ECONOMIC PERFORMANCE

34

aggregate and sectoral investment patterns in the context of the Iranian economy are consistent with neoclassical-accelerator type investment models which were developed for competitive open-market economies.

2.4. MACROECONOMIC PERFORMANCE AND OIL DEPENDENCY

35

the mid-1950s and grew consistently ever since.¹⁶ Malaysia, also an oil economy, performed considerably better than Iran since 1955. Turkey likewise illustrated steady economic growth during this period.¹⁷

Figure 2-1 Growth performance

Real gross domestic product (billion Rials) GDP per capita

GDP and oil sector value-added growth rates GDP and oil export growth rates

Note: Constructed based on data in billion Rials at constant 2004/05 prices. Source: CBI; International Monetary Fund (International Financial Statistics).

Furthermore, the development of the changes in real GDP appears to be associated with the evolution of the oil sector in Iran. The panel on the bottom left in Figure 2.1 plots the rate of growth in real GDP and in value-added by the oil sector during 1960-2010, demonstrating a rather similar pattern between the growth rates of these two variables during this period. In a similar vein, annual growth rates of real GDP and real oil exports suggest an association

16 See also Hakimian and Karshenas (2000) for a comparison of per capita GDP trends of Iran, Korea and Turkey during 1950-1995.

17 The main reason for Turkey’s sustained economic performance was its major structural economic reforms initiated in the early 1980s. Among others, see Ersel (1991) for Turkey’s structural adjustments in the 1980s.

0 400,000 800,000 1,200,000 1,600,000 2,000,000 2,400,000

60 65 70 75 80 85 90 95 00 05 10

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000

55 60 65 70 75 80 85 90 95 00 05

Real GDP per capita in Turkey Real GDP per capita in Malaysia Real GDP per capita in Iran

-80 -40 0 40 80 120 160

60 65 70 75 80 85 90 95 00 05 10

Real GDP growth rate (%)

Real oil sector value-added growth rate (%)

-80 -40 0 40 80 120

60 65 70 75 80 85 90 95 00 05 10

Real export growth rate (%) Real GDP growth rate (%)

36

between both variables’ boom and bust cycles during these years as shown in the panel on the bottom right in Figure 2.1. For instance, Iran’s strong economic recovery during the revolution was aided by strong recovery in oil exports. On the other hand, the country’s poor economic performance in the mid-1980s was associated with the collapse of international oil prices during that period.

The effects of variations in oil prices have been profound on the economy of Iran as a whole and particularly on the country’s total income. During the study period, international oil prices behaved with wide fluctuations in response to war and conflicts in the Middle East and as a result of changes in global demand and supply. The panel on the left in Figure 2.2 shows the evolution of nominal and real international oil prices over the years under study. The latter refers to Brent dated crude oil prices (in 2010 US $). Since the 1970s, the trend in oil prices can be divided into four sub-periods. Following the first oil boom in 1973, there was an upward trend in international oil prices until 1980. Nominal oil prices increased from $1.4 per barrel in 1972 to $3.3 per barrel in 1973 and to $12 in 1974. Bred by the second oil boom, nominal oil prices further exhibited a dramatic increase from $14 per barrel in 1978 to $32 per barrel in 1979 and to $37 per barrel in 1980. In the next sub-period from 1981-1986, nominal oil prices had a declining trend until the collapse of international oil prices, the so called the third oil shock, in 1986. During this period, nominal oil prices dropped to $14 per barrel, their lowest level since 1979.

During 1987-2001, oil prices fluctuated around a seemingly constant mean. In 1990, nominal prices of oil spiked to $24 per barrel following the lower production of crude oil and uncertainty stemming from the invasion of Kuwait by Iraq and the ensuing Gulf War. After the Gulf War, nominal oil prices dropped steadily until 1994, when oil prices fed by the booming Asian Pacific region and the US economy slightly increased to $20 per barrel in 1996. Stemming from the East Asian crisis and a combination of lower consumption and higher OPEC production, oil prices declined to as low as $12 per barrel in 1998. Nominal oil prices started to increase from 1999 reaching to $28 per barrel in 2000, until 2001 when the prices fell again to $24 in the wake of September 11 terrorists attack in 2001. During 2001-2008, oil prices showed an upward trend for most of the period, chiefly fueled by the weak Dollar, growth in emerging markets, and increasing petroleum demand and consumption. In 2008, nominal international oil prices averaged $97 per barrel.

37 Figure 2-2 Oil prices and oil income

Crude oil prices Growth rates of oil prices and oil income

Source: See Appendix 5A for detailed references of the data.

Figure 2.2 (the panel on the right) displays the changes in nominal values of oil prices, oil revenues, and government total revenues. From this figure, it can be seen that the changes in oil revenues and government’s total revenues appeared to be associated for most of the years under study. Following the second oil shock, government revenues rose, although the start of the war with Iraq mitigated this increasing trend. As a result of the collapse of oil prices in 1986, both government revenues and oil revenues dropped considerably. Afterwards, revenues again started rising steadily. This rise particularly became sharp in the early 1990s due to an increase in oil prices caused by the Gulf War and because of the substantial devaluation of the Iranian currency in 1993. Since the mid-1990s, both government revenues and oil revenues displayed associations with changes in international oil prices. This demonstrated the extent to which the government’s income was oil-dependent.

2.4.2. CONSUMPTION, CAPITAL ACCUMULATION AND NATIONAL