Dr. Alinaqi Mashayekhi

Undoubtedly, oil revenues are valuable resources which belong to the Iranian nation. However, the way oil revenues are spent can disrupt or speed up progress of the country. During the past few decades countries without valuable resources like oil, including Turkey, South Korea and Malaysia, have greatly advanced. However, some oil-rich countries like Iran have lagged behind. Relative backwardness of oil-rich countries cannot be blamed on their resource, but stems from the way those revenues are spent.

Appropriation of oil revenues can disrupt economic development of the country in a number of ways. One way is improper use of oil revenues by governments. Oil resources belong to the nation and governments are nation’s representatives in exploiting those resources and spending the subsequent revenues. In Iran, governments have been spending oil revenues in three ways. Part of petrodollars is spent on development of administrative organizations and rendering of public services. Part of it is used to establish infrastructures like roads, water networks, as well as health networks. Another part of oil revenues is spent on developing capacities of state-run companies. Inappropriate use of oil revenues can interrupt progress in anyone of the above fields.

By spending oil revenues on development of administrative and service organizations, which has been the case during past years; governments increase in size and due to dependence on oil revenues usually parallel ministries and organizations are established. Governments accept to subsidize and also undertake costs of some new services. In Iran, establishment of such ministries as housing, commerce, cooperative, and culture as well as Islamic Propagation Organization, Imam Khomeini Relief Committee and Welfare Organization are examples of state bodies with parallel missions the likes of which cannot be found in other countries. Payment of various subsidies on energy, medicines, bread, sugar, and so on is also among obligations accepted by governments when the country is awash with petrodollars.

Establishment of state bodies adds two new kinds of costs to government’s costs. Firstly, the government will have to undertake the cost of establishing needed facilities for state organizations. Secondly, it should undertake current and maintenance costs of those organizations like installations, wages, and other operational expenses. On the other hand, as population increases, so do subsidies on goods and services.

Expansion of state organizations and services in addition to rising subsidies will greatly push up government’s current expenditure. As the current expenditure rises, the government would need more revenues sources. For this reason, it would need higher oil revenues. Since such revenues will relieve pressure on taxation system, the latter system lags behind and tax revenues will not be sufficient to cover current expenses. As a result, the country will enter into a vicious circle of increased oil revenues and more obligations for the government which is constantly expanding. The government would need more revenues to cover the costs of that expansion. This vicious cycle has been there since 1970s and despite recent upsurge in international oil prices the government is still likely to need more and more money. In addition to the absence of a tax system and more reliance on oil revenues, establishment of big state-run bodies will have a number of untoward consequences. Firstly, oversized state bodies will result in more regulation and red tape. One of the most important hurdles on the way of balanced development of societies is inefficient regulations which increase the time and energy needed to go through formalities.

Another adverse effect of over-expansion of state-run bodies is increased number of civil servants who should be paid by the government. All through the world, state-run organizations are less efficient than the private sector. Therefore, as the number of civil servants increases, more people who should have been working with more efficient private organizations are added to government’s payroll. Therefore, productivity is decreased and gross domestic product is hampered. Increased productivity, which has been a major goal of the fourth and fifth five-year development plans, requires an annual economic growth rate of 8 percent for the realization of 20-Year Perspective Plan’s objectives. As manpower productivity lowers, realization of the said objectives would become more and more improbable.

Another consequence of that situation is increased number of civil servants. Save for times when oil prices have suddenly surged, government’s revenues do not increase in proportion to increase in state expenditure. Therefore, the government would not be able to pay all civil servants. In this way, average salaries based on fixed prices begin to fall. For example, considering fixed prices, the salary paid to a newly employed assistant professor of a university in 2002 was about 20 percent of his/her pay in 1981. Meanwhile, salaries of academic staff have increased more than other civil servants during the past years. As the purchasing power of civil servants decreases, experts refuse to be employed by the state-run sector. A cursory glance would show that a small number of university elite have been employed or are willing to be employed by governmental organizations. Since educated people gradually leave the government to find better jobs with the private sector or half-private companies affiliated to ministries, or find second or third jobs in order to make the ends meet, they pay less attention to their duties and quality of services provided by state-run organizations decreases.

All the above mishaps have occurred in Iran during the past two decades. The government has grown in size. Both the number of state-run organizations and size of them have increased. Their employees have also increased in number. An interesting example of that expansion could be seen in the Ministry of Foreign Affairs. Its employees had increased from 1,500 in early years after victory of the Islamic Revolution to 7,500 in early 2000s. Salaries paid to civil servants have not increased proportionate to inflation rate. As a result, their purchasing power has been constantly on the fall. Many experienced experts have left state-run organizations to work with the private sector or half-private companies affiliated with ministries. University elites are seldom willing to work with the government and, as a result, expert potentials of the government have decreased and this has reduced quality of decisions made by state authorities.

In addition to poor expert potentials inside the government and increased number of employees, low wages have prevented those employees from leading conformable lives and this has paved the way for corruption. Corrupt state bodies work to hamper development of the country and this will make economic activists who intend to do honest business disillusioned. Corruption prevents optimal allocation of resources and many opportunities for the advancement of the country are lost.

All adverse effects enumerated above have their roots in past periods of upsurge in oil prices and oil revenues. Every wave of high oil revenues brings with it new expenses and troubles for the government and the country. Those expenses and troubles lead to wastage of resources, reduced productivity, prevalent corruption, low quality of decisions, and overall backwardness of the country. To prevent those adverse effects, governments should avoid of increasing the size of state bodies when oil revenues rise. New organizations should not be established and new obligations should not be created which would impose additional expenses on the government. On the opposite, oil revenues can make governments capable of undertaking the cost of economic reforms. Therefore, they should try to remove redundant organizations and merge them into other organizations, merge parallel organizations, establish support systems through a single organization and phase out subsidies which undermine social justice, thus downsizing the whole government. The governments should also use their economic might to make the private sector more active in rendering services which are usually provided by the government with low quality. When oil revenues are high, governments should be very careful not to create additional obligations that would hamper future development of the country; this is exactly the same thing which has been done by previous governments since the victory of the Islamic Revolution. Some economic pitfalls created by the past governments include energy subsidies and now everybody admits that those subsidies are not compatible with social justice.