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Economic management at the national level, and in almost every country, is changing dramatically. A quiet and far-flung revolution is under way. Many states around the world are jettisoning failed economic systems that relied heavily on government intervention and are turning toward some form of free-market capitalism.

While the swing away from etatist economies is clear, it is uncertain which form of capitalism these countries will take in their push toward a free-market system. The contest among the models may replace the old, dying superpower rivalry. Governments inclined to select a more autonomous way of development, and striving for enhanced social justice based more on people than on capital, could be more successful in a more cooperative international environment.

As the unresponsive world economic structure discourages and/or inhibits the strugle of less developed economies against ignorance, poverty and inefficiency, the most promising road towards growth and development remains to be a restructuring of their economies. This should take place in an environment of economic cooperation and division of labor, securing their export values against the monopolistic behavior of the protected markets of the industrial economies.

In the course of 1980s, despite the sound criticisms made on the Iran's industrial policies adopted within the previous decades, and notwithstanding the fact that 2 new industry ministries were added to the previous one in order to ensure the desirable industrial development through the concentration of resources as well as efforts to meet the special requirements and imperatives of industrial development, no effective step was taken in this regard.

Industrial policy and performance in Iran were greatly influenced by the revolution in 1979 and the 1980-88 war against Iraq. The combination of these events created major shocks and disruptions in the domestic economy: trade and financial sanctions, capital flight-both human and physical, excessive regulation of the economy, and the diversion of resources to the war effort. Other events, such as major declines in the price of oil and an influx of refugees compounded the problems. The net result was a highly distorted economy operating under conditions of crisis for a full decade.

The performance of the industrial sector was especially constrained by excessive regulation, price controls, foreign exchange allocations, market and structural deficiencies, public enterprise domination, and a dormant private sector. Meanwhile the industrial sector suffered due to inadequate maintenance, aging plants and technology, a shortage of inputs, and low management efficiency. The First Economic Development Plan of the Islamic Republic of Iran was formulated after a decade-long resistance of the people against the military, economic and political aggressions. During that decade the most important objective at the forefront of our socio-economic goals was preserving the independence and integrity of the country. In securing this objective, our people not only withheld their demands for welfare and well-being, but also sacrificed their lives.

The economic revival of Iran was therefore postponed, while the imperatives of the revolution as well as the reconstruction of the war-damaged areas and industrial units, along with another imperative emanating from a newly emerging politico-economic-technological environment in the world called for a new economic mobilization and restructuring of the economy to reinstate the potential position of Iran in the coming decades.

After a decade of neglect and stagnation, Iran's industrial sector entered a revival phase in 1989. Due to the existence of productive capacities in the manufacturing sector and assisted by the increased availability of foreign exchange for imported inputs, capacity utilization in the sector increased significantly during the First Development Plan period.

The First Five-Year Plan (1989-93) set reasonable targets for the industrial sector: an annual growth of 14 per cent in output and 8.6 percent in productivity, an increase in capacity utilization from 40 per cent in 1989 to 62 per cent in 1993; the generation of $9 billion in non-oil industrial exports during the Plan, a reduction in import dependence, a deepening of industrial production up to the point where manufacturing value added, per dollar of imported inputs of production, shall increase form 195.5 Rials in 1988 to 468.0 Rials in 1993 (2.4 times)

The targets of output growth and capacity utilization have been achieved. Output per worker has increased by about 20 per cent during the Plan, which is closely tied to increases in capacity utilization and does not reflect real gains in efficiency. It is worth mentioning, however, that per capita productivity of the workforce engaged in the Iranian manufacturing sector showed an average annual decrease of 0.7 per cent during the previous decade (1977-1988). This decrease in productivity was mainly attributable to the stagnation of industrial output and the mandatory increase of employment in the large industrial enterprises. There are many ways to measure changes in the productivity of manufacturing industry, but for the purpose of the present analysis, the growth in the manufacturing industry is compared with investment, expressing productivity in a simple ratio: the percentage increase in manufacturing value added (MVA) resulting from every 1 percent MVA invested in capital formation. This ratio is akin to the "capital coefficient" in the orthodox Harrod-Domar growth equation or to the inverse of the so-called incremental capital output ratio.

Despite differences in the experiences of the various countries, the overall pattern of industrial investment productivity has been declining among the major industrialized economies during the last 3 decades. The figures for 5 industrial economies are as follows:

• U.S.: From 0.28 (1966) to 0.16 (1986) and 0.22 (1987)
• Japan: From 0.38 (1960s)to 0.14 (1988)
• Australia: From 0.24 (1971) to 0.09 (1983)
• Canada: From 0.22 (1960s) to 0.13 (1986)
• Germany: From 0.17 (1960s) to 0.08 (1980s)

Industrial investment productivity in the manufacturing sector of Iran, during the past quarter of a century (1966-1991) had been 0.42 on the average, which means investment equivalent to 1 per cent of manufacturing value added produced 0.42 per cent of extra MVA. The pattern of national investment productivity in manufacturing has been fluctuating every 5 years in the following manner:

Industrial Investment Productivity in Iran

Two periods deserve explanation. During 1976-1981, the industrial investment productivity was negative and therefore seems meaningless. But one can remember the uniqueness of this period because it embraces the Revolution and the early years afterwards, when factory performance could not have been as usual.

During 1986-1991, the industrial investment productivity is exceptionally high, the explanation being that capacity utilization increased dramatically as a consequence of increased availability of foreign exchange for imported inputs, for the first time after the revolution.

The industrial development experience of Iran during the present century has many features and striking lessons to comprehend. We spent large shares of our earnings from a depleting asset (oil), to purchase and import machinery and equipment for our industrialization programs. But technological and self-generating capacities of the economy did not expand proportionately, even in the long run. The industrial structure remained underdeveloped. This underdevelopment is evidenced in the following points.

a) Moderate contribution of the manufacturing value added to GDP (around 15 percent).

b) Insignificant share of capital goods and engineering industry in total manufacturing output (less than 10 per cent).

c) Limited contribution of domestic resources to industrial production, hence the overwhelming reliance on imports of materials, intermediates, and machinery.

d) Low-level penetration of the Iranian manufacturing exports in the regional and international markets (less than 0.006 per cent of total world manufacturing export or around 0.04 per cent of total developing countries manufacturing export belongs to Iran, against its 1.0 percent share in both population and area of the world).

One may ask, as we have asked repeatedly: Why the economic restoration and social modernization of Iran have taken place in sluggish manner, despite the existence of numerous production centers during the ancient periods of the Iranian history, and despite the availability of significant commercial and financial capital in the country during different eras up till now?

We do not intend to seek or give answers to the question at this point. From various surveys carried out and impressive analysis made on this matter, one could only mention both external factors (such as trade and commercial relations with industrial countries), as well as endogenous historical and structural factors (such as old despotic bureaucracies, public ownership with antagonistic attitudes toward private proprietorship, lack of flexibility and prompt response against a dynamic and changing world). It goes without saying that realizing the expectations of the society, accommodating the needs of a highly growing young population, and achieving economic self-reliance along with technological advancement necessitate the industrial development of the Iranian economy.

Sustained growth in income, achievable only through industrial growth, remains a necessary though by no means a sufficient condition for enhanced well-being. In this regard, I would like to quote Berkeley's Professor Paul M. Romer and his findings about the nature of growth and welfare:

"No amount of savings and investment, no policy of macroeconomic fine tuning, no set of tax and spending incentives can generate sustained economic growth unless it is accompanied by the countless large and small discoveries that are required to create more value from a fixed set of natural resources.

"There are more ways to arrange the objects of the physical world than we can possibly imagine. Ultimately, all increases in standards of living can be traced to discoveries of more valuable arrangements for the things we find in the earth's crust and atmosphere. By arranging materials in a slightly different way, one can make things more useful than they were in the original configuration."

These countless large and small discoveries of more valuable arrangements of things are the essence of what we call promotion of productivity in industry, agriculture and services.

For two centuries, until approximately 1960, the history of industrialization was characterized by the pursuit of increased productivity. Different aspects of this are the division of labor, mechanization, and increased scale. All these aspects of productivity can be classified and categorized as discoveries of more valuable arrangements for the things, as well as discovering better ways to make use of the physical objects available to us.

For the last 120 years, productivity in making and moving things has risen in developed countries at an annual rate of 3% to 4%, a 45-fold expansion overall. On this explosive growth rest all the gains these nations and their citizens have enjoyed.

The use of new technologies in products accounts for much of the recent productivity increases. Other productivity improvements stem from advances in process-technologies, such as flexible manufacturing systems (FMS's), or automation equipment for placing surface mounted devices (SMD's).

The highly complex and uncertain environment leads to the search for ways to reduce risks and calls for competence overriding hierarchy. Or in the words of Dr. S. L. Rao, head of India's National Council for Applied Economic Research, "Those firms which are run by chromosomes, not competence, won't survive".

Innovative ability is the new market requirement of the 1990s and beyond. This requirement is an extension from the previous characteristics of the time, i.e., efficiency, quality and flexibility. Innovation always involves renewal, and renewal always includes change. Flexibility means the ability to change quickly, innovativeness means the ability to renew quickly and thus more than change.

For our industries to cope with the challenges they confront, the promotion of productivity is a necessity, the essence of which as a consequence of physical limitations of human beings, lies in more knowledgeable work rather than just hard work.