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Iran: Oil Revenues and the Acceleration of Modernization, 1960-79
Country Study > Chapter 3 > The Economy > Role of the Government > Oil Revenues and the Acceleration of Modernization, 1960-79


During the reign of Mohammad Reza Shah, significant increases in oil revenues, coincident with the centralization of the economy, compounded societal stress and imbalance. The modernization that continued throughout the shah's rule affected the economic infrastructure but not the monarchical political structure. The gap between the two was accentuated by the Western industrial policies promulgated by the shah.

In the 1960s, economic planning focused on four main goals. The first was rapid development of large industries by capital-intensive methods and the use of the latest technology; the second was employment of foreign advisers and technicians to guide the modern industrial complex. The third was encouragement of large industrial profits, and the fourth was control of wages by reallocating savings from labor costs to capital investment. It was assumed that wealthy industrialists would reinvest their capital in the economy, thereby stimulating economic development. But such investment did not occur, and the gap in income between industrial owners and the commercial class, or bazaar (traditional middle class merchants), was never closed, which contributed to the revolutionary pressures that eventually brought down the regime.

The bazaar did not benefit from the 1974-78 oil boom; as a consequence, bazaar members helped lead and finance the Revolution. The series of national reforms and development programs that Mohammad Reza Shah had embarked on in the 1950s came to be known in 1963 as the "White Revolution". The White Revolution was simultaneously the shah's attempt at economic modernization and his attempt at political stabilization. He intended to accelerate nation-building and to enhance his regime's image as the promoter and guardian of the public welfare.

Land reform was a major element of the shah's economic development program. Land reform affected both the economic structure and the social mores of the agrarian component of society. The Third Development Plan (1962-68) and the Fourth Development Plan (1968-73) together infused US$1.2 billion into agriculture through land reclamation, subsidized irrigation projects, and land redistribution programs. These programs undermined traditional rural authority figures, encouraged commercial farming, and transformed the rural class structure. By the 1970s, the rural class was divided into three components: absentee farmers, independent farmers, and rural wage earners.

The third plan was transitional to a new time frame of five years for development plans. Oil revenues supported the US$1.9 billion national budget, which fostered an economic boom in the public and private sectors. The government concentrated its activities on heavy industries, dam building, and public utilities, as well as on expansion of oil and gas production. Private industry benefited from bank credits given as part of the third plan.

The fourth plan accelerated economic growth and integrated sectoral and regional concerns into a national development program. During the fourth plan, the annual rate of growth in gross domestic productaveraged 11.8 percent, which exceeded the growth target. The strongest growth occurred in industry, petroleum, transportation, and communications. Several large projects under construction during the fourth plan included a steel mill, an aluminum smelter, a petrochemical complex, a tractor plant, and a gas pipeline leading to the Soviet border. Farming and crop production were given low priority during this period of industrialization, which widened the large gap between the industrial and agricultural sectors.

The third and fourth development plans affected the urban population in particular because of the emphasis on the increased production of consumer goods and the expansion of industries such as gas and oil. Between 1963 and 1977, many industrial facilities were constructed, primarily in urban areas.

The Fifth Development Plan (1973-78) set investment at US$36.5 billion; this figure almost doubled to US$70 billion as a result of large increases in oil revenues during the period. Almost two-thirds of the capital allocated under the fifth plan was concentrated in housing, manufacturing and mining, oil and gas projects, and transportation and communications. Some additional oil revenues were spent on ad hoc defense and construction projects rather than on the fifth plan's priority areas.

In the period between the quadrupling of oil prices in 1973 and mid- 1977, Mohammad Reza Shah pushed both industrialization and the establishment of a modern, mechanized military much too rapidly. As a result, inflation increased, corruption became commonplace, and rural-to- urban migration intensified. In addition, because of a lack of technically trained Iranian personnel, the shah increasingly brought foreign consultants into Iran. This further exacerbated an already severe housing shortage in Tehran.

In mid-1977, the shah appointed Jamshid Amuzegar as prime minister, and the latter immediately launched a deflationary program. This sudden slowdown in the economy led to widespread unemployment, especially among unskilled and semiskilled workers, which further increased the gap between rich and poor. The economic slowdown was a major factor in radicalizing large segments of the population and turning them against the shah.

Some argue that rapid modernization created the disequilibrium that brought about the shah's fall. Others, however, stress the importance of the way in which the rapid modernization was implemented. After the economy's initial development, inequalities in income distribution were not addressed. Those at the lower end of the economic spectrum -- for example, small merchants and businessmen, urban migrants, and artisans -- felt disadvantaged in relation to workers in large businesses, industries, and enterprises with foreign associations. Western-educated Iranians rapidly became a well-paid elite, as did factory workers. Bazaar merchants, students, and the ulama, however, did not benefit so directly from modernization.

The increased availability of health and educational resources in towns and cities that resulted from Mohammad Reza Shah's programs contributed to an explosion of the urban population. In the 1950s, urban areas accounted for 31 percent of the population; by the late 1970s, that number had increased to about 50 percent. The urban population became stratified into an upper class, a propertied middle class, a salaried (managerial) class that included the bazaar, and a wage-earning working class.

Data as of December 1987

Last Updated: December 1987

Editor's Note: Country Studies included here were published between 1988 and 1998. The Country study for Iran was first published in 1987. Where available, the data has been updated through 2008. The date at the bottom of each section will indicate the time period of the data. Information on some countries may no longer be up to date. See the "Research Completed" date at the beginning of each study on the Title Page or the "Data as of" date at the end of each section of text. This information is included due to its comprehensiveness and for historical purposes.

Note that current information from the CIA World Factbook, U.S. Department of State Background Notes, Australia's Department of Foreign Affairs and Trade Country Briefs, the UK's Foreign and Commonwealth Office's Country Profiles, and the World Bank can be found on

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