Restructuring Iran's Economy

Last month, Multinational Monitor took a look back at the Shah's Iran, reviewing the integral role that multinational corporations played in the economy. This month, we offer a rare perspective on Iran's economic development since the revolution two years ago.

When the Shah fled his country two years ago, Iran expert James Bill offered the following prognosis, in Foreign Affairs, for Iran's future development: "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.,,

Bill was correct on the legacy of structural dependence embedded in the Iranian economy. He couldn't have been more wrong, however, about the intentions of the Shah's successors-most notably, their determination to develop an economy less reliant on Western, and particularly U.S., multinationals.

Contrary to most Western media accounts, Iran has taken the first tentative steps toward a coherent economic strategy. President Abolhassan Bani-Sadr has up to now used his many years of studying the Iranian economy to gain the upper hand over fundamentalist forces that take a vehemently anti-communist, more pro-multinational approach to economic issues.

At the same time, Bani-Sadr is more conciliatory than the staunch Islamic supporters of Ayatollah Beheshti on the issue of the American hostages.

This division has placed many U.S. officials in the awkward position of favoring Bani-Sadr because of his attitude toward the hostages-and in spite of his economic strategy which collides with U.S. busyness interests.

Even though preoccupation with the hostage crisis and severe damage from the Iran-Iraq war has prevented a full-fledged elaboration-much less implementation-of a grand economic strategy, enough changes have occurred since the Shah's downfall to warrant a look at Iran's new economic initiatives.

Bani-Sadr's economic plans call for directing investments away from export-oriented and internationally dependent sectors. His model emphasizes the development of indigenous capital goods, machinery, spare parts and basic industries with incentives for investment outside the urban centers. Bani-Sadr places priority on projects that yield internal linkages between sectors.

So far, this policy has focused on the control and ownership of existing investments, rather than the creation of new and alternative productive assets.

Starting with the Bazargan government (February-November, 1979), in which Bani-Sadr served as chief economic adviser, the Iranians have divided multinationals into three rough categories: those whose contracts are to be cancelled, those companies to be nationalized, and those to continue operating as before.

The government targeted for liquidation any ongoing projects it considered unrelated to self-reliant development, and any which were exorbitantly costly.

Military projects were at the top of the list, with Iran cancelling immediately U.S. $8 billion of nearly $12 billion worth of contracts which the Shah had been negotiating with U.S. arms merchants and installation contractors. The dispossessed include McDonnell Douglas, Westinghouse, Grumman, Lockheed, Bell Helicopter, and Brown and Root.

Similarly slated for cancellation were the projected twenty-odd nuclear power plants, with the post-revolutionary head of the Iranian Atomic Energy Organization recommending the government completely abandon all nuclear power plants for "political, economic, social, human and technical reasons."

Also getting the axe were computer projects involving IBM, Control Data, Honeywell and Electronic Data Systems; agriculture machinery provided by International Harvester; and highway construction by Morrison Knudsen.

The second tier of multinationals - those earmarked for nationalization - came from the following industries: metals, chemicals, petrochemicals, shipbuilding, automobiles, banks and insurance.

Iranian officials initially entered into compensation discussions with U.S. firms involved, but none were concluded before the hostage seizure, after which U.S. firms began shifting their claims to U.S. courts. As the claims have been building up this past year, Iran has moved to consolidate the nationalized sector.

For instance, a recent Iranian government study of the vehicle assembly industry suggested a minimum production size of 80,000 units per year would be optimal. A strong movement is underway to consolidate the eight to 10 companies of the industry into one large state enterprise, and to buttress Iran's indigenous capacity to supply more and more competent parts.

Even in certain sectors not specifically blueprinted for nationalization, Iranian takeovers have advanced. Construction firms such as Starrett, for instance, which were carrying out large-scale urban housing projects, have been replaced in most cases by Iranian contractors, with a few additional contracts being handed over to other Third World firms,,

Expanding state and Iranian private sector control, however, has by no means totally eclipsed the multinationals. Mitsui's ongoing participation in a petrochemicals project at Bandar Khomeini provides an important exception to the rule of nationalization in that sector of the economy.

In addition, continuing multinational activity has been sanctioned in oil and gas development, steel, copper and pharmaceuticals. These sectors were selected on the basis of their central importance as .employers, foreign exchange earners and repositories of fixed assets.

Perhaps more important, they are sectors in which large infusions of foreign technology are necessary to sustain production.

Oil and gas constitute the most needy areas of foreign assistance, the Iranians feel. Oil, of course, was the lifeblood of the ex= Shah's economy and the Iranian export most cherished by U.S. consumers and military strategists.

Slowing down the exploitation of oil reserves and the concomitant generation of foreign exchange has been a basic component of Bani-Sadr's efforts to "delink" the Iranian economy from Western multinationals and to build an internally-strong economy.

In pursuit of this goal, Iran initially halved oil exports to around 3 million barrels a day, a level the nation had the technical capacity to maintain despite the 1978-79 exodus of foreign technicians. The September Iraq invasion, however, all but cut off the oil flow, a circumstance that few Iranian politicians view with favor.

The war with Iraq has cost Iran dearly, moving the country's oil production from what had been viewed as optimal to a crisis situation in which even local needs for refined petroleum go unfulfilled. In mid-November, conservative estimates, of repair work and new installations in the oil sector necessary because of the war already were pegged at $5 to $7 billion, and more destruction has occurred since.

By contrast, the steel industry seems to be holding up fairly well, with the National Steel Company (NISCO) playing an ever larger role. NISCO owns and runs the country's largest factory, the rolled steel plant built by the Soviets -in Isfahan, and it is increasing its control over the other major steel center in Ahwaz. German and Italian firms continue to participate in the construction of steel plants, managing to coexist with the newly assertive Iranian national steel industry.

The most obvious change in Iran's economy since the revolution, however, consists not in the new arrangements which have been fashioned, but in the old power which no longer exists. Once dominant, the U.S. corporate role in Iran has been nearly eliminated.

Mass evacuation of personnel during the 1979 revolution, coupled with the nationalization and cancellations that followed, greatly reduced the U.S. business presence in Iran. In the midst of the rising tide of anti-Americanism that accompanied the seizing of the hostages, the position of the remaining U.S. firms became increasingly precarious.

The official ban by the U.S. on business with Iran in the wake of the hostage seizure made a legal requirement of what most firms had independently come to view as an economic necessity. (Only the arms manufacturers survived relatively unscathed, with the U.S. government, finding alternative buyers for most of the cancelled military deals.)

Massive U.S. corporate losses, due to nationalizations and damaged property, are now being addressed in a monumental court exercise. More than 300 suits have been launched against Iran, amounting to the biggest civil litigation in U.S. history. The claims, totalling between $11 and $14 billion, are now all pressed against the frozen Iranian assets.

The court cases, however, may not simply pit U.S. companies against Iran. Divisions could crop up within the U.S. corporate community itself, as those companies which have the most to gain from reentering Iran and which are most likely to be invited back (such as the oil and gas companies) may be more lenient in their claims. Firms in sectors that did not even survive the Shah's collapse and, have little hope for returning-such as agribusiness companies-can be expected to take a hardline stance on settlement issues.

European and Japanese firms have proved much more successful in preserving some of their stakes. Unlike U.S. contractors, European enterprises often do up to-and sometimes more than-50 percent of their total business in Iran: leaving would be tantamount to self-liquidation.

So, despite strong lobbying by the U.S., the governments of Western Europe and Japan turned down President Carter's request for a complete ban on economic relations with Iran. Instead, they decided to permit their multinationals to continue to honor pre-hostage contracts.

European and Japanese willingness to maintain investments in Iran has not, however, insured an easy go of things. The British auto maker Talbot, for instance, was forced to propose cuts of one quarter of its workforce (affecting 600 employees) due to disruptions in car kit exports to Iran. And only after months of frustrating negotiation did European pharmaceutical companies, backed by their governments, gain an Iranian guarantee that they could go ahead with Iran operations.

Mitsui continues to hold Japan's largest corporate investment in Iran, having minority share in a new $3.5 billion petrochemical complex at Bandar Khomeini, where Mitsui has supervised construction. The corporation's continued presence has required complex negotiations over the past two years, with the Japanese Ministry of International Trade and Industry steering the way for the Mitsui side.

None of Iran's economic changes have taken place in a vacuum. Bani-Sadr, having survived his first two turbulent years in government, seems now to be waning in influence. Islamic fundamentalists-hard-line on the hostage issue, but sympathetic to U.S. multinationals-currently dominate Parliament and have institutionalized opposition to Bani-Sadr's economic programs.

If the fundamentalists increase their power, Bani-Sadr's efforts at forging a more independent path for Iran may fall by the wayside.

Moreover, Bani-Sadr's plans may be jeopardized by external forces. The corporate interests behind the lost billions of dollars have an enormous stake in replacing the present government with either fundamentalist forces or a military strongman who might reverse the anti-multinational stance of the current regime. Such interests overlap with ideologies of many of the West's leaders. This combination creates an ever-present threat to Iranian self-determination.

Despite the uncertainties over Iran's future, one fact stands out about its economic experiment. Iran has dealt one of the most severe blows an underdeveloped nation has ever inflicted on multinational interests.

Limited by an infrastructure of multinational design and a series of tumultuous historical events, Iran has taken unmistakable first steps toward a more self-sustaining economy. Whether or not the attempt is successful in the long run, the significance of these first efforts should not be slighted.

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.

The Labor Councils Both Iranian government officials and multinational executives appear to be finding common ground in at least one area: shared wariness of Iranian workers. In a movement unparalleled in Middle Eastern history, independent strike committees, formed at factories during the civil unrest prior to the Shaw's flight. Were transformed into workers' councils during the Revolutionary period of early 1979. The councils have never been particularly strong in factories with a continuing foreign corporate presence. And, increasingly in the past year, as highly skilled government managers have been appointed, many councils have been forced to relinquish much of their substantive power. The council at the Moratab auto assembly plant (Supplied by British Leyland) outside Teheran offers insight into the operations of a workers' group that remains powerful. All employees participate in electing council members yearly and hold general workers meetings every two weeks. Their pervasive influence is revealed by the factory's government-appointed manager: "We have started a system here where every payment, no matter how small, has to be agreed upon by the council's representative. The workers have learned a very great deal in a very short time and on several occasions they have made useful suggestions." Both Bani-Sadr's government and Revolutionary Guards under the Islamic Republican party have attempted to discredit, co-opt and at times even physically attack the councils. A particularly bloody confrontation occurred in Gilan province in March 1980. There, 31 factory groups combined to form a coordinating council, only to be forced to dismantle it, along with many of the individual factory councils. Still, in large part due to worker councils, industrial wage hikes of 100-200 percent have been won along with housing, food, and travel allowances. Despite output well below capacity in most plants, few workers have been laid off and by September 1980, 90 percent of the half million industrial workers were still on the job. The future of worker militancy and low productivity are being carefully watched by multinational executives.

The Lesson of Iran? Iran's ability to survive without U.S. multinational support was noted recently with chagrin by Business International, a leading mouthpiece of U.S. corporate interests. "Troubles with the U.S. have made a dent in the economy but have not paralyzed it. There is a lesson in all this: don't count on the threat of pullout of private foreign capital and technology to prevent revolutionary movements from taking hold. Removal of the U.S. presence has resulted in costly delays and extra work� however, Iran has coped with these problems surprisingly well," the publication reported.