The Political Economy of Industrialisation in Iran, 1973-1978 Scheherazade Daneshkhu London School of Economics PhD /SST\ f L O f f t m i \mi.y UMI Number: U61574B All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI U615743 Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 T h e s e s . r . 3 5^3 . M Library British Library of Political and Economic Science ( 2 T 8 5 5 / A b stract This is a study of the impact of international political relations on the domestic economic policy choices of an oil-exporting developing country with special reference to the case of Iran during 1973-1978. These years began with the four-fold increase in oil prices and ended in revolution with the overthrow of Mohammad Reza Pahlavi, the Shah. The analysis is centered on the inter-relationship between the political and the economic to find an explanation for the Shah’s decision to adopt a big push industrialisation strategy in 1974, against the advice of his technocrats, and the reasons for its failure. It is concentrated on two inter-related themes, the nature of the state and its role in the country’s industrial development and the relationship between international political factors and domestic economic policy choices. It is argued that the international political dimension played a crucial part in the Shah’s decision to adopt a big-push strategy hut has usually been ignored. The Shah was an ambitious man who sought to purge the country’s humiliations at the hands of the great powers - Britain, the former Soviet Union and the USA - by building up the country’s military and economy through import substitution industrialisation, in the hope of propelling it into the league of top five world powers. Import-substitution industrialisation has fallen out of favour but we believe it can be a valid development strategy. Its shortcomings in Iran’s case were mainly due to the form of its implementation. The economy was unable to absorb over-accumulated funds caused by the sudden increase in oil prices in late 1973. It was in this rush to industrialise, and the desire to impress the outside world, that the roots of the failure of the Shah’s big push industrialisation policy lay. 2 CONTENTS List of Tables •page 7 Introduction.................................................................................................10 Chapter 1. Political Economy and Industrialisation: the Case of Iran 1.1 Introduction ....................................................................................13 1.2 The meaning of political economy .................................................14 1.3 The nature of the Pahlavi state .......................................................15 1.4 The drive towards industrialisation ................................................19 1.5 Oil income and the rentier economy .............................................. 22 1.6 Competing theoretical explanations of Iran’s industrialisation 23 1.7 Summary....................................................................................... 60 Endnotes to Chapter 1 ................................................................... 61 Chapter 2. The Process of Industrialisation 2.1 Introduction ................................................................................... 67 2.2 The meaning of industrialisation ................................................... 70 2.3 Measuring industrialisation ........................................................... 71 2.4 The role of growth......................................................................... 76 2.5 The objectives of industrialisation: economic development ......... 80 2.6 The objectives of industrialisation: labour absorption ................. 82 2.7 The objectives of industrialisation: political independence .......... 84 3 2.8 Industrialisation: the political context ..............................................86 2.9 Contending strategies of industrialisation: import-substitution and export-orientation ...................................................................... 96 2.10 The role of government: intervention and economic planning.. ..105 2.11 Balanced growth and big push strategies.....................................I ll 2.12 The role of agriculture..................................................................119 2.13 Summary......................................................................................121 Endnotes to Chapter 2 ..................................................................125 Chapter 3. Economic Policies and the Effect on the Economy during the Fifth Plan Period 3.1 Introduction ....................................................................................133 3.2 Cycles of economic boom and crisis ..............................................133 3.3 Import-substitution as economic policy .........................................138 3.4 The level of industrial development ...............................................142 3.5 Iran’s industrial growth in a comparative context ...........................147 3.6 The manufacturing industries: structure, employment and growth ......................................................................................150 3.7 The manufacturing industries: sectoral contribution to output 156 3.8 Structure of investment ....................................................................161 3.9 Foreign direct investment and skills shortages ................................173 3.10 Trade policy ...................................................................................181 3.11 Exports and the rise in domestic demand ......................................188 3.12 Fiscal policy and inflation .............................................................195 3.13 Summary....................................................................................... 201 Endnotes to Chapter 3 ................................................................. 204 4 Chapter 4. State and Development: the Planning Process 4.1 Introduction ...................................................................................... 209 4.2 The origins of planning in Iran ......................................................... 209 4.3 Planning and national independence ................................................ 211 4.4 Domestic politics in the planning process ....................................... 214 4.5 The Ebtehaj affair............................................................................ 216 4.6 The expansion of the planning process ........................................... 220 4.7 The erosion of the Plan and Budget Organisation’s independence..223 4.8 Obstacles to planning ...................................................................... 225 4.9 The rush to industrialise during the Fourth and Fifth Plans ........... 232 4.10 The Fifth Plan in political context ................................................ 237 4.11 Summary....................................................................................... 239 Endnotes to Chapter 4 .................................................................. 242 Chapter 5. The International Dimension 5.1 Introduction ..................................................................................244 5.2. Monarchy and the nation ............................................................. 245 5.3 Iran’s early foreign relations ......................................................... 250 5.4 US-Iranian relations ...................................................................... 253 5.5 The beginnings of US military aid to Iran ..................................... 258 5.6 The Mossadeq challenge............................................................... 261 5.7 The Shah’s doctrine o f‘positive nationalism’ .............................. 263 5.8 The forging of a US-Iranian alliance.............................................267 5.9 Towards a political and economic crisis ....................................... 272 5.10 The attempt to forge an independent military ............................ 278 5 5.11 Iran’s military build-up and growing regional role ..................... 282 5.12 The emergence of the ‘twin pillar’ policy ................................... 291 5.13 The surge in oil wealth................................................................ 295 5.14 The quest to become a regional power....................................... 304 5.15 The quest for nuclear power........................................................314 5.16 Turning the tables on the US .......................................................318 5.17 Summary.....................................................................................323 Endnotes to Chapter 5 .................................................................326 Chapter 6. Conclusion ......................................................................332 Endnotes to Chapter 6........................................................................343 Tables ...............................................................................................