STRUCTURE OF THE IRANIAN ECONOMY 31 not an acute adverse balance of trade, but rather an adverse balance of non-oil trade. In 1962, Iran's overall trade deficit was only $5 million, while its non-oil trade deficit was estimated at $438 million.2 This in turn means that the major impulse behind the ISI strategy may be different in such an economy. Elsewhere, particularly in lower-income countries with low and unstable export earnings, foreign exchange constraints may be the main impulse for adopting ISI.3 In Iran, by contrast, the chief purposes were income expansion and diversification of productive activities, to reduce the dependence on natural resource extraction as the chief source of income. It is important to realize that not all resource—rich developing countries faced similar conditions to those of Iran in the 1950s and early 1960s. Within the group of oil-exporting countries, it is possible to distinguish two broad categories. The first group includes countries with an inssufficient home market (because of low production) which do not find an ISI strategy advantageous such as Libya, Saudi Arabia and the Emirates. The second group comprises countries like Iran, Mexico and Algeria, which seem to have followed an intermediate industrialisation strategy, with initial emphasis on import substitution of consumer durables along with export promotion in the oil sector and its derivative industries. The ISI strategy was adopted in Iran from the Third Five Year Plan (1962-1967) onwards, following upon macro stabilization policies in the early 1960s. The objectives of ISI as pursued by Iranian policy makers were to vitalize exports, to achieve more favourable terms of trade, to lower the rate of increase in imports and to substitute domestic production for a wide variety of imports even with less efficiency and higher per unit costs if necessary. What the policy makers had in mind was based on a *trial and error* model of industrialisation4 and subsequently a transition to an export-promoting era in the longer run. The short period objectives of the planners were changes in the structure of the economy in favour of more modern industries. The increase in oil incomes, the availability of mineral resources, cheap manpower in the form of surplus labour drawn from the rural sector, potentialities for domestic market growth, and last but not least, the political ambitions of the ruling groups, were all listed as major impulses for pursuing a strategy of ISI. The specific process of Iranian industrialisation may be divided into several stages. The period prior to the 1960s was marked by major allocations of public investment for building infrastructure. In the early 1960s the process of import substitution in durable consumer goods started, leading to rapid urbanisation and market expansion. The period of the post-oil boom (1973-77) was marked by a gradual shift from import substitution to import liberalisation. In this paper we will examine how far the strategy of ISI was successful in changing the structure of the Iranian economy, in terms of altering sectoral shares and the degree of inter-sectoral integration.5 In