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Published online by Cambridge University Press: 01 January 2022
It is a commonly held view that development policies lead to domestic inflation together with balance of payments problems. The underlying mechanisms which in many developing countries have made this view come true are rather well-known. Increased investment outlays lead to increased purchasing power and imports; prices rise, and, to the extent that aggregate output and real income actually increase, this in itself will further contribute to the deterioration in the country's balance of payments. The time will soon come when the International Monetary Fund, as a precondition for extending short-term loans to support the country's depleted reserves of foreign exchange, will ask for deflationary measures in order to restore order to the country's finances. Development will slow down, and if the balance of payments has deteriorated significantly, devaluation will be required.
The author would like to express his deep appreciation to Professor Bent Hansen of the University of California, Berkeley, for having read and made helpful comments on an earlier draft of this paper.
1. For the underlying concepts and theories of this modern approach to formulating economic policy, which is primarily the work of Jan Tinbergen and his school of thought, see Tinbergen, Jan On the Theory of Economic Policy (Amsterdam: North-Holland Publishing Company, 1952)Google Scholar and idem, Centralization and Decentralization in Economic Policy (Amsterdam: North-Holland Publishing Co., 1954).Google Scholar See also Hansen, Bent The Economic Theory of Fiscal Policy (London: George Allen & Unwin Ltd., 1958)Google Scholar, especially Chap. 1.
2. The Second Plan, like its predecessor was not a comprehensive plan. The partial nature of the Second Plan was not merely due to the exclusion of the private sector, regarding which nothing was said, but also because it did not cover all of the activities of the public sector. It consisted exclusively of a public investment program covering merely that portion of public investments which was to be controlled by the Plan Organization, a portion which in actuality accounted for only about 50 percent of total public investments. The line of demarcation was determined essentially on the basis of a rather arbitrary arrangement for dividing the country's total oil revenues among the Plan Organization, the Ministry of Finance and the National Iranian Oil Company.
3. Baldwin, George B. Planning and Development in Iran (Baltimore: Johns Hopkins Press, 1967), p. 42.Google Scholar
4. At this juncture it is helpful to make a few remarks concerning some broad aspects of the investment program embodied in the Second Plan. Generally speaking, the basic methodological shortcoming of the Second Plan was not its lack of comprehensiveness, but the fact that the planning problem was approached in such a manner that it simply could not lead to optimal results. There is no evidence suggesting that the planners adopted any clearly defined planning methodology, including a method of ensuring internal consistency in the Plan. The investment decisions were made largely in an arbitrary fashion, and the selection of the investment projects embodied in the Plan did not follow from the application of any specific investment criterion. At the time, the overriding concern of the government was to launch an investment program of some sort as soon as possible. It was the size, rather than the composition, of the investment program which received the highest official consideration. Be that as it may, the proposed pattern of investments under the Second Plan was heavily biased towards investments in infrastructure and social overhead capital. Furthermore, the specific investments were dominated by a few highly capital- intensive and “monumental” projects, such as the multipurpose dams and the highways. In contrast, directly productive activities, in both agriculture . and industry, received low priorities. The large degree of concentration on capital-intensive projects, of course, prevented aggregate domestic output from increasing in proportion to investments. Output increases were even less than originally intended, although the original intentions were rather modest to begin with. This is revealed by the fact that roads and big dams absorbed almost 50 percent of actual investments, while according to original intentions the same programs were not supposed to absorb more than 20 percent of total planned investments. For further details see Daftary, Farhad Economic Development and Planning in Iran, 1955-1967 (Ph.D. dissertation, University of California, Berkeley, 1971), pp. 345-392.Google Scholar
5. Until 1964, the preparation of the government's annual general budget, which is sometimes also called the “ordinary” or “current” budget, was the responsibility of the Ministry of Finance. On the other hand, the so-called development budget, covering the transactions of the Plan Organization was prepared separately by the latter body. The budget of the Plan Organization was not a part of the government's general budget, but there was some overlap between the two. The general budget included some capital expenditures as well as some recurrent development outlays, while the budget of the Plan Organization covered some current expenditures. There was not a single capital, or development, budget as distinct from the ordinary budget in the country. Since 1964, the entire task of budgeting, in respect to both current and capital budgets, has been transferred to a special bureau, the Central Budget Bureau, in the Plan Organization. It should be noted, however, that still no close working relationship exists between planning and budgeting in general, and the preparation of the ordinary and capital budgets in particular. In other words, there still does not exist a unified and coordinated budget accounting for all of the government's revenues and expenditures. For further comments, see Daftary, Farhad “Development Planning and Budgeting in Iran,” in CENTO Seminar on Budget Administration (Ankara: Central Treaty Organization, forthcoming).Google Scholar
6. The government was basically unwilling to check its ordinary expenditures and planned for budgetary deficits, and deficit-financing, with respect to every single year during the Plan period. Actual deficits came to be even larger than the amounts anticipated by the government. See Plan Organization, Progress Report on the Second Seven Year Plan (in Persian, Tehran: Plan Organization, 1964)Google Scholar, Tables 11-12.
7. Excluding foreign exchange sold by the foreign oil companies operating in Iran to the Iranian government for rial expenditures in Iran.
8. See Baldwin, op. cit., p. 99; and Benedick, Richard E. Industrial Finance in Iran (Boston: Graduate School of Business Administration, Harvard University, 1964), pp. 19-20.Google Scholar
9. The par value of rial, which had remained unchanged since 1946, was devalued in March 1956, from 32.25 to 75.75 rials per U.S. dollar. However, the price of gold, which is used as 40 percent currency cover (with the remaining 60 percent mainly backed by the Crown Jewels), was not changed; the gold content rate still implied the pre-devaluation “official” exchange rate. In order to remedy the situation, the rial was revalued in terms of gold, according to the Note Reserve (Amendment) Act of May, 1957. The price of gold, held as note cover, was raised from 36.2901 to 85.2396 rials per gram. This revaluation did not affect the foreign trade sector. It only permitted the release of 7.1 billion rials, representing the difference between the old and the new value of the gold held as note cover, from the Issue Department to the Banking Department of the National Bank of Iran (then the Central Bank). The government decided to use the “windfall” revaluation fund as a loan program for the private sector. National Bank of Iran, Annual Report as of March 20, 1958 (Tehran: National Bank of Iran, 1958), p. 5Google Scholar; and Brutton, Henry J. “Notes on Development in Iran,” Economic Development and Cultural Change, Vol. 9 (July, 1961), p. 629.Google Scholar
10. The basic rate of interest charged was 6 percent. This compares rather favorably with the customary rates of at least 12 percent in the commercial banking system and rates of 18-36 percent charged by the lenders in the Bazaar, which is an important financial institution and a major supplier of loanable funds in Iran. For more details of the RLF, see Benedick, op. cit., pp. 102-118.
11. Private investment received a further impetus from a change in the distribution of income in favor of the upper-income groups, with higher propensities to save and invest. See Plan Organization, Outline of the Third Plan (Tehran: Plan Organization, 1961), p. 11.Google Scholar
12. For the relevant concepts and theories, see Hansen, Bent A Study in the Theory of Inflation (London: George Allen & Unwin, Ltd., 1951)Google Scholar, especially Chaps. 1,3,7 and 9; idem, A Survey of General Equilibrium Systems (New York: McGraw-Hill Book Co., 1970)Google Scholar, Chaps. 9-10; and idem, Long- and Short-Term Planning in Underdeveloped Countries (Amsterdam: North-Holland Publishing Company, 1967), pp. 41ff.Google Scholar
13. During the same period, the supply of labor increased rather significantly, with the result that money wages and wage costs were in general kept down. This tendency was further reinforced in the absence of effective labor unions and the generally weak bargaining position of labor vis-à-vis management in Iran. Therefore, one cannot speak in terms of a general cost-push inflation with respect to the domestic price rises of the period under consideration. See Plan Organization, Outline of the Third Plan, p. 12.
14. Brutton, op. cit., p. 632. See also Rasmussen, P. Norregaard “On the Interrelationships between Growth and the Distribution of Income,” in Marchal, Jean and Ducros, Bernard eds., The Distribution of National Income (New York: St. Martin's Press, 1968), pp. 522-29.Google Scholar
15. For example, see Hansen, Bent and Marzouk, Girgis A. Development and Economic Policy in the UAR (Egypt) (Amsterdam: North-Holland Publishing Company, 1965), pp. 231-32.Google Scholar
16. First, total credit expansion by the banking system was to be cut sharply; for the years 1339 (1960-61) and 1340 (1961-62), it was to be limited to 3 billion rials per annum. The minimum new credit requirements of the private sector, for the two years in question, had meanwhile been estimated at 10.5 billion rials, or 4.5 billion rials in excess of the total amount specified in the stabilization program. Therefore, in order to observe the credit ceilings, the net indebtedness of the public sector to the Central Bank was to be reduced by 2 billion rials in 1960-61 and 2.5 billion rials in 1961-62. These declines would require significant increases in the government's ordinary revenues and, more importantly, reductions in ordinary expenditures. Secondly, in addition to the above-mentioned change in its fiscal operations so as to achieve budgetary surpluses, the Ministry of Finance was also to transfer 1.9 billion rials (during the years in question) to the Plan Organization. The purpose of this transfer was to prevent further declines in the scope of the Second Plan. The full implementation of these measures would bring about surpluses in the ordinary budget, amounting to 2.75 billion rials in 1960-61 and 3.25 billion rials in 1961-62. The full texts of the stabilization program and its two subsequently revised versions are given in Central Bank of Iran, Bulletin, Vol. 1 (Jan.-Feb., 1963), pp. 24-33.Google Scholar See also idem, Annual Report as of March 20, 1962 (in Persian, Tehran: Central Bank of Iran, 1962), pp. 10-17.Google Scholar
17. Benedick, op. cit., p. 15.
18. Central Bank of Iran, Annual Report as of March 20, 1963 (Tehran: Central Bank of Iran, 1963), p. 9.Google Scholar
19. For example, in 1962, the Central Bank reduced the liquidity ratio imposed on commercial banks in order to enhance their lending potentiality, and in 1963, the rediscount rate was reduced from 6 to 4 percent.
20. See Central Bank of Iran, Annual Report as of March 20, 1971 (Tehran: Central Bank of Iran, 1971), pp. 132-134.Google Scholar
21. According to the official price indices, as calculated by the Central Bank, the general index of wholesale prices rose by 7 percent during 1350 (1971-1972).
