Hostname: page-component-cd9895bd7-8ctnn Total loading time: 0 Render date: 2024-12-26T18:39:27.094Z Has data issue: false hasContentIssue false
  • English
  • Français

The Inflationary Process of the Iranian Economy, 1970–1980

Published online by Cambridge University Press:  29 January 2009

Kamran M. Dadkhah
Kamran M. Dadkhah
Affiliation:
Department of EconomicsNortheastern University
Get access Rights & Permissions [Opens in a new window]

Extract

During the past decade, the Iranian economy has experienced two severe shocks. The first was the huge increase in oil revenues and the subsequent increase in government expenditures. The second was the Iranian revolution, with the concomitant flight of capital and production setbacks. The first shock produced in the Iranian economy severe inflation that, although not unfamiliar to the Iranians, has been unprecedented in scale and is still accelerating. Analysis of the causes of this inflation is important for understanding the course of events and for predicting future trends.

Type
Articles
Information
International Journal of Middle East Studies , Volume 17 , Issue 3 , August 1985 , pp. 365 - 381
Copyright
Copyright © Cambridge University Press 1985

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Author's note: I would like to thank Irwin Herrnstadt, Edward Shea, Fatemeh Zahedi and an anonymous referee for their many helpful comments.Google Scholar

1 For an account of this period in Iranian history, see Abrahamian, E., Iran: Between Two Revolutions (Princeton, 1982), Chs. 9–11;Google ScholarKeddie, N. R., Roots of Revolution: An Interpretive History of Modern Iran (New Haven, 1981), Chs. 7–9;Google ScholarCottam, R. W., Nationalism in Iran (Pittsburgh, 1979), Ch. 18;Google ScholarKatouzian, H., The Political Economy of Modern Iran: Despotism and Pseudo-Modernism. 1926–1979 (New York, 1981), Part IV;CrossRefGoogle ScholarGraham, R., Iran: The Illusion of Power (New York, 1980);Google Scholar and Halliday, F., Iran: Dictatorship and Development (New York, 1979). The first three are more general accounts of the Iranian society, and the last three are more concerned with the economy.Google Scholar

2 Discussions of different models of inflation can be found, as well as in many macroeconomics texts, in Trevithick, J. A. and Mulvey, C., The Economics of Inflation (New York, 1975),Google Scholar probably the best and most comprehensive book; and in Hague, D. C., ed., Inflation (New York, 1962),CrossRefGoogle Scholar and Laidler, D., Essays on Money and Inflation (Chicago, 1975).Google Scholar

3 Keynes, J. M., The General Theory of Employment, Interest and Money (London, 1936).Google Scholar

4 Maital, S., “Inflation, Taxation and Equity: How to Pay for the War Revisited,” Economic Journal, 82 (1972), 158–67;CrossRefGoogle ScholarHansen, B., A Study in the Theory of Inflation (London, 1951);Google Scholar Trevithick and Mulvey, Economics of Inflation, Ch. 2. Interestingly enough, Friedman, in his “Discussion of the Inflationary Gap,” in Essays in Positive Economics (Chicago, 1953), pp. 251–62, argues along the same lines.Google Scholar

5 The model presented here is based on S. Maital, “Inflation,” which, in turn, is based on Keynes, J. M., How to Pay for the War (London, 1940). For other references, see footnote 4 above.Google Scholar

6 For a quantity theory explanation of inflation, see Friedman, M., ed., Studies in the Quantity Theory of Money (Chicago, 1956), pp. 3–21;Google Scholar and Friedman, M., The Optimum Quantity of Money and Other Essays (Chicago, 1969);Google Scholar D. Laidler, Essays; Vane, H. R. and Thompson, J. L., Monetarism: Theory, Evidence and Policy (New York, 1979); and Trevithick and Mulvey, Economics of Inflation, Ch. 8.Google Scholar

7 Money (narrowly defined) is the sum of currency in circulation outside the banks and demand deposits. High-powered money (which will be referred to later on) is defined as currency plus banks' reserves with the central bank.Google Scholar

8 These services, in turn, provide the motives for holding money: the transactions motive, precautionary motive, and speculative motive. Today, with the high rate of inflation and introduction of certificates of deposit, the last motive is almost nonexistent. For elaboration of these subjects, see Baumol, W. J., “The Transactions Demand for Cash: An Inventory Theoretic Approach,” Quarterly Journal of Economics, 67 (1952), 545–56;CrossRefGoogle ScholarTobin, J., “The Interest-Elasticity of the Transaction Demand for Cash,” Review of Economics and Statistics, 38 (1956), 241–47;CrossRefGoogle Scholar and Tobin, J., “Liquidity Preference as Behavior Toward Risk,” Review of Economic Studies, 25 (1958), 65–86.CrossRefGoogle Scholar

9 References for cost push models are Chamberlin, E. H., “Labour Union Power and Cost Inflation,” in Hague, . ed., Inflation, pp. 221–32;Google ScholarPedersen, J., “Wages and Inflation,” in Hague, , ed., Inflation, pp. 233–47;Google ScholarLaidler, D. and Purdy, D., eds., Inflation and Labor Markets (Manchester, U.K., 1974);Google ScholarWiles, P., “Cost Inflation and the State of Economic Theory,” Economic Journal, 83 (1973), 377–98;CrossRefGoogle ScholarTrevithick and Mulvey, Economics of Inflation, Chs. 3 and 6;Google ScholarMeans, G. C., “The Administered-Price Thesis Reconfirmed,” American Economic Review, 62 (1972), 292–306;Google Scholar and Nordhaus, W. D., “Inflation Theory and Policy,” American Economic Review, 66 (1976), 59–64. Note that cost push theory can be applied to the international scene as well. Oil price increases by OPEC countries is an example.Google Scholar

10 The model is general and can be extended to the case of many classes and even different strata of workers in a society.Google Scholar

11 In the case of Iran, additional tax and total domestic borrowing are altogether negligible. Oil revenues and external borrowing are received in the form of foreign exchange. If they are spent on foreign goods and services, they do not affect supply and demand in the domestic market, as was pointed out above. If they are sold to the central bank, which pays for the foreign exchange by printing money, it is no different from deficit financing by resorting to monetary expansion.Google Scholar

12 In the case of Iran, inflation prior to 1978 cannot be attributed to cost push because there were no active, independent unions. However, during the revolution, wage increases led the way, and monetary expansion was the accommodating factor. The cost push effect of the rise in the prices of capital and intermediate inputs or imported inflation cannot be ruled out and are discussed in Section III.Google Scholar

13 The rate of change of GDP is computed from the latest figures of Bank Markazi and reflects annual changes. The rate of change of the consumer price index reflects the change in the fourth quarter (Iranian year) index over the previous year's fourth quarter. The rate of change of the money supply is computed from the figures for the end of the third quarter of each year. Thus, the rate of change of the money supply has a one quarter lag to allow for its effects to materialize in the economy.Google Scholar

14 Monetization refers to the increase in the role of money in the economy, as parts of the economy which were outside of the monetary system and practiced barter exchange of goods and services become integrated into the monetary system and use money in their transactions.Google Scholar

15 The official reaction was to blame the inflation of other countries. “The Shah, the P.M. and others repeatedly mentioned inflation in the industrially developed countries as a factor influencing the economic development of Iran” (Ettela'at, 8, 24 February 1970);Google ScholarDishon, D., ed., Middle East Record (1969–1970), (Jerusalem, 1977), p. 697.Google Scholar Accounts of the Iranian economy prior to 1970 can be found in Bharier, J., Economic Development in Iran, 1900–1970 (London, 1971);Google ScholarIssawi, C., “Iran's Economic Upsurge,” The Middle East Journal (1967), 447–61;Google ScholarIssawi, C., “The Iranian Economy, 1925–1975: Fifty Years of Economic Development,” in Lenczowski, George, ed., Iran under the Pahlavis (Stanford, 1978), pp. 129–66;Google ScholarMcLachlan, , “The Iranian Economy, 1960–1976,” in Amirsadeghi, H., ed., Twentieth Century Iran (New York, 1977);Google Scholar and Amuzegar, J. and Fekrat, M. A., Iran: Economic Development under Dualistic Conditions (Chicago, 1971).Google Scholar

16 Therefore, the government was pressing the oil companies for more production. The Shah, addressing the director of the National Iranian Oil Company (NIOC) in March 1969, said, “Our present partners the oil consortium … do not pursue a fair or even a farsighted policy in respect of the development of oil industry in Iran.” He wanted “the level of production in Iran to be based on its development needs and not on the commercial requirements of the consortium.” A senator was even more direct: “If despite our very rich national resources we are going to face a shortage of funds in carrying out our Five Year Development Plan, it would be difficult to see how such a co-operation with the consortium can continue” (Dishon, Middle East, p. 699.)Google Scholar

17 Graham, R., Iran, pp. 15–19.Google Scholar

18 The difference between the total value of oil exports and government revenues from oil has puzzled many. Part of the difference can be explained by the time lag between exports and the realization of revenue, and part by the practice, by NIOC, of keeping a portion of oil revenues to itself as compensation for certain for certain expenditures. However, not all of the discrepancy can be explained away. So far as I am aware. Fereidun Fesharaki was the first to raise this question.Google Scholar

19 This policy, together with high domestic demand, drastically reduced the nonagricultural, nonoil exports of Iran.Google Scholar

20 “A Survey of Iran: Quiet Thee Now and Rest,” The Economist, 08 28, 1976.Google Scholar