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Adjustment to a Foreign Exchange Shock: Iran, 1951–1953

Published online by Cambridge University Press:  29 January 2009

Patrick Clawson
World Bank and International Monetary FundWashingtonD.C.
Cyrus Sassanpour
World Bank and International Monetary FundWashingtonD.C.


Few oil-producing economies, and for that matter few primary commodity-producing countries, have experienced as abrupt and severe a loss of foreign exchange earnings as that undergone by Iran in the period 1951–1953 following the nationalization of the oil industry and the subsequent international boycott of Iranian oil. While the literature on Iran during this period is extensive, it has focused largely on the political implications of nationalization and not so much on the economy's adjustment to the loss of foreign exchange. This article argues that the Iranian experience provides an instructive case study–admittedly an extreme one—of the ability of countries exposed to external shocks to adjust to the new realities.

Copyright © Cambridge University Press 1987

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Authors' note: Earlier drafts of this paper have benefitted from valuable suggestions, especially by Aghevli, B., Borupajari, J., Chabrier, P., Floor, W., Iqbal, Z., Katouzian, H., Mehran, H., and Ripley, D.. Two anonymous referees of this journal also provided extremely useful comments. The views expressed in this paper are solely those of the authors and, in particular, do not reflect the views of the World Bank or the I.M.F.Google Scholar

1 The British Royal Navy escorted a tanker carrying Iranian oil into Aden harbor, where the cargo was held by government order. As early as May 1951, the Royal Navy at times posted ships outside Abadan, Iran's main port for oil export.

2 Oil production during the period July 1951–July 1953 was only a fraction of the preboycott level, being roughly 20,000 barrels per day compared with over 600,000 barrels per day earlier.

3 The estimate for GNP is based on the results of an econometric model developed by Afshar, K. in his Monetary Estimate of Iran's GNP 1900–1975, unpublished Ph.D. dissertation, (Gainesville: Florida State University, 1977) and cannot be regarded as particularly precise.Google Scholar

4 Melli, Bank, The Thirty Year History of Bank Melli Iran (Tehran, 1959) (in Persian), p. 264, describes the changes in the exchange rate during this period. See also Appendix II.Google Scholar

5 The Melli, Bank published in its Bulletin monthly indices of the price of imported goods, of exported goods, and of home-produced goods.Google Scholar

6 One factor reducing the availability of the foreign exchange reserves for financing imports was a dispute with the Bank of England. Bank Melli and the Bank of England had had an agreement through which Iranian sterling deposits could be converted to U.S. dollars. The agreement was renewed each November for a one-year period. In September 1951, however, the Bank of England unilaterally nullified the agreement, so that Iranian sterling deposits were essentially inconvertible into U.S. dollars and could not be used outside the sterling bloc.

7 At this time, the world economy was plagued by “dollar shortage,” i.e., a shortage of foreign exchange reserves outside of the United States. Many industrial countries had smaller foreign exchange reserves in months of imports than did Iran: France had two months, Great Britain had six months, Germany had two months, and Sweden had four months.

8 Usable reserves were defined as actual foreign assets minus the gold, silver, and foreign exchange holdings of the Bank Melli Issue Department, adjusted for the gold subscription to the IMF, which was included in the Issue Department assets.

9 As noted in Katouzian, H., The Political Economy of Modern Iran, 1926–1979 (New York, 1981), p. 185, the parliamentary opposition introduced a motion censuring the government for failure to observe the note cover law.CrossRefGoogle Scholar

10 Table 4 presents the weight of each category in total trade. The data on the value of the trade in the customs bulletin are available only in terms of the market exchange rates (including certificates) and are therefore different from the balance of payments data in Table 1, which are expressed in terms of the official exchange rate.

11 The categories of chemicals, rubber, metal and metal products, machinery and electrical appliances, and transport equipment roughly correspond to capital goods and industrial inputs.

12 For comments on the relative growth of different sectors in the 1950s, see Baldwin, G., Planning and Development in Iran (Baltimore, 1967)Google Scholar, and Bharier, J., Economic Development in Iran, 1900–1970 (Oxford, 1971).Google Scholar

13 United Nations Department of Economic Affairs, “Iran,” Public Finance Information Papers, 4 (1951), reported that in general the budgets, while somewhat understating receipts, overstated expenditures by as much as 15%.

14 1n the 3 years 1948/49–1950/51, about 72% of export receipts were remitted abroad by AIOC as profit remittances or used for purchases of services. Subtracting the 7%–10% that accrued to the Iranian government leaves a residual of about 18%–21% that would have gone for costs of production such as wages and imports. In 1950, according to AIOC accounts cited in Moghadam, G., Iran's Foreign Trade Policy and Economic Development in the Interwar Period, unpublished Ph.D. dissertation (Stanford: Stanford University, 1956), p. 76Google Scholar, AIOC paid £16 million to the Iranian government and £51 million to the British government while adding £49 million to its reserves and contingency funds. Katouzian, Political Economy of Iran, pp. 182–84, cites evidence from AIOC accounts published by the Mossadegh Government to show that the Iranian governments' income rom oil from 1933 to 1949 was £105 million, compared with pretax AIOC profits of £895 million and taxes paid to the British government of £175 million. The oil revenue shown in the Iranian government's budget was less than 7% of the oil exports in 1948/49–1949/50.

15 While the cumulative increase in the urban cost of living index from 1949/1950 to 1953/1954 was under 5%, this low level was influenced by the drop in prices in 1949/50, due in part to the devaluation of the pound sterling.

16 To adjust for the underspending noted earlier, the expenditure figures cited in the text are based on accepting the revenue figures as given in the budget/and using the banking system data to calculate the deficit.

17 Customs receipts data from the Customs Administration included some taxes on tea and sugar that were reported as monopoly profits in the budget data.

18 The budget generally understated income tax receipts. According to United Nations, “Iran,” p. 39, citing Iranian government sources, collections in 1947/1948 and 1948/1949 exceeded the budgeted amount by 32% and 20%, respectively.

19 Overseas Consultants Incorporated, Report on the Seven- Year Development Plan for the Plan Organization of the Imperial Government of Iran (New York, 1949) provides extensive information on the composition of the plan budget.

20 Motamen, H., “Development Planning in Iran,” Middle East Economic Papers (1955), 72–87, describes the actual expenditures under the plan and the reasons for the shortfall from the budget level.Google Scholar

21 Iran, Bank Melli, Report of the Executive Board, issues of 1950 through 1955, describe the progress on the water works and on other major development projects.Google ScholarGhassam-Zadeh, M. [Economics of Oil in Iran] (Tehran, 1960; in Persian), p. 253, presents data showing that in 1950, 32,042 Iranians worked at Abadan and 19,706 in the oil fields; total employment at Abadan was 34,960, and in the oil fields was 21,409.Google Scholar

22 The Export-Import Bank loan is described in United Nations, “Iran,” p. 53; the U.S. aid in Motamen, “Development Planning,” p. 106.

23 According to United Nations, “Iran,” p. 53, Iran had borrowed $32 million in 1948 from the United States to purchase surplus military equipment; the loan had a 12-year maturity.

24 Khosropour, A., Iran: Le contrôle des changes depuis 1930 jusqu'à 1955 (Ph.D. dissertation, University of Paris, 1956), describes the difficulties in marketing the public bonds.Google Scholar

25 The Bank Melli Bulletin includes a monthly series on interest rates for 45- to 60-day notes in each of the major cities; rates throughout 1951–1953 remained between 14% and 18%.

26 The figure cited for credit to the private sector includes unclassified assets, some of which were probably loans to public corporations, including, for instance, letters of credit to finance imports.

27 The effect on Iran of the devaluation of the pound sterling is described in Khosropour, Le contrôle des changes. One reason for the delayed impact was that the rial was held, through government intervention, at an artificially low rate from January 1949 through July 1950.

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