Studying rentier states over time: the political economy of macroeconomic policymaking in pre- Revolutionary Iran
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This thesis attempts to explain why the Pahlavi regime chose imprudent macroeconomic policies in response to the 1973 oil boom. It argues that the macroeconomic policies that were selected by this regime after 1973 were shaped by the economic policies that it had been pursuing in the 1960s. In 1963, the Pahlavi regime initiated the policy of import substitution industrialisation (ISI). The economic success of this policy in the 1960s generated spillover effects on the ideology, geopolitical standing and class coalition of the Pahlavi state. As this state moved from the first phase of ISI (1963-1967) to the second stage (1968-1972), its developmentalist ideology became stronger, its geopolitical standing in the Gulf was elevated and its economic alliance with the industrial elite grew deeper. A combination of these spillover effects generated a self-reinforcing process, whereby the political elite constantly sought to maximise oil prices in OPEC and use the resulting oil revenues domestically to push the ISI process deeper towards heavy and intermediate industries. Importantly however, this self-reinforcing process of ISI deepening set the stage for imprudent macroeconomic policymaking at the time of the 1973 oil boom. After the boom, the elite accelerated ISI to an extreme through a massive fiscal and monetary expansion and refused to reverse this policy despite its macroeconomic consequences. This indicates that it was the interaction of the 1973 oil boom with the self-reinforcing process of ISI deepening (which had been underway since 1963) that led to poor macroeconomic policymaking in the 1970s. Theoretically, this case study shows that, once chosen, an economic policy can possibly become self-reinforcing over time (by generating spillover effects) and shape future policy choices. This thesis, therefore, introduces the element of path dependency and dynamic analysis into the study of rentier states.
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