development Plan appropriation, and the other is the annual budget. There is, however, no clear distinc tion between developmental and nondevelopmental outlays. Rather than lump together the development and ordinary accounts which is typical of the Iranian budget system, thesb two might be separated. Since development projects require long views and steady pursuit, they are particularly vulnerable to poli tical instability. Therefore, all development projects 205 must be placed under the Plan Organization. The latter should be made a continuous body, unaffected by changing prime ministers and cabinet members, and by parliamentary influence. Long-run investment projects are expensive and should not be continually exposed to political variations and subject to the whims of influential figures. Further reasons supporting the concept of sepa rating the developmental and nondevelopmental budgets fol low from the peculiarity of Iran's sources of revenues. A long-run growth budget, supported by a permanent and reli able source of revenue, seems to have the following advan tages: (a) it fits different peculiarities inherent in developmental expenditures, (b) it gives assurance to the lender nations and international lending institutions, (c) it prevents the government from revising and reducing each year the growth appropriation to meet unproductive expend itures . Difficulties involved in a system of separate budgets are not, however, easy to overcome. Such minis tries as the Ministry of Education, Agriculture, Health, Industries and Mines (now Ministry of Industry and Com merce), have been carrying on administrative, maintenance, and developmental activities for a long period. There fore, broadening the scope of the Plan Organization would be at the expense of limiting the activities of these Ministries. 206 The Third Plan law has recognized this difficulty and provided that Third Plan projects he administered hy the Ministries concerned. This calls for cooperation be tween the Plan Organization and the Ministries. Developmental budget.— A budget system labeled "developmental1 1 is necessarily broader in scope and covers a period of several years. It includes only those ac counts which add to the "general capital stock" of the economy. Like any type of budget, a long-term development budget has two sides: revenues and expenditures. All oil receipts from the Consortium constitute the revenue side of this budget. Since the year-to-year flow of oil receipts is not adequate for huge expenditure programs, external borrowing should supplement the revenue side during heavy growth investment. A portion of the oil revenues, therefore, can be allocated to the gradual amor tization of the external debt. On the expenditure side, the following accounts must be included: (a) education and research, (b) public health, (c) housing, community development, and slum clearance, (d) agricultural development, (e) transporta tion and communication, and (f) basic industries to be leased or sold to private enterprise as conditions become favorable. Ordinary annual budget.— Tax receipts and custom 207 duties form the revenue side of this budget. The expendi ture accounts embrace national defense, internal security, administration of justice, outlays for fiscal administra tion, and traditional social services. Maintaining a high degree of monetary suability A sound economic development program requires con stant attention to the establishment of monetary, fiscal, and commercial policies which will maintain a relatively high degree of general monetary stability. Indeed, public policies must be used in coordination with each other. Being a developing country, Iran has a persistent tendency toward internal inflation. This is due to a rapid pace of private and public investment, with conse quent increases in incomes. In order to check internally- induced inflation, monetary controls must also prevail. The latter requires the central bank, Bank Markazi Iran, to function as a mechanism for monetary regulation. This, in turn, necessitates (a) an organized market for govern ment securities, (b) the necessary legal authority of the bank to vary the reserve requirements for commercial banks, and (c) control over the availability and cost of rediscounting. To shield the economy from the inflationary impact of rising world-market prices, manipulation of exchange rates may be used. Attracting; private foreign investment Private foreign investment seems indispensable for its many contributions to growth of the economy,. Private foreign investment bears the following advantages: (a) it brings with it managerial and technical talents not adher ing to public investment, (b) it flows on a sound business basis of mutual profit without political attachment, thus providing a firm foundation for long-term economic rela tions, (c) it raises the nation's productivity as a re sult of a constant search for the best profit opportuni ties, and finally, (d) it lightens the burden of taxpayers who otherwise might have to pay for public investment in the same projects. Because of its abundant petroleum and natural gas, Iran must attract private foreign investment in all types of petro-chemical industries. Other industries for which private foreign investment should also be sought include agricultural machinery, iron and steel, aluminum fabrica tion, metalware, paper, shoes, ready-made clothing, food and food processing, cold storage, canning, ore concentra tion and refining, batteries, fisheries, plywood, boxes, viscose, Automobile assembly, fruit and nut processing and packing, synthetic detergent manufacture and blending. All this must be conditioned to a phased program of lo cally procured components and raw materials and to a birth of new complementary industries, new techniques, and know-how for Iran. In order to attract private foreign investment Iran, of course, must attempt to create such conditions as political stability, sanctity of foreign-held property against possible confiscation, the right of repatriating profits, and nondiscrimination. Creating loca-l initiative and responsibility Overcentralized government is one of the greatest political barriers in Iran. The government has left little room for provincial and local autonomy. The strong tendency of the government toward centralization, the pre vailing tradition of regarding the government as the greatest public enemy, and the apathy of local leadership are severe barriers to the growth of local communities. Indeed, one can hardly find any small town or village which has carried out noticeable community improvements. The Iranian government should be aware of the fact that self-sustained economic growth cannot be imposed from above upon an unwilling people. The great mass of Iran ians must develop the will to, and share in the struggle for, progres 5. Active participation of the mass of the people is possible under strengthened local leadership and local responsibility. The case for decentralized democratic institutions appears to be relevant to a more rapid pace of economic 210 growth. Such changes will encourage greater local auto nomy and local responsibility and give way to the creation of conditions under which local community leadership can be discovered. The heart of the solution lies, of course, in the battle against illiteracy, and in the development of an effective agricultural extension service through which villagers and townsmen can be indoctrinated with a spirit of self-helpo Improving public-government relationships Antagonism toward the government is a frequent characteristic of the Iranian people. This unfriendly re lationship is another serious obstacle to Iran's economic progress. To a common Iranian, government still means a corrupt and marauding army, and it is difficult for him to think of government as representative. Although of a political nature, these relation ships must be improved so that the public and government can cooperate as a team in the nation's struggle for prog ress. Such improvement requires (a) freedom of election on the local and national levels so that the people elect their true representatives in whom they can place their confidence; (b) a spirit, on the part of government offi cials and local representatives, of service; (c) a belief in the dignity of labor; and (d) a zeal for sincere co operation and persuasion so that confidence and trust will 211 replace suspicion. Encouraging private enterprise One important task of the government in its de velopment activity is to promote private enterprise. The government should withdraw from areas where individual enterprise has learned to stand on its own feet, and con centrate its efforts in other fields where its powers are needed to clear the way. It is also expected that the government create conditions which give birth to new in dustries initiated and financed by private enterprise. This means, simply, creation of opportunity for private investment. In order to encourage private enterprise, it is essential for the government to take the following mea sures: (a) elevate constructive business pursuits to a higher prestige level in the social hierarchy; (b) divert the experience and talents of minority groups from com merce, trade, and real estate speculation to manufactur ing and other constructive activities; (c) define clearly the scope of public participation, and reserve explicitly all other fields to private enterprise; (d) avoid special privileges for the public sector in industries consisting of both private and public; and (e) give more attention to effective coordination of investment policies and the training of efficient business managers for private as well as for public employment. 212 A central place in the theory of economic growth is the role of the entrepreneur in searching for profit making opportunities and the plowing hack of profits. This fact is recognized as the major source of capital accumulation in Western economic progress, and there is no reason why such economic motivations cannot contribute to Iran's economic growth. The individual entrepreneur pro vides the means for saving the increment of income which capital investment creates. Substantial private saving is made, therefore, through the 'reinvestment of entrepre neurial profits. If the economy fails to fulfill this re quisite, neither the efforts of government planning nor foreign business investment will lead to an accelerated economic growth and a continued formation of capital. As Furkse indicates: Capital formation can be permanently successful only in a capital-conscious community, and this condi tion, which is just as important for the continued maintenance as for the initial creation of capital, is promoted by a wide diffusion of investment activity among individuals. Nothing matters so much as the quality of the people. 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Creator Zekavat, Seid Mansoor (author)

Core Title An Analysis Of The Feasibility Of The Use Of Fiscal Policy To Stimulate 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, Finance,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Anderson, William H. (committee chair), Elliott, John E. (committee member), Rodee, Carlton C. (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c18-163730

Unique identifier UC11359269

Identifier 6508930.pdf (filename),usctheses-c18-163730 (legacy record id)

Legacy Identifier 6508930.pdf

Dmrecord 163730

Document Type Dissertation

Rights Zekavat, Seid Mansoor

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

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