SOUTH VIETNAM - WHAT FUTURE FOR THE ECONOMY?

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP75B00380R000600010029-8
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 7
• Document Creation Date: December 12, 2016
• Document Release Date: March 25, 2002
• Sequence Number: 29
• Publication Date: March 1, 1973
• Content Type: MAGAZINE

OJL
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South Vietnam-Wlhat Future for the Economy?
in m
fields
basis
T O the millions of servicemen who have been
there-and to hundreds of millions of TV
viewers all over the world whose nightly news
has carried a seemingly endless succession of
jungle patrols and trucks mired in mud-the
economic future of South Vietnam must seem
almost hopeless. But the fact of the matter is
that by the standards of many developing nations
South Vietnam is by no means an unblessed
countrz.-Not only does it have considerable
potential for agricultural production and devel-
opmerit of its abundant timber and seafood
resources; as a legacy of the war, its infrastruc-
ture of communications and transportati on facili-
ties is much more extensive than that typically
found in less developed nations.
Such assets-coupled with the substantial train-
any Vietnamese have received in various
during the war years-could provide the
for fairly rapid economic progress, if the
cease-fire accord results in reasonable political
and military stability.' This is particularly- so
because economic planning for the postwar,
rind is already well advanced, an unusual cir-
cumstance before the end of a major war.
The key assumption, of course, is that of rea-
sonable political and military stability. At present,
according to the U.S. Defense Department, the
government controls areas inhabited by about
four fifths of the population-including most of
the critically important Mekong Delta "rice
bowl" and a major part of the country's extensive
coastal plains which also are rice-producing
lands. But control of large parts of the nation-
particularly its less populated regions-is still
contested. And the possibility of a new breakout
of full-scale warfare cannot be ruled out, par-
ticularly in view of reports that-Notch Vietnam
has been engaging in a major build-up of troops
and weapons in South Vietnam. Washington has
conveyed its concern about the infiltration to
North Vietnam and "other interested parties,"
President Nixon noted recently, pointedly
warning Hanoi against lightly disregarding the
U.S. concern.
The way in which things evolve obvi-
ously will depend heavily on whether the gen-
eral thaw that has been in progress in relations
between the United States and the Soviet Union
and China continues. Relative tranquility in
South Vietnam also clearly will be affected by
the degree of interest the North Vietnamese have
in receiving U.S. reconstruction aid. In both
instances, the imponderables are formidable.
High on the list of South Vietnam's priorities
is the regaining of self-sufficiency in rice pro-
duction, which was lost during the worst years
of the war as many farmers left their paddies.
Rice, a dietary staple, traditionally has been the
country's largest crop and the second largest
export after rubber. Another high priority is to
increase exports so as to start closing a huge
trade gap.
To close that gap, which last year totaled the
equivalent of about $650 million, government
officials are convinced that reliance on the old
standbys of rice and rubber won't be enough.
Rice production has been expanding rather im-
rep ssively in recent years, after having fallen
sharply in the mid-1960s, but for the next few
.years a realistic oal seems to be domestic self-
sufficiency rather than a return to substantial
exportable surpluses. Partly this is because in-
ternal dL>mand has grown rapidly, reflecting both
the swift income rise produced by the war and
a very high rate of population growth. In the
case of rubber, whose production fell by two
thirds from the early to the late 1960s, the
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chances of getting back quickly to the position
of sizable export earnings ($48 million in 1960,
for example, against less than $10 million annu-
ally recently) are almost nonexistent, in part
because of the long tree-growth cycle.
Because both rice and rubber have somewhat
clouded export potential, officials are counting
heavily on development of new export products,
and economic plans call for agricultural diversi-
fication into such lines as livestock, fruits, and
vegetables-something for which the country is
well suited as it can grow tropical, subtropical,
and temperate crops. Officials also have high
hopes pinned on greatly enlarged timber and fish
production. About three quarters of the coun-
try is forested and its coastal waters abound in
shrj and other seafood. Another early en-
deavor on the drawing boards is exploration for
petroleum, . which geologists suspect may be
9resent in sizable quantities under the conti-
nental shelf.
A ballooning budget
A legacy of virtually all wars is budgetary
strain, and Vietnam-not surprisingly-fits the
pattern. Saigon's planners are mindful that some
of the country's main economic difficulties stem
from a ballooning of the national budget during
the past several years. And they appear to appre-
ciate that getting the fiscal situation under
tighter control looms as an urgent need. Ex-
penditures multiplied nearly seven times between
1965 and 1972 from 54 billion piasters to P 355
billion., as the government took on more of the
responsibility for the war. Military manpower,
for instance, nearly doubled during the period,
from 600,000 men to 1.1 million-a formidable
drain on resources for a nation of some 19 mil-
lion people whose labor force- 19 estimated at
between 6 million and 7 million.
Although the Vietnamese experienced unprec-
edented income gains during the war years, the
government did not tax the population nearly
enough to pay for the spiraling expenditures.
The combination of import duties, which are
particularly important in Vietnam's tax struc-
ture, and domestic taxes has on average financed
less than three fifths of the budget in recent years.
Given the circumstances that prevailed-and the
heavy emphasis which the government placed
on not alienating the populace-this is perhaps
understandable. But the revenue deficiency did
create serious financial difficulties, despite sup-
plemental budget support from the U.S. The gov-
ernment ran growing deficits whose financing
helped fan an inflation, averaging 30% a year,
that gripped the country from the mid-1960s on.
Partly with the aim of containing price in-
creases, the U.S. encouraged a huge volume of
imports. The recorded value averaged more than
$700 million annually between 1966 and 1971
-during most of which time exports averaged a
mere $12 million annually. Surely this must be
a world record of sorts in trade imbalance.
Imports included food and other necessities,
as well as a significant supply of consumer goods
such as motor scooters-earning South Vietnam
the nickname "Honda Society." The imbalance
between imports and exports was possible in
part because more than half the bill was financed
by direct U.S. aid. This came principally through
the so-called Commercial Import Program
(CIP), under which goods, with a few excep-
tions, have to be bought in the U.S., and through
agricultural sales under the Food for Peace-
PL480-program. A good part of the balance
was financed by the South Vietnamese govern-
ment with "free" foreign exchange usable any-
where. This was derived essentially from the
U.S. military's purchases of piasters to pay for
local goods and services.
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However well-intentioned, the import pro-
gram had some unfortunate consequences. For
one thing, the revenue it generated permitted the
government to put off the day of domestic tax
reform. And it accustomed the population to
standards of consumption unrealistically high in
terms of what the country itself could provide.
The program also was accompanied by a good
deal of abuse, in part reflecting deficiencies in
the foreign-trade mechanism.
Among the deficiencies was the piaster's ex-
change rate, which was fixed at a level that
represented a significant overvaluation. And
tariff schedules on imports were so complex and
so high-in some cases imposing duties as much
as tenfold the value of the imported product-
as to defy administration. These things, together
with a variety of controls on transactions, led to
smuggling and other illegal activities that resulted
in loss of government import taxes and a slip-
page of foreign exchange into unofficial channels.
Response to the problems
The framework of a multi-thrust response to
Vietnam's various problems has begun to take
shape. Indeed, in some areas the attack alread
is producing significant results. Most spectacu-
lar of all is the degree of success achieved in
reversing the decline in rice production, which
fell from a 1963 high of 5.3 million metric tons
to an average of 4.5 million tons in the 1966-
68 period. The most troublesome feature of that
fall-off was the abrupt disappearance of Viet-
nam's exportable surplus. It had amounted to
300,000 tons in 1963, but in 1967 the country
imported 750,000 tons.
An impressive turnabout in the rice situation
has since occurred. By 1971 output was esti-
mated at 6 million tons, well above the 1963
high. Last year's major offensive -by North Vict-
nam, even though concentrated in non-rice pro-
ducing areas, caused some setback. But prospects
for a resumption of growth in the rice crop are
good-with the critical proviso that the cease-fire
accord works.
The turnabout reflected a number of develop-
ments, including the introduction of high-yield-
ing "miracle" rice strains in 1967, a major
expansion of agricultural credit facilities, and a
bold policy of land reform aimed at strengthen-
ing the rural population's resistance to the Viet-
cong by ending the widespread pattern of tenant
farming. The policy of land reform deserves
emphasis-especially since relatively little atten-
tion has been given to it in general commentary
on Vietnam. In March 1970 the government
adopted a "Land-to-the-Tiller" act, which pro-
vided for expropriation-with compensation-of
lands not directly cultivated by owners and for
distribution of the lands, . free of charge, to
farmers. The law covered about 1 million hec-
tares (approximately 2.5 million acres), repre-
senting some two fifths of the riceland under
cultivation, and affected some 700,000 tenants.
Transfers of title began in 1970 and, as planned,
they will be just about completed on the act's
third anniversary this month. Thus freed from
rent paments, farmers have had a marked
incentive to increase output.
A ri .u rah production, moreover, has been
stimulated by steps to expand agricultural credit
significantly, both through the official Agricul-
tural Development Bank (AD 13) and through a
new system of quasi-private rural. banks which
accept deposits and make loans in local com-
munities. Established in 1970 and jointly capi-
talized by ADD and private stockholders, the
rural banks multiplied rapidly to some 34 in
1972 and quickly began to attract local funds.
Incentives to save-in rural banks and other
financial institutions-were provided by a
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BEST COPY
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sharp increase in interest rates in the autumn of
1970. Before that step, people had little reason
to put money into banks because institutions
were limited by regulation to paying deposit
interest rates that were well below the rate of
inflation. But with the 1970 reform, private
saving in all commercial institutions almost quin-
tupled from the end of 1970 to the end of 1972.
,start with tax reform-another vital requi-
site to economic revitalization-has been made.
During the past few years the government has
taken several actions to revise its complicated-
and frequently unenforceable-tax code and to
step up collection efforts. The aim was to raise
the small 20% share that internal taxes (as
distinct from import taxes) had been playing in
financing the national budget to 507o by 1975,
and this has shown promising results. In 1972,
internal tax collections increased some two fifths
over the 1971 total, rising to an estimated P70
billion from P49 billion.
Further, in November 1971 the government
made a sweeping overhaul of therforei n-trade
..MaIIIIL ~ilflllf!!1!~~/lniirl? ~
s 'stem. Besides a major devaluation of the
piaster, this included adoption of a mechanism
permitting periodic rate adjustments. With this
reform, the piaster has been devalued progres-
sively from P275 per $1 in 1971 to P475 per
$1 currently (except for imports under the U.S.
CIP and PL480 programs, which are given spe-
cial treatment). As companion measures, the
government scrapped various of its former con-
trols--such as the licensing of importers to buy
foreign exchange-and simplified the tariff struc-
ture, reducing levies significantly on many items.
The package entailed some initial cost in that
the government's import-tax collections are esti-
mated to have dropped in 1972, to less than half
their 1971 level. But the simpler tariff schedule
arid lower duty rates are expected to make it
Pouible to improve customs collections in the
larch 1973
i
long run. Mean%%
the devaluation
later adopted.
In combinatic:=
trade stabilization
cant impact on is
tion from the avt
the late 1960s to
rate rose again
reflecting the d,::,
import prices, in!]:
l0%-150c; this
All i
to make a start
and la ing a oa
ment - no smali
wartime conditL:
to follow thr o~,
extent by whethc:
a sizable flow of
Without such ini
will face serious
improving
xports have responded to
.?.rtain subsidies that were
is budget, currency, and
.isures have had a signifi-
increases, reducing infla-
innual rate of 30% during
;t 14% in 1971. While the
?2 to some 231,"c,, in part
!lion's impact in raising
,;, is expected to be held to
's thus have done much
recting basic problems
economic develop-
especially under
/ietnam's ability
fined to a critical
eral years bring
and investment.
,untry obviously
maintaining and
Budgetary uni , pries
Of course, son,: the difficulties would be
alleviated if tine few years permit any sig-
nificant demobilii- >n of the armed forces.
This would not o-. case strains on the budget,
some three fifth hich has been devoted to
military expends but it would help eco-
nomic performer' as well. Military needs
have created a sl; : , n e of manpower, particu-
larly in agricultur c here the labor market has
been tightest. A t;;; rc adequate labor force in
agriculture will b., tical for development and
export growth, exports are expected to
come mainly fro,n: is sector. But the outlook
for demobilizatl(,; ',.viously is highly uncer-
tain at this time.
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Even if the military situation turns more
promising than it now looks, however, other
expenditure requirements will be a heavy drain
on the budget. Among them are the expenses of
supporting and eventually resettling refugees
estimated to number a million and a quarter, and
benefit payments to disabled veterans and fami-
lies of war victims.
The U.S. has provided economic support aver-
aging approximately $500 million a year since
1968.* But with Congress having cooled con-
siderably in recent years toward foreign aid gen-
erally, there plainly is no assurance that U.S. aid
will be continued at the past level. And while
other countries-including Japan, Germany, and
France-have indicated an intention to provide
unless a replacement is found for the "free"
foreign exchange that has been derived from the
U.S. military's purchases of piasters. With the
pullout of U.S. troops, dollars from this source
have been drying up fast. They were almost
halved between 1971 and 1972-dropping from
$403 million to $229 million-and will fall
sharply again this year.
That South Vietnam has not as yet experi-
.postwar assistance, no commitments have as yet
been made as to amounts or types of aid. If U.S.
support is cut hack significantly-in the absence
of offsetting aid from other sources-Vietnam
would face the need for severe belt-tightening,
possibly involving expenditure cuts and the need
to do more than has been done thus far to
increase domestic revenues. Farmers in-particu-
lar have been lightly taxed, and the government
might have to turn to agriculture for more reve-
nues. But with the government needing the rural
population's support and anxious to encourage
a reflow of persons to farms, this might prove
difficult politically and questionable in terms of
rational population distribution.
Needed: foreign exchange
The government also would be on politically
sensitive ground if it found itself obliged to
curtail imports because of a shortage of foreign
exchange. But imports will have to be curbed
? This includes financing of the Commercial Import Program,
which has yielded budget revenues; aid fpr special projects; and
PL480 sales, from which most of the piaster proceeds have been
used to support the budget.
enced a severe shortage of "free" foreign ex-
change reflects some fortuitous circumstances.
The most important is that an economic setback
last year produced a decline in import demand.
The U.S. Agency for International Development
(AID), moreover, has cushioned the exchange
losses from military withdrawal through a new
program of refugee aid. With the 1972 invasion,_
refugee rolls swelled by about a million. and
AID purchased piasters to help the government
defray the expenses of support. But this was a
stop-gap measure. The country's economic prog-
ress in the next few years clearly depends on
more permanent aid arrangements to help tide
it over until expanded exports can become a
more important earner of foreign exchange.
An export drive already is under way, stimu-
lated by hefty subsidies which enable exporters
to earn 100 to 125 piasters per dollar more
than the going exchange rate of P475 per $1.
This encouragement unquestionably was a fac-
tor in the rise of export earnings to $23 million
in 1972, double the.1971 level. But the country's
prospects of achieving the many-fold increases
that will be needed to bridge the trade gap are
still highly questionable.
Improved security and additions to the labor
force will be critical to the effort, as will stepped
up investment. Fishing, for instance, is still
mainly a small-scale enterprise; sizable export
growth in this promising area seems likely to
require development of large-size commercial
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operations, Realizing the nation's wood and
wood-product potential also will necessitate big
investment outlays.
Significantly, from the legal point of view, the
investment climate was vastly improved wit i
the rovcrnment's adoption, last June, of a law
that provides liberal incentives for both donmes-
ticand- foreign investment in approved enter-
#es. But while a number of foreign firms have
been exploring opportunities of late, any big
inflow of investment capital doubtless will await
clarification of political and military conditions.
This is particularly so of U.S. firms since at
present the facilities of the U.S. government's
O- rseas Private Investment Corporation (OPIC)
-which insures investors in developing coun-
tries against certain risks-are not available for
investment in South Vietnam. However, if rea-
sonable security is attained, it is possible that the
U.S. will extend OPIC facilities for investment
in that country.
If the investment climate does in fact become
March 1973
attractive, in time Vietnam may he able to
develop industries outside the fields of agricul-
ture, fishing, and timber with large potential for
earning foreign exchange. Geological configura-
tions have suggested to experts that the country
may find sizable petroleum reserves offshore,
perhaps enabling it to become a significant pro-
ducer-as neighboring Indonesia has become in
recent years. Looking even farther ahead, Viet-
nam conceivably could develop a thriving tourist
industry, drawing visitors from more populous
and prosperous neighbors to its attractive
beaches, which extend from a point below Sai-
gon several hundred miles up the coast.
The key to South Vietnam's progress clearly
lies in a resolution of the political and military
unknowns which now cloud the country's future.
Obviously, the situation is still open-ended. How-
ever-to a greater extent than is commonly appre-
ciated-a constructive start has been made in
creating a framework for economic development.
South Vietnam may yet surprise the doubters.
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