For a short summary of this article, please see: Iran’s Economy Crisis: A Failure of Planning by Reza Ghasimi
For many years, medium-term economic planning has played an important role in Iranian economic life. Before the Iranian revolution, the government designed and implemented several five-year and seven-year economic plans, focusing on private and public sector interactions, their investment requirements, structural reforms, and stabilization policies to achieve sustainable economic growth.
With emergence of the Islamic Republic of Iran in 1979, followed by an end to the eight-year war with Iraq, the government concentrated on constructing and carrying out medium-term economic plans. Several five-year economic plans constituted the medium-term framework and a platform to both promote the private sector and embark on public sector reforms aimed at a more equitable and just society.
Following a 10-year hiatus since its formation – the result of revolutionary upheavals, capital flight, migration of skilled manpower, the heavy costs of the influx of great number of refugees from neighboring countries, and the eight-year war with Iraq – the Islamic Republic carried out its first five-year economic plan (FYDP), focusing on the reconstruction of damaged infrastructures. The plan also aimed at tackling the inefficient public sector and the reluctant private sector, both suffering from rapidly changing economic policies and uncertainty. The first FYDP, approved by the Parliament on 31 January 1990, included many ambitious and unrealistic objectives in comparison with the country’s capacity; consequently, progress in implementation was inadequate .
After a one-year delay from the end of the first FYDP, the authorities initiated the second FYDP in 1996, to implement basic free- market principles. Nevertheless, the plan remained impractical and was only partially implemented. The unsuccessful first and second FYDPs prompted the 3rd FYDP to strengthen the initial but necessary structural reforms, including promotion of the private sector, development of private domestic and international banks and insurance companies, and substitution of tariffs for quantitative trade restrictions. Rising oil prices facilitated a conducive environment to achieve an average GDP growth of 5.5%, close to the plan’s target of 6%. Other accomplishments included operation of a private bank, Egtesade-e Nowin, in August 2001; ratification of the Law on Attraction and Protection of Foreign Investment on 24 August 2000; and allocation of $7.5 billion of increased oil revenues to a newly established Oil Surplus Fund, to safeguard against oil price fluctuations. However, unemployment and inflation remained high, the uncertain financial environment prevented effective banking operations, the anticipated foreign direct investment was imperceptible, and resources allocated under the Oil Surplus Fund were used unsuitably. Overall, the plan’s implementation fell considerably short of intentions.
The 4th FYDP was comprehensive, contained abundant quantitative targets, and constituted the first of the four pillars of a 20-year economic and social vision to significantly upgrade Iranian economic, political, and social international status. The 4th FYDP underscored a smaller government role in the economy, drew attention to enterprise privatization, and stressed more reliance on market forces. However, the plan’s implementation responsibility was assigned to President Ahmadinejad’s government, with little conviction as to its content, assumptions, and objectives and only modest desire for its success or modification. Under these conditions, the 4th FYDP missed a golden opportunity to use high oil and gas revenues to facilitate an environment conducive to transforming the Iranian economy from a state of high inflation, protracted unemployment, and low growth to a platform with higher standards of living that the hard-working Iranian people deserved.
After the 4th FYDP, the government deliberated on a 5th FYDP with many targets that were much less quantitative. This was really only a compilation of wishes and desires. Although Article 8 of the 4th FYDP obliged the government to submit to Parliament a draft of the 5th FYDP before the last six months 2009/10 (the last year of the previous plan), the government delayed its compliance until presentation of the 2010/11 budget. However, because Parliament had to give priority to budget review, debate and approval of the 5th FYDP was suspended until 5 January 2011. The plan’s unsatisfactory initial implementation constituted the second trembling pillar of Iran’s 20-year economic and social vision.
As will be reviewed in this article, the 4th and 5th FYDPs, like previous Iranian development plans, were both based on an unconvincing and unattainable range of assumptions and unattainable objectives. The Iranian authorities lost the opportunity to learn from the results of implementation of the 4th FYDP and did not attempt to revise many similar and improbable assumptions under the 5th FYDP. While there is no doubt that both the 4th and 5th FYDPs were comprehensive- encompassing most of the country’s desires in social, security, and foreign relations and in scientific, technological, cultural, and economic areas- they were nevertheless unachievable and unworkable. Implementation of the 4th FYDP, 1384-1388 (2005/06-2009/10), and the 5th FYDP, 1390-1394 (2011/12-2015/16), focusing on economic areas, are the subject of the current article.
Following a discussion of economic growth under the 4th and 5th FYDPs, this article will review the failure of both plans to achieve employment targets. This will be followed by an analysis of inflation, liquidity, factor productivity, domestic and foreign investment, poverty reductions, and research and development expenditures under the plans. External sector developments, including oil and non-oil exports, will be next appraised. The final section deals with subsidy reforms, the 20-year economic and social vision, the need for a Medium Term Expenditure Framework (MTEF), and the newly referenced “resistance economy plan.”