IMPLICATIONS OF DIFFERENT FY 1975 ECONOMIC ASSISTANCE LEVELS FOR SOUTH VIETNAM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79R01099A001100060002-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 35
• Document Creation Date: December 20, 2016
• Document Release Date: October 13, 2006
• Sequence Number: 2
• Publication Date: April 8, 1974
• Content Type: MF

Approved For Release 2006/10/ 01099AO01100060002-8
THE DIRECTOR OF CENTRAL INTELLIGENCE
WASHINGTON, D. C. 20505
9 April 1974
NRANDUM FOR: The Honorable Henry A. Kissinger
Assistant to the President
for National Security Affairs
SUBJECT . Implications of Different FY 1975 Economic
Assistance Levels for South Vietnam
1. Attached is a memorandum which may be helpful to you in
assessing the impact on South Vietnam of different U.S. economic aid
levels for FY 1975. Three possible aid levels -- a low, a medium
and a high one -- are examined.
2. The memorandum makes clear that a low level of aid (the one
arbitrarily chosen here is a continuation in dollar terms -- but a
substantial reduction in real terms -- of present aid) would result
in a further deepening of South Vietnam's economic difficulties.
There is full agreement in the intelligence community on this point.
There are two opposed schools of thought, however, as to whether this
low level would threaten the political stability of South Vietnam
during FY 1975, or start an irreversible process that, would threaten
the GVN's stability in the years immediately thereafter. Both schools
spell out their positions in some detail in the attached memorandum.
3. My own view is that the low aid level as defined herein would
not lead to the collapse of the GVN. It would, however, probably result
in a further economic downturn and some political unrest which would be
used by the GVN's opponents abroad to question further the U.S. invest-
ment over the years in a successful Vietnam.
4. Because of the sensitivity of this subject at present, we are
limiting the distribution of this memorandum very strictly.
SECR
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
CONFIDENTIAL
April 8, 1974
MEMORANDUM FOR THE DIRECTOR OF CENTRAL INTELLIGENCE*
SUBJECT: Implications of Different FY 1975 Economic Assistance
Levels for the Future Viability of South Vietnam
The Key Points
This memorandum projects three possible US economic
assistance levels for South Vietnam in FY 1975 and assesses
the impact of each on the South Vietnamese economy.
-- The Low Aid O tion -- $300 million in Commodity
Import Program C P) aid and $50 million in devel-
opment aid -- would essentially be a continuation,
in dollar terms, of the present economic assistance
level. Because of global inflation, it would be
a substantial reduction of real aid. Under this
option:
South Vietnam's real imports in the first half
of CY 1975 would be only about three-fourths as
large as in the first half of 1974.
-- The present economic difficulties in South Viet-
nam would deepen.
Real incomes, especially among the urban pop-
ulation, would continue to decline, and infla-
tion would remain a serious problem.
The Medium Option -- $600 million in CIP aid and
$50 million in development aid -- is the level of
assistance for FY 1975 foreseen in the President's
budget request to the Congress earlier this year.
Under this option:
This memoran was drafted jointly by the Central Intelligence
Agency and the Bureau of InteZZigence and Research, Department
of State. It was reviewed and endorsed by representatives of
these agencies, the Defense Intelligence Agency, and the
Department of the Treasury.
Copy No.
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
r`nM 1PT1IF NTT A T .
-- South Vietnam's real imports would remain essen-
tially at the CY 1974 level through FY 1975.
The decline in South Vietnam's economic output
could be halted, but there would not be much
of an upturn.
Real incomes, among both the urban and agri-
cultural population, could be stabilized. Urban
incomes, however, would remain appreciably below
those of 1970-1971.
-- The High 01tion -- $850 million in CIP aid and $50
million in development aid -- is the level of assis-
tance requested by the US Mission in Saigon for FY 1975.
Under this option:
South Vietnam's real imports would increase
appreciably throughout FY 1975. .
The total economic output of South Vietnam could
grow, in real terms, as much as 5 percent in
1975, assuming investor confidence and consumer
demand were restored.
Real incomes of all population groups would also
increase, though the 1970-1971 level could not be
reached until 1976.
If the US objective is to put South Vietnam on a growth
track and move it well down the road to self-sufficiency, big
"shots" of assistance limited to the next two years or so will
not do the job. To meet this objective, South Vietnam will
need large-scale aid -- probably with major US inputs -- into
the 1980s.
There are two diametrically opposed schools of thought
within the intelligence community on the political implications
of the aid levels discussed above:
-- One school holds that even the Low option would provide
enough aid to give reasonable assurance of political
stability in South Vietnam and prevent any significant
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
CONFIDENTIAL
shift in the military balance during 1975. This school
also believes that a low aid package in FY 1975 would
not, by itself, create such irreversibly serious economic
conditions in the South that the situation could not
be rectified by larger aid packages in succeeding years.
-- The other school holds that under the Low Option the GVN
would run a high risk of major adverse political reac-
tions in FY 1975. These reactions would cause insta-
bility, weaken the control of the central govern-
ment, and encourage Hanoi to step up political and
military pressure on the South. Even if the Thieu
government survived FY 1975, a process would be set
in motion which would threaten its existence in the
years immediately following. In this school's opinion,
there is a serious risk that this process could not be
reversed before the GVN collapsed. Under the Medium
Option there would be some adverse internal political
reactions, but the government probably could keep the
lid on the situation. The High Option, this school
believes, would clearly strengthen the present gov-
ernment of South Vietnam.
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
DISCUSSION
Background: The South Vietnamese Economy and Recent Aid Levels
1. The large-scale mobilization in South Vietnam which
began in 1965 was carried out without a significant reduction
in consumption levels because heavy inflows of US economic
assistance filled the gap. The US aid program from 1965
through 1970 was aimed primarily at containing the severe
inflationary problems that were the by-product of huge govern-
ment deficits necessary to finance military expenditures. After
the 1968 communist "Tet" offensive, however, the pacification
program of the Government of Vietnam (GVN) began to make real
progress and economic conditions improved markedly. By the
end of the 1960s, the preoccupation of the GVN -- and the
US -- with stabilization lessened, and a greater effort was
devoted to fostering growth in the South Vietnamese economy.
With imports still financed largely by US aid and continuing
at the high levels of the mid-1960s, the South Vietnamese were
able to channel more resources toward increased output rather
than current consumption. During 1969-1970 GNP increased at
an annual rate of some 4 percent in real terms, and agricul-
tural output increased by about 10 percent per year.
2
the US) uBegidertooknningaisn
1970 the advsed by
imula e
the private sector and ultimately to end dependence on US
economic assistance. The measures taken included interest
rate reforms (establishing interest rates higher than the
rate of inflation), domestic banking reforms to increase
private saving, adoption of a flexible and realistic exchange
rate policy to stimulate exports, and, by late 1971, a liber-
alization of import procedures to give the market system
greater influence over the volume and,type of goods to be
imported. The response to the reform measures was favorable;
by the end of 1971 the South Vietnamese economy appeared on
the verge of a new departure in recovery and development. It
was generally believed that, with continued foreign assistance
and the establishment of greater
poli
stability, Vietnam's largely untapped tical and military
provide the basis of steady and relativelyurapidagrowth.
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
C..0NFTTIFNTT A T
3. The 1972 Communist military offensive dashed these
optimistic predictions. A recession ocurred as consumer
demand dropped and investment came to a virtual halt. More-
over, military disruption and poor weather combined to produce
a shortfall in the 1972-1973 rice harvest. The Vietnam set-
tlement agreement of January 1973 did little to halt the
economic decline. Consumer confidence was not restored, for-
eign investors continued to show reluctance to make commit-
ments, and key commodity shortages created upward pressure
on prices.
4. Coupled with these problems was a steady, signifi-
cant decline since 1971 in real aid levels and a commensurate
reduction in real imports (see Figure 1). Indeed, in constant
prices the volume of US aid fell by about one-third from 1971
to 1973, and South Vietnamese imports -- again in constant
prices -- diminished by 25 percent in the same period. These
declines are primarily the result of sharp increases in world
commodity prices. In 1973, for example, import prices were
on average some 35 percent higher than in 1972, while the
actual volume of imports dropped by some 20 percent.
5. The government has made strenuous efforts to reduce
imports of non-essential consumer goods and to channel reduced
aid funds toward investment. Imports of consumer goods other
than food account for less than 10 percent of the total import
bill. Nevertheless, attempts to initiate reconstruction and
steady growth have been frustrated as rising shares of the
country's import bill have been diverted to meet essential
commodity shortages. Food imports, for example, rose as a
share of total imports, from 15 percent in 1972 to more than
25 percent in 1973. (This is reflected also in PL-480-funded
imports, which rose dramatically from $81 million in 1971 to
$1.44 million in 1973, and may reach $275 million in 1974.)
Imports of petroleum products and fertilizer, accounting
for about 15 percent of total imports in 1972-1973, could
exceed 25 percent in 1974. Suffering the sharpest declines
in 1973, in both absolute terms and as a percent of total
imports, and likely to be reduced further in 1974 as well,
are construction materials and machinery. These items fell
as a share of total imports from nearly 30 percent in 1971-
1972 to about 15 percent in 1973. The lack of both demand and
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 It Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
4we %W4
South Vietnam: Estimated Imports and US Economic Aid
Million US $
1,000
900
Imports US Aid *
Current Current ---
In 1964 Prices ~~- In 1964 Prices
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
rnNTRTTI1'AT'T`T A T
funds available for investment has brought a complete halt
to earlier progress in reducing South Vietnam's reliance on
foreign capital.
The Present Situation
6. The impact of this slump of the past two years has
not been felt equally by all economic sectors. The resulting
economic difficulties are concentrated in urban areas and
among those with fixed incomes.* The stagnation of industrial
production, rapid inflation, and the sharp reduction in US
military spending have hit these groups the hardest.
7. Wages are failing to keep up with the rising cost
of living, and supplies of consumer goods in local markets
are decreasing. As supplies have declined, consumers --
attempting to maintain former living standards -- have bid
prices beyond the range of lower-income groups. Some 1.5
million government employees, both civilian and military,
received a 25 percent pay increase in 1973. Because of
inflation, however, the real wages of civil servants and
military personnel now are only about two-thirds what they
were a year ago, continuing a decline which has been
underway for several years. The wages of lower-level of-
ficials, enlisted men and junior officers now barely cover
a family's expenditures for food. For most other wage
earners, rice purchases alone probably take more than
half of their income. This shift in consumption patterns
has been reinforced by policy measures designed to cope
with declining aid availabilities. For example, extremely
high special duties have practically eliminated imports
of such non-luxury goods as clothing and books.
8. Moonlighting and the employment of other family
members help in meeting rising costs, but jobs are scarce.
The an population expanded rapidly in the Zate 1960s,
a result of the intensification of hostilities and the
American buildup. Urban dwellers now account for about
40 percent of the population, up from 20 percent in 1960.
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
There have'been some layoffs by Vietnamese manufacturers;
moreover, the US Government, which in 1969 directly employed
some 150,000 Vietnamese and probably indirectly provided
work for an equal number, continues to reduce the size of
its establishment in Vietnam. Although no firm data are
available, as many as one million people, some 15 percent
of the labor force, may now be unemployed in the country.
9. Agriculture remains relatively strong, recovering
from a disappointing year in 1972. Real incomes among farmers,
who comprise the bulk of the labor force, have probably in-
creased somewhat over the past few years, and a good harvest
is now coming in. The growth of real incomes is unlikely to
continue, however, unless the supply of fertilizers and fuels
is increased and the prices of these commodities are brought
down. Recent increases in rice production have been due al-
most entirely to the greater use of high-yield varieties,
more intensive application of chemical fertilizers, and in-
creased mechanization. The retail price of fertilizer has
more than doubled over the past year, and the price of gaso-
line has tripled. Faced with these prices, some farmers are
reportedly reverting to subsistence agriculture and to the
use of the traditional, lower-yielding varieties of rice.
These varieties are hardier and less dependent on the vagaries
of weather, require less fertilizer, and are easier to culti-
vate without gasoline-burning machinery.
10. If such a shift became widespread, farmers would
probably still be able to meet their own needs as well as
insulate themselves somewhat from external market forces. But
private merchants or government representatives would find it
increasingly difficult to purchase delta rice for shipment to
Saigon and other rice-deficit areas of the country. Further
increases in paddy prices would eventually bring forth the needed
production response from farmers, but these prices had already
nearly doubled in 1973. More price increases would either
further burden low-income urban families or, if the government
attempted to subsidize rice sales, put added strains on a gov-
ernment budget already showing a large deficit.
11. In the area of foreign trade, South Vietnam's outlook
is also cloudy. Despite a rapid growth of exports from a very
small base, total earnings from this source are unlikely to
reach $100 million in calendar year 1974. Assistance from
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
CONFTDFNTT A r
countries other than the US (primarily Japan and France) will
probably show some increase, but in 1974 the total amount will
still make only a small dent in Vietnam's import requirements.
South Vietnam's imports in 1973 totaled some $765 million.
Unless imports are to decline catastrophically, the bulk of
them must continue to be financed by US aid. Moreover, since
prices for major import items (fertilizer, rice, wheat, petroleum
products) are markedly higher now than they were a year ago, the
same volume of goods imported last year would cost about $1
billion in 1974.
Aid Alternatives and Economic Prospects Through Mid 1975
12. In the material that follows we have projected three
possible Commodity Import Program (CIP) and development aid
scenarios for FY 1975 and have attempted to assess the economic
and political prospects in South Vietnam under each. The
three scenarios are:
-- a low case, reflecting continuing appropriations
on approximately the same level as FY 1974: some $300
million in CIP aid and $50 million in development aid.*
-- a medium case, reflecting the President's request
to Congress for FY 1975: some $600 million in CIP
aid and $50 million in development aid.
-- a high case, reflecting the request of the US Mission
in Saigon for FY 1975: some $850 million in CIP aid
and $50 million in development aid.
13. It should be borne in mind that external aid is only
one factor influencing the economic situation of South Vietnam.
A lack of business and consumer confidence has kept private
The FY 1974 aid appropriation 4,ncZ
for CTP udes a basic $300 million
funding plus a $50 mi77ion development Zoan. A sup
pZemental appropriation of about $50 million has also been
requested for FY 1974? Although prospects for an FY 1975
development loan do not Zook good at present, it is assumed
for all three cases, $25 million to be used in each half of
the fiscal year.
UUNYIDENTn
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
sector demand below what it would be in a peaceful, stable
Vietnam. Since the communist offensive of 1972 and the suc-
cession of austerity measures necessary to cope with global
and domestic inflation, the private sector (particularly in
industry and commerce) has been reluctant to invest or plan
business expansion. This problem will not be solved by in-
creased aid levels alone, although higher aid -- and the US
commitment it would signify -- would clearly affect the
climate in which Vietnamese and foreign businessmen made
their decisions.
14. Projections of the volume of aid and imports are
dependent not only on absolute levels but on the choice of
import price deflators as well. The average price of imports
into South Vietnam is estimated to have increased 35 percent
in 1973, despite the fact that the sharpest price increases
did not occur until the fourth quarter. Although some slow-
down in global commodity price inflation is likely this year,
increases already registered -- plus continued pressures in
particular commodity lines -- will probably raise average
1974 import prices another 35 percent (projections range
from 25 percent to 50 percent). For this study, no attempt
has been made to project a possible break in world inflation;
increases are, instead, split roughly equally between the
first and second halves of this year. A further rise in
import prices of 10 percent (in dollars) is assumed for the
first half of 1975.
15. It should also be borne in mind that the impact of
FY 1975 aid levels will be affected by events in the last
three months of FY 1974 (April-June). If the present high
rate of CIP licensing continues unabated, FY 1974 funds may
be depleted early in May. If an emergency supplemental
appropriation cannot be obtained, no further CIP funds could
be used until next fiscal year's appropriation became availa-
ble, probably sometime in July. The instability and uncertainty
generated by even a short CIP closure could in turn have a
measurable effect in depressing South Vietnamese economic
conditions in the early months of FY 1975. Speculation would
almost certainly mount, as many importers assumed that licen-
sing through US aid funds would not again be available at
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
CONFTDFNTT A r `" ~
levels comparable to the past. Although imported goods would
continue to flow into South Vietnam for a while under previous
orders, business confidence would clearly be adversely affected.
16. The GVN's flexibility in dealing with a shortfall of
US import financing in May and June of this year is limited by
its relatively weak foreign reserve position and by a virtual
halt in recent US piaster purchases. Declining US piaster needs,
combined with a rapid buildup in piaster holdings generated from
last year's PL-480 program, may allow the US to meet its total
local currency requirements for the rest of CY 1974 without
further purchases. Although GVN dollar earnings from US piaster
purchases have declined in recent years, they still amounted
to some $130 million in CY 1973.
17. The impact of an immediate funding crisis arising
from the above factors is discussed under the Low Option case
below; although it could occur under any of the three scenarios,
its impact would be sustained through FY 1975 only under the
Low Aid option.
18. The three aid options and the projected import levels
they would support are summarized graphically in Figure 2.* In
addition, per capita import trends for South Vietnam and several
other Asian states are shown in Figure 3.
Low Aid Option
19. Under this scenario, world price increases would mean
a modest reduction in South Vietnam's real imports in CY 1974,
and a further reduction in the first half of CY 1975 (see
Table I). The Commodity Import Program (plus development
loans) would provide about $350 million to South Vietnam for
FY 1975. PL-480-funded imports would increase considerably
because of higher world rice prices and reliance on the pro-
gram for stabilization purposes. Piaster purchases by the US,
however, would drop significantly -- as they would under all
three options -- through CY 1974 and the first half of CY 1975.
See Annex for a statement of the assumptions which underlie
all of the projections in this memorandum.
uuivv 11JEN-~rar
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
Ww/ %?/'
Figure
South Vietnam: Imports and US Aid* Under
Three Funding Alternatives for FY 1975
Low Option (Continuing Resolution)
Million US $
----~-
1,000.
0L
1972
-----------------
Medium Option ($600)
Million US $
1,300,
High Option ($850)
Million US $
1,500 t---
01
1972
Of
1972
I mports
US Aid
1972
Prices
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
Per Capita Imports:
Selected Countries and Projections for South Vietnam
us $
Figure 3
73
*For purposes of comparison with other countries, the 1974 and 1975 values for South Vietnam
and 20% respectively.
d
in 1973
are comp
The 1975uimport level is derived from annual rates of the p ojections for the first half of 1975.
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 25X1 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
%of S%00
CONFTDFNTTA T.
South Vietnamese exports would probably decrease gradually
from a high point in the first half of CY 1974 toward a
stable level near $4-5 million per month in the first half
of CY 1975, as production suffers from rising costs and the
unavailability of capital for replacement and expansion.
Invisible earnings (other than piaster purchases) would also
be likely to decline through FY 1975 as the poor state of the
economy fails to attract foreign businessmen and tourists.
Although limited in its capacity to do so, the GVN would
probably be forced to draw its foreign exchange reserves
down to the equivalent of one month of imports at the end
of FY 1975.
20. South Vietnam's projected imports for FY 1975 under
the Low Option would be less than two-thirds the annual volume
of imports in 1970-1971. Consequently, as FY 1975 progresses
South Vietnam would be forced to shift increasingly to imports
for current consumption -- largely food and fuels -- and forego
many of the foreign inputs required for economic development.
The few capital goods imported would probably be for support of
the agricultural sector, since the continuing business slump
would preclude many industrial imports.
21. Although South Vietnam's economy would be seriously
affected by such a decline in resource flows, day-to-day economic
activities would naturally adjust somewhat to the new order.
Farming would revert to more traditional patterns using greater
amounts of labor. Smaller industrial firms with unsophisticated
equipment and needs might find some domestic substitutes for
their inputs. Larger industries, dependent on key fiber, food,
and machinery imports, would be hard hit.
22. The real import levels resulting from the Low Option
would not provide the South Vietnamese economy a basis for any
growth at all. Investment would remain depressed and a further
real decrease in GNP would be likely, particularly if fuel,
fertilizer and transportation problems in the agricultural sector
continue. Inflation would remain a serious problem, and there
would be continued declines in real income.
23. Even under the Low Option, the South Vietnamese Gov-
ernment would probably carry out a modest nominal increase in
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
..r, CONFIDENTIAL
salaries for government workers and military personnel, but
not one which would keep step with inflation. Moreover, the
reduction of aid arrivals would be sharper in the first half of
CY 1975 than in the last half of CY 1974, and this would deepen
real income declines. The result would be a further perceptible
deterioration in living standards, particularly in urban areas.
The real incomes of most urban families would probably fall to
a level that would cover little more than a modest diet, limited
clothing expenditures, and shelter. Unemployment would also
probably increase above present levels, as imported industrial
inputs became scarcer and more expensive.
24. The cost of imported goods under the Low Option would
almost inevitably continue upward, not only because of increasing
global prices but also because of government efforts to limit
imports. The GVN would almost certainly impose more and higher
import taxes, for example, under the low funding scenario, and
these taxes would affect the prices and availability of indus-
trial inputs, key commodities, and those few non-food consumer
imports now allowed.
25. If the Low Option for FY 1975 were accompanied by a
serious funding shortfall in the remaining months of FY 1974,
the above problems would be magnified. Moreover, even a short-
term import crisis could have a serious impact on general
living standards. The natural concentration on commodity
imports under limited funding availabilities would be further
spurred by import speculation and a run on licensing. Importers
would attempt to take advantage of the uncertainties by increasing
both inventories and prices of imported goods. Windfall profits,
common in the late 1960s but largely eliminated by the exchange
and import tariff reforms of 1970-1972, would probably become a
problem again, resulting in a renewal of income transfers to a
small group of Saigon speculators.
26. A basic problem facing the South Vietnamese Govern-
ment under the Low Option is that the government has few new
administrative and financial tools to cope with its economic
problems, particularly in the short run. This was demonstrated
in 1973 when a series of emergency measures had little impact
except for forcibly drawing rice reserve stocks out of the delta.
Import controls -- including increased taxes, outright bans, and
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
rnNTFTTYRNTT A l .
rationing of specific commodities -- as well as more direct
government intervention in rice marketing and subsidies of
various kinds for various groups, were all tried with little
success. By early 1975, the GVN would be faced with heavy
pressures for further government controls -- more stringent
than those applied in CY 1973 and early CY 1974, but probably
no more effective.
Medium Aid Option
27. The Medium option would provide CIP and development
loan aid of $650 million to South Vietnam in FY 1975. Under this
option, capital inflows and GVN exchange earnings through FY 1975
should show a marked improvement in comparison with the Low
Option (see Table II). In particular, a CIP of $600 million
(plus development loan financing of $50 million) should allow
imports in the first half of FY 1975 to increase significantly
more than they would under the Low Aid option, and prevent them
from declining in the second half of FY 1975. Adequate imports
of raw material and capital goods, in turn, and a reasonably
healthy business climate would support expanded export growth.
Similarly, invisible receipts could be expected to improve.
The competition for imports between the agricultural and indus-
trial sectors might be greater under the Medium than under the
Low Option, and this might hold the growth of agricultural
output below potential if imports of fertilizers and pesticides,
for example, diminished. The PL-480 program would probably
have to be maintained at a high level because of continued
high world rice prices, slow growth in the South Vietnamese
agricultural sector, and stabilization requirements. Under
this option, South Vietnam would also have to draw on its for-
eign exchange reserves during the first half of FY 1975, but
by the end of the fiscal year, total capital inflows would be
such that some improvement in reserves should occur.
28. The level of imports allowed under the Medium Option
would still be such that food, fuel, and other basic consumer
items, would account for most of the total. There would be
little funding available for many types of consumer imports
normally found in countries at this stage of development. More
important, little increase would be possible -- in real terms --
in raw material and capital imports. Investment would continue
at a low rate and little reconstruction would take place. Some
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 25X1 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8 140
CONFTDF.NTT A T .
real growth in the private sector probably would occur, but it
would come less from new investment than from increased use of
existing capacity as the economy recovered from the stagnation
of 1972-1973.
29. The positive impact on living standards under this
option would be limited in CY 1974, but the declines registered
in 1972-1973 should nevertheless be halted by the end of the year.
Moreover, assuming that this level of funding were accompanied
by a commensurate recovery in domestic economic activity, real
incomes would probably register some gains by mid-1975. In
particular, salary increases for government workers and military
personnel could just about match domestic rates of inflation
since early 1973, even though real incomes for these groups
would still remain below those of 1970-1971. Under the Medium
Option, employment in the private sector should also increase
modestly, but industrial recovery would be plowed by the higher
cost and scarcity of petroleum inputs, the effects of which are
likely to remain serious through FY 1975. Moreover, farm incomes,
which increased in 1971-1973, would probably level off under
this option because of the sharp jumps in fuel and fertilizer
costs in late 1973. The government would probably attempt to
introduce regulatory measures to reduce the cost of these im-
ported agricultural inputs. This would lessen the impact of
rising import prices, but agricultural growth would nevertheless
be slow.
30. In sum, under this level of funding, the GVN would
be able to allow somewhat more private sector initiative in
economic activity than in 1973. Through FY 1975, however,
there would be little scope for policy innovation or increased
government investment. Inflation would continue to be a
serious problem with few options open to the government for
stemming it. The decline of real incomes could be halted and
perhaps reversed, but not to the extent of redressing the decline
in living standards of the past several years.
High Aid Option
31. The High Option would provide CIP and development
loan aid of $900 million to South Vietnam in FY 1975 (see Table
III). Likely to offset this increase somewhat would be a de-
cline in PL-480 aid because of increased agricultural production
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 25X1 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
CONFTDTFNTT A T .
within South Vietnam. On the other hand, exports would grow
rapidly under the High Option because needed raw material and
capital inputs would be available. Invisible receipts would
also benefit from the improved business climate and the future
growth potential of the economy. All these factors would com-
bine to slow the rate of foreign exchange depletion during the
first half of FY 1975 and result in a substantial expansion of
reserves in the last half of the fiscal year.
32. In real terms, the volume of imports under the High
Option would still be slightly below the 1970-1971 average, but
it would be sufficient to support moderate economic growth.
Financing would be available for an adequate level of industrial
and agricultural imports, in addition to basic consumer imports.
The level of "luxury" imports would almost certainly not increase
because of continuing government restrictions.
33. The full amount of the High Option aid (and the im=-
ports of almost $1.5 billion) probably could not be absorbed
by the GVN economy during FY 1975 but it would be possible to
rebuild the depleted aid pipeline and foreign exchange reserves.
Nevertheless, rapid short-term recovery and growth could take
place if private sector confidence and import demand were restored
by US government approval of the High Option. The key problem is
that of encouraging the private sector to buy the goods. Foreign
assistance can pay for the dollar cost of imported commodities,
but ultimate sale must be financed by piaster expenditures. For
an agricultural economy like that of Vietnam, the problem is
made more difficult because this sector does not respond quickly
to monetary stimulation. Thus, if investor and consumer demand
were restored, real growth in excess of 5 percent would be possible
with the High Option aid funding. Although there might be a temp-
tation to encourage a much more aggressive role on the part of
government in productive investment, this sort of development
strategy, in addition to working against the US preference for
greater private initiatives, would require many more well-
conceived and carefully-planned projects than could be generated
in this period. Even with major reconstruction expenditures, the
full amount of a $900 CIP and development aid program probably
would not be spent by the end of FY 1975.
34. Assuming that most of the $900 million were spent, how-
ever, there would be substantial improvement in private sector
employment and wage conditions, particularly in the second half
UONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
CONFIDENTIAL
of FY 1975. Moreover, government receipts under this option
should allow not only real wage increases for government em-
ployees and military personnel but possibly also some expansion
of government employment in reconstruction/development activi-
ties. If a significant portion of this aid were channeled into
projects, a further increase in private sector employment could
also result. Even this level of aid, however, would not en-
tirely insulate the average Vietnamese from the effects of global
inflation. Under the best of circumstances, with continued
large-scale foreign capital inflows accompanied by domestic
economic recovery, the average living standards of 1970-1971
probably would not be reached again until 1976 or beyond.
35. The High option would also allow the government to
retreat from its recent efforts to control economic activity
directly. A relaxation of import controls would, for example,
allow a more rational and responsive distribution of available
financing. To a greater degree than in the Medium Option, this
option would also permit a focus on retaining and expanding the
1971-1972 interest and exchange rate reforms which allow the
price adjustments necessary to keep the Vietnamese private sector
growing in tune with changing global economic conditions. Even
the High Option, however, probably would not solve Vietnam's
problem of domestic inflation during the period under review, as
increasing import costs rather than excess demand will remain
the major factor. Nevertheless, this option does provide the
basis for more optimistic predictions for real growth and stabili-
zation beyond FY 1975, assuming that continued foreign capital
inflows are forthcoming. Moreover, the increase of real re-
sources available to the economy would allow the government to
attempt income redistribution measures with less likelihood of
absolute income declines among particular population or economic
groups.
Im lications for Future Growth and Aid Re uirements
36. Overall aid requirements for moderate growth -- or the
US share of them -- will not decline significantly during the
next five years. That is, given the low base from which South
Vietnam begins, the attainment of steady economic growth will
not result from big "shots" of capital limited to the next two
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
14ROV -400
r(INFTTIFNTrPT A T
years or so. An initial surge can at best be expected to start
a movement toward self-sufficiency, not to attain it. No country
at a stage of development similar to that of South Vietnam today
has ever come close both to sustaining growth and to covering its
trade deficit through exports and "normal" capital inflows in less
than 15 years.
37. Unless South Vietnam continues to receive -- for the
rest of this decade at least -- annual foreign capital inflows
similar to those at present (in constant prices), it will not
have moved significantly beyond the living standards and real
income levels that obtained when the US began its massive mili-
tary and economic aid in the :mid-1960s. So much has taken place
in the global and domestic economies since mobilization shifted
large numbers of the best workers into the armed forces, that
prospects for accelerating the pace of recovery or shortening
the period of "client" status for South Vietnam are not good.
If the US objective still is to put South Vietnam on a growth
track and move it well down the road to self-sufficiency, it is
likely that South Vietnam will continue to be dependent on US
aid into the 1980s. The only development which conceivably
could speed the movement toward self-sufficiency would be major
oil discoveries in areas under South Vietnamese control,
The Political Factor
38. In Vietnam as in the rest of the world, it is impos-
sible to define precisely the relationship between economics
and politics. Nor is it possible to identify that point at
which a nation with growing economic problems starts to ex-
perience serious political instability. In the case of South
Vietnam, there are two schools of thought within the intel-
ligence community on the political implications of the economic
aid levels discussed in this memorandum. The arguments of
these two schools are presented below.
SCHOOL A: This school holds that even the Low Option
wou provide ~'enoug a~ td o gave reasonable
ass-~ u e of po atical stabllaty an South
Vietnam and pre- vent_an"`! y s g afaca shift
in the military balance during 1975. This
believes that
school also a low aid package
UUNFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099AA0~01100060002-8
CONFIDENTIAL
in FY 1975 by itself would not create such
irreversibly serious economic conditions in
the South that the situation could not be
rectified b larger aid packages in succeeding
ears.
39. Analysts who support the School A case argue as fol-
a. It is unlikely that the economic conditions
projected under the low case option would directly
threaten the stability of the GVN through FY 1975.
This is not to deny that there would be some political
cost -- for instance, declining morale in the armed
forces and perhaps some popular alienation from the
Thieu government. The levels of assistance under the
medium and high options would reduce such effects and
would improve the relative position of the GVN vis-a-vis
the Vietnamese Communists. The long-term survivability
and effectiveness of the GVN, however, will depend on
a wide range of factors; economic problems in the short
range at least, are not likely to give the Communists
any critical or clearcut advantage in the continuing
struggle between the North and South.
b. Having withstood intense military, political
and economic pressures in the past, South Vietnam is
in many ways relatively well equipped to face even
greater economic problems without political breakdown.
There is no sign that Thieu's tight control and politi-
cal strength is weakening and no particular reason to
question his ability to handle any political repercus-
sions with his usual skillful blend of political finesse
and, where necessary, tough security measures.
c. A further worsening of the economic situation
in FY 1975 is anticipated by the populace and its
psychological impact may have already been somewhat dis-
sipated. During the present economic slump, the gov-
ernment has steadily increased its involvement in regu-
lating the economy, thus bringing to the attention of
the public the magnitude of the problems and the gov-
ernment's concern with meeting them. The administration
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
Nale %W
C:ONFTTIFNTT A T 25X1
has regularly informed the public that the economic road
ahead will become rougher. President Thieu also has
stated repeatedly that South Vietnam must take the load
on its own shoulders in solving its domestic economic
problems with lesser amounts of US assistance.
d. The bleak forecasts and repeated calls for
belt tightening have not triggered significant public
expressions of dissatisfaction with the government.
While all sectors of society have expressed degrees of
concern about the economic situation, the prevailing
attitude has been one of grudging acceptance, if only
for want of a feasible alternative. The South Viet-
namese population generally recognizes that conditions
and prospects in Communist-controlled areas are even
more bleak and unacceptable. There is also a general
realization that no other government policies or group
of South Vietnamese leaders would be any more success-
ful in securing greater US or other foreign aid than
have Thieu and his administrators.
e. Any economically-derived political tensions
would likely originate from one or a combination of
three major groups: the military, Buddhists, and labor.
The military is the most capable of challenging Thieu's
authority. It is highly unlikely, however, that it
would do so if only for fear of losing all forms of US
assistance and support. Military officers would be
quite hesitant to move against Thieu unless they were
certain that the US wanted a change and would support
it. In any event, there are now no signs of disaffection
within the upper levels of the military over economic
problems.
f. A more realistic concern is the likely effect
of worsening economic conditions on the rank and file
of the Vietnamese Armed Forces (RVNAF). As belts are
further tightened within RVNAF -- already hard hit by
inflation -- the familiar problems of corruption and
moonlighting are bound to intensify, as they will in
other government services. There have been scattered
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
`rrr/
CONFTDFNTTAT. , 25X1
reports of troops stealing from the populace and en-
gaging in other forms of corruption recently, but this
does not appear widespread or even much, if any, above
normal levels. It was a very widespread problem in
the mid-1960s, yet did not produce any breakdown in
political order.
g. Tougher economic conditions almost certainly
will take some toll in troop morale and may contribute
to a perceptible decline in combat effectiveness, but
they are unlikely to result in a significantly adverse
shift in the existing military balance in the South at
least through 1975. Historically, economic problems
have had little effect on the military's combat effective-
ness. Despite the reduced levels of real income, ARVN
is reputed by most observers to have become more pro-
fessional, more confident, and a better fighting machine
during the past few years. It has taken the combat to
the Communists in an aggressive way. The state of the
economy seems unrelated.
h. As long as the country continues to be con-
trolled by President Thieu and the military, it is
quite possible that the position of the ARVN rank and
file could become more attractive in a worsening eco-
nomic situation when viewed against the privations of
other less privileged groups or against those under
Communist control. The government is in a position
to control the availability and price of rice for
ARVN and its dependents more effectively than for the
urban population. Although ARVN has already been hit
hard by inflation, the government could ultimately be
expected to take strong action to keep ARVN morale
from disintegrating -- if that were a prospect --
even at the expense of other South Vietnamese on fixed
incomes.
i. The Buddhists have traditionally focused
on political rather than economic issues. They have
some potential for fomenting local unrest, but fac-
tionalism and other problems probably would prevent
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
CONFIDENTIAL *ftw
them from rallying any widespread antigovernment sup-
port. The Buddhists, in fact, might serve as a
stabilizing rather than a disruptive force. They
are strongly anti-Communist and thus might view any
political exploitation of economic hardships as ul-
timately serving Communist ends.
j. Although hard hit by inflation, organized
labor -- a relatively small proportion of the total
labor.force -- has tended to support the central gov-
ernment. Such support is likely to continue and may
even be-reinforced by the same considerations that
militate against political agitation by the military
and by the Buddhists -- the need to maintain US sup-
port and the lack of an acceptable alternative.
While labor leaders can be expected to encourage mass
action to protest localized shortages and other eco-
nomic grievances, they have the capability to keep
such activities under control. The government is
not likely to face a nationwide challenge from or-
ganized labor.
k. There is always some possibility of wide-
spread unrest sparked by other groups, e.g., students,
veterans, or unorganized labor. It was such unrest
which surprised and toppled the military administra-
tion in Thailand in 1973. In such a situation the
government involved have usually been out of touch
with their populace, and had taken little or no prior
action to deal with the developing problem. This is
not characteristic of the Thieu administration, which
has actively attempted to cope with its situation and
which is in close touch with its populace.
1. From the North Vietnamese perspective, there
can only be encouragement at the South Vietnamese
economic difficulties. Hanoi is clearly alert to
Saigon's economic problems. COSVN has warned its cadre
to be ready for "sudden developments" arising out of
the economic situation that may present an opportunity
to "destroy the enemy." But the economic situation is
only one factor that Hanoi must consider in determining
its strategy toward the southern struggle.
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
CONFIDENTIAL
M. Through the end of FY 1975 the South Vietnamese
economic situation seems unlikely by itself to present
Hanoi with many exploitable opportunities. The Com-
munists currently lack the assets to exacerbate signifi-
cantly any economic troubles or to turn them to their
direct political advantage. They would not have much
chance of successfully exploiting such difficulties
until the problems had sapped the strength of the Saigon
regime and made the South Vietnamese populace more
receptive to Communist pressures and blandishments.
At this point (other considerations being favorable)
they might move, through some combination of military
and political action, to take advantage of Saigon's
economic troubles. But economic deterioration of the
sort that might provide such openings is not likely to
occur in the next year or so.
n. There can be no doubt that the deleterious
impact on South Vietnam which would be produced by the
low option aid package would be greatly magnified after
FY 1975 if a similar low level of real US aid were con-
tinued in succeeding years and if there had been no
substantial inputs into the GVN economy from other
sources (such sources might include oil revenues or
increased foreign investment). We do not believe that
a low aid package in FY 1975 by itself would create
such irreversibly serious economic conditions in the
South that the situation could not be rectified by
larger packages in succeeding years.
SCHOOL B: This school holds that under the Low Option
the GVN would run a high risk of serious
adverse political reactions in FY 1975.
These reactions would cause instability,
weaken the control of the central govern-
ment, and encourage Hanoi to step up po-
litical and military pressure on the South.
Even if the Thieu government survives FY
1975 under the Low Option, a process would
be set in motion which would threaten the
existence of the government in the years
immediately following. In this school's
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79RO1099AO01100060002-8
1
CONFITIFNTTA T .
opinion, there is a serious risk that this
process could not be reversed before the
GVN collapsed.
40. Analysts who support the School B case argue as fol-
a. The present government in South Vietnam has en-
joyed a high degree of political stability since the
late 1960s. It has also established a relatively effective
administration from Saigon down to the village and hamlet
and has been successful at eroding Communist political
control in the countryside. Part -- and perhaps a large
part -- of the GVN's political achievements, however, must
be attributed to the economic stability of the period and
the economic opportunities enjoyed by a rather large seg-
ment of the population. This in turn was made possible by
regular large doses of US assistance over the years. South
Vietnamese society has undergone a significant transforma-
tion in the last decade. The dramatic shift in population
from rural to urban areas has created a situation in which
it is very difficult to judge the impact of economic pri-
vation. Belt tightening, the traditional Vietnamese re-
action to hardship, may have new limits under these cir-
cumstances.
b. In the past two years, South Vietnam has ex-
perienced a severe decline in living standards. Those
hardest hit have been urban residents and those living
on fixed salaries, mainly the military and civil service.
Thus far there has been little overt political reaction,
and President Thieu's control of the political scene
remains intact. However, virtually all Vietnamese gov-
ernment officials, starting with Thieu, appear to be
greatly concerned about the economic situation and the
potential political dangers. The Communists also appear
to be counting strongly on the possibility that economic
problems will weaken the GVN.
c. Short Term Implications of the Low Option: Under
the Low Aid Option, it is likely that in FY 1975 the GVN
would start to face serious political reactions. The
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099AA0001100060002-8
IMPO
CONFTTWNTTAI,
reactions might take several forms, each of which would
have the effect of weakening central government control
and creating political instability:
--With continuing inflation and rising unemployment,
unrest in the hard-hit urban areas, especially
in the cities in Central Vietnam, is likely to
increase. There is a significant possibility of
strikes by organized labor and of demonstrations
led by veteran groups and religious and politi-
cal organizations in Central Vietnam and Saigon.
--The morale and combat efficiency of ARVN will
decline. All military commanders admit that this
problem is significant, although it has yet to
have a debilitating impact. It is impossible
to predict if there is a critical point at which
a breakdown in combat effectiveness will occur,
and it is likely that ARVN will continue to fight
even if its back is to the wall. RVNAF's capa-
bility to protect rural areas and to conduct
offensive and counter-offensive operations, how-
ever, could be seriously reduced.
--The Territorial Forces and the National Police
will be placed under even more serious pressure.
Since they lack the pay and privileges of full-
fledged ARVN members and are more susceptible to
influence from the population around them, de-
terioration of their economic position will in-
crease tendencies toward neglect of duty and in
some cases accommodation with the enemy. Since
these forces constitute the first line of defense
against Communist guerrilla warfare in many parts
of South Vietnam, dissatisfaction among them does
not need to reach the point of active expression
of dissatisfaction with the government to have
a seriously debilitating effect on security.
--Corruption is likely to become a serious politi-
cal problem for the GVN. Saigon will almost cer-
tainly institute more government controls which
UONYrnEiv- raL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
r.CINFTDFNTTAT.
will result in a growing black market and wide-
spread illegal payoffs. The GVN will not be able
to increase civilian and military salaries ade-
quately to keep pace with inflation; the resulting
decline in real wages will result in more corrup-
tion. There have recently been an increasing
number of reports of troops selling their equip-
ment and in some instances even selling ammunition
to the other side. There are also increasing
incidents, especially in MR 1, of armed robbery
by ARVN troops. Continued corruption could begin
to impact seriously upon the morale and combat ef-
fiency of ARVN.
--Declining military and civil service morale and
growing corruption will adversely affect the im-
plementation of GVN programs at all levels.
--As economic and attendant problems mount, con-
tinuing shake-ups in high-level leadership are
likely in order to seek new solutions or
affix blame. Uncertain and erratic policy
direct:bn will result.
--The Communists could make some psychologically
important political gains by taking advantage
of GVN vulnerabilities. Rebuilding of the rural
infrastructure and recruitment of Communist
sympathisers in the cities will be easier,
and increasing numbers of South Vietnamese may
opt for a neutral stance.
--Communist propaganda to depict the GVN as
thoroughly rotten and lacking popular support
will gain wider acceptance, both within South
Vietnam and internationally. The GVN will prob-
ably lose ground internationally to the PRG.
--In short, under the Low Aid Option the GVN would
run a serious risk of major adverse political re-
actions in FY 1975.
CON YrnEN-rAt
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A0000.1100060002-8
C`(1T~TFTT1pNTTT A T 25X1
d. Hanoi's Reaction: The North Vietnamese are counting
on the GVN's having major economic problems this year. They
are certain to exploit the situation in some form. Commu-
nist cadre will step up subversive activities if there is
rural economic dislocation and urban disorder. Indications
that the GVN was seriously weakened by economic and politi-
cal problems would encourage Hanoi to step up its political
and military pressure on the South.
e. Long-Term Implications: Under the Low Aid Option,
even if the Thieu government survives the political conse-
quences of the adverse economic situation in FY 1975, a process
would be set in motion which would threaten the existence of
the government in the years immediately following. Some of
the processes and tendencies described in paragraph c above
are already beginning. Others will begin to develop in the
coming year. With the Low Aid Option for FY 1975, it would
be very difficult to reverse them even if a considerably
higher aid level were provided for FY 1976. Moreover, the
further deterioration in the GVN's situation during 1974 and
early 1975 which is likely under the Low Option probably
would, of itself, adversely affect the prospects of obtain-
ing outside assistance for FY 1976.
f. The South Vietnamese police and rank-and-file mili-
tary men, who will be called upon to control demonstrations,
strikes, and rioting, are some of the people who have been
hit hardest by economic problems. The situation would be-
come critical for the GVN if elements of the police and army
were to participate in demonstrations and strikes or to en-
gage in their own organized protest measures. Incidents of
police and military involvement in civil disorder occurred
in the mid-1960s in South Vietnam, most notably in MR 1 in
1966. There would be little the Thieu government could do
to lessen the economic plight of these groups.
g. Any real domestic challenge to Thieu's position
would probably come from his major political base -- the
military. While there are no signs of unrest in the mili-
tary at this time, the political developments outlined
above could during FY 1975 create dissension within the of-
ficer corps. Middle grade officers, caught between the
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A101100060002-8
swol~
CONFIDENTIAL
declining morale and discipline of their men and the un-
abated corruption and ineffective performance of senior ARVN
officers and politicians, could pose a serious threat to
the present government. A "Colonels' coup," designed to
establish an austere, disciplined, nationalistic South Viet-
nam prepared to continue the struggle against the Communists,
seems unlikely now, but after a period of worsening economic
dislocation it could become a serious possibility.
h. The Medium and High Assistance Options: Under the
High Aid Option, it is unlikely that there would be any
major political consequences. There might be a period of
months before the impact of the high level would be felt.
During this initial period there could be minor political
problems, but the GVN would certainly be able to cope
with these before they became serious.
i. Under the Medium Aid option, the consequences
would be more difficult to assess. There would be con-
tinued economic stagnation at this level which would be a
major problem for GVN policy makers. While there would
probably be political reaction, the Thieu government would
probably be able to keep the lid on the situation during
FY 1975.
CONFIDENTIAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8
 Approved For Release 2006/10/13: CIA-RDP79R01099A }01100060002-8
rr+
The following assumptions underlie all of the economic
projections which are made in this memorandum.
--The security situation will remain the same (no marked
improvement over conditions prevailing since the cease-
fire agreement in January 1973).
--Military assistance levels to South Vietnam will not
change in ways that will affect the availability of for-
eign economic resources.
--No demobilization of the GVN armed forces will occur.
--The 1974-1975 harvest will be at least as good as
1973-1974, and therefore PL-480 requirements will not
increase significantly in real terms.
--There will be no change in the distribution of population
(no significant outflow from urban to rural areas).
--Inflows from third-country aid will not exceed an annual
rate of $100 million in CY 1974 and $200 million in
CY 1975, slightly less than half of which will be avail-
able for general imports -- i.e., not earmarked for
specific projects.
--The private sector will, except under the High Option,
actually use all the available aid, i.e., South Viet-
namese businessmen will overcome their own uncertainties
and will use available capital. Otherwise the economic
situation under any of the postulated scenarios would be
bleaker than described herein.
--The aid pipeline (the unutilized portion of past funding)
will not change significantly during the period.
--The timing of aid for import financing will coincide
directly with the period for which the aid is authorized.
CONFIDENHAL
Approved For Release 2006/10/13: CIA-RDP79R01099A001100060002-8