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The Effects of an overvalued Exchange Rate on The Iranian Economy,1979–1984

Published online by Cambridge University Press:  29 January 2009

Wolfgang Lautenschlager
Wolfgang Lautenschlager
Affiliation:
Pseudonym for a businessman with interests in Iran.
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Extract

The Iranian economy under the Islamic Republic has been strongly influenced by factors which lie for the most part outside the Iranian government's control, in particular lower oil sales due to the Iraqi attack and to the world-wide oil glut. One should not underestimate, however, the impact of the policies which have traditionally most concerned economists, namely, the government budget and monetary matters. The major thesis of this article is that the Islamic Republic's economy has been heavily influenced by an overvalued exchange rate which has: (a) forced reductions in government development spending; (b) fueled inflation as the government printed money to finance its deficit; (c) worsened the imbalance in foreign trade by encouraging imports and discouraging non-oil exports; (d) subsidized the consumption of imported goods, primarily benefiting the urban population, especially the rich; (e) distorted the allocation of resources in favor of commerce at the expense of production; and (f) benefited well-to-do merchants at the expense of poorer farmers and artisans.

Type
Articles
Information
International Journal of Middle East Studies , Volume 18 , Issue 1 , February 1986 , pp. 31 - 52
Copyright
Copyright © Cambridge University Press 1986

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References

Notes

1 Keyhan, 15 May 1983.

2 E.g., Majlis speaker Rafsanjani, Keyhan, 23 September 1984.

3 Multiplying the 1978/79 exchange rate by changes in the consumer price index since then.

4 While some institutions and corporations in Iran may have borrowed from abroad since the revolution, and while the Central Bank and some other institutions repaid foreign loans (in part as a result of the Algiers agreements of January 1981), the government of the Islamic Republic appears to have neither borrowed nor repaid much abroad. The differences between the reported government deficit and the banking system records may be due to various reasons such as leads and lags in payment of bills.

5 The criticism of the official inflation index has been generally misplaced. Observers have been misled by the increase in the price of goods, which was much more rapid than the rise in housing costs during 1977–81. In the official index, food prices rose 15 percent per year before 1977/78 and 35 percent after—meaning that food prices would be six times their March 1978 level in March 1984, according to the official data. Lists of food prices roughly corroborate the official index. For instance, chicken prices in rials per kilogram were 140 in the summer of 1979, 235 in the summer of 1981 (Ittihad-e mardom, 15 February 1982) and officially 260 from May 1984 (Keyhan, 27 March 1984). On the other hand, in the three years before 1977/78, housing prices rose 42 percent per annum, compared to less than 3 percent year in the succeeding four years, due to government policy to hold down rents and to reduce land speculation. Since 1982/83, housing prices have increased at roughly the same pace as the price of goods.

6 Etelaat, 4 July 1984.

7 For instance, for automobiles; Etelaat, 11 February 1983.

8 Economic theory states that businessmen will increase the scale of their operations up to the point where the marginal cost, which is increasing with larger scale, equals marginal revenue, that is, the extra cost of procuring the last unit of output equals the extra revenue from the sale of that unit. Under perfect competition, marginal revenue equals price, with the result that price equals marginal cost.

9 Etelaat, 11 March 1983. The estimate of the value of the kits in relation to the value of the cars is from Talbot, the U.K. supplier; Financial Times, 29 December 1983.

10 Etelaat, 3 November 1983 and 3 April 1984; Keyhan, 8 November 1984.

11 The smuggler who is primarily avoiding customs duties needs only to smuggle in, while he who is circumventing foreign exchange controls needs to smuggle out at least as much as to smuggle in.

12 Etelaat, 22 November 1984.

13 Etelaat, 14 July 1983.

14 Article 44 of the Constitution states that foreign trade “will be publicly owned and administered by the state.”

15 Under the Foreign Trade Monopoly Act of 23 February 1931 and a supplement passed the next month, the right to export nearly all products became the monopoly of the government. In practice, over the next 25 years, private importers generally had to purchase certificates for the amount they wished to import, while exporters earned such certificates from the sale of goods abroad.

16 An important theme in 1981, e.g., Keyhan, 12 October 1981 and Etelaat, 27 October 1981.

17 Etelaat, 13 May 1983 and 6 June 1984.

18 Keyhan, 8 September 1984 and 23 October 1984.

19 Keyhan, 30 August 1984.

20 The black market exchange rate dropped briefly from 600 rials per dollar to 450 rials, a sign of business confidence and willingness to keep funds in Iran rather than take them overseas.

21 Such as Majlis speaker Rafsanjani's speech; Keyhan, 8 September 1984.

22 Other important industrial projects which have now opened or on which work resumed are thesecond blast furnace of the Soviet-built Isfahan steel mill and the Mubarak steel mill near Isfahan. Infrastructure projects include the Bandar Abbas–Kerman railroad, several road projects, the Chah Bahar port, the 2,000 MW Martyr Rezaii electrical plant west of Tehran, a 744 MW plant near Tabriz, a 600 MW unit near Meshad, and an 800 MW plant near Isfahan.

23 The drop in automobile production from 77,000 in 1981/82 to 60,000 in 1982/83 was clearly due to a shortage of imported inputs; Etelaat, 9 October 1983.

24 International Labour Organization, Employment and Income Policies in Iran, Geneva, 1973.Google Scholar

25 The survey was reported in the Iranian press on 13 August 1983. The total urban population was 23.2 million. The 1976 census data available to me do not allow a completely clear identification of urban employment.

26 Paradoxically, bureaucratic inefficiency at granting import licenses for vital industrial inputs has to some extent helped small industry, because small firms are able to respond quickly to produce domestic substitutes for the scarce input–production at a cost which would never be economical were it not for the bureaucratic foul-up.

27 One example from a great many such articles is Keyhan, 10 June 1984.

28 The post-revolutionary Central Bank reports list wheat output in 1976/77 as 6.0 million tons, while the 1980/81 and 1981/82 production are each given as 6.6 million tons. The Ministry of Agriculture cited a 1983 crop of 6.0 million tons, but the breakdown of that output between irrigated and non-irrigated wheat implied a production of 4.5 million tons; Etelaat, 20 October 1983.

29 Keyhan, 14 November 1984.

30 The National Meat Organization estimated the 1982/83 output at 400,000 tons (Sobh-e Azedagan, 10 November 1983) and the Ministry of Agriculture cited 1983/84 output as 450,000 tons (Etelaat, 25 November 1984), while both listed imports as one-third of consumption.

31 The Agricultural Ministry announced it has purchased 2 million tons of chicken feed for 1984/85 (Keyhan, 9 December 1984), or up to twice the 1982/83 level.

32 Keyhan, 5 December 1984 and 10 December 1984. The original budgeted figures for 1984/85 were lower; Etelaat, 27 March 1984. The main nonfood subsidy is 40 million rials for fertilizer.

33 The agricultural pricing policy of the imperial government is well described in Hooglund, E., Land and Revolution in Iran 1960–1980 (Austin, Texas: 1982), pp.111–114.Google Scholar

34 Etelaat, 12 April 1984.

35 Permits were needed to take more than 50 kilograms of the rice preferred by consumers out of Gilan or Mazendaran, the rice-growing provinces; Etelaat, 23 January 1984. The government's explanation was a desire to encourage production of a higher-yielding rice.

36 While 7.5 million ration cards were distributed in Tehran, the nation-wide discrepancy between ration cards and estimated population was 13 percent; Iran Reflected in Statistics (Iran dar A⊂ineh-e Amar), Central Statistical Office of Iran, 1983.

37 Etelaat, 1 February 1984.