From: Rakesh Bhandari (rakeshb@stanford.edu)
Date: Sat Oct 12 2002 - 13:03:04 EDT
OIL AND THE RENTIER STATE: IRAN'S CAPITAL FORMATION, 1960-1997 ^(1) Sousan Badiei and Cyrus Bina California State Polytechnic University, Pomona and University of Minnesota, Morris binac@mrs.umn.edu Keywords: Oil, Iran, Capital Formation, Rentier State JEL:O11, N5, Q4 1. INTRODUCTION The focus of this study is on the "rentier" character of state and economy in relation to capital accumulation during the period of 1960-1997 in Iran. The rentier character and structure of the Iranian State reflects the domination of the economy by the oil sector (Mahdavy 1970, Bina 1992a). The rentier nature of the Iranian economy is also potentially recognized through a strand of literature in economic development, known as Dutch Disease (Katouzian 1978, Corden and Neary 1982, Corden 1984, Romer 1985, Evans 1986). Such domination has continually been the common denominator of both the Shah's, as well as the Islamic Republic's regimes in Iran. For the analysis of oil rents theory, see Bina 1985 (Ch. 5), 1989, 1990, 1992b. It is shown through a simple but decisive econometric model that oil revenues had a positive and significant relationship with the long-term trend of gross fixed domestic capital formation (GFDCF) during the latter part of Shah's regime in Iran. However, it is also shown that such a positive and significant relationship had suddenly become negative after the legendary oil price hike of 1973-1974, despite the fact that it brought an enormous windfall to the Shah's treasury by 1975 (Bina 1985, 1988, 1990, Karshenas 1990). The situation under the Islamic regime has been somewhat different. Iran's oil revenues have declined substantially, and were subject to much fluctuation during the period of 1980-1997 (Fesharaki 1985, Bina 1992a, EIU, various issues). It is shown that econometrically there is no significant relationship between the extent of oil revenues and the gross fixed domestic capital formation (GFDCF) during the period of 1980-1997 in Iran. Moreover, the Islamic regime in Iran does not appear to have paid much attention to capital accumulation and long-term investment. Instead, the government seems to have allocated the revenues from oil rents to politically motivated consumption expenditures and unproductive activities, presumably, to contain and ameliorate the potential internal political upheavals and external threats during the period under study (Mofid 1990, Yaghmaian 1992). The analogue of these activities is the fact that the Government of the Islamic Republic has consistently engaged in the allocation of various sorts of (formal and informal) subsidies to those areas and interest groups that provided sustained ideological and material support for the fortification of the regime in Iran (see Bina and Zangeneh 1992, Amuzegar 1993, Bina 1994a, 1999, Zangeneh 1997, 1999). http://gsb.luc.edu/depts/economics/meea/volume4/oilrentier/index.htm
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