The Role of the State, Creative Destruction, and the End of the Private Sector in the 1960s

The role of government in economic development and industrialization has been a central theme in Iran's political economy, especially during the second Pahlavi era. This article employs Peter Evans' institutionalist framework, which delineates four government roles—trustee, curator, midwife, and nurturer—to analyze Iran's evolving economic policies. In the late 1950s, confronted with resource shortages, the government established the Ministry of Economy under Alinaghi Alikhani, adopting midwife and nurturer roles to support the private sector. This approach contributed to significant economic growth in the 1960s, with the private sector experiencing notable development. However, the Shah and his elites grew increasingly wary of industrial feudalism and the concept of creative destruction, fearing that the private sector might challenge state control. The 1970s marked a dramatic shift driven by rising oil revenues. The government abandoned its supportive roles, transitioning to curator and employer functions by taking direct control of industries. This interventionist stance marginalized the private sector, stifling innovation and competition while expanding state-owned enterprises. This article critically examines these transitions, highlighting tensions between state-led development and private sector growth. It underscores how shifting government roles shaped Iran's economic trajectory—leading to the rise of state-controlled industries and the decline of private enterprises. By analyzing the relationship between policies and outcomes, the study offers a nuanced understanding of the development challenges faced during the Pahlavi era. It emphasizes the importance of institutional frameworks in shaping economic strategies and highlights the difficulties in balancing state control with private sector dynamism. The findings provide valuable lessons for policymakers, stressing the need for a balanced approach that leverages both the strengths of the state and the private sector. Additionally, the article raises critical questions about the long-term consequences of state intervention, particularly regarding the trade-offs between rapid industrialization and sustainable economic growth.
 
Introduction
The economic development and growth during the second Pahlavi era are often viewed through conflicting lenses. Some argue that the regime engaged in precise planning, citing growth indicators and industrialization efforts as evidence. However, the inconsistent economic approaches observed during this period suggest that the planning was not as meticulous as claimed. The Pahlavi political system fluctuated between supporting and opposing the private sector, largely due to fears of the creative destruction it could cause. According to Juan Linz, sultanistic regimes—such as the second Pahlavi era—are characterized by distorted capitalism, which makes genuine private sector-driven growth unlikely. This raises important questions about the sources of economic growth from the early 1960s to the early 1970s and the underlying processes that facilitated it. To understand these dynamics, it is crucial to analyze the nature of the state—not just the regime—during different periods of the Pahlavi era. Although the regime was sultanistic, its interactions with various governments and economic actors shifted depending on the needs and circumstances of the time. This article aims to uncover the factors that contributed to Iran's economic development in the 1960s and explain why this growth eventually stalled. By examining the state's role and its relationship with the private sector, the authors seek to provide a deeper understanding of the forces driving growth, as well as the reasons behind its stagnation. This analysis highlights the complex interplay between political and economic structures during this transformative era.
 
Methodology
The study employs a descriptive-analytical approach rooted in historical institutionalism, utilizing Peter Evans' theoretical framework to examine the state's role in Iran's economic development during the second Pahlavi era. It combines qualitative methods with documentary review, analyzing historical data, government documents, economic reports, and primary and secondary sources. Evans' four state roles—trustee, curator, midwife, and nurturer—are applied to analyze government policies and actions from the 1950s to the 1970s. Key developments, such as the establishment of the Ministry of Economy, Alinaghi Alikhani’s influence, private sector growth in the 1960s, and the shift toward state stewardship in the 1970s, are critically examined. The research employs comparative methods to assess economic growth rates and content analysis to evaluate policy impacts on the private sector and industrial feudalism, providing a comprehensive assessment of the state's economic performance.
Findings

Establishment of the Planning and Budget Organization in Iran

The Planning and Budget Organization (PBO) originated from the Economic Council in 1937, tasked with coordinating government agencies and managing economic programs. In 1946, a 50-member committee drafted a seven-year development plan, leading to the creation of the Plan Organization in 1948, modeled after U.S. strategies to address market inefficiencies, poverty, and resource allocation. However, the 1951 oil nationalization disrupted funding, halting the plan’s progress. Under Abolhasan Ebtehaj’s leadership, the organization temporarily gained independence, focusing on national development. Yet, political pressures later placed it under the Prime Minister’s office in 1959, reducing its autonomy and enabling rent-seeking behaviors, which undermined its effectiveness.

The Second and Third Development Plans and the Challenges of the Planning and Budget Organization

The Second Development Plan (1955–1962), led by Ebtehaj, was ambitious but faced implementation problems due to disjointed efforts among ministries and the PBO, resulting in economic stagnation and a trade deficit. Policies such as austerity measures, import tariffs, and IMF-backed reforms failed to stabilize the economy, deepening recession. Land reforms and industrial state ownership disrupted traditional social structures, causing unemployment and rural migration. Political unrest, exemplified by the 1963 protests, further complicated economic management. Despite these challenges, the Third Development Plan was approved, focusing on employment, investment, and industrial growth.

Deprivation of Independence and Establishment of the Ministry of Economy

Initially, the Shah opposed granting independence to the PBO, placing it under the Prime Minister’s office. Recognizing the need for stronger economic institutions, he supported creating the Ministry of Economy in 1962, inspired by Japanese and German models to centralize economic decision-making. Dr. Alinaghi Alikhani, appointed as minister, led a technocratic team to reform policies. The ministry’s establishment strengthened the Shah’s authority amid land reforms and signaled a shift toward state-led industrialization. However, its centralized approach limited private sector autonomy and created tensions with traditional elites.

Power Groups, the Shah, and the Midwifery Approach of the Ministry of Economy

With the Shah’s backing, the Ministry adopted a midwifery approach to industrial policy, promoting import substitution industrialization. This strategy achieved early successes, leading some to describe the 1960s as Iran’s "mini industrial revolution." Yet, traditional elites and religious groups opposed these reforms, fearing their loss of influence. Resistance from courtiers and the military accused the ministry of corruption. Nonetheless, it helped cultivate a modern industrial class, similar to East Asia’s economic elites, which gained wealth and influence—causing tensions with traditional power structures. While the Shah supported the ministry, he limited private sector involvement in heavy industries to maintain control.

The Shah’s Support and External Pressures

As criticism and protests against the Ministry grew, the Shah’s support waned. He faced a dilemma: industrialization required backing for the ministry, but internal support was divided, and foreign influence played a role. Western allies, especially the U.S., preferred Iran to be a consumer over an industrial power and aimed to align Iran with Eastern European industrial projects like steel and machinery plants. After Kennedy’s assassination, Western engagement with Iran intensified. Internal power struggles—particularly between Alikhani and Prime Minister Hoveida—and pressure from the Shah’s circle led to Alikhani’s resignation. This marked a turning point, shifting Iran’s economic landscape toward a more centralized, state-dominated system and ending the ministry’s transformative role.
 
Analysis
The Government’s Problem-Solving for the Ministry of Economy
Although the Shah supported the Ministry of Economy’s initiatives, internal political conflicts complicated its functioning. Some cabinet members favored an approach centered on state-led industrialization, limiting private sector involvement, while the Shah was wary of private sector dominance. Minister Alinaghi Alikhani championed private sector participation and opposed strict anti-hoarding laws that discouraged investment. Conversely, Prime Minister Hoveida criticized the private sector for profiteering and formed a coalition against it, pushing Alikhani into a defensive stance. As Alikhani gained popularity and influence -as a potential future prime minister- both Hoveida and the Shah perceived him as a threat, especially since his rising stature challenged their control over Iran’s economic narrative.
The Growth of the Private Sector and the Shah’s Fears of Being "Taken Over"
The Shah aimed to maintain his image as the ultimate authority in Iran’s decision-making processes, resisting the Ministry of Economy’s push for independence. Despite opposition from Hoveida, the ministry’s policies led to substantial economic growth during the 1960s—around 400 factories being established annually—significantly boosting Iran’s industrial capacity. However, as this growth reduced political risks, the Shah grew uneasy about the private sector’s expanding influence and the potential for it to challenge his authority. He increasingly opposed industrial capitalism, favoring a move toward state-led socialism. Rising oil revenues further enabled increased state intervention in the economy. Ultimately, Alikhani’s popularity and perceived defiance of the Shah’s authority culminated in his dismissal, marking a shift toward consolidating authoritarian control over both Iran’s economy and its political landscape.
 
Conclusion
In the late 1950s, amid economic and political crises, Mohammad Reza Shah initiated a series of economic reforms, establishing the Ministry of Economy under Alinaghi Alikhani. Alikhani championed the development of the private sector, which led to unprecedented economic growth throughout the 1960s. However, the Shah restricted private investment in strategic industries such as steel and oil to maintain control over key sectors. As the Ministry gained prominence, Alikhani’s charisma and popularity began to threaten the Shah’s authority, raising concerns about the emergence of a new industrial elite and the rise of "industrial feudalism." With increasing oil revenues, the Shah eventually shifted toward promoting state-led industrialization, reducing private sector influence, and centralizing economic decision-making. This shift marked a decline in private sector participation and a move toward a more state-dominated economic policy framework.