Agricultural production & the government
By Mehrdad Valibeigi
October 11, 2000
Iran imported 5.5 million tons of wheat and became the largest wheat
importing country in the world in 1998. This figure is expected to increase
in the year 2000 as the result of a severe draught affecting most of the
country. Increased wheat imports has brought the Islamic Republic's long
advocated and pursued policy of self-sufficiency in food and active support
of the agricultural sector vis-à-vis other sectors of the economy
under question. This is particularly important as the direction of economic
policy under the reform-minded President Khatami is not yet clear.
Despite their inconsistencies and lack of coherence, market liberalization
reforms of the early 1990s have had an overall positive impact on the performance
of agricultural productivity. Post-reform improvements came after a shift
in the overall economic philosophy of the government from one that emphasized
price controls, farm input, and consumer subsidies and cheap credit, to
one that recognized the significance of market incentives, export promotion,
better system of fertilizer distribution, research and development.
The extent of the improved production and yield varies from crop to
crop. In the case of staple crops -- mainly wheat, rice, potatoes, onions,
and pulses, there was a notable increase in production after the reforms.
Increased yield has been particularly significant for wheat, the main staple
crop in Iran. Rationalization of input prices such as machinery, fertilizer,
seeds and water resulted in more efficient use of inputs, particularly
machinery and fertilizer, in this category. Production and yield of industrial
crops has remained stagnant as government intervention in various steps
of production, distribution, and marketing of the crops has remained strong.
In the permanent crops category, improvement in production and yield that
had started during the pre-reform period continued in a much faster pace.
Devaluation and unification of the foreign exchange rate significantly
influenced production and export performance of these crops after the reforms.
Production and yield of industrial crops has remained the most stagnant
part of the agricultural sector in the post-revolutionary period. For example,
production of sugar beets rose by only 9 percent before the reforms and
13 percent after the reforms. The impact of the reforms on production of
this crop was minimal because in both periods the public sector has remained
the main purchaser of sugar beets, and the sugar mills have continued to
be predominantly owned by the public sector. Similar performance is observable
in the production of tobacco and sugar cane where government monopsony
is the dominant form of market structure. Therefore, for example, tobacco
production actually declined by 13 percent in the first period and further
dropped 7 percent in the second period. Tobacco yield has declined by 15
percent throughout the post-revolutionary period.
Production of sugar cane also dropped by 1 percent before the reforms
and slightly recovered after the reforms when it was increased by 37 percent
in this period. In this category, production of tea, cotton, and soybeans
whose markets were less dominated by the public sector before the reforms
was relatively better than the former industrial crops. For example, production
of tea rose by 75 percent or 8.3 percent annually after the reforms. Production
of cotton and soybeans registered 49 and 24 percent before, compared to
38 and 77 percent after the reforms. Cotton yield improved 1.7 and 0.7
percent before and after the reforms, while soybeans yield rose by 2.1
and 1.4 percent during these periods. We will notice this is dismal compared
to the growth of production and productivity of permanent and high-value
crops that were much less affected by market intervention policies of the
government in both periods. This crop category constitutes the backbone
of Iran's agricultural exports.
Three main reasons explain the stagnant growth in industrial crops.
First, the continued domination of the government over procurement, distribution,
and marketing of these crops; second, the shift from their production to
government-supported strategic crops, mainly wheat; and third, the stagnant
demand from the industrial sector that is dominated by large state enterprises.
In contrast to the industrial crops, permanent crops, with the exception
of almond, show major gains in production, yield, and area under cultivation
in both of the post-revolutionary periods. For example, production of pistachios,
apples, oranges, and dates respectively rose by 140, 103, 210, and 107
percentages respectively in the first period. This performance continued
in the second period when the same crops registered 58, 54, 50, and 64
percent increases over a shorter period of time. This rate of increase
in the production of oranges has actually propelled Iran to the ranks of
the largest citrus producers. Iran ranked eighth among orange producers
in the world in 1998.
Market liberalization policies also show a strong impact in production
in the area of animal husbandry. Production of meat, eggs, and milk shows
a stronger performance in the second period relative to the first. The
average annual growth rate of production of meat, eggs, and cow milk, respectively
rose from 3.4, 4.9, and 3.1 percent in the first period to 7, 9.6, and
7.7 percent in the second period. Indeed, throughout the post-revolutionary
period a major gain in production of food has been due to the improvements
in the production of permanent and other high-value crops and animal husbandry.
Improvement in the agricultural and rural sector has, unfortunately,
come at a high cost to the economy, in particular to the industrial sector.
If industrial development is to truly become the pivot of economic development,
as advocated during the post-reform era, the lopsided terms of trade against
the industrial sector should be modified. This can be done in conjunction
with the existing pace of improvements in basic needs and the rural infrastructure.
Throughout the post-revolutionary period the agricultural sector has continued
to be the only sector that has grown in real terms. This rate of growth
has largely come as the result of significant input and consumer subsidies
to the farmers and the rural communities at the expense of the industrial
Reduced subsidies and market reforms improved this bias significantly.
In the case of fertilizer, a major industrial input to agriculture, the
price of fertilizers was doubled in 1992. In the same year, price of machinery
moved up as the government reduced subsidies and reduced access to cheap
foreign exchange to the importers. This took the price of a Massey Ferguson
285 (75 h.p.) tractor, for example, from 1.6 million rials in 1991 to 9.7
million rials in 1993. This figure was increased further in 1994 when the
exchange rate was changed from the "official" to "competitive"
The agricultural sector was the only sector with a positive rate of
growth, 28 percent in real terms between 1979 and 1989. All other sectors
that are the main suppliers to the agricultural sector experienced a negative
rate of growth in this period. Among these sectors, in particular manufacturing
and utilities sector, have continued to be, controlled predominantly by
the public sector. While the public sector is the sole supplier of almost
all utilities in the country, government or quasi-government agencies own,
or manage, over a thousand large public enterprises which together produce
over 70 percent of total value added by large industrial units in the country.
Therefore, agriculture absorbed proportionately a much higher share of
economic resources in the pre-reform period. This is obviously through
a lower price of industrial goods and services to this sector.
The total cost of agricultural subsidies in the government budget in
1998 amounted to $5.8 billion dollars, which constituted about ten percent
of total government budgetary revenue of $63.5 billion. This figure is
quite misleading and does not reflect the actual cost of agricultural subsidies
to the economy. This is basically for two reasons. First, the agricultural
subsidies do not include the indirect subsidized prices of industrial inputs
that are, as argued before, are heavily dominated by the public sector.
According to the Central Bank of Iran, the government spent $1.1 billion
on wheat imports in 1998. This figure constituted 40 percent of total non-oil
exports of $2.9 billion, and 70 percent of total industrial exports of
$1.6 billion. If we add $800 million of other imported food items, mainly
rice and cooking oil, then these ratios will rise to 66 percent of total
non-oil export earnings and exceeds the total dollar value of industrial
exports by 20 percent.
Second, considering the difference between the official and competitive
exchange rates, economic subsidies are far higher than the financial subsidies.
That is, if we consider the free market exchange rate of about 8,100 rials
per dollar versus the official rate of 1,750 rials per dollar, the actual
economic cost of these resources will increase by more than four times.
Due to the stochastic nature of the agricultural production, a certain
level of governmental protection is necessary to reduce losses to crop
failure. This is a common practice by the developed countries such as the
United States and Europe. However, the major difference between the Iranian
case and some other third world countries is in the level of protection
and its overall cost to the economy.
Extensive presence of the government in the industrial and service sectors
significantly distorted the terms of trade between agriculture and other
sectors of the Iranian economy. This was particularly acute before the
onset of the market liberalization policies. Reduced input subsidies, reduction
of consumer subsidies by increasing prices closer to international levels,
and unification of the exchange rate induced a certain level of efficiency
in agriculture which not only resulted in increased yield but also resulted
in higher productivity of capital and more effective use of valuable inputs
such as fertilizer. Substantial improvement in the permanent and exportable
crops categories is clearly an indication of Iran's comparative advantage
in these areas and should be pursued more diligently. At the same time,
over-zealous government pursuit of self-sufficiency in the staple crops
category may have to be revised in favor of the former.
Iran is still reliant on foreign sources of staple foods, such as wheat,
rice, and maize. Although there was a significant improvement in other
areas of the agricultural sector, particularly in the permanent and export
crops and animal husbandry categories, post-revolutionary developments
in Iran's agricultural sector confirms the validity of the argument that
the role of the government in the economy should be limited to providing
for basic infrastructure needs, improving education, and access to basic
health care, and to stay away from interference with the market forces
by controlling prices and subsidies.
Mehrdad Valibeigi is a professor of economics at the American University
in Washington, DC.