Table of Contents
2. The 20th Century - An Overview
3. Resource Curse
3.1 Resource Curse
3.2 Dutch Disease
3.3 Rentier State
4. Curse, Blessing or Other
4.1 Empirical Analysis
4.2 Scharia & Islamic Banking
Irans GDP growth rate is below average compared to other developing countries1. It faces the same problems of stagnant or low growth and unemployment, which have become relevant for other natural (fossil) resource rich countries foremost in the 20th century as well. Economists have tried to explain this paradox. With the most prominent named by economist Richard Auty in the 1990’s as Resource Curse or Paradox of the Plenty2. In short, it states that this resource abundance, paradoxically, does not fuel an increase in growth and a boost in wealth, but instead leads to overall underperforming economies.
In this paper however, I will take a look at the different obstacles Iran had and has to face, including the Dutch Disease. I will argue that evidence to support this theory is weak. And that other factors are also relevant to explain the curse. Political institutions play a large role to contribute to, or to counter negative economical effects. I will also argue that rentseeking behavior of political actors is a relevant issue for the curse. And that the influence of the Islamic rule set shape the economic portfolios. Also, powerful monopolistic institutions such as the bonyads contribute to the inefficient and underperforming Iranian economy. Thus the Iran would not be a victim to the resource curse but rather her own perpetrator.
I will start with an overview of the historical events in the 20th century, then briefly explain the theories behind the resource curse. Discussion of institutional failures, the economic, and the belief system will then shape a basic picture of Irans oil industry and its effects on - and vice versa - the political, economical and religious landscape over the last century.
2. The 20th Century - An Overview
In principle, the developments in Iran concerning the oil industry can be categorized into three distinct phases. The first can be drawn around 1908 to 1959, with the discovery of oil resources, and the start of production. The second between 1960 and 1978 with an increased relevance of the oil industry for Iran, and the last phase starting with the revolution in 1979.
1908-1959. 1901, William D’Arcy started his search for oil with the consensus of the Shah in Iranian territory, granting the latter a 16% share of net profits. 1908 marked the finding and production start of oil, after almost seven years without findings. Shortly after, the Anglo Persian Oil Company (APOC) was founded, belonging to the British under the influence of Churchill3. Thus, the British Navy was its single largest buyer. Even with a 23 fold production increase in the first two decades, due to discounts to the Navy net profits remained low and so did income for Iran. With failed renegotiations between the parties, the APOC was nationalized in 1951 and renamed Anglo Iranian Oil Company (AIOC)4. The results however were not increased income, but falling productivity and an embargo by the British. 1953 under the British umbrella, the CIA delivered a coup against the Mossadegh government and was replaced by the pro-Western Iranian government around Prime Minister Fazlollah Zahedi5. Oil drilling rights were redistributed to several interested parties, including the British Petroleum (BP) and the Royal Dutch Shell. With a new 50/50 split of profits between the companies and the government6.
1960-1978. Oil was now the single most important source of income for Iran. With the introduction of the OPEC fostering profits by stabilizing oil prices over the next decade. Although the Shah attempted to introduce political and social reforms with a pro western course, such as the right to vote for women7. Opportunities for reforms and investments in the economic sector were missed. Income was spent rather than invested in reforms having long term economic impacts. Inflation rose and oil reserves depleted fast. Thus the public’s anger aggregated and with the help of the clerics started the revolution8.
From 1979. The February Revolution led to the fall of the government leaving the provisory government of Bazargan in place. It also marks the first time in Iranian history of controlled oil production, with a decrease of about 30% in total production and the end for discounts introduced by the former NIOC. All in an effort to stabilize oil prices. Oil production stayed low for a longer period than intended with the Iran-Iraq war between 1980 and 1988 naturally reducing productivity. Nonetheless, oil income remained high even though this period was marked by highly volatile world oil prices and the OECDs loss of influence in the 1980s. With the end of the war oil production and export began to increase again. But the new world prices remained highly volatile and thus did income for Iran9.
3. Resource Curse
3.1 Resource Curse
Named by Richard Auty in 1993, the resource curse is a theory also known as the paradox of plenty and has been on economists’ minds since the middle of the 20th century. It is generally explained as the phenomena wherein the exploitation of a country’s natural fossil (non-renewable) resource leads to economic stagnation and political instability. Observed was this paradox empirically in the 1970s where most natural resource rich countries constantly underperformed compared to counterpart economies with regards to GDP, good governance and income equality10. This was in stark contrast to Adam Smith’s and David Ricardo’s arguments that an abundance of natural resources give countries an absolute or at least comparative advantage. With resource abundant countries such as Norway, Malaysia, Finland and Indonesia showing growing and flourishing industries, despite the curse theory, the phenomenon apparently cannot be explained as inherent consequence11. Economists found two main explanations for the resource course. On one hand the dutch disease and on the other the rentier state problem: governance failures.
1 International Monetary Fund (IMF): Regional Economic Outlook, Middle East and Central Asia, various years. Washington 2014. Also Alizadeh, Parvin; Hakimian, Hassan (publ.): Iran and the Global Economy. Petro Populism, Islam and Economic Sanctions. New York 2014, p. 88.
2 Auty, Richard M.: Sustaining Development in Mineral Economies: The Resource Curse Thesis. London: Routledge 1993.
3 Mohaddes, Kamiar; Oesaran, Hashem: One hundred years of oil income and the Iranian economy. A curse or a blessing? In: Alizadeh, Parvin; Hakimian, Hassan (publ.): Iran and the Global Economy. Petro Populism, Islam and Economic Sanctions. New York 2014, p. 14.
4 Cf. ibid, p. 15f.
5 Cf. ibid, p. 17.
6 Cf. ibid, p. 18.
7 Hornung, Steffen: Das politisch-administrative System der Islamischen Republik. In: Felgentreff, Carsten (publ.): Die Islamische Republik Iran. Eine Studienreise. Potsdam 2006, p. 9f.
8 Cf. Mohaddes, One hundred years of oil income and the Iranian economy, p. 18ff. Also Hornung, Das politischadministrative System der Islamischen Republik, p. 11.
9 Cf. Mohaddes, One hundred years of oil income and the Iranian economy, p. 20-22.
10 Cf. ibid, p.23-25.
11 Same, Achille Toto: Mineral-Rich Countries and Dutch Disease: Understanding the Macroeconomic Implications of Windfalls and the Development Prospects. The Case of Equatorial Guinea. The World Bank. Africa Region Economic Management Department. 2008, p. 3.