Foreign Relations of the United States, 1955–1957, Near East Region; Iran; Iraq, Volume XII

358. Report of the Interdepartmental Committee on Certain U.S. Aid Programs¹

Washington, July 3, 1956.

IRAN

Problem

The present pro-West Government of Iran, in power since 1953, inherited a virtually bankrupt economy, due largely to the loss of oil revenues following nationalization of the industry, and Iran has since been beset with the problem of achieving order after the economic and political debacle into which the country had been plunged. Communist efforts to exploit Iranian nationalism have complicated the problem. Inflationary pressures have remained great and domestic resources have been inadequate to cope with the problems of internal security and the ever present Russian threat from the north.

The United States during the past three years (FYs 1954, 1955 and 1956) has taken a leading role in efforts to achieve security and stability in rehabilitating and rationalizing the oil industry and in encouraging plans for sound economic development. Nearly $150 million in economic support has been provided largely to meet usual budgetary requirements and only a part of which has been related to build-up of military strength. However, in addition, over $75 million in direct military assistance has been provided and about $18 million in defense support has been provided for military construction.

At the present time the Government of Iran is launching a new Development Program and is beginning to receive sharply increasing oil revenues which, over the next five years, may run close to a billion dollars. Nevertheless, heavy internal and external financial deficits persist.

The present Iranian army can maintain internal security, preserve the existing government and provide limited resistance against aggression, but is not capable of sustained combat against Russian forces. However, if redeployed and built up to a level of approximately one-third of U.S. TOandE’s, it is estimated that this force could, with outside operational and logistical support, provide limited resistance to a Russian attack. About $195 million in military assistance plus $35 million to generate local currencies for construction projects would be required during the period 1957–1960 both to maintain existing forces and to accomplish this buildup.

In addition to the military costs, about $100 million² in further outside support over the same period may be needed if Iran maintains its present level of defense expenditures and expands developmental, social and welfare programs without continuing sizable budget deficits (even with the expected increase in oil income).

The problem facing the U.S. Government is accordingly whether to:

a) hold military aid down to the minimum needed to fulfill U.S. commitments ($25 million per year in FY 1957 and 1958);

b) provide aid through 1960 in the general magnitude mentioned above which would build up Iran’s military position;

c) provide the external assistance necessary to carry out Iran’s planned development program, or if not, what alternative level of aid.

U.S. Military Commitments to Iran

The U.S. has maintained military advisory missions in Iran since 1943 and has agreed to continue them through March 1958. In July 1955 the U.S. undertook to maintain deliveries during FY 1956 at the previous general rate and to provide an increase in military assistance during FY 1957 and FY 1958, tacitly relating the level of future military aid to Iranian adherence to the Baghdad Pact. This would mean deliveries of approximately $25 million per year with a corresponding requirement of annual funding in FYs 1957 and 1958. The scale of future U.S. military aid to Iran awaits decisions on Middle East defense plans by both the Baghdad Pact nations and the U.S. and will be limited by Iran’s ability effectively to absorb military aid.

U.S. Military Objectives and Missions

The JCS’ current force objectives are:

• Army—8 light infantry and 4 light armored divisions and 5 infantry brigades
• Navy—11 combatant vessels
• Air Force—5 squadrons

The force missions are:

a) to assist in the maintenance of internal security,

b) to resist external aggression, and

c) to assist in regional defense arrangements.

These force objectives were based generally upon the size of the military establishment currently maintained by Iran (170,000 men, including 22,000 Gendarmes) with a view toward modernization rather than expansion.

The JCS’ specified military objectives include:

a) insuring the area to the West (denying it to the Soviet Bloc),

b) developing capacity for maintaining internal security and providing defensive delaying capabilities contributing to Middle East defense, and

c) Iranian participation in Middle East defense arrangements.

Military Capabilities

The Iranian Army, equivalent in numbers of men to about 5 U.S. divisions, can maintain internal security, preserve the existing government and provide limited resistance against aggression. At present, the Iranian Army is not capable of sustained combat against Soviet forces. If built up to presently contemplated equipment levels (one-third of U.S. TO&E), partially redeployed and with outside operational support (principally U.S. air) and logistical support, it might hold back 15–20 Russian divisions at the Zagros Passes for 30 days.

The Air Force is weak and incapable of resisting air attack.

The Navy is weak and ineffective.

The Iranian forces are deployed primarily to maintain internal security, but some units are being moved to make possible more effective resistance against Soviet attack where this does not adversely affect internal security.

Costs of Military Build-up and Maintenance³

Military assistance to Iran, under DOD established criteria, is limited to filling screened equipment deficiencies in existing units and maintenance and support of existing units with possible limited improvement in tactical and logistical capabilities.

The cost of maintaining existing forces (including the Gendarmérie) at present strength and level of effectiveness is estimated at approximately $103 million annually, of which $15 million represents U.S. military assistance (training ammunition, training, spare parts, attrition and POL) and $88 million represents local currency costs contained in the Iranian defense budget.⁴

To raise existing forces to approximately one-third of U.S. TO&E and to improve their logistical support capabilities would require approximately $128 million⁵ in military aid and an additional $3 million in dollar maintenance costs each year thereafter. Also, a $35 million U.S. local currency contribution for construction may be required.

This program does not provide for any increase in personnel strength or for further increases in pay and allowances. For the period FY 1957/1960 new funds averaging about $50 million a year in military aid and $9 million a year in defense support (for construction) would be required for both maintenance and build-up. After FY 1960, U.S. military assistance costs should level off at $18 million annually. Thus, of a total estimated cost of the build-up and maintenance of $584 million, the U.S. would contribute in military assistance and defense support $230 million, or about 40%.

Iranian divisions presently comprise two combat and one training regiments. To support a third combat regiment in each division would cost an additional $124 million in military aid, as well as an additional $15 million annually in personnel costs.⁶ The Department of Defense does not recommend this program, which in any event probably could not be carried out before 1960.

Economic Situation in Iran

Iran, in spite of holding one of the largest oil reserves in the world, is underdeveloped, has a low per capita productivity, is essentially agricultural and suffers chronic serious budgetary and balance of payments deficits. Lack of power, transportation facilities and technically competent workers and low domestic consumption are among the retardants to economic growth.

Iran has been unable to cope with a chronic and increasing budgetary deficit, partly, perhaps, because it has been unable or unwilling to improve its taxation system or to introduce budgetary reforms. With the aid of about $150 million provided by the U.S. for budgetary support over the past three years the Government of Iran has been able to avoid resort to bank financing and perhaps uncontrollable inflationary pressures. Recent upward movements in prices coupled with the prospective 1956/1957 budget deficit give rise to concern about future price increases. Even with defense expenditures stabilized at the FY 1957 level, prospective increases in government expenditures relative to revenue will probably result in annual budget deficits of 10–15% of total government expenditures for many years.

If Iran carries out its presently scheduled development expenditures, it is estimated that, despite substantial foreign exchange earnings from oil, Iran’s balance of payments (not including military payments) may also run a deficit of about $70 million annually through FY 1960. If revenues level off by that time, this deficit may increase thereafter, in view of Iran’s contemplated increase in development expenditures and improvements in consumption level.

A Seven Year Development Plan launched in 1949 has not been carried out. A second Seven Year Development Plan is, however, being worked out under which nearly a billion dollars of revenue is to be used for economic purposes, roughly one-fourth for programs under way.⁷ About one-third of government expenditures are currently used for economic development purposes, and this proportion is expected to rise to 40% for the four years ending with FY 1960. This increase is largely in connection with the new Development Plan.

Economic Projections⁸

Although national accounts data are unavailable for Iran and physical production statistics are incomplete and unreliable, it is estimated on the basis of analysis of major segments of the Iranian economy and projections based thereon, that the GNP of Iran might increase about 8½% annually through 1959/1960, which increase would add about $250 million annually of new resources over the next four years. Since this rapid rate of growth is partially explained by the rehabilitation of productive resources, the rate of increase may diminish after 1960, depending on the effectiveness of the economic program. The lack of information regarding the relation between government and private consumption and government and private investment makes it difficult to predict what part of Iranian resources, including their potential increase, can be used for defense and/or investment programs without inflationary consequences, or whether the projected sums can be effectively spent for development purposes.

Rough projections indicate that $50 million annually of the above increment on the GNP would be required to maintain current consumption levels, $60 million more would be required to raise per capita consumption by perhaps 3% a year.

If development with economic stability is to be maintained, increases in private and government investment, defense expenditures and other government financing would have to be met from the $140 million residual increment. We have no way of knowing how the Iranian Government can or will use these resources. However, estimates indicate that the competing claims exceed these anticipated additional Iranian resources. If the Iranian Government does not reduce requirements or more effectively utilize its resources, the resulting gap may lead to pressures for continued U.S. economic aid.

Estimated Iranian defense expenditures of about $88 million per year⁹ over the next four years constitute a substantial share of total government expenditures (e.g. about 1/5 in FY 1956/57). Since improved means for raising revenues pose serious political difficulties, an increase in expenditures would probably increase Iran’s budgetary deficit unless projected increases in government outlays for other purposes, including development programs, were curtailed. Although politically difficult, reductions in government and Plan Organization development programs could be effected without short range adverse economic consequences.

On the basis of the foregoing conclusions drawn from the Study Group’s projections, external support of about $100 million¹⁰ over the four year period would be required provided that Iran’s projected developmental expenditures are carried out, social services also expand as projected, and defense expenditures remain constant at about $88 million. This would be in addition to deliveries of military end items and dollar DFS (about $195 million) and local currency for military construction (about $35 million). If the $33 million of budgetary support and technical aid requested of Congress for FY 1957 is obtained, about $70 million of external resources would be needed for the years 1958–1960, primarily to reduce budgetary deficits.

Military Capabilities of an Unaided Iran

Despite the fact that U.S. military aid has supported a substantial portion (30%) of the Iranian military program in the last three years, the Iranian Government has run sizable budget deficits (16.5% last fiscal year) which have been covered by U.S. economic aid. Although these deficits can, in part, be attributed to military expenditures, other items (such as social welfare and governmental investment) have had an equal impact.

If all further U.S. aid were discontinued, Iran could assume the $15 million annual cost of maintaining existing forces by holding down projected increases in other governmental expenditures. Theoretically it could also assume the cost of building up its forces during the period FY 1957/1960 at an additional annual cost of $45 million; however, the impact on development programs, on other governmental expenditures, and on consumption standards, would be such as to make this economically and politically difficult.

Aside from the military and economic significance of cutting of U.S. aid, such a development probably would result in a major reorientation of Iranian foreign policy in the direction of neutralism and/or closer cooperation with the U.S.S.R.

Alternative Courses of Action

It is recommended that the NSC determine what choice or combination of choices the U.S. should make among the following alternative courses of action:¹¹

1. Fulfill existing U.S. military aid commitments which extend through FY 1958 and thereafter assist in the maintenance of forces at this level, exclusive of any economic assistance given.

Implications:

a) cost to U.S. of about $50 million for the period through FY 1958 and possibly about $15 million annually thereafter for assistance toward maintenance. Iran would probably not go ahead with the military build-up in 2. below;

b) would leave Iranian forces weak, ill-equipped, and able only to maintain internal security;

c) might not create insurmountable political problems in the immediate future, but would increase the danger of adverse Iranian reaction due to doubts concerning U.S. intentions.

2. In addition to 1. above, increase combat and logistical capabilities through providing additional end items and redeploying selected units.¹²

Implications:

a) cost to U.S. about $150 million in addition to $80 million for 1. above through FY I960; construction projects in the military build-up might compete with Iran’s development program for scarce commodities, such as skilled labor;

b) this program, which represents the maximum Iranian forces can effectively utilize, will give these forces increased capabilities for sustained combat; with outside operational support (primarily U.S. air) and logistical aid might delay Soviet forces at Zagros Passes for 30 days;

c) although not meeting Iran’s desires for increased forces, arising from Baghdad Pact strategic concepts, this program would help greatly to solidify its pro-Western affiliations.

3. Limit economic aid beginning in FY 1958 to technical assistance.

Implications:

a) cost to U.S. about $33 million in FY 1957 plus $8–10 million annually thereafter.¹³ Iran would have some difficulty in completing the projected Development Program, but might do so with deficit financing running risk of serious inflation;

b) this would create uncertainty regarding U.S. intentions and might lead Iran to seek funds elsewhere (Consortium, additional loans, dealings with USSR) and possibly create conditions for growth of extreme nationalism.

4. Provide economic aid and technical assistance over the four year period FYs 1957–1960 up to an amount of about $100 million in new funds to assist Iran in carrying out its contemplated Development Plan.

Implications:

a) Iran’s Development Program more likely to be achieved without serious difficulty. Would permit an appreciable advance in living standards and in government sponsored social improvements;

b) political realities may, however, require continued aid of this magnitude.

1. Source: Department of State, Central Files, 700.5–MSP/7–356. Secret; U.S. Eyes Only. According to a cover sheet attached to a copy of this report ibid., OCB Files: Lot 61 D 385, Iran, it was submitted to the Secretaries of State, the Treasury, and Defense and to the Director of the International Cooperation Administration. The report was the work of the Prochnow Committee, formally titled the Interdepartmental Committee on Certain U.S. Aid Programs, which was established by the NSC on December 8, 1955, to prepare reports on the coordination of military and economic aid programs in Turkey, Iran, Pakistan, Vietnam, the Republic of China, and Korea. The committee was headed by Deputy Under Secretary of State for Economic Affairs Herbert V. Prochnow and consisted of representatives of the Departments of Defense and the Treasury, the Bureau of the Budget, ICA, and CIA. For documentation on the establishment of the committee, see volume x. The Prochnow Committee submitted a final composite report to the NSC on August 3. (Department of State, S/S–NSC Files: Lot 63 D 351, NSC 5610 Series) This combined report was discussed by the NSC at its 301st meeting on October 26, 1956; see vol. x, p. 124.
2. This is exclusive of $173 million of external resources which appear to be readily available from other sources. [Footnote in the source text.]
3. The financial data and cost estimates contained in this Chapter represent the cost of deficiencies screened by ARMISH–MAAG–Iran and reviewed by the foreign aid divisions of the military departments. They have not received a budget review by the Comptrollers of the military departments nor by the Office of the Secretary of Defense. They, therefore, represent order of magnitude values only. [Footnote in the source text.]
4. An unknown amount of the $88 million comes from U.S. budgetary support to Iran which in FY 1956 was programmed at $35 million. [Footnote in the source text.]
5. This includes $75 million for additional equipment, $18 million for a 30-day war reserve of ammunition, and $35 million in DFS dollar construction costs. [Footnote in the source text.]
6. $71 million in unit equipment, $7.5 million military construction, $45 million for a war reserve of ammunition for new units, and $15 million annually for increased personnel costs for an additional 50,000 men. [Footnote in the source text.]
7. Annual direct oil revenues are expected to rise from $92 million in FY 1955/56 to a stable level of about $237 million by FY 1958/59. At the same time, foreign exchange earnings from Consortium rial purchases are expected to rise from about $46 million in 1955/56 to a level of about $64 million in 1958/59. Current Iranian law requires that most of the oil revenue go for development purposes, thereby limiting the sums available for defense and other government expenditures. [Footnote in the source text.]
8. Wide margins of error must be allowed, considering the questionable nature of statistical data available and the need to rely on assumptions which may not always be valid. [Footnote in the source text.]
9. This excludes abut $10 million per year over the present level to cover local currency costs involved in the build-up (i.e., $35 million over the four year period to come from U.S. aid—see Annexes I and II). It also excludes cost of police, but includes cost of Gendarmérie. [Footnote in the source text. Annexes I and II are not printed.]
10. This is exclusive of $173 million of external resources which appear to be already available from other sources. [Footnote in the source text.]
11. Each implication set forth below should be considered in light of possible combinations in courses of action selected and upon methods of implementation. [Footnote in the source text.]
12. These measures do not meet Iranian desires for increased forces to carry out the agreed strategic concept of the Baghdad Pact powers. The strategic concept and country capabilities are still under study by the JCS. While Iran will undoubtedly press for large increases in military aid, no determination as to aid levels can be made until military analyses have been completed, and interdepartmental agreement reached on all factors involved. [Footnote in the source text.]
13. As shown in Annexes I and II, if the projected military construction build-up were to be carried out, a total additional $15 million (included in the $230 million in alternative 2a) in local currency for military construction projects would have to be generated after FY 1957 from defense support assistance. [Footnote in the source text.]