Academic journal article The Middle East Journal

Economic Reform and the Reconstruction of the Iranian Economy

Academic journal article The Middle East Journal

Economic Reform and the Reconstruction of the Iranian Economy

Article excerpt

SINCE the 1979 revolution, profound changes have taken place in the Iranian economy as a result of a combination of external and internal factors. The revolution itself, the taking of US hostages in November 1979, the trade sanctions and freezing of Iranian assets that followed, the costly and protracted eight-year war with Iraq, and the vagaries of the oil market all have made their mark on the economy. The Islamic Republic's response to these unfolding economic crises was to follow a policy of severe import compression, international economic isolation, and reliance on bureaucratic arrangements as principal allocative and distributive mechanisms in the economy. The outcome has been a deteriorating economy, rising inflation, foreign indebtedness on an unprecedented scale, a substantial increase in rent-seeking activities at the expense of productive enterprise, a shrinking of capital stock, an inadequately trained work force, and economic institutions that are badly in need of fundamental reform.

There is now a general consensus, both inside and outside Iran, that the economy is badly in need of reconstruction. President Ali Akbar Hashemi Rafsanjani's First Five-Year Plan represented the government's manifesto for the reconstruction of the Iranian economy, and laid down a blueprint for Iran's future development. This plan, formally approved by the Majlis (The Consultant Assembly of the Islamic Republic) in January 1990, was the product of years of negotiations and compromise and was made possible only after the cessation of hostilities with Iraq in August 1988. The plan covered the period from 1989/90 to 1993/94, and envisaged an average annual growth rate of 8.1 percent in real gross domestic product (GDP) and an annual average rate of 11.6 percent in real investment, with corresponding growth rates of 5.7 percent and 3.8 percent for private and public consumptions, respectively.

The First Five-Year Plan provided an important framework within which the government could embark on a program of structural reform and economic liberalization, although the quantitative targets envisaged in the plan were ambitious and could be achieved on a sustained basis only under very optimistic scenarios. The latest data released by the Central Bank of the Islamic Republic suggest a mixed picture. Over the five years covered by the plan, the real GDP has grown by an average annual rate of 7.0 percent, which is only slightly below the plan's overall growth target.(1) Oil exports have risen from around 2 million barrels per day in 1999/90 to 2.8 million barrels per day in 1993/94. Investment as a percentage of GDP has increased from 11 percent in 1989/90 to 14 percent in 1992/93, and with the removal of trade and foreign exchange restrictions, private consumption expenditures at constant prices, which had shown only a modest growth of around 2.5 percent in 1989/90, grew by the staggering rates of 19.5 and 9.5 percent over the years 1990/91 and 1991/92, respectively, followed by more moderate and realistic growth rates of 5.1 and 2.6 percent for the last two years of the plan. Over the five-year period 1989/90 to 1993/94, private consumption expenditures at constant prices have risen by an annual average rate of 7.9 percent, which is well in excess of the plan's average annual growth target of 5.7 percent.

This excessively high consumption growth was accomplished primarily through increased imports of goods and services, which rose from 13.5 billion dollars in 1989/90 to around 25 billion dollars in 1991/92. According to the national income statistics released by the Central Bank of the Islamic Republic, during the first three years of the plan, imports of goods and services in constant prices rose by an average annual rate of around 28 percent. Given Iran's limited capacity to export and the prevailing weak international oil market, it is now clear that the high output and consumption growths achieved over the 1989-91 to 1991/92 period are unlikely to be repeated in the medium term. …

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