The Fate of the Structural Adjustment Program

After the cease-fire with Iraq in 1986, when its economy was in the worst state since the revolution, Iran began a series of economic reforms which later were consolidated in a structural adjustment program within the context of the first five year plan. These reforms included easing price controls, liberalizing foreign trade, instituting a unified foreign exchange rate, reducing government controls on the banking sector, privatizing some state enterprises, and cutting the budget deficit. The economy experienced a period of rapid growth, but, by 1993, faced a crisis stemming from the government's inability to service its foreign debt. The response to the balance of payments difficulties and the inflationary pressures that had built up was to slow down the reforms considerably and to reimpose price controls and exchange and trade restrictions.

The failure of the structural adjustment program to provide the basis for sustainable growth can be attributed only partly to the extent, timing, and internal consistency of the reforms. The currency devaluation was at first too little, necessitating a large and disruptive adjustment at the time of the final exchange rate unification in 1993. Concern with the impact of reforms on living standards made the government reluctant to reduce consumer subsidies significantly, even though per capita consumption was growing rapidly. In addition, wages and salaries were raised several times and a distinctly pro-worker labor law was enacted. Consequently, income distribution, which usually worsens during structural adjustment, improved slightly. The government privatized many publicly-owned firms but continued to invest heavily in new enterprises. The reduction in the budget deficit came mainly from the sale of foreign exchange at the new competitive and floating rates rather than from higher tax revenues and reduced expenditures.

The ineffectiveness of the reforms can be blamed primarily on the government's failure to carry out the stabilization program. Unrealistic assumptions about the extent of unused capacity in the economy, the availability of foreign capital, and the growth of non-oil exports led the government to follow overly expansionary policies. Domestic demand grew more rapidly than planned while output failed to reach the plan targets, causing a marked rise in the rate of inflation. The trade deficit was financed mostly through short term borrowings which eventually led to balance of payments difficulties. The cause of the present crisis is clearly not the reform measures but the inappropriate policies that enabled the country to live beyond its means for a while. The imposition of more controls, to which the government has turned again, will only exacerbate the structural imbalances of the economy.

* Abstract prepared by the author

Vahid Nowshirvani
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