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Durham E-Theses The eects of the Islamic revolution and the gulf war on Iran's economy Aryan, Hossein How to cite: Aryan, Hossein (1989) The eects of the Islamic revolution and the gulf war on Iran's economy, Durham theses, Durham University. Available at Durham E-Theses Online: http://etheses.dur.ac.uk/9344/ Use policy The full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that: • a full bibliographic reference is made to the original source • a link is made to the metadata record in Durham E-Theses • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders. Please consult the full Durham E-Theses policy for further details. Academic Support Oce, Durham University, University Oce, Old Elvet, Durham DH1 3HP e-mail: [email protected] Tel: +44 0191 334 6107 http://etheses.dur.ac.uk THE EFFECTS OF THE ISLAMIC REVOLUTION AND THE GULF WAR ON IRAN'S ECONOMY BY HOSSEIN ARYAN The copyright of this thesis rests with the author. No quotation from it should be published without his prior written consent and information derived from it should be acknowledged. A THESIS SUBMITTED TO THE UNIVERSITY OF DURHAM FOR THE DEGREE OF MASTER OF ARTS DECEMBER, 1989 2<UUl fflflfl AianriRAGT The Islamic revolution, followed by the eight-year Gulf war, has caused severe disruption and extensive changes in the structure of the Iranian economy. This thesis is concerned with an analytical study of Iran's economy in the period from the Shah's western-style modernisation to the Islamic revolution and the war with Iraq. Thus, the thesis provides first, an overview of the economic development and industrialisation activity under the Shah, which gives a yardstick for understanding the post-revolutionary economy. Secondly, the thesis examines the concept of Islamic economics as articulated by the prominent contemporary Shi'i figures that continue to influence the post-revolutionary economic policies. Thirdly, the major part of the thesis devotes considerable attention to the study and evaluation of the post-revolutionary economy, focusing on agriculture, industry, foreign and domestic trade, Islamic banking, public finance, the oil sector and the oil war.The latter was a determining factor in the continuation of the Gulf war. The appraisal and the overall picture of the post-revolutionary economy makes bleak reading. The negative impact of the revolution and the war has left Iran with a shattered infrastructure and a moribund industrial base. Unprecedented destruction of wealth, both in human and non-human terms, has further exacerbated the pre-revolutionary economic problems. The politico-religious government has not been able to address the country's economic ills effectively, partly owing to self -imposed constraints. A lack of active and structured economic policies has adversely affected all sectors of the economy, in particular, agriculture. While facing the daunting task of post-war reconstruction, Iran, more than ever before, is dependent on trading oil in exchange for basic commodities and consumer goods. Acknowledgement Introduction 1. Economic Development during 1949 -1973 1.1 The First Development Plan 1949-1955 1.2 The Second Development Plan 1955 -1962 1.3 The Third Development Plan 1962-1967 1.4 The Fourth Development Plan 1968-1972 1.5 Conclusion 2. The Fifth Development Plan 1973 -1979 : From Boom to Bust 2.1 The Original Fifth Plan 2.2 Twilight of the Economic Boom 2.3 The Tehran Oil Agreement 2.4 The Shah's Vision of the Future 2.5 The Big - Push Strategy 2.6 Resource Allocation . 2.7 The Revised Fifth Plan 2.8 Inflationary Pressures 2.9 Iran's Economy Adrift 2.10 Absorptive Capacity m 2.11 Infrastructural Bottlenecks 2.12 Agricultural Stagnation 2.13 The Shortfalls of Industrialisation 3. Shi'i Islamic Economics 3.1 The Totality of Islam 3.2 The Islamic' Concept of Economics 3.3 Nonscarcity 3.4 The Theoretical Structure 3.5 Islam, Socialism and Capitalism II page 3.6 Ownership 62 3.7 Classification of Property Ownership 63 3.8 Labour, Wage and Profit 65 3.9 Riba, Interest and Money 66 3.10 Partnership in Investment and Trade 68 3.10.1 Mozaraba 69 3.10.2 Mozara'a 70 3.10.3 Other Contracts 70 3.11 Economic Role of the.lslamic State and the Imam 70 3.12 Conclusion 72 4.The Post Revolutionary Economy 78 4.1 Introduction 78 4.2 The Immediate Economic Decline 1977-1979 79 4.3 Agriculture 82 4.3.1 Land Reform Policies 82 4.3.2 Impasse over Land Reform 83 4.3.3 Land Utilisation 85 4.3.4 Agricultural Output 85 4.3.5 War and Production 86 4.3.6 Food Imports 87 4.3.7 Problems and Government Measures 88 4.3.8 Organisational Implications and Likely Prospects 89 4.3.9 Conclusion 90 4.4 The Industrial Sector 92 4.4.1 Initial Attemps to Revive Industry 92 4.4.2 Expropriation and Nationalisation of Private Industry 93 4.4.3 Confusion and Resuscitation in Industry 95 4.4.4 Renewed Industrial Activity 96 4.4.5 Reactivation of the Shah's Nuclear Power Plans 97 4.4.6 Petrochemical Industry 98 4.4.7 Mining ~ 98 4.4.8 Electric Power 99 4.4.9 Housing and Construction 100 4.4.10 The Handicraft Industry 101 III 4.4.11 Performance 102 4.4.12 Conclusion 103 4.5 Domestic and Foreign Trade 106 4.5.1 Partial Nationalisation of Foreign Trade 107 4.5.2 Reinforcing Factors 108 4.5.3 Objections to Total Nationalisation 108 4.5.4 Foreign Trade and the Private Sector 109 4.5.5 Composition of Exports 111 4.5.6 Non - Military Imports 112 4.5.7 Major Trading Partners 113 4.5.8 Conclusion 114 4.6 Planning 116 4.6.1 Introduction 116 4.6.2 Supreme Objective of the Plan 117 4.6.3 Qualitative Objectives of the Plan 117 . 4.6.4 Policies 117 4.6.5 Projected Government Reciepts and Expenditures 120 4.6.6 Appraisal of the Plan and the Actual Performance 121 Islamic Finance 129 5.1 Islamic Banking 129 5,1.1 Nationalisation 129 5.1.2 Islamisation 130 5.1.3 Bank Accounts 131 5.1.4 Modes of Financing Operations 132 5.1.4.1 Mosharakat 133 5.1.4.2 Direct Investment 134 5.1.4.3 Mozaraba 134 5.1.4.4 Installment Transactions 135 5.1.4.5 Hire Purchase 135 5.1.4.6 ' Salaf Transactions 136 5.1,4.7 Other Transactions 136 5.1.5 The Role of Bank Markazi 137 5.1.6 Assets and Liabilities 138 5.1.7 Conclusions and Implications 142 IV page 5.2 Public Finance and Budget 145 5.2.1 The Public Sector after the Revolution 145 5.2.2 The First Post Revolutionary Budget 146 5.2.3 The Budget for 1980/81 147 5.2.4 Erosion of the Reserves 148 5.2.5 Debate on the Budget for 1981/82 1 50 5.2.6 Budget Trends from 1982/83 to 1987/88 152 5.2.6.1 1983/84 152 5.2.6.2 1984/85 152 5.2.6.3 1985/86 1 53 5.2.6.4 1986/87 154 5.2.6.5 . 1987/88 1 55 5.2.7 Taxation 156 5.2.8 Summary and Conclusion 159 6. Oil and War 166 6.1 The Oil Sector 166 6.1.1 The Oil Price Shock of 1979 -1980 166 6.1.2 Ideological Baggage and Oil 167 6.1.3 Marketing Patterns 168 6.1.4 Pridng Policy 170 6.1.5 Deteriorating Economic Conditions 171 6.1.6 Rationalisation of Oil Policy 173 6.1.7 Iran and OPEC since 1982 174 6.1.8 Production 177 6.1.9 Domestic Consumption 178 6.1.10 Exports 179 6.1.11 Summary and Prospects 180 6.2 The Oil War 183 6.2.1 Introduction 183 6.2.2 Early Attacks on Shipping 184 6.2.3 Reversal of War Aims and Strategies 185 6.2.4 The Tanker War 187 6.2.5 Aerial Bombing of Economic Infrastructure 188 6.2.6 Escalation of the Tanker War 188 V page 6.2.7 Reflagging and Acceleration of Intemationalisation 189 6.2.8 f Respite and Resumption 192 6.2.9 The Shuttle Service 194 6.2.10 Kharg and Oil Exports 196 6.2.11 The Cost of the Shuttle Service 197 6.2.12 Maritime Tolls 198 6.2.13 The Cost of the Iran-Iraq War 198 6.2.14 Summary and Implications 201 7. Conclusion 206 Bibliography 214 vi ACKNOWLEDGEMENT I would like to express my gratitude to my supervisor Dr.Rodney J. A. Wilson for his unstinting advice and encouragement. I am indebted to my wife and sons for their support. To them, this thesis is dedicated. VII The Third World has its own economic spectrum. At one extreme lie the poorest of the less-developed countries. At the other extreme are the OPEC members, both underdeveloped and rich, many with income and growth rates far higher than the former, even before the oil price shock of 1973. Iran, a member of the OPEC, prior to the revolution of February 1979, could hardly be termed least developed.