DECEMBER 1980 - VOLUME 1 - NUMBER 11
Business In the Shah's Iran
by John Cavanagh
Since the February, 1979, overthrow of the Shah developments in Iran have seldom moved from center stage in the Western media. The ongoing hostage crisis and the Iran-Iraq war have served to keep attention focused on the diplomatic and strategic implications of the creation of a revolutionary Islamic government in Teheran.
There is, however, another dimension to the Iranian revolution, vital yet often overlooked. In the past two years, the new government has taken dramatic steps to lessen the influence of Western, and particularly U.S., multinationals, in Iran.
In this first article of a two-part series, the Monitor explores the historic role of foreign investors in the Shah's Iran: concentrating the benefits of rapid growth in the hands of multinationals and corrupt Iranian elite. Next month, the Monitor will report on the efforts of Iran's new rulers to create a self-reliant economy.
When Iran's elite Imperial Guard disintegrated before the Iranian masses in February 1979, Western corporations lost what was rapidly becoming their most lucrative client state in the Third World. The price tag-including cancelled contracts, plant shutdowns, list trade agreements and outstanding loans-surpassed U.S.$100 billion. Only the oil conglomerates, aided by forecasts from then U.S. energy czar James Schlesinger of impending world oil shortages, managed to reap short term gains from the Iranian revolution by hiking up gasoline and oil prices to record levels.
While enormously lucrative to Western corporations, the historic links between Iran and multinational corporations have had a devastating impact on 'Iranian peasants and workers, distorting the entire course of Iranian economic development. It is a history characterized by:
The reasons why multinationals flocked to Iran are quite simple. In 1955. the Law for the Attraction and Protection of Foreign Investment was passed wherein corporations were permitted unlimited repatriation of profits and transferal of capital out of Iran, as well as assurances of total protection of capital and assets within Iran. Subsequent legislation granted generous tax holidays (five to ten years) on foreign investment which, when combined with government financing of infrastructure and preferential loan and licensing policies, drew in billions in investments beginning in the sixties.
By mid-1977, 327 foreign corporations were engaged in 243 joint-venture industrial undertakings, often with members of the royal family or with the Shah's Pahlavi Foundation. Meanwhile, foreign loans poured in to finance public sector communications, transportation and construction.
The high rate of return proved a major incentive to foreign corporations. Government brochures for foreign investors often claimed that annual returns on capital of 30 percent were normal in Iran, and economists who knew the country well often spoke of 50 percent returns.
The glue which cemented almost all multinational business deals in Iran was payoffs-to the tune of hundreds of millions of dollars, politely referred to as commissions or agents fees. To ensure the loyal support of Iran's numerically small elite, the Shah condoned, and often facilitated, a panoply of channels for corruption. Documented payoff figures on single transactions often exceeded one million dollars.
Multinational profits went hand in hand with a development scheme that failed to spread economic and social benefits beyond a narrow Iranian elite, as a look at the role of multinationals in Iran's arms, energy and agribusiness sectors will illustrate.
In May, 1972, Richard Nixon and Henry Kissinger stopped off in Iran and signed a secret agreement which gave the Shah a carte blanche to buy any and all conventional weapons he wanted from the U.S. It was the first and only agreement of its kind, escalating to new heights the means of enforcing the- Nixon Doctrine of policing the world through regional mini-powers under U.S. tutelage (e.g., Iran, Brazil, Indonesia, Nigeria).
Arguably, it also saved key corporate pillars of the beleaguered U.S. arms industry. Indeed, several U.S. officials, including the ex-ambassador to Saudi Arabia, James E. Akins, recently argued that Kissinger acquiesced in the Shah-led oil price hikes beginning in 1974 to provide Iran with the finances to help out ailing Northrup, McDonnell Douglas, General Dynamics, Boeing, Grumman and Litton Industries. Between the Nixon/ Kissinger trip and the onset of the Iranian Revolution in November, 1978, Iran squandered $19 billion on U.S. arms, with most selections personally tested and approved by the Shah. When the Revolution began, $11 billion more was on order.
The Persian word for mountain goat is Ibex. It was also the code name of a $500 million. CIA-managed boondoggle in Iran. Ibex was top-secret until August, 1976, when three Rockwell officials were gunned down in the streets of Teheran. Rockwell signed the deal in 1974 to provide Iran with a highly-automated computer network, ostensibly to supply electronic surveillance of the Soviet Union. A former National Security Agency official admitted, however, that the Rockwell equipment could be used "by the Iranian secret police, the SAVAK, to help locate dissidents inside the country and for other internal security functions."
Then CIA Director George Bush, ex-CIA Director Richard Helms (then U.S. Ambassador to Iran) and several CIA employees helped set up and execute the deal. Iranian multimillionaire Abolfath Mahvi, nicknamed "the prince" by U.S. executives, acted as a middleman and processed Rockwell payoffs through companies he set up in Bermuda and Panama. Perhaps the most outrageous aspect of the deal was that the Ibex system had previously been tested in the U.S. and the secret conclusion of many officials was that it was basically unworkable.
Northrup Corporation displayed more foresight than the other arms merchants in choosing their advance man for Iran. In 1965 the hired Kermit Roosevelt who organized the 1953 coup which reinstated the Shah onto his Peacock Throne. As top consultant and intelligence-gatherer for Northrup in the Middle East, Roosevelt arranged contracts running close to $1 billion, over an eight-year period (mainly in Iran and Saudi Arabia). Along with another notorious Northrup super-Trader, Tom Jones, Roosevelt spent many hours with the Shah discussing the merits of Northrup's prize fighters the Tiger (of which the Shah ordered 141) and later, the Cobra.
Even more than Rockwell or Northrup, Grumman Corporation relied upon the Shah's government. Indeed, the Shah may have actually saved Grumman from bankruptcy. Grumman had been in financial trouble ever since winning the 1969 contract to build the first entirely new American fighter in 10 years. The new F-14 Tomcat, the most expensive fighter of its day, was a computer with wings and sold (or more accurately, did not sell) at $10 million per plane. Through former Northrup counsel, Chuck Colson, who happened to be one of Nixon's closest aides, Northrup convinced the White House for the first time to allow a nonindustrial country to acquire the most recent and sophisticated military technology. At the same time, via bribes-Grumman slipped $2.8 million to agents in the deal as well as skillful promoting and constant flattery of the Shah, Grumman convinced the Shah to extend a $75 million loan to the corporation and eventually to purchase 80 of the new planes.
The Shah transmitted a legacy of dependence through his decision to become military master of the Third World. An August 1976 Senate Foreign Relations Committee report on arms sales to Iran anticipated the country's dire military predicament in the current war with Iraq, concluding: "the purchaser becomes dependent on the U.S. in much the same manner as a local automobile dealer becomes dependent on Detroit." It was clear that without seriously involving U.S. advisors and military personnel, much of Iran's armaments would not even be operational.
Iran entered the 1970s as the second largest exporter of oil in the world, and hoped to exit the 1980s as the Third World's largest producer of nuclear power. Just as the oil corporations dominated the corporate history of the first three quarters of Iran's twentieth century, in the Shah's schema nuclear corporations would play a leading role in the last quarter.
Oil companies- dominated the Iranian economy since the British formed the Anglo-Persian Oil Company (APOC) in 1909. APOC developed as a classic enclave importing almost all of its inputs (including food, clothing, fruit and vegetables), and providing minimal training to Iranians. The company's net profit in 1950 alone exceeded the total Iranian share of the company's revenues for the preceding 50 years.
When nationalist premier Mohammed Mossadegh nationalized the British concession in 1951, international oil companies showed determined solidarity in boycotting Iranian oil, and the 1953 CIA-orchestrated coup against Mossadegh resulted in 40 percent control by U.S. oil companies in a new consortium (the other 60 percent went to British Petroleum, Royal Dutch Shell, and Companie Francaise des Petroles).
Even as Iran attempted to extend the processing of some of its oil and natural gas onto Iranian soil, it did so largely via foreign transnationals. A 1976 sectoral breakdown of investment revealed 20 percent of total foreign capital in petrochemicals and 13 percent in oil-based pharmaceuticals and chemicals. When the April 1979 announcements of projects to be cancelled or nationalized were published, the staggering dimensions of these projects became known, including (With foreign corporate partners in brackets): a $6 billion gas secondary recovery project (Ralph Parsons, Foster Wheller, Fluor); a $900 million oil refinery in Isfahan (Fluor, Thyssen); a $800 million aromatics plant (Foster-Wheeler); a $465 million polyester plant (Dupont, aided by a $40 million U.S. Export-Import Bank loan).
The future, however, really rested with the nuclear vendors. I n 1974, as oil prices spiralled upward, the Shah launched what, if completed, would have been the most ambitious nuclear program in the Third World: 20 power plants to generate 23,000 megawatts of nuclear capacity by 1994.
The Shah and his small industrial elite were in large part motivated by the huge kickbacks to be gained in the negotiations of each reactor contract. The, corporate vendors, on the other side, were reacting to dwindling sales at home and were often backed by substantial export credit offerings from the home governments. Iran's first contract was signed with Germany's Kraftwerk Union AG, a subsidiary of the Siemens conglomerate, Germany's third largest corporation in 1979. Two reactors were to be installed on a turnkey basis. Iran had paid $2.75 billion of an estimated $7 billion total costs before late 1978 strikes closed down both construction sites.
At that time, two Westinghouse-licensed plants from France's Framatone were also under construction and negotiations were ongoing with Westinghouse and General Electric for eight more reactors.
In 1955, when former Tennessee Valley Authority chief David Lilienthal planned with the Shah a giant dam and agribusiness complex for Iran, the country was largely self-sufficient in food. Two decades later, after a misdirected land reform and the surrender of hundreds of thousands of subsistence farmers' hectares to agribusiness and state farm corporations, Iran was importing almost $2 billion of agricultural products. The food imports were accompanied by declining consumption levels in the countryside, uncontrolled rural-to-urban migration and a worsening distribution of income.
Originally, agribusiness was devel oped principally to service Khuzistan province-the cradle of the Iranian oil industry, and the potential breadbasket of Iran due to its concentration of rivers with steep upper courses, ideal for dams. Realizing that lack of water was Iranian agriculture's major technical roadblock, Lilienthal entered Khuzistan in 1955 with a grand TVA-type scheme for Iran.
His Development and Resources Corporation proposal called for the construction of l4 dams, with ancillary projects in irrigation, land preparation, crop and soil research, power transmission, establishment of petrochemical industries, public health and housing.
From the beginning, costs were way above the original estimates, and one particularly difficult technical problem precipitated the 1968 appeal to agribusiness. The problem developed when irrigation water finally began to flow from the Dez Dam in the mid 1960s, and farmers realized that in order to utilize the water efficiently, land had to, be levelled, supply ditches provided, drainage ditches dug, and initial subsoiling and construction of pads for field ditches concluded.
Private corporations from California to Japan responded to generous government concessions and formed joint agribusiness corporations with Iranian capitalists. Six international companies took the lead, carving up the land surrounding the Dez Dam project.
The results were a bitter disappointment: only one-fifth of the area had come under irrigation by 1974, despite the expulsion of 38,000 peasant families.
The reasons for failure were plentiful. First of all, several investors, including John Deere and Dow Chemical, apparently saw their agribusiness investments as stepping stones to more lucrative industrial investments in Iran, and pulled out of agribusiness after a few years. In addition, a lack of competent farm managers in Iran,' coupled with a dearth of skilled farm labor, caused repeated delays in the face of rising costs. Resentment towards the agribusinesses rose amongst the landless peasants in the areas, along with more well-to-do peasants who had expected to become landowners with the development of the region.
A 1974 World Bank report best summed up the mistaken promise of agribusiness in Khuzistan and, indeed, for all of Iran:
Growth in agricultural production has been obtained at the price of colossal investments . . . From the social point of view, the mass of the rural population has had little benefit from the agricultural development of the area.
Multinational firms in Iran became a major force in insuring that industrialization benefitted only a small number of Iranians and left the country sorely lacking in the prerequisites of self-sustaining development when the oil dries up. Iran's President Bani-Sadr once claimed that "Iranian industry is nothing but a mechanism for draining its resources to the outside." He and French economist Paul Vieille elaborated the characteristics of industry:
financial dependency for investments, but also and above all dependency as to the productive goods used, dependency for technical competence (hence the project of massive immigration of foreign technicians and skilled workers), dependency as to the kind of production and the kind of products made, dependency for supplies of intermediate products, dependency for access to foreign markets.
In the face of the Iranian Revolution, the temptation arises to speculate as to what segments of the multinational agro-industrial shell can be salvaged for future developments. At the height of the popular uprising, many analysts continued to believe the economic ties of any post-Shah Iran would inevitably remain close to U.S. multinationals. James Bill, writing for the Council on Foreign Relations' Foreign Affairs magazine, capsulized this view: "The Iranian economic and military infrastructures are American in design. Any successor regimes to the Pahlavis will need U.S. technology, markets and continued military advice and materiel."
John Cavanagh is a recent graduate of the Woodrow Wilson School at Princeton University. He is the author of several articles on transnational corporations in commodity markets and has served as a consultant for the United Nations Conference on Trade and Development.