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Effects of government expenditure, credit and tax policies on the economic development of Iran with special reference to the 1960-76 period

Effects of government expenditure, credit and tax policies on the economic development of Iran with special reference to the 1960-76 period Thumbnail


Iran is ons of the best case studies among the oil producing countries in which the effects of oil revenue can be examined. While it has some of the basic characteristics of developing countries, it is endowed with enormous wealth. A combination of these factors has increased the role of the government in economic development by granting a greater possibility of spending and menoeuverability with regard to its economic policies. Due to the importance of the state in the economic development of Iran, this thesis has been devoted to the economic role of the government in Iran. We have examined the determinants of government expenditure, in three parts, its effects and the importance of different channels of finance.
In the first part, we have examined the determinants of government expenditure which indicate that on the one hand, the revenue constraint has determined the level of government expenditure at the aggregate level and changes in the pattern of expenditure have been produced by an exogenous factor mainly oil revenue. On the other hand, this exogenous factor which has granted the state a political independence from its social base, has affected the pattern of distribution of government expenditure. Due to the importance of political factors, social and economic expenditures have been undermined while defence expenditure has been over-emphasised.
The effects of such a pattern of government expenditure which has been reinforced by other economic policies, have been the distortion of economic development. As the second part will show, the effects of government economic policies have been determined by the short-run nature of the determinants of government expenditure through which the government has tried to benefit the middle and upper classes in order to grasp some political support. In the main the majority of peasants have been ignored and have received no part of government expenditure. Also, by the emphasis on capital intensity, has created a maldistribution of Income which has appeared as an impediment to the growth of industrial production* In the service sector, while the long -run needs for human capital and infra-structural investment have been undermined, defence expenditure has resulted in the depletion of foreign exchange and the distortion of the pattern of development.
As the third part shows, the above pattern has been affected by the structure of the Iranian fiscal system in which a relative independence of the state has been ensured through the external channel of finance which has reduced the importance of public opinion in the allocation of government spendings. Not only has it resluted in retarding the development of the fiscal system , but, has also reinforced the gearing of the Iranian economy to the exogenous determinant which in turn has been determined by the structure of the international oil market and the commitment of the Iranian government to its allies.
Due to the existence of such dualistic determinants, the government has had to balance between internal and external factors. Because of the gradual rising of importance of oil revenue, the trade-off point has moved toward external factors which has caused . an increasing trend towards military expenditure. In this way, the gap between the state and its internal /
social base has widened and the political system has no longer been able to reflect the long-run needs of the economy. Since economic decision making has been strongly affected by the political factors, a socio-political change may be inevitable at a time of economic crisis.


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