Industrial Development in Post-revolutionary Iran: Continuity and Reform in a Turbulent Environment

Abstract

This chapter examines industrial development in Iran during the past four decades. It looks at both external and internal challenges. Economic and industrial trends exhibit erratic patterns of high growth followed by growth collapse. This is due to the injection of oil revenues into the economy resulting in inflationary pressures, overvaluation of domestic currency, soaring imports, price controls, and pro-cyclical fiscal policies. Such a process gradually leads to foreign exchange shortages, sudden devaluations, and growth collapse. The share of industry in Iran’s GDP has been gradually rising in real terms (constant prices). Whereas in a high-inflation economy imports check the price of manufactured tradables, the price of non-tradables increases substantially. As a result, the share of industry in GDP has decreased in current prices. In addition, there has been a major change in the mix of industries. Consumer goods as well as engineering- and labor-intensive industries have lost share by 50% in terms of most indicators. In contrast, resource-based, capital- and energy-intensive industries have doubled their shares. Thus there has been a clear shift in the production specialization of the country. This is reflected in the Iranian export specialization as well, since close to 90% of the country’s manufacturing exports are either directly derived from oil and gas or are highly energy-intensive—defying diversification goals. In addition, investment priorities for industrial development have been based on a “comparative advantage” logic, whereas major delays and policy challenges have emerged in moving along the value chains into downstream industries and/or diversifying into new, more knowledge- and technology-intensive industries.