Dr. Mousa Ghaninejad, Senior Economist

Once it was thought that the reason for underdevelopment of Third World countries is vicious circle of poverty. The vicious circle of poverty is that a poor society cannot get rid of poverty for two economical reasons. One reason is lack of savings due to low incomes which prevents accumulation of capital and subsequent investment. The other reason is that due to poverty, demand in the market is limited and, therefore, there is no motivation for more investment and production. This theory excludes an internal approach to economic development and proposes foreign aid or external capital for breaking up the vicious circle of poverty. This theory and related development strategies were historically tested in decades following World War II in many countries, but the results were not satisfactory.

In reality, capital, as a precondition for economic progress is more complicated than what is looks at the beginning. As long as capital formation has not turned into an intrinsic affair of the economy, injecting capital will not solve problems, but will add to maladies. The windfall capital resulting from oil sales in Third World oil exporting countries is a major example. Huge financial facilities of those countries have failed to use petrodollars for promoting economic growth. Economic fate of such societies, which is frequently vulnerable, has been strongly tied to a major extrinsic factor, which is international oil price.

Iranian governments have been seeking to realize an oil-independent economic system for more than half a century and it was one of the main goals of revolutionary movement during the Islamic Revolution. However, the curse of petrodollars is more powerful to make way for such aspirations. Following high oil prices in early 1970s, the Iranian Shah, who was earning huge revenues all of a sudden, dreamt of moving toward “Big Civilization” and turning Iran into another Japan. Therefore, injecting petrodollars into the Iranian economy continued in spite of overt and covert warnings issued by far-sighted economic experts. Harmful effects of that policy in terms of wastage of resources, severe imbalances and inflation became manifested much earlier than was previously thought. The structure of national economy became heavily state-run and despite high per capita revenue, public dissatisfaction was rising. Interestingly, economic performance of the government during that period (1973-1977) which coincided with the third and fourth five-year development plans of the past regime was weaker than predicted by the government and economic growth was stymied.

The big mistake committed by Shah was that he thought petrodollars could be easily turned into productive capital. You can buy everything with oil money including machinery (physical capital), but merely owning machinery does not mean increased production and productivity.

Despite the fact that post-revolutionary politicians and decision makers talked about an economy which would not be dependent on oil, in practice, they attached a lot of importance to oil earning. They stressed that oil revenues had been used for encouraging consumption of consumer goods and if essential goods were imported in their place, economic situation would improve. In reality, however, Iran’s oil earning has greatly increased over the past 30 years and, apart from three first years after the revolution (1979-1981), the value of consumer goods imported has never exceeded 20 percent of total imports. In most of those years, more than 80 percent of total imports were comprised of intermediate and capital goods.