[OPE-L:7809] Bina on Oil and the Rentier State

From: Rakesh Bhandari (rakeshb@stanford.edu)
Date: Sat Oct 12 2002 - 13:03:04 EDT



Sousan Badiei and Cyrus Bina

California State Polytechnic University, Pomona and University of 
Minnesota, Morris


Keywords: Oil, Iran, Capital Formation, Rentier State

JEL:O11, N5, Q4


The focus of this study is on the "rentier" character of state and 
economy in relation to capital accumulation during the period of 
1960-1997 in Iran. The rentier character and structure of the Iranian 
State reflects the domination of the economy by the oil sector 
(Mahdavy 1970, Bina 1992a). The rentier nature of the Iranian economy 
is also potentially recognized through a strand of literature in 
economic development, known as Dutch Disease (Katouzian 1978, Corden 
and Neary 1982, Corden 1984, Romer 1985, Evans 1986). Such domination 
has continually been the common denominator of both the Shah's, as 
well as the Islamic Republic's regimes in Iran. For the analysis of 
oil rents theory, see Bina 1985 (Ch. 5), 1989, 1990, 1992b. It is 
shown through a simple but decisive econometric model that oil 
revenues had a positive and significant relationship with the 
long-term trend of gross fixed domestic capital formation (GFDCF) 
during the latter part of Shah's regime in Iran. However, it is also 
shown that such a positive and significant relationship had suddenly 
become negative after the legendary oil price hike of 1973-1974, 
despite the fact that it brought an enormous windfall to the Shah's 
treasury by 1975 (Bina 1985, 1988, 1990, Karshenas 1990). The 
situation under the Islamic regime has been somewhat different. 
Iran's oil revenues have declined substantially, and were subject to 
much fluctuation during the period of 1980-1997 (Fesharaki 1985, Bina 
1992a, EIU, various issues). It is shown that econometrically there 
is no significant relationship between the extent of oil revenues and 
the gross fixed domestic capital formation (GFDCF) during the period 
of 1980-1997 in Iran. Moreover, the Islamic regime in Iran does not 
appear to have paid much attention to capital accumulation and 
long-term investment. Instead, the government seems to have allocated 
the revenues from oil rents to politically motivated consumption 
expenditures and unproductive activities, presumably, to contain and 
ameliorate the potential internal political upheavals and external 
threats during the period under study (Mofid 1990, Yaghmaian 1992). 
The analogue of these activities is the fact that the Government of 
the Islamic Republic has consistently engaged in the allocation of 
various sorts of (formal and informal) subsidies to those areas and 
interest groups that provided sustained ideological and material 
support for the fortification of the regime in Iran (see Bina and 
Zangeneh 1992, Amuzegar 1993, Bina 1994a, 1999, Zangeneh 1997, 1999).


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