Reconstruction and Regional Diplomacy in the Persian Guif
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Reconstruction and regional diplomacy in the Persian Guif Edited by Hooshang Amirahmadi and Nader Entessar London and New York j 1 7 9 Z. 108 Economic destruction and reconstruction Chapter 5 17 Amirahmadi, Revolution and Economic Transition, p. 201. 18 See /ran Focus 3 (1) January 1990: 10 (quoting President Rafsanjani Iranian economic reconstruction responding to the radical critics of his plan bill in a 4 December unofficial session of the Parliament. plan and prospects for its success 19 H. Amirahmadi, 'Stubborn Economic Problems 13Hindering (19) D Iran's Reconstruction Efforts', Middle East Executive Report ecem be r 1990: 11. 20 Economic Bulletin (Echo of Iran) 6 (18) 12 May 1987: 5. Hooshang Amirahmadi In Chapter 4 I gave an analysis of the war destruction. A prelimi- nary assessment of the damage wrecked on the economy by the earthquake was also reported. The final part focused on eight sets of economic imbalances from which the economy suffers the most and explained their complex and interrelated causes. In this chap- ter I shall give a detailed account of the First Five-Year Economic, 1 Social and Cultural Development Plan of the Islamic Republic of Iran (1989-93). The plan intends to stabilize the economy and structurally adjust its imbalances in the hope of normalizing the war economy and then leading it toward a growth path. An account of policy changes in the wake of the Gulf crisis is also given. The chapter concludes with an assessment of prospects for economic development in Iran. Iran's post-war reconstruction plan should in theory be dis- cussed under four general headings: economic recovery plan, physi- cal reconstruction projects (for the war-destroyed and earthquake- damaged areas), rebuilding of the army, and social welfare and justice. This last has hardly been a top government priority in the post-war period while military recovery plan falls outside the scope of this chapter. I also do not wish to concentrate on physical reconstruction in this chapter, which is concerned with economic issues. Therefore, in what follows I shall discuss Iran's economic recovery plan including its physical reconstruction strategies. Economic recovery has been the government's number one priority in the post-war period. The plan is more or less based on similar understanding of economic imbalances as discussed in Chapter 4. Before the war with Iraq, the Islamic Republic's economic devel- 110 Economic destruction and reconstruction Iranian economic reconstruction plan 111 opment strategy focused on both growth and redistribution. The quo. Instead, it aimed at minimizing the rate of economic decline new Constitution made the government responsible for the pro- and providing for the people's bare necessities without going into vision of basic needs for all, emphasized 'systematic and sound foreign debt. The government emphasized agriculture which was planning', and allowed for extensive nationalization of major socio- only minimally dependent on foreign exchange. At the same time, the war wag given tnn prinrity alon g with ^ ^ economic activities. lir cwitinity way, however, to consist of three ripfp n .,.._ r ,0,-1 int.1, .s ries sectors: public, private and co-operative. The public sector, which and public services. had dominated the economy before the Revolution, was expanded extensive further under the new regime. Revolutionaries favoured AYATOLLAH KHOMEINI'S DIRECTIVE state intervention and the war created new responsibilities for the government in Tehran. The Survival Strategy was maintained until the cease-fire in Redistribution was the first casualty of the war. In the original August 1988, w hen the old debate on a suitable development First Social, Economic and Cultural Development Plan of the strategy resurfaced.' The radicals, conservatives and pragmatists Islamic Republic, which covered the 1983-7 period, the focus had within the government also disagreed on which of the following already shifted to economic growth. Radicals in the Parliament should get top priority: protested, and after months of debates, the plan was shelved. A 1 rebuilding the national economy revised version (in 1983) acknowledged that Iran would reach the `destined society' depicted in the Constitution in stages, through 2 revitalizing the army the 'elimination of obstacles', the 'maximum utilization of the 3 reconstructing the war-damaged areas existing capacities' and 'institution building'. Only then, it was 4 promoting the economic well-being of the war victims. argued, could 'regular development planning' begin. Thus a plan- In a classic compromise, the late Ayatollah Khomeini intervened ned approach to the economy was rejected under the war con- by issuing a 'directive' to the government in which he advocated dition; annual budgeting became the major economic management a mixed development approach for the Islamic Republic (one tool where significant restrictions were placed on market forces.' between a planned and a market approach). The Ayatollah's direc- Nevertheless, Iran followed the plan's policies on maximizing tive also placed economic recovery at the top of the government's utilization of capacities and removing the bottlenecks until 1986. list of priorities for the post-war period. A similar approach was The sharp decline in oil prices in 1986 created a dangerous foreign also advocated by the pragmatists, led by then Speaker of the exchange shortage and forced the government to proclaim an Aus- Parliament (now President) Ali Akbar Hashemi Rafsanjani.' terity Plan for the New Economic Condition. The Plan gave up The directive also emphasized rebuilding the army and promot- any hope of economic growth. Instead, it aimed at maintaining the status quo and reducing the economy's dependency on oil ing the well-being of war-victims. Reconstruction of the war-dam- revenue through stricter management and reallocation of the avail- aged areas was to proceed slowly, moving along with national able foreign exchange. As a result, the foreign exchange budget economic recovery. Among the economic sectors, oil, agriculture was reduced by two-thirds in 1986 and the war along with defence- and industries producing construction materials were listed as top related industries were given higher priority for receiving foreign priorities. Other priority areas included housing, rural develop- exchange. Among the far-reaching implications for Iran's depen- ment and local participation. This directive became the basis of a dent industries were a sharp decline in value added, employment second plan called again the First Social, Economic and Cultural and productivity. Development Plan of the Islamic Republic, for the 1989-93 period The economy continued to deteriorate, however, and by 1988, (formulated on the basis of the original first plan in 1983). This when the 'war of cities' was going on, the government had again new plan, prepared under Prime Minister Mir Hussein Mussavi to change its policy and introduce a so-called Survival Strategy. (Mussavi plan), and a subsequent revised version, prepared under The new strategy gave up all attempts to even maintain the status President Hashemi Rafsanjani (Rafsanjani plan), were specifically 112 Economic destruction and reconstruction Iranian economic reconstruction plan 113 designed to address the economic imbalances discussed in Chapter in 1993. The share of public development expenditures was also 4. to increase, from about 19.4 per cent in 1988 to 26.4 per cent in 1993. The foreign exchange budget was equally ambitiously plan- ned: $97.000 million, some 85.7 per cent of which was to come THE MUSSAVI PLAN from nil exports. Projections for social sectors also painted a rosy The Mussavi plan envisioned economic recovery passing through picture: some 2.5 million houses would be built, literacy rate would three stages: economic normalization through maximum utilization increase to 97.2 per cent, and the number of physicians per 1,000 of productive capacities; economic growth through added capacit- population would increase from 0.18 to 0.37 by the end of the ies; and sustained economic growth and maturation. Oil revenue plan period.' and foreign savings were considered critical for the implementation of the first two stages. Completion of unfinished projects and THE RAFSANJANI PLAN production or imports of industrial inputs were given top priority. The plan also emphasized promotion of non-oil exports, and Before the Mussavi plan could pass the Parliament, the Prime creation of free-trade zones in a number of Persian Gulf islands. Minister's office was abolished and President Hashemi Rafsanjani Significantly, the plan included provisions for population control, took control of the government in July 1989. The new pragmatist indicating a rather significant ideological shift. The population cabinet decided on a bolder, flexible, open, more market-orientated growth rate was to decline to 2.9 per cent by 1993, from 3.2 per strategy. The Mussavi plan was thus revised to reflect the new cent (gross natural increase) in 1988. This strategy was particu- pragmatism. The Rafsanjani plan (1989-93) passed the Parliament larly meant to mitigate the supply-demand imbalance and help on 31 January 1990, about a year after it was to be put in practice, stabilize prices and mitigate unemployment. and is currently being implemented.' The government hopes to put The private sector was to receive material incentive to redirect the economy back on a more normal footing using a combination of its huge liquidity towards productive sectors. This was hoped to oil revenue, foreign assistance, domestic resources and the private assist in reducing liquidity imbalance and inflation, while increas- sector. It intends to build a mixed economy in which the private ing production. The plan also directed the government to limit sector's role will expand, while that of the public sector will be the public ownership of the economy to large-scale and basic confined to basic and strategic sectors. The plan incorporates a activities. The rest was to be sold in a renewed Tehran stock supply-side economic policy according to which most government market to the private sector.