Government incentives to bolster domestic industry were offered in the mid-1980s, but they were offset by the effects of the war. Factories were forced to lay off workers or to shut down because of declines in imports of as much as nearly 50 percent. This decline resulted in raw material shortages. Other state and private industrial enterprises converted to production of military matériel.

In the mid-1980s, Iran halted importation of domestically producible machinery. As an incentive to domestic production, industries that produced war matériel were granted about US$400 million to replace items whose import value would have exceeded US$1.3 billion. Domestic production increases by 1986 resulted in local manufacture of 80 percent of required munitions, including an antitank missile and such items as gas masks for protection against Iraqi chemical weapons. Industrial production held steady in early 1987, following a 20 percent drop in 1985 from 1984. The Ministry of Heavy Industries anticipated US$75 million in industrial exports in FY 1986.

Among the projects scheduled for funding in FY 1987 were a pesticides plant at Qazvin and the completion of a steel plant at Mobarakeh. There were also plans to construct mineral processing plants in the northwestern city of Zanjan that would produce 40,000 tons of lead and 60,000 tons of zinc annually.

The non-oil industrial sector represented a small portion of the economy, but it provided labor-intensive domestic employment, such as the hand knotting of rugs. Foreign sales of Iran's non-oil products also generated badly needed hard currency. Iran exported US$2.3 billion worth of non-oil goods between 1982 and 1987. Of this total, agricultural products accounted for 32.2 percent, carpets 29.3 percent, textiles 10.9 percent, and caviar 4.9 percent (see Non-Oil Exports , this ch.).

In 1986 Iran started placing greater emphasis on non-oil sectors to offset falling oil prices and revenue. Non-oil revenue totaled about US$700 million in 1986, in comparison with oil revenues of less than US$1 billion. Although it had increased by US$200 million over the previous year, non-oil revenue fell short of the official goal of US$1 billion. Carpet sales accounted for most of the increase, whereas exports of such items as industrial goods and minerals decreased. The FY 1987 target for non-oil exports was doubled to US$1.4 billion, including US$50 million in locally made goods.

Data as of December 1987