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Uneven crops
Agricultural production & the government

By Mehrdad Valibeigi
October 11, 2000
The Iranian

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 sector.

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" rate.

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.

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