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Iran
The Beginnings of Modernization: The Post-1925 Period
Reza Shah introduced the concept of centralized economic planning
to Iran at the expense of older societal values and traditions
(see The Era of Reza Shah, 1921-41 , ch. 1). Reza Shah consolidated
power by developing support in three areas: the army, the government
bureaucracy, and the court circle. Once his power was consolidated,
he pursued economic, social, and cultural reforms. Reza Shah believed
that the secret of modernization lay in replacing many religious
and social norms of traditional society with the values of a twentieth-century
nation-state. Reza Shah's policies favored the urban over the
rural, the wealthy over other classes, and industry in general
over agriculture. Developing this "new order" gradually cost Reza
Shah most of his base of support. Nevertheless, government centralization
enabled him to achieve full control over the economy.
Economic development began with the expansion of the transportation
system. The first project was the expansion of the Trans-Persian
Railway. In the first five years of his reign, Reza Shah developed
a network of railroads that connected ports to inland cities,
thereby encouraging trade between rural and urban centers. By
1941 railroads crossed Iran from north to south and from east
to west (see Transportation and Telecommunications , this ch.).
The existence of a modern transportation system by the 1930s
encouraged industrial growth, which was further promoted by government
financial incentives. Construction of modern manufacturing plants
was a high priority, as was the development of whole industries
rather than small, individual factories. Financial incentives
included government- sanctioned monopolies, low-interest loans
to prospective factory owners, and financial backing for plants
and equipment by the Ministry of Industry. The number of industrial
plants (excluding those processing petroleum) increased 1,700
percent during Reza Shah's reign.
In 1925 only about twenty modern plants existed, of which five
were relatively large, employing about fifty workers each. By
1941 the number of modern plants had risen to 346, of which 146
were large installations. These large plants included thirty-seven
textile mills, eight sugar refineries, eleven match factories,
eight chemical companies, two glassworks, one tobacco-processing
plant, and five tea-processing plants.
Between 1926 and 1941, the oil industry labor force increased
from 20,000 to 31,000. By 1941 the oil industry employed 16,000
workers at the Abadan refinery and another 4,800 at drilling sites
in Khuzestan. These wage earners, in conjunction with those employed
in emerging modern industrial enterprises, formed a working class
of about 170,000 and represented about 4 percent of the total
labor force in 1941.
Rapid industrial growth created a modern, urban working class
that nonetheless coexisted with people who had more traditional
occupations, values, and ways of life. This new industrial work
force developed in the five major urban centers, where 75 percent
of the modern factories were located: the towns of Tehran, Tabriz,
and Isfahan, and the provinces of Gilan and Mazandaran. Tehran's
population alone increased from more than 196,000 in 1922 to about
700,000 by 1941. Modernization accelerated the pace of life through
changes in culture, education, and traditional social norms, including
those governing the role of women.
The cost of developing the military establishment, centralized
ministries, large-scale industrial plants, and institutions of
higher education increased the budget nearly 1,800 percent during
Reza Shah's reign. The Iranian national budget grew from approximately
US$15 million in 1925 to US$166.5 million in 1941 (based on the
1936 exchange rate). Because industrial development was predicated
on oil revenues, the government's lack of control over the oil
industry created periodic tensions with foreign oil companies.
The emphasis on industrial development also demonstrated the need
for development planning.
The concept of development planning by the government dates back
to 1947, when it was initiated by Mohammad Reza Shah's government
as a series of seven-year cycles. The Plan Organization consisted
of leading government officials, who provided guidelines from
which a development strategy was formed. Planning had a direct
impact on the public sector because of its effect on allocations
of capital expenditures. In Iran's mixed economy, however, the
planners had no direct power over private sector investments and
development; instead, they had to rely on indirect measures, such
as fiscal and financial incentives.
The First Development Plan (1948-55) failed, except for strengthening
the role of the Plan Organization, which, after 1973 was called
the Planning and Budget Organization and in January 1985 was transformed
by the parliament, or Majlis (see Glossary), into a ministry.
The basic development strategy was the pragmatic approach of accelerating
growth by incorporating the latest technology into large-scale,
capital-intensive industry. Expansion of the infrastructure, however,
preceded the development of industry. The planners often built
ahead of demand, creating physical and economic incentives for
the private sector. Diversification of industry was also a goal,
although the planners recognized that the excessive dependence
on oil revenues would have to continue at first to provide the
capital to diversify. Diversification was intended to facilitate
import substitution, and development of large-scale industry meant
that many plants producing for export could achieve economies
of scale.
The Second Development Plan (1955-62) focused on public sector
expenditures, with an investment program to be funded by foreign
loans and 80 percent of oil revenues. The government spent so
much money, however, that the regime faced severe inflation and
depleted foreign currency reserves by fiscal year (FY--see Glossary)
1959. Although Iran was experiencing economic problems, the plan
provided for the construction of several reservoir dams, the most
important of which were located on the Dez, Safid, and Karaj rivers.
Simultaneously, private sector investment in light industry remained
strong until the economic crisis that began in 1959.
During the middle and late 1950s, economic instability exacerbated
chronic social problems, such as overcentralization of government,
concentration of land in the hands of relatively few wealthy landlords,
enormous bureaucracy, and regressive tax laws. As early as 1949,
the shah voiced his intention to consider needed changes, especially
in land reform. It was not until the 1960s, however, that he actually
instituted agrarian reform. The intervening decade was a period
of consolidation following the regime of Reza Shah; it also featured
a period of government control by Mohammad Mossadeq (see Mossadeq
and Oil Nationalization , ch. 1).
Data as of December 1987
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