The Role of Industry in Iran's Future Growth

During the latter part of the war with Iraq (years 1986 to 1988) the Iranian GDP declined to around 80 percent of the pre-revolutionary (1977) level. The first post-war Five Year Plan, which came into effect at the beginning of 1989, placed the industrial sector at the vanguard of the Iranian economic recovery. Thus, manufacturing was to grow at an average annual rate of 14 percent, while its structure would radically shift towards the production of intermediate and capital goods. The emphasis on the export of manufactured products also formed a cornerstone of the government's growth strategy.

While the achievement of manufacturing growth was reasonably on track during the first three years of the Plan (almost totally due to the existence of large underutilized capacity and enormous imports of imported inputs), the growth rates declined to 3.2 percent and 1.0 percent in 1371 and 1372 respectively. Consequently, not only has the average annual growth of manufacturing during the Plan dropped to around 9 percent, the results clearly demonstrate that the Iranian manufacturing sector remains increasingly dependent on imported inputs for its growth, a fact that led to its decline once the foreign exchange crisis of the last two years slowed the flow of intermediate imports. This is particularly damning for a regime that once excoriated the pre-revolutionary Iranian policy makers as encouraging import dependency. In fact, it was the long list of manufacturing units under construction or near completion in 1978: synthetic fibers, petrochemicals, steel, cement, copper, aluminum, plants manufacturing capital goods, etc., that prevented higher dependency in the post-revolutionary period.

Of late, and especially during the discussions leading to the formulation and approval of the Second Five year Plan, some planners have rekindled the old and, now, totally discredited concept of export pessimism. At a time when many proponents of this line of thinking have either abandoned or radically shifted their previous positions, these Iranian economists talk about inward-looking self- reliance. While this may be a reflection of the response to the external political hostility to the regime, it is, nonetheless, disconcerting. Now that Iran has lost much of its economic strength, and is facing daunting challenges, the first order of business in putting the economy on a course to sustainable growth should be to reduce its dependence on the income and foreign exchange derived from the export of petroleum. And this calls for an export-oriented trade and industrial policy that would act as an engine for economic growth and employment creation. The experience, accumulated over the last quarter century, shows that not only have the export-oriented economies, such as those of the Asian Tigers, performed much better, but also that the distribution of income in many of these countries has improved over time.

While the achievement of the pre-revolutionary growth levels may appear a dream, the economy should not be doomed to a low growth path through the adoption of inward-looking policies. Iran's human resources should be trained and mobilized for a manufacturing sector capable of creating a place for itself in the global market with goods of the right quality at competitive prices. This requires an export-oriented strategy that would take advantage of Iran's significant natural resources for the economic advancement of the nation.

* Abstract prepared by the author

Farrokh Najmabadi
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