(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88T00096R000400470002-6
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 30
• Document Creation Date: January 12, 2017
• Document Release Date: May 31, 2011
• Sequence Number: 2
• Publication Date: December 1, 1986
• Content Type: REPORT

Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Directorate of Confidential
Intelligence 25X1
The Islamic Economic System
and Its Prospects in Iran
Confidential
NESA 86-10050
December 1986
346
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Directorate of
Intelligence
and Its Prospects in Iran
The Islamic Economic System
This paper was prepared by a contractor with the
Office of Near Eastern and South Asian Analysis.
Comments and queries are welcome and may be
directed to the Chief, Persian Gulf Division, NESA,
Confidential
NESA 86-10050
December 1986
- - - Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
- Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6 --
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Summary
Information available
as of 3 November 1986
was used in this report.
and Its Prospects in Iran 25X1
The Islamic Economic System
The Islamic economic system, under which market practices and the
distribution of income reflect Koranic teachings, has little future in today's
turbulent Muslim world--even in Iran, where the system is furthest
advanced.
the allocation of these resources.
The model Islamic economic system serves as a subordinate component of
a militant Islamic state whose people believe in the primacy of Allah, His
ownership of productive resources, and the position of man as His trustee in
sources or from other Islamic countries.
The Islamic economic system features the following operational
characteristics:
? Private ownership and use of productive resources within religiously
determined constraints.
? Support of the poor by the well-to-do through alms taxes, charitable
contributions, and the payment of fair wages.
? Strict prohibitions against the payment of interest as not justified by
labor effort or risk.
? Bans on pork, liquor, prostitution, gambling, speculation, and hoarding.
? A code of fair dealing in the marketplace that prohibits taking advantage
of the ignorance or poverty of either buyer or seller.
? The greatest possible reliance on goods and technology from domestic
Ayatollah's lack of attention to economic affairs.
Since Ayatollah Khomeini's accession to power on 11 February 1979, his
government has installed the Islamic economic system only in piecemeal
fashion because of the survival of strong secularist elements, the preoccu-
pation with the bloody war with Iraq (now in its seventh year), and the
The revolutionary regime has failed to arrange for private operation of the
large industrial enterprises seized from the Shah's supporters or to settle
disputes over land ownership that resulted from the Shah's land reform and
the flight of many landowners. The new regime has generally succeeded in
establishing minimum levels of consumption through the rationing of basic
items, but the poor still suffer bitterly from the drastic overcrowding of
housing, growing shortages of consumer goods, dislocations stemming from
the war, a 20-percent annual inflation rate, and massive unemployment.
The nationalized banking system continues to pay interest under the guise
Confidential
NESA 86-10050
December 1986
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
of dividends from pooled investment funds, and private currency transac-
tions flourish at several times the official exchange rates. While conform-
ing to the Islamic code of behavior in public, people continue to drink
alcohol and enjoy luxuries in private. The marketplace retains its tradition-
al Iranian qualities of lively wheeling and dealing, illegal trafficking in
smuggled and rationed goods, bribery, and the sale of some goods of
'abysmally low quality. As for economic self-reliance, oil still must be sold
and weapons procured in non-Islamic markets, despite the oft-repeated
slogan "neither East nor West." Population has risen rapidly under the
Ayatollah-from 37 million to 46 million people-without a like increase
in food production, housing, utilities, and jobs.
The Islamic economic system in Iran probably has reached its high water
mark. Once Iran loses the unifying influence of the Ayatollah, the spiritual
energy necessary for the further development of the system almost
certainly will fade. When the war ends, the Iranian people will have to ad-
dress the secular tasks of pumping more oil, replacing deteriorated
industrial plant, and securing additional quantities of food. Broad trade
and educational contacts with the secular West will continue. The
conflicting interests of religious and technocratic factions, formerly held in
rough balance by the authority of the Ayatollah and the requirements of
war, will have to be sorted out.
Secular-minded rulers govern the other Muslim states, which have retained
their close links to foreign sources of technology and weapons, thus
drawing fire from militant advocates of thoroughgoing Islamization. The
militants assert that today in every Muslim society an Islamic revolution-
like Iran's-is waiting to be born in order to uphold Allah's oneness and su-
preme power. To judge from Iran's experience since the revolution,
however, other Muslim countries will not adopt truly Islamic economic
systems in view of their present secular tilt and the strength of global
technological and secular forces.
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6 -
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Summary
iii
Scope Note
vii
Spiritual Background
1
Operational Features
1
Khomeini's Inability To Satisfy Original Supporters
5
Khomeini as Economic Policy Guide
6
Perspective on Gross National Product
9
Situation in Agriculture
11
Cut in Dollar Earnings
12
Extent of Implementation of System
13
Prospects for the System After Khomeini
14
The Iranian Economy Under the Shah
17
- Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Scope Note This report examines the spiritual tenets and operating features of an
Islamic economic system, the extent to which revolutionary Iran has
adopted such a system, and the likelihood that the Islamic elements in
Iran's economy will survive after Khomeini passes from power. The report
was prepared under contract
Sources of
information include books, journal articles, and newspaper accounts deal-
ing with militancy in the Muslim world, the efforts of Muslim religious
scholars and young Muslim economists to rethink the nature of an Islamic
economic system, and the course of economic developments in Iran,
especially since 1970;
The views expressed in the
report are those of the contractor and not necessarily those of the Central
Intelligence Agency.
25X1
25X1
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Figure 1
* Ankara
SOVIET
UNION
ISRAE
Tel Aviv-Yafo
Cairo
SYRIA
amascus
riORDA
Aam
aw,na,.
IRAQ*
Baghdad
Caspian
Sea
Aral
Sea.
IRAN
*Riyadh
Red Doha Gu/t u Dhabi
Arabian
Sea
0 400 Miles
Islamabad
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
The Islamic Economic System
and Its Prospects in Iran
Muslim economists and religious scholars have writ-
ten several hundred books and articles since World
War II describing the spiritual tenets and operating
principles of an Islamic economic system as an alter-
native to the reigning capitalist and socialist systems.
Their discussion has been theoretical and speculative
in the absence of a real-life Islamic economy any-
where in the world (with the partial exception of Iran).
In some cases, Muslim authors disagree on what the
important elements of an Islamic economic system
are, such as the extent of private ownership and the
degree of clerical control over economic decisions.
Western writers, who have typically treated the Third
World countries as embryonic capitalist or socialist
economies in the process of modernization, are only
beginning to assess the feasibility of an Islamic
alternative.
Spiritual Background
According to Islamic theoreticians, the following spir-
itual tenets form part of the essential environment in
which an Islamic economic system would function:
? The primacy of Allah as the all-comprehensive, all-
powerful, and all-compassionate Deity, who is the
ultimate owner of all economic resources.
? The vice-regency of the spiritual heads of the
Islamic community as interpreters of Allah's will,
governors of the people, and judges of the overall
allocation of economic resources.
? The conformance of economic and all other behav-
ior to the Sharia (the corpus of Islamic law made up
of the Koran, the sayings of the Prophet Muham-
mad, and the interpretation of these precepts by the
leading schools of religious thought).
? The individual's free will to choose between good
and evil and between proper and improper use of the
community's productive resources.
? The concept of life as an ever-evolving test of the
individual.
? The right of the individual to own private property
and his responsibility for the sound management of
this property as a trustee of Allah and as a member
of the community of believers.
? The choice of this life plus an afterlife as the proper
timespan for an individual to consider in maximiz-
ing his goals.
? The position of the family as the cornerstone of the
social and economic order, with male overseership.
Operational Features
Islamic Economy: Subordinate to the Islamic State.
An Islamic economy would operate as a subsystem of
an Islamic state that incorporates the spiritual tenets
outlined above. One conservative branch of clerical
opinion would place the top religious leaders, as
highly respected spiritual monitors of society, outside
the day-to-day operations of government. Another
opinion calls for a professionally trained clergy to
head the state's political mechanism, as in contempo-
rary Iran. The latter condition appears necessary if
the religious leaders are to have any practical chance
to implement a distinctive Islamic economic system.
Private Property: Under Constraints. A second major
feature of an Islamic economy is the private owner-
ship and control of most agricultural, industrial, and
commercial property. With the exception of large-
scale industrial enterprises, the national banking sys-
tem, and sizable holdings of minerals and land,
productive resources would rest in the hands of indi-
vidual owners so long as they use their property to
promote the Islamic faith and the well-being of their
fellow Muslims. A minority of Muslim thinkers,
__ Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6 --
25X1
I
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Confidential
Sunni and Shia Islam do not differ on the substance
of economic doctrine, each emphasizing the authority
of the Koran and the teachings of the Prophet. The
Sunni clergy, however, tend to take a literal, undevi-
ating interpretation of the scriptures, whereas indi-
vidual Shia clergymen take more latitude in interpre-
tation and exercise a more activist role in
implementing their interpretation.
including some influential radical thinkers, advocate
government ownership of all productive resources of
any substantial size.
Community Role: Overall Allocation. The govern-
ment-or, more broadly, the religious community-
would play an important role in deciding the general
allocation of resources, the area of authority left free
for private entrepreneurship and administration of
economic affairs, and the ways in which the well-to-do
would underwrite the care of the poor. The govern-
ment-at the national, provincial, and local levels-
would own key economic enterprises and manage
substantial revenues and expenditures. Leaders would
consult with their colleagues and the rank and file
before taking action.
Natural Resources: Conservation of Allah's Bounty.
Muslim writers underscore the importance of a na-
tion's natural resources as evidence of Allah's bounty,
to be carefully conserved and used for the general
benefit. In the case of oil, coal, and other natural
wealth, some writers hold that Islamic economic
doctrine requires government ownership. Others
would accept private ownership but argue that, just as
Islamic doctrine forbids interest on money because it
does not reflect labor effort or risk, receiving personal
income from land is unjustified. Still others would
allow income to be collected from land and other
resources to the extent that the owner has made
improvements. Many writers favor placing an upper
limit on the holdings of natural resources by any one
individual.
finds work for idle hands-at all levels of society.
Labor: Fair Wage for Honest Work. Islam empha-
sizes diligent and honest work and the obedience of
the worker to his employer. The Islamic code also
requires the employer to pay sufficient wages to
maintain the worker at a level appropriate to his
station and to relieve the worker in time of adversity.
The community is responsible for ensuring that each
individual has a suitable job at a fair level of remuner-
ation and that adequate arrangements are made for
sickness and old age. Muslim writers extol the dignity
of labor and subscribe to the principle that the devil
Capital: Rights and Obligations. In an Islamic econ-
omy, owners of industrial plant and equipment, farm
structures, commercial properties, and other real capi-
tal have a right to the surplus of their revenues over
the costs of doing business. The man who profits from
risking his property in business ventures does not
violate Islamic law as long as he deals justly in the
marketplace and shares his surplus with the poor. The
Islamic code permits the owner to share the risk with
others under an agreement dividing profits and losses
in an agreed ratio. The owner can also rent real
property because the depreciation of the physical
facilities justifies a return.
Markets: Fair Dealing and Mutual Cooperation. The
market plays a major coordinating role in the Islamic
economic system. It sorts out the requirements of
buyers and sellers and signals for adjustments in
volume and type of output. Neither seller nor buyer
should take advantage of the ignorance or poverty of
the other. Sellers and buyers receive a constant
stream of market information and collectively agree
on a fair price. The maintenance of quality standards
becomes a moral issue, supported by the community
forces of tradition, authority, and reputation and also
by the flow of information. Although the market
fosters the prompt supply of the right goods through
competition, sellers must cooperate with one another
in matters of mutual concern. Most Muslim writers
believe that the merchants are effective arbiters of
supply and demand and that the government cannot
25X1
25X1
- Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
possibly know market details or determine correct
prices. A minority, however, distrusts market results
and argues that the government should allocate re-
sources and coordinate all economic activities.
Financing the Economy: Prohibition of Interest. Per-
haps the most dramatic characteristic of an Islamic
economy is the prohibition of riba (payment or receipt
of interest for the loan of funds). In the case of a
personal loan of money or goods, a Muslim business-
man may not collect more than the principal, since
this would be taking advantage of a brother in want.
In the case of a business loan, the lender cannot
receive interest, since he has neither exerted personal
effort nor undergone any risk. Commercial banks,
however, may transform themselves into investment
banks that advance funds on the basis of sharing
profits and losses in an agreed proportion with the
user of the funds. Such banks pool the funds of
depositors and pay them a fluctuating return based on
the profitability of the bank's joint ventures. Risk and
administrative costs thus justify the receipt by the
bank and the individual of a return above principal.
? They ostensibly avoid investing their funds to earn
interest.
? They normally employ a board of religious consul-
tants to make sure their activities conform to Islam-
ic law.
? They confine their activities largely to traditional
forms of business insurance, particularly marine
insurance.
25X1
Objections to Insurance: Permissible Forms. Islamic
doctrine is hostile toward insurance, alleging that:
? Insurance involves an uncertain return and is to be
equated with gambling, which is prohibited in the
Koran as socially divisive and disruptive of spiritual
life.
? Insurance is unnecessary, since Allah has prescribed
mutual aid arrangements (via the family, the
mosque, and the employer) to provide for believers.
? Insurance encourages reckless business ventures and
fraudulent claims.
? Premiums typically are used by insurance compa-
nies to earn interest and to speculate on security
markets.
? Insurance has entered the Muslim world because of
trade with the West.
Insurance companies in most Muslim countries oper-
ate on a low-key basis:
? They do not advertise openly or press potential
clients.
? They normally do not insure personal lives or prop-
erty (Personal lives are in the hands of Allah, not of
man).
business innovation at a lower level.
Providing for Innovation: Low-Key Encouragement.
The Islamic economic code emphasizes the preserva-
tion and enhancement of religious values rather than
the discovery of new products and methods of produc-
tion. Islamic economists believe that, once the faithful
have overthrown non-Islamic regimes and established
Islamic standards for using and sharing Allah's boun-
ty, the economy will become value-oriented rather
than production- or profit-oriented. Investment in new
capital plant and production methods would be reject-
ed unless the impact on old plant and methods is mild
and the gains from innovation are especially large.
The top authorities would reject most innovative
development projects involving foreign technicians,
and the markets would quietly deal with the flow of
Preventing Inflation: Conservative Spending. Muslim
writers have little to say about inflation beyond noting
that recently inflation has been a worldwide phenome-
non attributable to boom-and-bust cycles in capitalist
countries. A Muslim writer addressing the problem in
an Islamic economic system might argue that several
elements would combine to keep prices from rising or
at least from rising rapidly:
? Once an Islamic economy is in place, consumer,
business, and government spending will be governed
by fair market prices, be free of speculation and
extravagance, and be conducive to social stability.
? Workers will give an honest day's work for their pay
and receive an honest dinar's worth of goods in the
marketplace.
? Loan values will not be inflated by interest.
? The central bank will advance additional funds to
the transformed investment banks only if unem-
ployed resources are available for new ventures.
? Friendly Muslim countries will be available as
alternative sources of supply in case of shortages.
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Taxation: Zakat and Other Taxes. The keystone in
the tax system of the model Islamic economy is zakat,
an annual religious levy on an individual's wealth for
the relief of the poor. A modernized zakat conceiv-
ably would entail a small percentage levy on all
wealth above a certain level, paid annually to the
religious leader or organization of the believer's
choice. The Koran established zakat as a tax payable
annually on food grains, cattle, and cash after one
year's possession. Rates varied-2.5 percent on money
and precious metals, 10 percent on grains and fruits
from rainfed land, and 5 percent on grains and fruits
from irrigated land. The tax originally did not suffi-
ciently distinguish between wealth and income. It
eventually became a matter of voluntary charity, with
coverage and rates varying widely among Muslim
countries. A second traditional religious tax, khums
(literally, one-fifth) also is discussed in widely varying
terms by Muslim writers. The typical description
involves a 20-percent tax on an individual's surplus
annual income. The writers praise these taxes for
restraining the undue accumulation of wealth and
providing substantial funds for social welfare. Under
an Islamic state, religious taxes would have to be
integrated with government taxes on property, in-
come, transactions, and licenses.
Consumer Choice: Forbidden Products and Activities.
In an Islamic economic system, the "what is to be
produced" would partly depend on the Islamic pro-
scriptions against extravagances and luxuries, particu-
larly at a time when people at the bottom of society
lack necessities. Under Islamic law, furthermore,
individuals may not traffic in pork, liquor, or lewd
reading matter. Among forbidden activities are prosti-
tution, gambling, hoarding, and speculation (corner-
ing the market). In general, Islamic scholars believe
that in a truly Islamic economy the "preference
schedules" of families and government organizations
would differ markedly from their capitalist and social-
ist counterparts.
Technology: Lower Priority. An Islamic economy
places a higher priority on religious duties, human
relations, and community values than on numerical
output goals, productive efficiency, and modern tech-
nology. The Islamic society in some instances would
view the displacement of workers by technological
change as too high a price to pay for increased output.
Muslim economists are beginning to argue that reli-
gious requirements, such as fasting, may increase
rather than lower production, for example, by nurtur-
ing community solidarity and the work ethic. A
further influence on the "how it is to be produced" is
the call for indigenous technical innovation to avoid
dependence on outside nations for technology, ma-
chinery, and spare parts
Distribution of Income: More Equitable. Muslim
writers are uneasy in dealing with the wide disparities
of income prevalent in almost all contemporary Mus-
lim countries. If the true spirit of Islam permeated
society, they claim, the haves would freely and gener-
ously support the have-nots, and inequality in incomes
would steadily decline. The forces that encourage a
more equitable distribution of income in the model
Islamic state include the zakat levy, other taxes,
private charity, socially enforced obligations for well-
to-do individuals to support the extended family,
inheritance laws, public welfare measures, pressures
against extravagant living, the prohibition on interest,
the notion of fair price in the market, and the
emphasis on the work ethic. Despite the presence of
these forces, the majority of Muslim commentators
recognize that substantial differences will continue to
exist in personal inheritance, ability, and luck and
that Allah distributes his bounty in uneven amounts.
A small minority of writers urge complete equality in
income distribution. Whatever the blend of income
distribution policies, the Islamic economy will exert
new and untried pressures in the area of 'for whom it
is produced," with the outcome highly dependent on
the traditions and character of the individual Muslim
nation-state and the priorities of its leaders.
Women and Non-Muslims: Permanently Low Status.
The economic position of women in the Islamic
economy would reflect their general confinement to
the household and to custodial, childrearing, and
nurturing duties. Certain fields would be open to
women such as nursing, teaching (of female students),
and obstetrics. Employment in textiles and other light
25X1
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
industry would be authorized under carefully con-
trolled conditions. Women normally would not prac-
tice a profession or serve in high business or political
posts. Non-Muslims also would be relegated to sec-
ond-class status, since society would be monolithic
and theocratic in operation. They would lack neces-
sary contacts, mutual supports, and moral sympathy.
Education: Decisive Arena. Most Muslim writers hold
that the educational arena is decisive in the battle for
Islamization. An Islamic economy would allocate
substantial resources to education, with priority going
to the inculcation of Islamic attitudes and values and
less attention to the sciences and humanities. The
authorities would purge Western and Eastern cultural
influences as soon as possible.
Population: Increases in Store. Even though a few
Muslim thinkers recognize the necessity of population
control through family planning, most Muslim coun-
tries almost certainly will pursue policies that reflect
existing pronatalist social values rather than antinata-
list economic requirements. The fully consolidated
Islamic state would encourage marriage, the family,
the production of children according to Allah's will,
and the support of poor children through the network
of charitable institutions. More children mean more
of the faithful, more hands to work with the natural
resources provided by Allah, and more soldiers to turn
back the infidels.
Foreign Economic Relations: Favoring Muslims. The
Islamic economy would gather momentum more rap-
idly if launched in a sea of ideologically compatible
Islamizing countries. A newly fledged Muslim econo-
my competing in a world of capitalist and socialist
states, on the other hand, would remain tied to a
system of interest payments, alien technology, and
proscribed cultural attitudes. In the latter case, which
describes the real world today, the Islamic state would
reduce non-Islamic influences by shifting trade to
other Muslim nations and would stress the develop-
ment of indigenous production capacity and techno-
logical strength. Leading Muslim thinkers, especially
those emphasizing a transnational Islamic communi-
ty, urge the establishment of noninterest
banking institutions in the Muslim world as a whole,
cooperative development projects, and aid to the
poorer by the richer Muslim nations.
In spite of the widespread interest of Muslim writers
in establishing an Islamic economic system, the rulers
of the 40-odd newly independent Muslim states did
not experiment with such a system in the post-World
War II era. These rulers, normally educated in for-
eign schools, faced internal political struggles or
ethnic conflicts that demanded their immediate atten-
tion. Furthermore, they often depended on interna-
tional capitalist markets for machinery, military
equipment, and technology. In Iran, however, West-
ern orientation suddenly gave way to fundamentalist
Islamic values in the revolution of 1979.
Khomeini's Inability To Satisfy Original Supporters
Most of the Iranian people greeted the assumption of
supreme political power by Ayatollah Ruhollah Kho-
meini with genuine enthusiasm. The different social
groups, however, had accumulated widely varying
grievances against the Shah and had drawn up mutu-
ally incompatible blueprints for the postrevolutionary
society. Some groups envisioned a devoutly religious
society, others a pluralistic secular society. Some
believed in government ownership of economic re-
sources, others in private ownership. No matter what
political path the Ayatollah decided to take, the
majority of those who had joined in dismantling the
Shah's regime would end up with little to show for the
revolution:
? The intellectuals, who wanted a humanistic regime,
open elections, and a free play of ideas, discovered
that the Ayatollah envisioned a strict religious
society that brooked no humanistic nonsense and no
opposition political parties. As put by one pair of
commentators: "From the very early days of the
Islamic regime, the religious leaders chose to silence
the intellectual community by attacking its dignity
and credibility."
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Confidential
? The technocrats, who looked forward to rational
leadership by engineers, economists, lawyers, educa-
tors, and professional managers, lost out in the
competition for top posts to clerical and radical
forces, whose members had manned the forward
trenches during the revolution. The moderate Presi-
dent Abol Hasan Bani-Sadr, elected in January
1980 before the hardline clerics had consolidated
their political position, fell from power in June 1981
as part of the growing ascendancy of the clerical
ideologues. The bulk of the technocrats shared
secular middle-class attitudes and even pro-Western
sympathies with many other Iranians. They favored
a prosperous and trouble-free life with a good
educational system for their children that provides
desk jobs with the government.
? Islamic Marxist guerrillas, the Mujahedin, who
had waged underground war against the Shah, were
savagely repressed in mid-1981 (5,000 to 10,000
executions) after they openly challenged the
Ayatollah.
? The Communists (Tudeh Party) failed in their
attempt to capture the revolution and have been
pushed back underground by the regime's security
forces.
? Labor leaders, who had struggled for the establish-
ment of free unions, stood helplessly by as the
revolutionaries forced workers into Islamic associa-
tions in the factories. The lot of the worker became
an amalgam of daily prayer, exhortations to work
hard, and declining real wages.
? Conservative clergy, who wanted to restrict the
mullahs to a spiritual advisory role in the new
regime, were overruled in favor of a highly activist
policy of direct rule.
? Socialist-minded clergy, attracted to leftist doc-
trines of widespread government ownership of land
and other productive property, are still struggling
against fellow clergy and rich laity who cite the
Koranic support of private property.
? Kurdish and other ethnic leaders, seeing in the
political disorder an opportunity for greater regional
autonomy, were held in check by the Ayatollah's
newly formed Revolutionary Guard.
? Women (especially women from well-to-do families),
who had had a taste of modern education, responsi-
ble jobs, and personal freedom, were removed from
judgeships and other top posts and pressed to return
to the household.
The Ayatollah's domination of the political scene
originally rested on his personal popularity and the
widespread opposition to the rule of the Shah. As a
consequence of the shattering of the anti-Shah coali-
tion, Khomeini's power by mid-1986 rested mainly on
his own stern will and three instruments of raw
power-the fundamentalist clergy, the mosque-based
security and support system, and the Revolutionary
Guard.
Khomeini as Economic Policy Guide
For Ayatollah Khomeini, the inculcation of Islamic
spiritual values, the beating back of internal political
challenges, and the conduct of the war against secu-
larist Iraq take precedence over economic issues.
Khomeini seems little disposed to get into the details
of economic affairs. His reluctance stems in large
measure from his aloof managerial style, which con-
sists in letting issues bubble for a while before he
comes to a final decision. This style allows issues to be
aired among subordinates, conserves the Ayatollah's
limited physical strength, and confirms his position
above the battle and his ultimate authority over all
matters of consequence.
Although not his own economic minister, Khomeini
has adhered to certain general views on economic
affairs within the Islamic republic:
? Iran must be as self-sufficient as possible, relying on
its own agriculture, industry, and technological
know-how rather than on imports and foreign
experts.
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
? The organizational unit must be much smaller both
in agriculture and industry, that is, there are to be
no more giant agribusinesses or industrial trusts.
? Instead of putting technology ahead of other values,
the revolutionary economy must slow the introduc-
tion of complex production methods, especially
those that require the import of foreign equipment
and the employment of foreign experts.
? The community's standards for taking care of the
poor must be raised.
? Oil must play a lesser role in the Iranian economy,
both to conserve Allah's bounty and to reduce
dependence on dealings with the non-Muslim world.
? The Ayatollah apparently has taken an intermediate
position in the dispute among the Iranian clerics as
to whether private ownership of productive property
should prevail (the view of the majority of clerics) or
whether government ownership of productive prop-
erty should be the norm (the minority view).
? In other matters, the Ayatollah's views parallel the
usual guidelines for the Islamic economic system.
Initial Economic Difficulties and Advantages
Because of demonstrations, strikes, and shutdowns the
urban economy was in disarray when the Ayatollah
took charge. Tens of thousands of businessmen and
property owners had fled the country. Many others
had closed their businesses because of a lack of goods
and public disorder. Mobs in Tehran had seized
government offices, the police stations, and the Army
barracks. Many local revolutionary groups were run-
ning amok, arresting and killing people.
The Khomeini regime filled this vacuum of authority
with remarkable speed, considering the size and com-
plexity of the issues:
? It sponsored new revolutionary institutions, such as
the Islamic Republic Party, the Revolutionary
Guard, the Hezbollahi (enforcement squads), and
the revolutionary courts.
? It replaced hundreds of bureaucrats, factory manag-
ers, and military officers deemed loyal to the Shah.
? It set up rationing and distribution systems for basic
commodities in urban areas, using a combination of
government bureaus and the mosque-based neigh-
borhood komitehs (revolutionary committees).
? It forced reluctant businessmen to open shops and
factories that had been shut down.
? It facilitated the recovery of oil production to
roughly half the level under the Shah.
? It began what is proving to be the long-drawn-out
process of settling land distribution cases that had
resulted from both the Shah's land reform and the
flight of landowners.
As to initial economic advantages, the Ayatollah
came to power on a wave of revolutionary excitement
and could call on the nation for material sacrifices.
The new regime inherited accumulated foreign re-
serves of roughly $20 billion and-above all-a large,
well-developed oil industry that Iranians could oper-
ate with diminishing outside help. The loss of several
hundred thousand well-to-do people through emigra-
tion could be counted a blessing in a nation that might
need to trim its consumption to spartan levels. The
simple lifestyle of Khomeini set a politically useful
example in contrast to the opulent lifestyle of the
Shah and his associates.
Secularist Influences
Tens of thousands of Iran's professional and manage-
rial people had studied in Western Europe or the
United States and had absorbed secularist views of
science, history, economics, and politics. New battal-
ions of Iranian students have been sent abroad to
these "satanic" centers during the Ayatollah's rule.
The Ayatollah consequently has been experiencing
the same "red-versus-expert" dilemma that has
plagued the USSR, China, and Eastern Europe
throughout the postwar period. The students who
return to Iran often are carriers of non-Islamic values.
A sizable number support the Ayatollah's transforma-
tion of society passively, adhering to Khomeini's
brand of Islam only outwardly. A small number infect
society ideologically and could even endanger the
revolution in conjunction with other forces, especially
after Khomeini passes from power.
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Confidential
The Economic Decision Making Process
Under the Ayatollah's rule, the economic decision
making process in Iran remains a shifting mixture of
capitalist, socialist, and traditional elements, but with
a strong and increasing Islamic overlay.
Although medium- and small-scale capitalist owners,
except for the Shah's supporters, have retained the
bulk of their agricultural, industrial, and commercial
property, they must,act in an Islamic fashion: giving
up the old financial system of interest payments and
receipts; keeping unneeded workers on the payroll;
paying more taxes and responding to the host of
"voluntary" collections for the war effort; dealing
under growing restraints in the marketplace with
respect to price and quality of goods; and avoiding
extravagance in their own lives, at least in public.C
Socialist planners and managers likewise have Islamic
obligations to see that Allah's bounty of natural
resources is carefully guarded, conduct the operations
of large government enterprises in support of Islamic
objectives, arrange for widespread relief of the poor,
remold the educational system along Islamic lines,
and root out forbidden products and economic activi-
ties. These planners and managers face difficult short-
term economic decisions in mobilizing resources for a
major war at a time of declining national output.
Traditional elements still play an important role in
Iranian economic society, and some of these elements
get strong support from the Islamic code: the influ-
ence of the mullahs, the bazaaris, and the heads of
households in local affairs; the daily prayers and the
religious holidays that are woven into the schedule of
economic life; the poor tax, almsgiving, and other
community measures that help the needy; and the
limitations placed on women's role outside the family.
Economic planning under the Ayatollah has suffered
from serious disabilities, many the same as under the
Shah:
? The presence of a strong-minded leader at the top
whose economic decisions reflect military, political,
and religious factors and override economic plans
constructed by planning and budget technicians.
? The existence of a complex pattern of authority,
including important new revolutionary organiza-
tions, which largely precludes disciplined use of
scarce resources under an internally consistent eco-
nomic plan.
? A lack of trained and experienced planners and the
absence of reliable statistics.
? Uncertainty as to the availability of raw materials
and spare parts.
? A substantial increase in shortages and black mar-
keting, coupled with inflation and the near exhaus-
tion of foreign exchange reserves.
Households, business firms, and government offices
do little planning beyond the needs of the moment.
People eat, crops grow, oil is lifted, and the Army
fights-all without the benefit of the coherent eco-
nomic planning that makes a substantial difference in
how leaders think and resources move. The economy
simply goes on because of its resourceful bazaari
businessmen, its residuum of Western-trained techno-
crats, its improvising rank and file, its bribable au-
thorities, and its traditions of localized decisionmak-
ing. Iranians have long had to live by wheeling and
dealing, and they do it well.
Economic Impact of War With Iraq
The cost in human and material resources of the Iran-
Iraq war has been enormous:
? Approximately 300,000 Iranian soldiers killed and
perhaps twice that number wounded (Iraq, with one-
third the population of Iran, has suffered roughly
one-third as many casualties).
? The destruction of industry and housing in a popu-
lous section of Iran and the import of $3-4 billion
annually of weapons, spare parts, and war supplies,
often bought at premium prices.
? The domestic cost, in the neighborhood of $10-15
billion annually, of provisioning, arming, and trans-
porting the armed forces and of caring for the
wounded and refugees.
The ability of the Khomeini government to wage a
war of this magnitude and at the same time deal with
its internal enemies and with the dislocations in
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
the international oil market testifies to the great
strength and staying power of the Ayatollah and his
regime, as well as to the economic and financial
Figure 2
Iran: Per Capita GNP, 1970-85
legacy from the Shah.
The main economic costs of the war have been a
curtailment in investment, with a consequent deterio-
ration in industrial and agricultural capacity, and a
sharp fall in foreign exchange reserves. The abandon-
ment or indefinite postponement of some grandiose
projects sponsored by the Shah has had little short-
term consequence. What has hurt most has been the
failure to obtain machinery for completing useful new
industrial plants and upgrading oil installations; the
spare parts and the raw materials to keep existing
industrial facilities in full operation; and the machin-
ery, chemicals, and seeds needed if agricultural out-
put is to keep pace with population growth.
The central government has lacked sufficient mana-
gerial skills and the information system needed to
effectively conduct a large-scale war on top of its
other obligations. Consequently, local organizations
and families have taken care of a substantial part of
the provisioning, transport, and medical care of the
soldiers, a further testimony to the resiliency of the
underlying economy.
Perspective on Gross National Product
Rough calculations for the Iranian GNP from 1970 to
1985 reflect the great rise in GNP in the last years of
the Shah's reign and the falloff in the economy under
the Ayatollah attributable to the war, the decline in
oil revenues, and the confused management of eco-
nomic affairs. The year 1977 marked the peak of
prerevolutionary GNP. Production in 1978, the last
full year of the Shah's reign, suffered from wide-
spread strikes and riots. Under the Shah in the 1970s,
per capita output doubled from about $1,500 to
$3,000. Under the Ayatollah, per capita output has
fallen from $3,000 to $2,000. Population has grown at
an estimated annual average rate.of 3 percent over the
entire period since the revolution, with at least one
government health official now believing the rate has
started to climb toward 3.5 percent because of the
I i i i i I i i i I i i i i I
0 1970 75 80 85
Situation in Industry
As of mid-1986, industry continues to suffer from the
confusion of managerial authority under the revolu-
tion, lack of raw materials and spare parts, and
worker inefficiency. Iran still feels the loss of half or
more of its managerial and professional talent, even
though the hastily mustered managers of the first
months of the revolutionary regime have had seven
years of experience. Much of the trouble in industry
stems from the continued mismatch of responsibility
and authority. Representatives of the new revolution-
ary organizations have acquired a vested interest in
wielding power at the factory level. Zealous young
Revolutionary Guards, for example, monitor attitudes
and behavior in industrial plants. Even if he enjoyed
complete authority, the factory manager could impro-
vise only so much in the face of power outages, raw
material shortages, and the absence of necessary
pronatalist stance of the Khomeini government.
25X1
25X1
- Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Strategic location: massive Middle Eastern
landbridge
Area: 1.6 million square kilometers
Climate: hot and and in central plateau; colder and
wetter in rim lands
Population: 46 million (mid-1986), growing at 3.1
percent per year
Ethnic groups: Persian, 62 percent; other Iranian, 13
percent; Turkic, 18 percent; other, 7 percent
Religion: Shiite Islam (93 percent)
Arable land: 16 percent of land area
Mineral wealth: oil, iron ore, coal, copper, lead, zinc,
limestone
Key postwar events: decline of British influence, huge
oil wealth, fall of Shah (1979)
Focus of energies: extremely bloody war with Iraq,
now in seventh year
Form of government: theocracy; militant Islamic rule
Head of government: Ayatollah Ruhollah Khomeini,
born 24 September 1902
Capital city: Tehran; growth from 5 million to 9
million people since 1978
Political alignment: "Neither East nor West" but
Islamic
Economic system: partly developed Islamic economic
system
Public ownership: banks, major industry, transport,
and communications
Private ownership: agriculture, lesser industry,
handicrafts, commerce
Government planning: wartime economic planning;
poor statistics
Rationing: basic necessities; endemic shortages
Role of market: pervasive at microeconomic level;
includes black market
Economic membership: OPEC, IMF, World Bank,
G-77
Special features: prohibition of interest; religious
duty to support needy
Industry: oil, war goods, textiles, construction mate-
rials, foodstuffs
Agriculture: wheat, barley, sugar, beets, rice, cotton,
livestock, dates
Exports: $15.6 billion (1985), approximately 95 per-
cent oil
Imports: $15.7 billion (1985); foodstuffs, war goods,
machinery, services
Major trade partners: Western Europe, Turkey,
Japan
GNP: approximately $90 billion (1985), or $2,000 per
capita
GNP trend: downward drift as capital plant wears
out because of war
Basic economic problems: cost of war; decline in oil
revenues
Inflation: caused by wartime shortages; roughly 20
percent per year
Unemployment: 30 to 35 percent; because of the lack
of raw materials and capital plant
spare parts. Furthermore, much of the support struc-
ture for industry-in finance, transport, communica-
tions, training, and utilities-operates well below
prerevolutionary standards. The government encour-
ages people to reopen old businesses or to start new
ones but fails to provide the proper setting. The case
of an entrepreneur who opened a chicken factory in a
provincial capital illustrates the hazards. Because of
shortages of fuel and imported feeds, the chickens
sickened and died, and the business failed. Potential
entrepreneurs understandably shun the hassles of
factory ownership and invest their mone in tradin
enterprises, notably import businesses. 7~
Existing industrial plant typically operates at 40
percent below capacity. Net industrial capital forma-
tion almost certainly is negative, that is, the deteriora-
tion of old capacity exceeds the completion of new
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
facilities. Quality of output has been low since the
onset of the revolution and, according to most observ-
ers, has been falling still lower. Workers, whose real
pay continues to drop because of inflation and the
drop in per capita output, have little motivation to
procurement prices for some farm products and fairer
treatment of rural families in the distribution of
scarce consumer goods.
increase production or to restore quality.
Firm aggregate statistics on the decline in industrial
capacity, output, and discipline are not available. The
observer, however, benefits from some fairly good
statistical series, for example, in oil and from first-
hand information about specific problems. In January
1986, for example, Minister of Heavy Industries
Behzad Nabavi told a seminar on industrial planning
and budgeting of the need to improve worker disci-
pline and productivity. Nabavi had found at one truck
plant that a worker had a quota of spraying under-
coating on 60 trucks a day when it took only 70
seconds to spray each truck. In another case he
discovered workers had increased the amperage of
welding torches to speed up their work, with the result
that they burned holes in the aluminum material. In a
third plant he found workers cooking breakfast at
0800, taking a break at 0900, working at 1000,
knocking off for prayer at 1100, and putting in a total
of two hours' work for the whole day.
Situation in Agriculture
The severe natural limitations on output in Iran's
agricultural sector continue to limit production. Rain-
fall not only is scanty in most of the country but also
varies from season to season and year to year. Farm-
ers over past generations have already brought into
use the good land suitable for cultivation. Troubles in
domestic industry and the decline in Iran's ability to
purchase foreign fertilizers, agricultural chemicals,
and farm machinery have also held back the expan-
sion of capacity and output. Further, the regime has
failed to resolve the question of land tenure in the
countryside. Production of major crops has held fairly
steady over the past several years, discounting for
weather variations. This is not good enough, given the
3-percent annual growth in population and the gov-
ernment's provision of more food to the poor. As in
most developing countries, the building of new fac-
tories, roads, and dwellings has increased the competi-
tion for scarce agricultural land. Two important
positive factors have been increases in government
Situation in Banking
The revolutionary government has nationalized the
commercial banking system and has consolidated all
commercial banks into four major banks with numer-
ous branches. These banks supply funds for the
industrial and agricultural enterprises now in govern-
ment hands and for individual borrowers. The banks
have no theoretical limit on the amount of credit they
can extend so long as the Iranian central bank
authorizes the expansion and stands ready to issue
more money. The inefficiencies of government enter-
prises, the growing shortages of goods, and the con-
stant struggle of Iranians to minimize the fall in their
living standards all contribute to the high inflation
rate, estimated at anywhere from 15 to 30 percent or
more and in this paper assumed to be approximately
20 percent.
Businessmen and travelers who need dollars to travel
abroad can no longer get even small amounts from the
government, whose holdings are down to minimum
transaction requirements. They have recourse, howev-
er, to a brisk private market for foreign funds in
which dollars can be bought for about 650 rials
each-seven or eight times the official exchange rate.
Financial representatives of bazaari businessmen
hawk foreign currencies in front of major banking
offices, notably in Tehran. After an agreement, both
buyer and seller enter the bank where the purchaser's
passport will be stamped authorizing his taking out
the specified sum (ranging up to $5,000). To obtain
larger amounts, for example, in order to pay for a
student's Western education or a businessman's for-
eign purchases, a buyer may make a deal with the
bazaari businessman himself, transferring an Iranian
property for a nominal sum in rials plus the delivery of
some dollars abroad. The supply of dollars in this
market comes from the billions of dollars in Iranian
accounts in Western banks. In the few months before
the fall of the Shah, Iranians added more than $1
billion to these accounts. The government tolerates
the transactions as an economic necessity.
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
The nationalized banking system conforms on the
surface to the strict Islamic prohibition against inter-
est. The banks supply funds to enterprises under
profit-sharing agreements, and depositors receive (say)
7 percent on short-term and 9 percent on long-term
deposits under the guise of a return from an invest-
ment pool organized by the bank. Meanwhile, the
banks continue to perform normal commercial ser-
vices for the customers: routing checks, handling bills
of lading, and so on. The banks serve as the govern-
ment's financial agent in this era of widespread
nationalization and regulation of economic activity.
Current State of Consumption
The regime has succeeded in providing the population
with at least a minimum amount of necessities in both
urban and rural areas. Basic foodstuffs and household
goods have been furnished at low official prices. The
gradual increase in recent years of shortages of goods,
even of rationed quantities, reflects the pronounced
decline in per capita national economic output, the
near exhaustion of foreign exchange reserves, and the
heavy burden of war.
Despite unemployment of 30 to 35 percent and low
real wages, people in the cities and towns seem to have
money. This is both a reason for and a result of the
virulent inflation and the flourishing black market.
The government's war expenditures and its limited
ability to collect taxes also help explain the apparent
abundance of money.
Because of the rapid growth of population, consump-
tion is even more clearly shrinking on a per capita
basis. The most critical area probably is urban hous-
ing, which is extremely crowded because of the
continuing large-scale migration of people from the
countryside, perhaps averaging more than 1 million
people a year, the necessity to take care of 2 million
war refugees, and shortages of construction materials
and skilled labor. The quantity of water available in
big cities has increasingly fallen short of the needs of
the people. In some cases, the quality has badly
deteriorated because of inadequate supplies of pipes,
pumps, chemicals, and skilled personnel. Shortages of
electricity in both cities and the countryside are
endemic.
Measures to improve the supply of consumer goods
and services falter because of the necessity to prose-
cute the war, the decrease in investment resources,
and the reduction in funds available to import food-
stuffs. Managerial failures have hampered efforts to
rebuild areas devastated in the war and to move the
refugees back to their homes.
As for the relation of inflation to consumption, the
government seeks to stabilize the prices of rationed
goods, while accepting rapid rises in the prices of
luxury goods and above-ration quantities of basic
goods. This policy requires constantly increasing bud-
getary subsidies to support the rationing system.
Unfortunately for the authorities, the policy results in
a growing differential between the ration price and
the market price and hence an increased incentive to
divert supplies from ration channels and to bribe
people who control supplies. The more severe the
shortages of goods, the stronger these tendencies are.
Cut in Dollar Earnings
If oil prices received by Gulf producers continue to
average $13 per barrel, as in March-April 1986,
Iran's earnings from oil will be cut from roughly $15
billion in 1985 to $9 billion in 1986. Each previous
reduction in Iran's national income has bitten into
increasingly important areas of spending. By now,
accumulated foreign exchange holdings-approxi-
mately $20 billion when Khomeini took over-are
down to the minimum level of about $3 billion deemed
necessary for transaction purposes. The revolutionary
regime has made a point of not going into debt to
foreign suppliers, but in early 1986 it apparently was
arranging to lengthen payment terms from 180 to 360
days on some types of transactions.
Consequences of Economic Pressures
The Iranian economic system under the Ayatollah has
had to accommodate the enormous burden of a war
whose tactics and casualties warrant comparison with
World War I. The economy regained some of its
strength in 1982 and 1983 with the partial restoration
of oil production and sales at $26 to 28 per barrel.
Sanitized Copy Approved for Release 2011/06/01 : CIA-RDP88T00096R000400470002-6 -
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Subsequently, increased shortages and continued de-
terioration of capital plant have caused national out-
put to sag, most clearly on a per capita basis. The
recent precipitous fall in oil prices, unless soon re-
versed, cost Iran a further $6 billion in foreign
exchange in 1986 at a time when its economic
maneuvering room had been perceptibly narrowed.
The anticipated cuts in foreign exchange earnings will
add to consumption blues and hamper Iran's ability to
exploit its military successes of early 1986. The
differential between official government prices and
black-market prices continues to widen. The percent-
age of imports coming into Iran through illicit chan-
nels is rising, and growing shortages encourage the
diversion of even more industrial and consumer goods
to the black market. The range of possible govern-
ment countermeasures or temporizing actions is
outside capitalist oil market; and the existence of
secularly minded professional and technical people,
some of whom resent being made scapegoats for
economic misjudgments and chafe under the interfer-
narrowing.
The spiritual environment necessary for an Islamic
economic system exists at the top level of leadership in
Iran today and among the great masses of people, but
many members of the technical and managerial class
have only a superficial dedication to these values.
Ayatollah Khomeini, who dominates the Iranian na-
tion-state under its revolutionary constitution and by
virtue of his own strength of character, has seen to it
that able clerical supporters fill the most important
posts in the government. Yet the economy carries on
only because of the efforts of tens of thousands of
secular technocrats and businessmen in the ranks
below the clerical rulers. Moreover, the time-honored
requirements for making a living and acquiring
wealth give way only grudgingly to Islamic precepts
governing economic behavior.
Extent of Implementation of System
Two main features of the Islamic economic system are
in place in Iran today: the subordination of economic
goals to religious values and the position of the
economic system as a subsystem of the Islamic repub-
lic. Their practical impact on the lower levels of the
system are continuously undercut by the exigencies of
the war with Iraq; the dependence on the
ence of revolutionaries in daily business affairs.
Khomeini has not taken a strong position on the
question of private property, which has Koranic back-
ing as a means of working Allah's will through
trusteeship and as a practical means of eliciting hard
work. The minority who take the leftist path of almost
universal government ownership have found them-
selves blocked by a conservative majority of clerics
who themselves, or their key backers, frequently are
large landholders or businessmen.
The Ayatollah's government has nationalized Iran's j
heavy industrial plants, banks, and major transport 25X1
lines. The government almost certainly will continue
to operate the banks, oil facilities, and major transport
lines. Over the long run, it probably will encourage
private investment in and operation of many of the
nonoil industrial facilities now in government hands.
Private economic activity dominates the middle and
lower reaches of the Iranian economy, embracing
most of light industry and agriculture, handicrafts,
and local commerce. As shortages have mounted and
foreign exchange has become scarcer, more private
activity has moved outside officially sanctioned chan- 25X1
nels. Dealings in the marketplace exhibit the rough-
and-tumble characteristics of an older Iran more than
the Islamic ideals of fair market conduct.
Managers of factories, large merchants, owners of
market stalls, and people everywhere feel a gradual
increase in financial exactions and intervention into
their affairs by the Islamic revolutionary organiza-
tions. As has happened in other revolutions, many of
the new local authorities have become corrupted by
power. The increase in payoffs and black marketing in
Iran today is in stark contrast to the Islamic economic
model, under which clerical influence would be uni-
fied and benign.
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Other features of the present-day Iranian economy
fail to match the idealized features of the model:
? One-fifth of the labor force is unemployed even
though under the model Islamic economy each
individual is guaranteed work that will nurture his
God-given talents.
? Resources are wasted because of the ineffectiveness
of economic planning, although the waste of Allah's
bounty is especially condemned in Muslim writings.
? The slow work pace and low quality of output reflect
a tendency to encourage "revolutionary" rather
than productive activity, whereas Islamic precepts
require that the laborer gives an honest day's work
to an employer who in turn is concerned with the
worker's health and welfare.
Government authorities have banned the payment
and receipt of interest in accordance with Islamic
doctrine. Yet the reorganized banks continue to
charge interest to business enterprises and to pay
interest to depositors under the fiction of a return on
risky investments. Private lending-under some other
name-no doubt continues, the interest rates presum-
ably reflecting the high degree of risk and the high
rate of inflation.
The rationing of basic consumer goods through gov-
ernment offices and mosque-based komitehs consti-
tutes the bedrock of government policy for aiding the
poor as required by the Islamic model. The payment
of zakat (the alms tax on wealth) is voluntary, and
only a fraction of the people honor this religious
obligation. Ad hoc collections for the support of the
armed forces, the relief of refugees, and assistance to
the wounded are numerous and cannot be avoided. A
merchant may have to give up a fraction of his stock,
a truck owner may have to carry provisions to the
front, or a passerby in a downtown street may have to
contribute.
The revolutionary regime has enforced the provisions
of the Islamic code that prohibit certain types of
consumer goods and social practices. Drinking liquor,
prostitution, and abortion are among the prohibited
activities, and offenders are severely punished if
caught. A considerable amount of drinking and high
living continues in private.
Trade has shifted perceptibly toward Third World
countries, including other Muslim states. Iran, howev-
er, still relies heavily on the Western world for
modern machinery and technology, and the great bulk
of its oil still goes to industrial countries.
The Ayatollah has removed women from judgeships
and other top positions and has tried to force the
several hundred thousand women in urban jobs back
into the household. He has failed to eliminate them
from the work force, however, because of their resis-
tance, the need for their skills, and the drain of skilled
males into the armed forces. He has conceded the use
of women in education, nursing, and obstetrics.
Prospects for the System After Khomeini
The Islamic economic system has reached its high
water mark under the Ayatollah. After his departure
and the end of the war, any efforts to advance the
system most likely will give way to the practical
requirements of an oil-based developing economy with
major capitalist customers and suppliers. Iran, with
its long tradition of private ownership and trade and
its still huge oil wealth, will follow the capitalist
model if its business interests have their way. Yet
government ownership and regulation will continue to
play a large role. Post-Khomeini Iran will possess not
only a large bureaucracy inherited from the Shah's
regime but also the sizable numbers of offices added
in the new revolutionary organizations.
The Ayatollah-constrained by war, falling oil reve-
nues, and a secularist fifth column-has introduced
many of the conditions needed for establishing an
Islamic economic system while failing to introduce
full-blown Islamic features into day-to-day economic
affairs. He lacks the resources, the popular support,
and the time to complete the shaping of his half-
formed Islamic economic system into an unalloyed
Islamic system. Even the end of the war with Iraq will
not allow Iran to construct a full-blown Islamic
economic system because of the high cost in popular
25X1
25X1
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Confidential
disaffection and economic efficiency, the lack of
support from other countries, and the difficulty of
promoting the system in a secular, high-technology
world.
The revolutionary government cannot conduct the
war, produce and market oil, or provide for its rapidly
growing population without recourse to Western mar-
kets and goods. As the bloody war moves into its
seventh year and living standards and morale continue
to sag, the rage against the Shah is losing some of its
fervor, and the incompatibility of most people's aspi-
rations with the Ayatollah's bellicose policies is be-
coming clearer.
Iran's need for links to Western markets and goods
refuses to disappear. The dilution of Iran's Islamic
society with Western influences persists, and the
rulers of the other Muslim countries continue to
promote an ersatz brand of Islam that, the militants
charge, is more detrimental to the faith than the rule
of the colonialists.
The mullahs (clergymen) at the top realize that a loss
in economic control leads almost inevitably to a
decline in political power. In the absence of
Khomeini's unifying authority, however, they will
possess considerably less control over factionalism and
personal ambition in their ranks, and they will face
the desire of businessmen to run their own show and
the wish of the populace to return to quiet everyday
life. This diminution of authority will take unpredict-
able forms. Almost certainly the general result will be
a decline in prospects for the completion of an Islamic
economic system.
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Appendix
The Iranian Economy
Under the Shah
Iran emerged after World War II as a large, populous
Muslim nation with rich oil and gas resources; a
landlord-dominated peasant economy; a merchant-
dominated urban economy; an enormous, often ineffi-
cient or venal bureaucracy confined largely to Tehran
and the oil region; and a highly inequitable distribu-
tion of income and an unfairly administered tax
system. Iran was an important Third World country
in a region whose low-cost energy helped propel the
unprecedented postwar economic growth of Western
Europe, Japan, and the United States.
Thus, most of the land was in the form of large estates
worked by the proprietor himself, tenants, sharecrop-
pers, and farm laborers. Peasant-owned properties,
mostly small in size, were worked by the owner,
perhaps with the help of farm laborers at peak
seasons. Waqf properties could be leased or share-
cropped under a resident manager. The concentration
of landholdings reflected past grants of land by Iran's
rulers, bequests to religious bodies, and purchases by
the rich. The high cost of irrigation facilities in this
dry country often put the small owner at a special 25X1
disadvantage. 25X1
Once the Shah had ousted the nationalist Prime
Minister Mohammad Mossadegh in August 1953 and
had begun to rule rather than reign, he embarked on a
large-scale modernization program that, a quarter of
a century later, was to contribute to his spectacular
downfall. The program, dubbed "the white revolu-
tion," aimed at a rapid buildup of modern industrial
facilities, land reform and the technical transforma-
tion of agriculture, universal literacy and the training
of tens of thousands of technical and administrative
specialists at foreign universities, and the creation of
powerful military forces. The quadrupling of interna-
tional oil prices from 1973 to 1974, together with the
boosting of Iranian output to 6 million barrels per day
(fourth largest after the USSR, the United States,
and Saudi Arabia), provided the necessary financial
backing.
Agriculture Under the Shah
The ownership and operation of farmland in Iran
reflected the highly unequal distribution of political
and economic power in the countryside. According to
the official estimates of 1951:
? Less than 0.5 percent of the population owned 56
percent of the land under cultivation.
? Between 14 and 20 percent was owned by peasant
proprietors.
? Some 15 to 25 percent consisted of waqf (religious
trust) properties.
? Public domain and crown lands each made up about
5 percent.
The Shah's land reform of the 1960s aimed at
breaking up large estates through the sale of sizable
portions to tenants, sharecroppers, and village cooper-
atives, with the government regulating and subsidiz-
ing the purchase price. The program substantially
reduced the absolute power of the landowner while
not ending his dominance in many aspects of rural
life; greatly increased the role of the central govern-
ment in agriculture; did practically nothing to help
the majority of landless farmworkers; did little in
practice to raise the economic status of the former
tenant and sharecropper, who still faced a hard life of
subsistence farming, but markedly improved their
social, legal, and political status; and disturbed time-
honored landlord-peasant arrangements that had re-
flected the realities of irrigation patterns, economies 25X1
of scale, and credit arrangements in the countryside.
Landlords took advantage of the exceptions and loop-
holes in the land reform laws, for example, by trans-
ferring properties to relatives, but the government
generally prevailed over landlord opposition, a major
illustration of the great political power of the Shah.
The Shah's agriculture program also called for the
establishment of modern agribusinesses, sizable enter-
prises that were to level land, build roads, improve
irrigation, bring in fertilizers, and otherwise lead the
25X1
- - - Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
transformation of the stagnant farm sector. This long-
term program had gotten off to a shaky start because
of heavy infrastructure costs and the general overcom-
mitment of the economy when it was brought to a halt
in 1979 by the revolution.
Meanwhile, the rapid growth of population, combined
with the dislocations attributable to the new patterns
of rural ownership and control, led to the migration of
millions of people to the cities. Not only was the
population getting too large for domestic agriculture
to feed, but the standards of consumption were also
rising rapidly because of the oil-fueled boom.
Industry Under the Shah
The key to the Shah's modernization program was the
influx of oil revenues that put at the government's
disposal tens of billions of dollars with which to buy
foreign industrial equipment and expertise. The gov-
ernment-owned National Iranian Oil Company
(NIOC) entered into an agreement with an interna-
tional oil consortium in October 1954 on the produc-
tion and marketing of Iranian oil. With the rising
expertise of Iran's oil personnel, the growth in OPEC
influence, and the quadrupling of international oil
prices from 1973 to 1974, NIOC gradually became
master of all phases of the oil business in Iran.
Parallel to programs for expanding the production
and refining facilities in oil were programs to exploit
the country's large natural gas reserves.
Oil revenues permitted an acceleration of growth in
other branches of industry, which had long dwelt in
the shadow of oil. The government poured large sums
into the exploitation of iron ore, copper, lead, zinc,
and other mineral resources. For example, it allotted
$450 million for a 20-year project to develop copper
ore near Kerman.
The government also moved to end the shortage of
electric power for industry and to extend transmission
lines in rural areas. Even so, the expansion of industri-
al and household demand was so rapid that brownouts
and blackouts occurred frequently by the mid-1970s.
The broad aims of the Shah's government were the
establishment of an industrial base featuring modern
technology and the ultimate capacity to produce
industrial material and equipment then being import-
ed. A series of five-year plans called for rapid in-
creases in the output of steel, copper, aluminum,
petrochemicals, and other major materials, with ma-
chinery to follow as quickly as feasible. Rates of
growth were so high and the influx of oil funds so
great that the economy could not easily digest the
mounting volume of industrial activity. Money was
considered the cure for all problems, whereas in
reality the economy lacked the managerial know-how,
the skilled labor, the industrial capacity, and the
transportation facilities to support the rapid growth
set forth in government economic plans. Furthermore,
the Shah disrupted economic plans and budgets by
insisting on going ahead with his own grandiose
projects that stripped more useful projects of re-
sources. In the mid-1970s ships sometimes had to wait
several weeks to discharge their cargo, and major
industrial plants suffered from such severe shortages
of raw materials that a third or more of their labor
force was redundant.
Despite rapid increases in capacity, output, and tech-
nological skill, the nonoil branches of industry could
not fill domestic demand, let alone generate sizable
exports against the day when the oil ran out.
The Shah's Economic System
Like most rulers in the newly freed Third World, the
Shah inherited a traditional economy with a subsis-
tence agriculture, a low-technology light industry, and
a dependence on Western countries for advanced
equipment and technical training. But, unlike the
majority of other rulers, the Shah commanded enor-
mous oil revenues. He regarded these revenues not as
the receipts of a centralized bureaucratic state, but as
the revenues of an absolute monarch to be distributed
at his whim in directions he deemed good for himself
and his monarchy.
At the same time, the Shah was a valued and trusted
ally of the United States and a major beneficiary of
US economic and military technology. The Iranian
nation-state played a leading role in an important
sector of the then US-dominated international market
system. The Shah had far fewer economic dealings
with the USSR and its East European allies.
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Confidential
Within Iran, the bulk of local economic activity
continued under the auspices of traditional markets-
a system of premodern capitalism laced with unique
cultural influences. The millions of rural family
households produced much of what they consumed or
met the remainder of their needs mainly from local
sources. They sold their labor services and products to
local buyers. In areas near cities, traditional landlord-
peasant arrangements were changing to market-domi-
nated or government-decreed patterns. In outlying
ethnic areas immediately after World War II perhaps
one-fourth of Iran's population led a nomadic, pasto-
ral existence, an economic form even older than the
landlord-peasant arrangements. As part of the cen-
tralization of political power in Tehran, the Shah's
government appreciably increased the state's control
over these nomads, and they gradually adopted a
more settled way of life.
Under the Shah, most external economic activities
and small-scale internal activities were brokered
through the market system, whereas large-scale inter-
nal activities were conducted largely as state econom-
ic ventures and/or entrepreneurial ventures by the
Shah and his associates. His economic system was a
changing mix of capitalist, socialist, and traditional
features with strong financial and technological links
to the United States, the leading capitalist nation.
The Balance of Classes Under the Shah
The Shah's economic programs helped his own asso-
ciates, the Western-trained technocrats, new industri-
al capitalists, skilled urban workers, and foreign
suppliers and experts. They hurt the clergy, rural
landowners, old-style merchants, and landless agricul-
tural workers. The programs secularized, monetized,
and internationalized the economy. They provided
major improvements in material well-being for many
people while worsening the distribution of income in
both rural and urban areas and greatly raising expec-
tations on all sides.
The Fall of the Shah
At the beginning of 1978, only 13 months before the
fall of the Shah, learned observers wrote of his
apparently solid political, economic, and military
position. In retrospect, we know that beneath the show
of rising income and consumption, strong anti-Shah
currents were at work:
? Resentment by the Islamic clergy over the secular-
ization of educational, political, and economic af-
fairs and the consequent loss of clerical influence.
? Uprooting of millions of lower-class workers as the
result of rapid changes in agriculture and industry,
and an increase in their receptivity to anti-Shah
movements.
? Disgruntlement of local merchants and capitalists
who had been hurt by the new competitive forces
and their own loss of status.
? Disaffection of nationalists, who felt especially bit-
ter over the legal and economic privileges of Ameri-
cans in Iran.
? Alienation of intellectuals who saw Iran being
turned into an unproductive consumption economy,
"one huge assembly of flea markets hawking Euro-
pean manufactured goods."
? Indiscipline of the military rank and file because
many soldiers had come from disadvantaged classes
and often had been drafted against their will.
These forces, however, would not have proved an
explosive mixture if the Shah had not vacillated in
dealing with his enemies or if the exiled Ayatollah
Khomeini had not provided such shrewd leadership.
One observer sums up the final scene: "In February
1979, the 50-year-old Pahlavi monarchy collapsed in
a brief two-day popular uprising. The uprising deliv-
ered the coup de grace to a regime that had already
been battered and broken by a year of street clashes,
strikes, and demonstrations."
Missed Opportunity
The Shah, whose arrogance grew with his power and
wealth, badly mishandled the task of modernization in
Iran. Although some highly useful industrial and
agricultural projects were completed and hundreds of
thousands of technical people were trained, the Shah
tried to modernize at a pace far beyond the absorptive
capacity of the country's political and social systems.
He wasted tens of billions of oil dollars, which could
have been the means of fashioning an independent,
progressive nation, able to fend for itself when the oil
ran out.
25X1
25X1
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
 Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6
Confidential
Confidential
Sanitized Copy Approved for Release 2011/06/01: CIA-RDP88T00096R000400470002-6