Economic History of Iran: Pre-Islamic Revolution

These days are the anniversary of the 1979 Islamic revolution in Iran, and it’s better to write about the economic history of Iran. In the past 100 years, the economic situation in Iran has had a key role in the political unrests. The economy has had a key role in almost all movements and revolutions in Iran, since 1905. The economic history of Iran can show us why the Islamic revoluton happened, how the Mullahs destroyed Iran, and why almost all people hate the Mullahs now. Even if you look at only the economic conditions, and ignore the tragedy of the freedom, democracy, and human rights in Iran, you can understand why the people deeply hate the Mullahs and the Monarchists. The inflation rate in Iran can show us many things about the economic conditions. We try to take a look at the inflation rate in the past 70 years, in a series of two articles. The official statistics that have been used here, have been extracted from different sources, such as CBI, Mehr News Agency, IMF, Iranica Encyclopedia (“Economy” section), and the World Bank. Many historians have written about the past 100 years, but just some of them were independent and wise. We try to use the views of the wise historians. After the Constitutional Revolution, specially in 1910s, the economic situation was so horrible in Iran and also in many other countries. By 1907, Anglo-Russian Treaty divided Iran between British and Russian spheres of influence. In 1908, oil was discovered and by 1912, the first cargo of crude oil was exported by Anglo-Iranian Oil Company (AIOC). But only less than 10% of the oil money were paid to Iranians. The World War I created many problems in Iran, and many people died of starvation. In the late-1920s, Reza Shah established a state monopoly over foreign trade, founded Persias first national bank (Bank Melli), aimed at taking over the note-issuing function of the British-owned Imperial Bank (Bank Shahi). The other banks were Sepah Bank and Mortgage Bank that helped to end the economic anarchy. Some historians say: “The Mortgage Bank of Iran granted loans to current homeowners for a 25-year period at a low fixed interest rate of 6%, while the bazaar rates was 24%”. Reza Shahs reforms were instrumental in rescuing Persia from the economic anarchy that had afflicted the country in the aftermath of the First World War. By 1933, Irans share of AIOCs net profits increased to 20%, and annual oil revenue reached $17 million by 1938. In the late-1930s, Russian share of Iranian exports fell from 35% to 1%, and the German share rose from 20% to about 45%. When Germany invaded Russia, the British and the Russians bilaterally invaded Iran, occupied Tehran, deposed Reza Shah. They wanted to keep Germany away from Irans oil and to punish Reza Shah for his friendly relations with the Germans. The presence of foreign troops in Persia from 1941 to 1946, characterized by frequent changes in the government, rising prices, and food shortages. The cost of living index increased fourfold during 1941-43, rising by 96 percent in 1942 and by 110 percent in 1943.

Year Official Inflation rate unofficial rate
1940 13.8
1941 49.5
1942 96
1943 110 150
1944 2.7
1945 Negative (-14.4)
1946 Negative (-11.5)
1947 6.6
1948 11.1
1949 2.3

In 1940s, many of the new industrial plants and the small-scale industries were forced to curtail their operations or to shut down completely largely due to shortages of raw materials and spare parts. The state of economic uncertainty continued after the end of the Second World War. In 1949, Persias first development plan was put into effect. It was a seven-year plan, but due to many stupid problems, and also shortages of funds, primarily arising from the oil nationalization, was terminated prematurely in 1955 and replaced by another seven-year plan. Some historians say: “The uncertainties surrounding the oil nationalization process dominated the economic situation in Persia during the 1949-53 period. During the 1939-1948 period, oil prices had doubled in international markets, while Persias direct receipts per ton had fallen by about 15 percent. Aftermath of Azerbaijan crisis in 1946, Bank Melli (BM) that functioned as the Central Bank in Iran, cooperated with the Plan Organization (PO) created in 1948, to assist industry”. After the nationalization of the oil industry in 1951 under Mosaddeq government, the British government froze Persias accounts in Britain, placed an embargo on exports of sugar, iron, and steel to Persia, prevented the sale of the Persian oil on international markets, and referred the dispute to the International Court of Justice ! The result for Persia was a halt in oil exports and increased financial difficulties for an already embattled economy. “Between 1951 and 1953 the index of wholesale prices rose by an average annual rate of 14 percent, and the general consumer prices rose by 8 percent. The fall of Mosaddeqs government, by a CIA-backed military coup, marked the beginning of a new era of ‘oil and autocracy’ in Persias economic development. The new oil agreement reached in 1954 between Persia and a Western consortium of oil companies, which took over the functions of the old AIOC, once again put Persias oil resources under foreign control, but Iran’s share increased to 50%”, some historians say. But the resumption of oil exports and increased financial assistance from the US enabled the government to launch the second development plan (1956-1962). It concentrated on a number of infrastructural projects. For example, most of the plans allocation for the agricultural sector was devoted to the completion of three large dams, namely Karaj, Sefidrud, and Dez. The money supply by 20 percents over the years 1956, 1957, and 1958. And the consumer prices, which had stabilized over the 1954-55 period, started to rise again (specially in 1959 and 1960)

Year Official Inflation rate unofficial rate
1950 Negative (-17.2)
1951 8.3
1952 7.2
1953 9.2 15
1954 15.9 20
1955 1.7
1956 8.8
1957 4.4
1958 1.0
1959 13.0 20

In 1961, the government was forced to embark on an Economic Stabilization Program, prescribed by the International Monetary Fund (IMF). The stabilization program involved stringent restrictions on imports, and cuts in government expenditures. In 1960, the government established the Central Bank of Iran (CBI) and separated all central banking responsibilities from Bank Melli Iran and assigned it to the CBI. After Economic Stabilization Program, Inflation moderated significantly. In fact, in the 1960s the inflation rate has its lowest rate in Iran’s history. It also marked a slow-down in general economic activity and a deep recession developed in two sensitive sectors, construction and domestic trade. Some historians say: “Over the 1960-63 period, the real wages of unskilled construction workers declined at an average annual rate of 3 percent. The recession, particularly affecting the migrant construction workers and the traditional merchants in the Bazaar, rekindled the fire of social discontent, leading to political unrest throughout 1962-63”. The Shahs response to the deteriorating socioeconomic conditions was a six-point reform program, known as the White Revolution and the suppression of opposition groups by force. Of course, the main politicians behind the idea of the White Revolution were JFK in the US and Ali Amini in Iran, not the stupid Shah. The White Revolution announced in 1963 included the program of land redistribution (dissolution of feudal system), nationalization of forests and pastures, female suffrage, profit-sharing for industrial workers, return of state industries to private enterprise, and formation of literacy corps. The Mullahs, specially Khomeini, opposed the White Revolution, but it’s sadly funny that two decades later they created the Black Revolution, with the White Revolution’s goals! The period between 1963 and the start of the revolutionary upheavals in 1978 represents the longest period of sustained growth in per capita real income the Persian economy has experienced. Some historians say: “ During the 1963-1977 period gross Domestic product (GDP) grew in real terms by an average annual rate of around 10% with the annual population growth rate of around 3% and placed Persia among the fastest growing of both developing and developed economies in the world. As a result, Persias per capita income (in current prices) rose from $170 in 1963 to $2,060 in 1977″. However, not all sectors shared equally in this growth process. Over the 1963-1977 period the agricultural sector grew at an annual average rate of around 5%, while the industrial and the service sectors showed annual growth rates of 15%. In fact, the gap between the poor and the rich, and between the rural and urban areas increased significantly. Many poor, illiterate, and traditionalist people in the rural areas started to migrate to the urban areas.

Year Official Inflation rate unofficial rate
1960 7.9 15
1961 1.6
1962 0.9
1963 1.0
1964 4.5
1965 0.3
1966 0.8
1967 0.8
1968 1.5
1969 3.6

Under the influence of rising oil revenues, the rate of urban and rural population changed rapidly. The rapid and unbalanced expansion, especially between the agricultural and the industrial sectors, led to a substantial increase in the rate of migration from rural to urban areas. The degree of urbanization rose from 30% in 1956 to 50% in 1978. It is estimated that rural migrants accounted for 44% of the increase in urban population between 1956 to 1966, as compared to as much as 50% during the 1967-76 decade. The oil price increases during 1973-74, converted Persia from a debtor to a creditor country . The accumulated balances on current account over the period 1959-78 was in surplus and amounted to $16 billion. But the inflation started to be a problem during the period of the fifth five-year plan (1973-1978) when the Shah decided, against all advice, to double the total expenditure. Over the period 1963-73 (covering the 3rd and the 4th plans) consumer prices rose by an average annual rate of around 2.5 percent, while the average annual rate of inflation during the period covered by the 5th plan was 15.5 percent. Iran’s development was rapid, but unbalanced. “From 1969 to 1977, the number of private cars produced in Persia increased steadily from 29,000 to 132,000. And the number of television sets produced rose from 70,000 in 1969 to 350,000 in 1975. The share of the oil sector in GDP at current prices rose steadily from 14% in 1962 to 24% in 1972, peaking at 48% in 1974 before falling back to around 32% in 1977. On the other hand, the value added in the agricultural sector as a share of GDP fell from 32% in 1962 to 8% in 1977. The share of oil revenues in the government budget was around 47% in 1963 and rose to 63% in 1978, after having fallen from its peak of 86% in 1974. We know that in 1975 ships had to wait between 160 to 250 days to enter Iran’s principal port, Khorram-Shahr, at the tip of the Persian Gulf. Tehran had to pay more than $1 billion in charges for ships stuck in ports unable to unload. It led to a sharp increase in inflation to an average of 15% per year between 1973 and 1978, from an annual rate of less than 3% before (that means more than 5 times increase)”, some historians say. The widening gap of income distribution in the urban areas and between the urban and rural areas resulted in substantially increased migration from villages to urban centers. These trends were further accentuated by the implementation of the last phases of the land reform, which were seen by many peasants as a reversal of the original land-redistribution program in the early 1960s. “The quadrupling of oil prices in 1973-74 presented the regime with a golden opportunity to rationalize the development program and move toward a more balanced development of the urban/rural sectors of the economy. But the Shah didn’t listen to expert advices. He was a stupid dictator“, some historians truly say. The Shah’s stupidities and the unbalanced expansion, and the huge gap between the poor rural migrants and the urban middle class created a huge disaster: “The Islamic Revolution”

Year Official Inflation rate unofficial rate
1970 1.5
1971 5.5
1972 6.3
1973 11.2
1974 15.5 20
1975 9.9
1976 16.6 20
1977 25.1 30
1978 10.0
1979 11.4 25

In 1974, the shahs response, against expert and ministerial advice, was a further hasty expansion of the industrial sector with greater reliance on foreign experts and imported workers. Inevitably, these economic policies exacerbated already entrenched social and economic inequalities and helped create fertile grounds for the flourishing of social discontent and revolutionary upheavals“, some historians truly say. “The 1971 ‘Tehran accord’ between six Middle Eastern Organization of Petroleum Exporting Countries (OPEC) and the major international oil companies forced the latter to agree to higher prices and better terms. By 1973, the Iranian government, not the oil companies, was in the driver’s seat, setting prices, owning production fields, and determining output levels. It had made the Western capitalists angry”, some historians say. In a 1974 interview, the shah said: “In 25 years, Iran will be one of the world’s five flourishing and prosperous nations … I think that in ten years’ time, our country will be as you [in Britain] are now.” But the Shah was so stupid and blind, and could not see the huge gap between the poor and the rich, and between the rural and urban areas, that was the result of the unbalanced expansion. During the 1963-1978 period, the gap between the lower class (about 70% of Iranians) and the middle class (about 20% of Iranians) increased. The lower class was illiterate, and only followed the Mullahs. There was also a huge geographic disparity. “By late 1976, the economy was in bad shape, with national income growing only slowly while shortages of electricity, water, cement, and some foodstuffs constrained output and fed popular discontent. At last, the shah reversed course, acknowledging he had wrongly pushed too fast. He stupidly appointed a new prime minister who suspended many development projects and introduced an IMF-style stabilization program in 1978. But the Shah was the main responsible for all disasters, not the prime minister (Hoveyda) who always kissed the Shah’s ass and the Shah’s hands”, some historians say. As we said before, the Shah and the stupid Monarchists were the main responsible for the Islamic Revolution in 1979. They created a huge gap between the poor and the rich, and between the rural and urban areas. The inflation rate in the mid-1970s was much more than what the stupid Monarchists often say. When you compare the inflation rate in the 1960s with the 1970s, and when you look at the social classes in Iran at that time (In 1978, about 70% of Iranians were members of lower class, and only about 30% of Iranians were members of middle class and upper class), you can understand why the Islamic revolution happened. In fact, it was the result of a dreadful tyranny and a dreadful economic situation. When about 70% of Iranians were poor and illiterate, the stupid Shah and those who kissed his ass (the Monarchists) were embezzling the oil money and lived in luxury. Of course, after the Islamic revolution, the secular tyranny was replaced by the religious tyranny, and while the huge gap between the poor and the rich decreased, the economic situation got worse and worse. The economic conditions went from bad to worse. We would write more about it later.

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