Iran: Planning A New Mirage

By-Jahangir Amuzegar*

In early December 2014, the Rohani government announced the decision to reinstate the Management and Planning Organization – the agency in charge of economic development planning since 1948 – which President Ahmadinejad had abolished in 2007 as part of his administrative reorganization. The reestablishment move was preceded in late September 2014 by the completion of the Sixth Plan’s “framework” for the 2015-20 period – while more than a year was still left of the ongoing moribund, and widely ignored, Fifth Plan (2010-15).

This review intends to use the vast and highly illuminating experiences gained from the performance of the five consecutive economic development plans undertaken by the Islamic Republic in the last 35 years since the 1979 revolution, to examine the wisdom and usefulness of embarking on yet another one.

THE PLANNING HERITAGE

The concept and machinery of “economic planning” has been one of the rare monarchy institutions kept by the succeeding revolutionary government, and enshrined in the Islamic Republic’s 1979 Constitution. Articles 3 and 44 of the new basic law call for the “the planning of a correct and just economic system in accordance with Islamic criteria” as one of the basic responsibilities of the state. And, true to form, five-year development planning has since been a virtually sacred ritual by all succeeding administrations – wartime, market-oriented, reformist, and hardliner — including the Ahmadinejad government which claimed to have been receiving daily guidance from the Hidden Imam himself.

As in the Shah’s time, however, these “plans” have had no affinity with, or resemblance to, the Soviet prototype except in name. Iranian plans have not been a comprehensive, communist-style document dealing with all aspects of national inputs/outputs data or the production/distribution cycle. The five successive plans discussed below have all been akin to a medium-term public investments budget – with presumably some indicative guidelines for the private sector.

THE STILL-BORN PLAN: 1983-1988

In carrying out the mandate of the new constitution, the Bahonar administration in August 1981 asked the active Plan and Budget Organization to prepare a new 5-Year Plan for the 1983-88 period – as the first part of a 20-year perspective (1983-2003) – designed to raise Iran’s GDP four-fold, and double the per capita figure. The Plan’s basic orientations were: economic self-sufficiency, social welfare, and propagation of the Islamic culture.

With the explicit intension of reducing the economy’s alleged dependence on the West, the plan’s goals were to: (1) achieve agricultural “self-sufficiency” in 10 years; (2) accomplish industrial “independence” by producing an increasing share of machinery, parts, and materials at home; (3) reduce the share of oil in the total energy supply from 80% to 50% (by increasing natural gas and hydroelectric power); and (4) lowering the oil’s share in the GDP from 22% to 10%. The annual GDP growth rate was expected to reach 9%—based on 7% yearly expansion in agriculture, 14% in industry, and 10% in construction – promising every household their own home by 2001.

But the plan’s ambitious growth targets, uncertain and unrealistic sources of finance, and some of its politically controversial provisions gave it no chance of passage in the unruly Majlis. With the escalation of war with Iraq, a depressed world oil market, and internal political bickering between the clerical leadership and lay government, the plan’s bill lingered for two and a half years in Majlis committees and was never implemented. Interestingly enough, its ambitious targets still remain to be realized after 35 years!

THE FIRST PLAN: 1989-1993

Dire postwar socio-economic condition – low crude oil prices and export receipts, fallen GDP growth and per capita income, low industrial capacity use, rising government financial burdens and budget deficits, rising prices, rapid population growth, and widespread unemployment – called for urgent action.

Thus, after the Iran/Iraq ceasefire in 1988, and under Ayatollah Khomeini’s specific direction – reemphasizing the fight against “consumerism”, encouraging domestic production and self-sufficiency, reducing reliance on oil export income, and encouraging non-oil exports – a comprehensive National Reconstruction Plan was prepared by the Mussavi government which later became the basis for the formulation of the 1989-93 plan approved by the Majlis in January 1990.

The new plan called for an average real growth rate of 8.1% a year, comprised of specific rates for each economic sector (eg, 6.3% for agriculture, 14.3% for manufacturing, etc). Per capita GDP was to increase by 4.9%. The plan’s other major objectives were such variegated items as: reconstruction of war-damaged areas, restoration of the country’s defense capability, attainment of full employment, self-sufficiency in strategic products, fight against inflation, provision of the citizens’ basic needs, and the design of a “consumption model.” The plan’s only novelty was the call for population control, a goal that had become extremely urgent as the Mussavi government’s disastrous pro-natal policy of producing “new soldiers for Islam” had gotten completely out of hand.

By the end of the plan period, major economic indicators showed different, and not altogether, happy outcomes. The only shining case was that of population control where the 3.3% annual growth before the plan is claimed to have been brought down to 2.2%. Another positive case was GDP (and per capita income) growth where consecutive annual declines in the first post-revolution decade were reversed. Annual growth in the water and power sector overshot targets, and those in agriculture and petroleum sectors approached their designated objectives.

On the minus side, annual growth in such sectors as industry, mines, and construction failed to reach their targets. The share of services in GDP rose in spite of a targeted reduction. Aggregate investment which was expected to grow by 19.7% a year did not exceed 10.6%. Reducing the budget deficit also remained an unfulfilled dream. Controlling rising liquidity and taming galloping inflation were likewise unsuccessful. The consumer price index averaged 18.7% a year during the plan period. Anticipated receipts from oil and non-oil exports also did not materialize. By contrast, the tripling of imports on short-term finance raised the country’s debt to a record level. In short, official data show that by the end of the plan period in 1993, none of its quantitative targets had behaved as planned. The overall goal of 8.1% annual real GDP growth was no more than 7.2%. The economy’s individual sectors showed similar deviations. While such sectors as services, and water and power overshot their targets, all others – agriculture, oil, industry and mines, and construction – fell considerably short of their goals. Aggregate investments, as well as public and private consumption, on the other hand, both exceeded theirs.

What is significant about these data is that both the plan’s positive and negative outcomes materialized largely irrespective of the Plan itself. For example, population control success had almost nothing to do with the planners’ specific provisions and actions, but almost solely with the result of economic hardships (eg, rising living costs, falling public subsidies, lower per capita income, and housing shortage). Close-to-target petroleum sector outcomes were largely due to increased oil prices following the Kuwait war.

THE SECOND PLAN: 1995-2000

The first plan ended in 1993, but the Second Plan did not begin in 1994 as policymakers wanted to take more time to evaluate the outcome of the First Plan, and the Majlis wished to spend a year studying its results in order to have proper input in drawing the new plan. Prolonged squabbling over the new draft’s prospectus further delayed the start until March 1995.

The new plan was a modified version of the first, and altogether more cautious, and more inward-oriented than the previous one. Its quantitative targets were more modest with its projected expenditures to be financed mainly by oil export receipts and partly by internal taxes. It aimed at GDP growth being based on agriculture, and called for higher factor productivity, non-oil export increases, environmental protection and civil service reform. Its quantitative targets were more modest and somewhat more realistic. Yet, due to the lack of fiscal self-discipline by the government, expanding civil service cadres, and oil export shortfalls, it was nearly abandoned half way through with all its targets missed. Average annual GDP projected at 5.1% ended up at 3.2%. Inflation averaged 25.6%/year, more than double the 12.4% target, with the 1995 figure of 49.4% the highest in the last 65 years. Unemployment, liquidity, government revenues and foreign direct investment all deviated from their targets.

THE THIRD PLAN: 2000-2005

The Third Plan was the most elaborate, comprehensive, and detailed of the five. Its text, comprising three basic parts, 26 chapters, and 199 articles, was approved by the Majlis on 5 April 2005 after several months of haggling and bargaining over its reform proposals. The document was proudly described by President Khatami as the product of 24,000 hours of endeavors by 1,000 experts over more than two years.

The document contained specific quantitative objectives as well as elaborate detailed qualitative goals: Numerical targets aimed at gross domestic product, aggregate consumption and investment, employment, liquidity, inflation, exports, imports, and population growth. Qualitative goals covered such categories as administrative reorganization and bureaucratic downsizing; production cost-cutting and enhanced productivity; privatization of state enterprises; reform of unfair and unaffordable government subsidies; reduction of poverty; lowering unemployment; cutting budget deficit; judicious use of the Oil Stabilization Fund (OSF); protection of the national currency value; rationalizing the use of various energy sources; and environmental protection and resource conservation.

The economy’s five-year performance, however, showed a near total disconnect from the Plan. In its quantitative profile, none of the indicators behaved as projected. Both oil and non-oil GDP failed to grow as forecasted. Population overshot its target. Employment and inflation, on the other hand, behaved better than expected. The targets for public and private consumption, liquidity, as well as imports and exports of both oil and non-oil items exceeded their goals.

Failure to reach other goals was witnessed in many other areas. First, the state bureaucratic corps that was expected to be reduced by ministerial consolidation actually rose as the ratio of annual government expenditures to GDP increased from 24.5% to 27.2% during the plan period. And, while two ministries were merged, a new one was created.

Second, prices of goods and services offered by state enterprises that were supposed to be reduced by increased production efficiency actually increased as labor, capital and total factor productivity numbers failed to reach their targets.

Unsuccessful privatization of state enterprises was the third setback as some 80% of shares offered by the Privatization Organization were transferred to other State entities (eg, the Social Security Fund, and the State Employers Pension Fund) or bought by investment subsidiaries of the state banks and insurance companies.

Fourth, despite a strong emphasis in the plan, nothing was done in reducing unfair and fiscally unaffordable public subsidies – a fact that President Khatami himself called “the greatest failure” of his tenure.

Fifth, the official unemployment rate of 15% in the Plan’s first year, which was to be brought down to 11.5% by March 2005 through an elaborate series of measures, did not materialize, and by some estimates, joblessness actually increased.

Sixth, despite elaborate provisions in the plan document regarding the preparation, execution, and audit of the national budget, no significant changes occurred either in the budget’s formulation or its major components.

Failure to protect the foreign exchange value of the national currency was the plan’s seventh flaw, as the rial’s exchange rate depreciated by 12.4% against the US dollar, and even more vis-à-vis the Japanese yen and the euro.

Continued wasteful use of energy resources (oil, gas, and water) was the eighth, and failure to protect the environment, the plan’s tenth shortcoming.

As well as missing specific targets, several other mandates (including the design of an ideal “consumption model”) were neglected. The most egregious failure of the Plan, however, was the repeated draw-downs on the OSF for a number of off-budget expenditures– contrary to the principal objective of the fund which was to protect the national budget in case of a world oil price slump. The irony of all ironies was that the largest draw-down on the fund was in the year 2004-05 when crude oil prices, and Iran’s oil export receipts, had reached record high levels.

THE FOURTH PLAN: 2005-2010

The Fourth Plan, approved by the Majlis in June 2005, was the first of a four-plan scenario within an ambitious Twenty-Year Economic Perspective 2004-24, designed to significantly enhance Iran’s economic, political, and social status in the international community. Methodically prepared by Western-trained experts in the Khatami administration, the Perspective underscored greater reliance on free-market forces, smaller government’s role in the economy, and faster privatization of state enterprises.

In its economic section, this plan was the most detailed and comprehensive of all post-revolution attempts. In quantitative terms, the document contained a number of numerical suppositions regarding: population growth rate, labor and capital productivity; liquidity expansion; domestic and foreign direct investment; foreign exchange value of the Iranian rial; internal revenues from taxes; government expenditures; size of the fiscal budget; and appropriation for research. Based on those basic assumptions, concrete numerical targets were assigned to each major indicator including GDP growth; annual real per capita income; unemployment; price rises; internal income distribution; extent of poverty: magnitude of non-oil exports; ratio of fiscal budget to GDP; and the number of civil servants.

By the end of the five-year period, however, none of these targets – with the exception of non-oil exports – were hit, in many cases by a wide margin. The average annual GDP growth was the most disappointing outcome. Based on a projected oil price of $20/B, and total oil exports receipts of $120bn, the economy was to grow at an average annual rate of 8%. But, despite actual average oil price of $68/B and total five-year revenues of $346bn, the annual expansion rate was merely 5.8%. High employment was the second goal to prove elusive. Considered the regime’s Achilles Heel, average jobless rate was to be brought down to 8.4% by March 2010. However, even the disputed average official rate of 11.2% was well above target. And 3.5-5.0 million workers – the largest number is post-revolution history – were out of work. Inflation, as reflected in the consumer price index, similarly missed its target. The average annual rate targeted to be 9.9%, shot up to 14.2%. And, while the CPI in June of 2010 was officially given as 10.8% (but privately estimated at 22%) it was lower than the five-year average, and only six out of the world’s 222 countries and territories had a higher inflation rate.

Productivity enhancement targets were also missed. According to the Plan, some 2.5% of the projected 8% average annual GDP growth was to be realized from increase in labor, capital and total factor productivity. Yet, according to private estimates, there was only a miniscule rise in labor productivity, and negative figures for both capital and total factor productivity. Other plan goals met similar non-conforming fates. Investment growth was to average 12.8% a year, and reach 35% of GDP. Actually, the five-year average came to only 6% a year. Exports and imports, on the other hand, both exceeded their targets by large margins. Population and liquidity numbers also shot up more than projected. On the whole, the plan as such turned out to be a major disappointment.

A significant event during the plan period was the abolition of the Management and Planning Organization by President Ahmadinejad: he called it “an American institution” and the “graveyard of the revolutionary ideals. The 60-year old organization was divided into two newly created bureaus in the President’s office: “Planning and Guidance Supervision” and “Management and Human Capital Development.”

THE FIFTH PLAN: 2011-2015

After a long delay in its preparation, the text of the Fifth Plan was approved in January 2011 by the Majlis with a slim majority. The convoluted and verbose document covered all aspects of life under the sun, including spiritual, social, and cultural topics, in addition to economic matters. However, failing to learn from the failures and shortcomings of the 4th Plan, the Ahmadinejad planners again repeated an ambitious annual GDP growth target of 8%. Inflation was to be kept at 12% annually; unemployment was to be reduced to 7%, and the share of total factor productivity in annual growth to reach 31%.

While an overall judgment about the plan’s results cannot be made before its expiration in 2015, the first three years of its operations offer a very bleak picture. The plan’s first two years saw negative growth, and the third year appears to have been flat. Inflation hit 43% in June 2013 before it was brought down to 25% later in 2014. The unemployment rate has officially hovered around 12.5%, but privately estimated to have exceeded 20%. Total factor productivity did not reach its target. Foreign direct investment has been a miniscule fraction of the anticipated amount. The newly-elected President Rohani called his inherited twin scourges of high unemployment and high inflation the worst in 70 years.

THE FAULT LINES

By consensus, the Islamic Republic’s 35 years of five-year plans has not succeeded: each of the five plans has failed to achieve its basic objectives. And, interestingly enough, the earliest and most repeated goals of the plans – the reconstruction of war ravaged areas and the design of a ‘consumption model’ did not only fail to be achieved by the end of the First Plan in 1993, but still remains to be fulfilled in 2015.

Some ruined areas in the Iran/Iraq war zones are yet to be reconstructed, and no one talks about the frugal ‘consumption model’ anymore, a fact illustrated by the recent emergence of a popular Instagram account dubbed the “Rich Kids of Tehran,” on which photographs of wealthy young Iranians wallowing in their multi-million dollar apartments and $400,000 sports cars are being uploaded.

The analytical significance of the data presented here on the behavior of major economic indicators in various plans is thus not so much in their assessment of the Iranian economy’s ups and downs during various periods, but in their display of a total disconnect between planned targets and final results.

While exogenous factors such as natural disasters, the Iran/Iraq war, universal economic sanctions, and other impediments might have had their share of responsibility for the outcomes, the principal fault lines seem to have fallen in (1) the nature and quality of the plans themselves; (2) the devotion, competence, and integrity of the plan implementers; and (3) the extent of the planners’ control over the country specific growth pivots.

First, a cursory look at the content of the five plans shows that they have been prepared with no solid conceptual framework, dubious and unrealistic assumptions, and overly ambitious targets. Their texts have more resembled literary essays than a practical blueprint for action: They seem to have been more occupied with eloquence, comprehensiveness, and inclusion of all universal desiderata than concerned about practicality and guidance for operation.

Second, records show that the outcome of each plan has, to a notable degree, depended on the conviction, loyalty, and diligence of its handlers as well as the quality of its supervision. Thus, the blueprint of the Third Plan, while suffering from the same flaws as the others, produced more concrete results because it was entrusted to a group of President Khatami’s technocrats with conviction, dedication, and diligence.

By contrast, the Fourth Plan, which was by some distance better prepared, more comprehensive, and placed more emphasis on the long-coveted goals, turned out to be the least productive of all five, because the responsibility for its implementation was entrusted to the Ahmadinejad administration with its unconcealed hostility toward the plan’s “western-educated” preparers, its “American inspired” content, and its “non-revolutionary” objectives.

And, third, there has been no control by the Iranian planners over the country’s basic growth factors. As the last 35 years history of Iran’s economy shows, the country’s growth and stagnation have been mainly the outcome of two crucial factors: (1) the magnitude of oil export revenues (and its impact on the crucial exchange value of the Iranian rial on the free market); and (2) the extent of annual rainfall. Oil revenues have depended on annual volume of crude exports, and the ups and downs of world oil prices.

Volume, in turn, has been partially constrained by the oil industry’s inability to reach the coveted 5mn b/d production capacity, and (b) being dependent onworld energy demand. And, rainfalls have followed the grace of God in regular cycles of uncontrolled draughts and floods.

The Iranian experience thus clearly shows that in countries whose economic development is subject to such uncontrolled elements, a medium-term economic outlook as a guide for national budget preparation and public investment program might be all that is needed. Detailed plans of the Iranian variety – with decimal percentage details for various targets – might be a costly intellectual exercise in futility.

A prominent group of Iranian economists have reportedly reached the same conclusion about the incoming Sixth Plan, according to Iranian economic daily Donya-e-Eqtesad.

*Dr Amuzegar is a distinguished economist and former member of the IMF Executive Board.