IMPLICATIONS OF DIFFERENT ECONOMIC AID LEVELS FOR SOUTH VIETNAM IN FY 1975

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80B01495R000500180013-7
• Release Decision: RIFPUB
• Original Classification: C
• Document Page Count: 41
• Document Creation Date: December 19, 2016
• Document Release Date: December 29, 2005
• Sequence Number: 13
• Publication Date: April 1, 1974
• Content Type: MF

C O N F I D E N T I A L
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Draft
April 1, 1974
MEMORANDUM FOR THE DIRECTOR OF CENTRAL INTELLIGENCE*
SUBJECT Implications of Different Economic Aid Levels
for South Vietnam in FY 1975
The Key Points
This memorandum projects three possible U.S. assistance levels
for South Vietnam in FY 1975 and assesses the impact of each on the
South Vietnamese econozay.
The Low Aid Option --1300 million in Commodity Import
Program (CIP) ail and $5O million in development aid -- would
be 4 continuation, in dollar terms, of the present assistance
level. 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 recession in South Vietnam would deepen.
- Real incomes, especially among the urban population,
would continue to decline, and inflation would remain a
serious problem.
The Medium Option -- $600 million in CIP aid and $50 million
in development aid -- is the level of assistance which the
Administration presently plans to request from the Congress
for FY 1975. Under this option --
- South Vietnam's real imports would remain essentially at
the present level from now through the first half of
CY 1975.
This memorandum was drafted jointly by the Central Intelligence
Agency and the Bureau of Intelligence and Research, Department
of State. It was reviewed and endorsed by representatives of
these agencies the Defense Intelligence Agency, a,4
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- 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 agricultural
population, could be stabilized. Urban incomes, however,
would remain appreciably below those of 1970-1971.
The High Option -- $850 million in CIP aid and $50 million in
development aid -- is the level of assistance requested by the
US Mission in Saigon for FY 1975. Under this option --
- South Vietnam's real imports would.increa#e appreciably
...from iow through mid-1975?
- The total economic output of South Vietnam could grow,
in real terms, as much as 5 percent in FY 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 U.S.
aid until 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 Lo`w Option would provide enough
aid to prevent unacceptable political risks from arising
regarding the survivability and reasonable effectiveness
of the GVN.
The other school believes that under the Low Option the GVN would
run an unacceptable risk of serious adverse political
reactions in FY 1975, which could both create instability
and weaken the control of the central government. This
school further believes that under the Medium Option there
would be some adverse political reaction, though the Thieu
government would probably be able to keep the lid on the
situation. The High Option, this school believes, would
clearly strengthen the present government of South Vietnam.
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 Discussion
Background: The South Vietnamese Economy and Recent Aid Levels
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1. The large scale mobilization South Vietnam
which began in 1965 was carried out without a significant
.reduction A` consumption levels because in-
flows of US economic assistance filled the gap. The US aid pro-
gram from 1965 through 1970 was aimed primarily at containing
the severe inflationary problems that were the by-product of
huge government deficits necessary to finance military expendi-
tures. After the 1968 communist "Tet" offensive -ha-- r- mss
however, the pacification program of the Government of
Vietnam (GVN) began to make steady progress and economic condi
\iNlffil i WE rte. i"~I~rk /y+
tions '~reg By the end of the- 1960s, the pre-
occupation of the GVN -- and the US -- with stabilization less-
ened, and a greater effort was devoted to fostering growth in
the South Vietnamese economy. With imports financed largely
M~a~he
by US aid( continuing at the high levels of the mid-1960s, the
South Vietnamese were able to channel more resources toward in-
creased output rather than current consumption. During 1969-
1970 GNP increased at an annual rate of some 4 percent in real
terms, agricultural output increas by about 10 percent
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2. In late 1970, the GVN (closely advised by the US) began
to undertake a series of reforms designed to stimulate the private
sector and ultimately to end dependence on US economic assist-
ance. The measures taken included interest rate reforms (estab-
lishing interest rates higher than the rate of inflation), domestic
banking reforms to increase private saving, adoption of a flex-
ible and realistic exchange rate policy to stimulate exports, and,.
by late 1971, a liberalization of import procedures to the
market system 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. A pith continued
foreign aid and the establishment of greater political and mili-
tary stability,',tt generally believed that Vietnam's largely
untapped resource base could provide the basis of steady and
relatively rapid growth.
3. The 1972 Communist military offensive dashed these
optimistic predictions b--L11 A. isloa-o recession
40.
occurred as consumer demand dropped and investment came to a
virtual halt. Moreover, military disruption and poor weather
combined to produce a shortfall in the 1972-1973 rice harvests.
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The Vietnam settlement agreement of January 1973 did little
to remedy the situation. Consumer confidence was not restored,
foreign investors continued to show reluctance to make commit-
ments, and key commodity shortages created upward pressure on
prices.
4. Coupled with these problems-,a9s.o~b?e a steady, signifi-
cant decline since 1971 in real aid levels and a commensurate
reduction in real imports. (See Figure 1.) Indeed, in con-
stant prices the-volume of US aid fell by about one-third from
'97t
Ito 1973, and South Vietnamese imports -- again in constant
prices -- diminished by 25 percent in the same period. These.
declines are the result of the depreciation of the dollar (to
which the piaster has remained tied) combined with sharp in-
creases in world 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. Al-
though the government has made every effort to reduce imports
of nonessential consumer goods and to channel available funds
toward investment, attempts to initiate reconstruction and
steady growth have been completely frustrated. Rising shares of
the country's import bill have necessarily been diverted to meet
essential commodity shortages; the lack of funds for invest-
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South Vietnam: Estimated Imports and US Economic Aid
Million US $
1,000
900
Imports US Aid`
Current Current
In 1964 Prices 10 In 1964 Prices
4% "000
e
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 Approved For Release CONRI
ment has also wiped out most of the earlier progress in
strengthening the private sector of the economy and in reducing
the reliance on foreign capital.
5. Thus, South Vietnam's economy has been in a severe
slump for two years. There has been very little investment,
consumer demand has diminished, and average real incomes have
declined.
The Present Situation
6. The impact of the slump 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 unemployment increasing.. Gov-
ernment employees, both civilian and military, who account for
more than one-fifth of the labor force, received a 25 percent
pay increase in 1973. Because of inflation, however, the real.
hold
wages of civil servants and military personnel re only about
two-thirds what they were in early 1973. The wages of lower-
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level officials, enlisted men and junior officers 4461* now
barely cover a 'family's expenditures for food. For most wage
earners, rice purchases alone probably take more than half of
their income. Moonlighting and the employment of other family
members help, but jobs are scarce. There have been some lay-
offs by Vietnamese manufacturers, and 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 South
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.
8. Agriculture remains relatively strong, recovering
from a disappointing year in 1972. Real incomes in farming
have probably increased somewhat over the past few years, and
there are preliminary indications that a record harvest is now
coming in. This growth 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 almost entirely to the greater use
of high-yield varieties, more intensive application of chemical
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fertilizers, and increased mechanization. The retail price of
fertilizer has more than doubled over the past year, and the
price of gasoline 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 cultivate without gasoline-burning machinery.
9. 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.
10. In the area of foreign trade, South Vietnam's outlook
is also cloudy.. Despite a rapid growth of exports from a very
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small base, total earnings from this source are unlikely to
reach $100 million in calendar year 1974. Aid from 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
i
d h d dive/n n,ey7'`-
1974.
Aid Alternatives and Economic Prospects Through Mid-1975
11. In the material that follows we have projected three
possible Commodity Import Program (CIP) aid scenarios for FY 1975
and have attempted to assess the prospects for economic growth
in South Vietnam under each. The three scenarios are:
-- a low case, reflecting continuing appropriations
.h 2.
on approximately the same level as FY 1974: some
The FY 1974 aid appropriation includes a basic $300 million
for CIP funding plus a $50 million development Loan and a requested
supplemental appropriation of about $50 million. An additional
development loan of $60 million has also been requested for
FY 1974. Even if the latter is authorized, however, it will
almost surely not be available during the few months remaining
in this fiscal year. It is assumed, therefore, that this
request will, under each option, eventuate. in a $50 million
development loan, $25 million used in the first half of FY 1975
and $25 million in the Last half of FY 1975.
7 -
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-- a medium case, reflecting the Administration's request
-- a high case, reflecting the request of the US Mission
in Saigon for FY 1975: some $850 million in CIP ai
12. It should be borne in mind that external aid is only
one factor influencing the economic situation of South Vietnam.
A lack of business confidence has kept private sector demand below
what it would be in a peaceful, stable Vietnam. Since the
communist offensive of 1972 and the succession 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 increased 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.
13. 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 by
some time in May. If an emergency supplemental appropriation
cannot be obtained, no further CIP funds could be used until
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next fiscal year's appropriation became available, probably some-
time 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 licensing through US aid funds would
not again be available at levels comparable to the past. Although
imported goods would continue to flow into South Vietnam for
a while under previous orders, business confidence
14. 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.
15.. 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,
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Figure 2
South Vietnam: Imports and US Aid* Under
Three Funding Alternatives for FY 1975
Low Option (Continuing Resolution)
Million US $
1,000
of
1972
74
73
Medium Option ($600)
Million US $
1,300
High Option ($850)
Million US $
*including US plasters purchases
Nominal 1972
Prices
Imports .+.... .. as
US Aid -- ?~
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it would have a significant impact on FY 1975 only under the
Low Aid option.
16. The three aid options and the projected import levels
they would support are summarized graphically in Figure 2.*
Low Aid Option
17. 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 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 program 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. South Vietnamese exports
would probably decrease gradually from a high point in the first
Cy
half of V1974 toward a stable level near $4-5 million per month
/ f 4 ~rtrt' k1/i of C Y 127$;
as production suffers from rising costs
and the unavailability of capital for replacement and ex]?ansion.
Invisible earnings (other than piaster purchases) also likely
to decline through FY 1975 as the poor state of the economy fails
See Annex I for a statement of the assumptions which underlie
all of the projections in this memorandum.
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TABLE I
FY 1975 Low Option Funding (CRA
Millions of US Dollars
1st Half
2nd Half
Total
lst Half
1973
1974
1974
1974
. 1975
FY 1975
Total Imports
766
492.5
477.5
970
492.5
970
(1973 Prices)
(766)
394
329
(723)
(3 00)
(629)
Financing:
A. US
337.5
700
337.5
675
II
H
1. CIP (including DLF)
175
400
175
350
a. POL
(74)
(76.5)
(76.5)
(153)
b. Fertilizer
(50)
(37.5)
(37.5)
(75)
c. Other
(134)
(111)
(61)
(172)
z
O
2. PL-480
144
137.5
137.5
275
137.5
275
U
a. Ri ce
(76)
(80)
(80)
(160)
b. Other
(68)
(57.5)
(57.5)
(115)
3. Piaster Purchases
0
25
25
25.
50
B. Non-US Aid (including
50
40
60
100
100
160
non-commercial import
financing)
C. Commodity Exports
60.
1 45
35
80
25
60
D. Net Invisibles
48
20.
20-
40
15
35
E. Decline in,-Foreign
78
25
25
50
15
40
Reserves
-'
-
-
(Gold and Foreign Exchange,
(.154).
(129)
(104)
(104)
(89)
(89)
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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.
18. 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.
19. The real import levels resulting from the Low Option
would not provide the South Vietnamese economy-a basis for Qmaa
groh~~"~ ~.nvestment 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.
20. Under the Low Option, the South Vietnamese government
would be able to carry out a modest nominal increase in salaries
for government workers and military personnel, but not one which
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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.
21. 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 both of
industrial imports and of those few non-food consumer imports
now allowed.
22. 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 haveserious
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impact on the living standards of particular groups. The natural
concentration on commodity imports under limited funding avail-
abilities would be 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, causing
further income transfers to a small group of Saigon speculators.
23. A: basic problem facing the South Vietnamese govern-
ment under the Low Option is that the government fewn admin--
istrative and financial tools left 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
rationing of specific commodities -- as well as more direct
government intervention in rice marketing)
'~.
and subsidies of various kinds- a d- 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.
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Medium Aid Option
24. 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 somewhat 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 industrial sectors might
be greater under the Medium than under the Low Option, and this
might slow the growth of agricultural output if imports of ferti-
lizers and pesticides, for example, diminished. The PL'-480 pro-
gram 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
foreign 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.
15 -
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TABLE II
FY 1975 Medium Option Funding (600)
Millions of US Dollars
Total Imports
(1973 Prices)
Financing:
1st Half 2nd Half Total 1st Half
1974 1974 1974 1975 FY 1975
766 492.5 642.5 1,135 627.5
(766) (394) (443) (837) (383)
1,270
(826)
530 362.5 487.5 850 487.5 975
1. CIP (including DLF) 258 225
a. POL (74) (76.5)
b. Fertilizer (50) (37.5)
c. Other (134) (111)
2. PL-480
325 550 325 650 ,..~
144 137.5 137.5 275 137.5 275
a. Rice (76) (80)
b. Other (68) (57.5)
3. Piaster Purchases
B. Non-US Aid (including
non-commercial import
financing)
0 25 25 25 50
40 60 100 100 160
C. Commodity Exports 60 45 50 95 60 110
D. Net Invisibles 48 20 25 45 30 55
E. Change in Foreign Reserves 78 25 20 45 -50 -30
(Gold and Foreign Exchange, (154) (129) (109) (109) (159) (159)
End-Period)
Z
0
0
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25. 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
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.
26. 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 th.e 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 fir-. would
still remain below those of 1970-1971. Under the Medium Option,
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employment in the private sector should also increase' modestly,
&>v,.td
but industrial recoverybe slowed 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 imported
agricultural inputs. This would lessen the impact of rising
import prices, but agricultural growth would nevertheless be
slow.
27. 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. Even though real income declines could be halted
and perhaps reversed, the government would face continuing
though manageable pressures fromh ave seen no
significant improvement in living standards for 3-4 years.
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High Aid Option
28. The High Option would provide CIP and development
loan aid of $900 million to South Vietnam in1.975 (see Table III).
Likely to offset this increase somewhat would be a decline in
PL-480 aid because of increased agricultural production 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 combine to slow the
rate of foreign exchange depletion during the first half of
d flC-~jS~d4 f l
FY 1975 and result in expansion of reserves in the last half
of the fiscal year.
29. 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 3swe.i~ would notincrease because
of government restrictions.
30. The full amount of the High Option aid (and the
~ho~
imports of $1,.5 billion) probably could not be absorbed by the
GVN economy during FY 1975. Importers would be hard-pressed in
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TABLE III
FY 19 75 High Option Funding (85 0 )
Millions of US Dollars
.1st Half
2nd Half
Total
1st Half
1973
1974
1974
1974
1975
FY 1975
Total Imports
766
492.5
772.5
1,265
725
1,497.5
(1973 Prices)
(766
(394)
(533)
(927)
(442)
(975)
Financing:
530
362.5
612.5
975
575
1,187.5
1. CIP (including DLF)
258
225
450
675
450
900
a. POL
(74)
(76.5)
b. Fertilizer
(50)
(37.5)
c. Other .
.(134)
(111)
2. PL-480
144
137.5
137.5
275
100
237.5
c?~ Q
a. Rice
(76)
(80)
(80) .
(160)
Z
b. Other
(68)
(57.5)
(57.5)
(115)
3. Piaster Purchases
128
0
25
25
25
50
B. Non-US Aid (including
50
40
60
100
100
160
non-commercial import
financing)
C. Commodity Exports
60
45
60
105
75
135
D. Net Invisibles
50
50
80
Change in Foreign
78
25
35
-75
-65
Reserves
(Gold and Foreign' Exchange,
(154)
(129)
(.119)
(119)
(194)
(194)
End Period)
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our judgment to find demand for nonluxury imports at a higher
level than would result from a CIP 'o fa oumftlion.
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 high aid funding. Although there might be a temptation 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
fl
with major reconstruction expenditures, the full amount of a.$8&&
^
di d i~'0 t~pA ' Y, -a f r~, r J
CIP proAa y wou`1 not be spent by the end of FY 1975.
. I
31. Assuming some -750 million were spent, however,
there would still be substantial improvement in private sector
employment and wage conditions, particularly in the last half of
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V
FY 1975. Moreover, government receipts under this option should
allow not only real wage increases for government employees and
military personnel but possibly also.some expansion of government
employment in reconstruction/development activities. If a
significant portion of this aid' 'cI nneled into projects, a
further increase in private sector employment could also result.
Even this level of aid, however, would not entirely. insulate the
.average Vietnamese from the effects of global inflation, because
ty- v sal ~
increased costs of consumer imports Emmbiwtsmagnified
by the competition of industry for a greater share of total
imports. Under the best of circumstances, with continued large-
scale foreign capital inflows accompanied by domestic economic
recovery, the average living standards of 1970-1971 wou d
not be reached again until 1976 or beyond.
32. The High Option should 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
re 'c +h ' i h 6 -"
option would also permit 1e - ~ ~-e rf the 1971-1972
interest rate reforms which have encouraged the private sector,
') /lato
an e price adjustments necessary to keep the Vietnamese economy
in tune with changing global economic conditions. Even the. High
Option, however, probably would not solve Vietnam's problem of
22
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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 stabilization
beyond FY 1975, assuming that continued foreign capital inflows
are forthcoming. Moreover, the increase of real resources avail-
able 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.
Implications for Future Growth and Aid Requirements
33. 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
1- ses ti It X per r4 - y -.v " , wd cart ,r lc~,
notes from big "shots of capital No..(_country
in circumstances similar to those 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.
34. 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
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significantly beyond the living standards and real income levels
that obtained when the US began its massive military 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 accel-
erating the pace of recovery or shortening the period of "client"
status for South Vietnam are not good. If the US objective-is'
to put South Vietnam on a growth track.and move it well down the
road to self-sufficiency, it ___'''___? ?h-4 S6 uth Vietnam
move out of `a leading position among US aid recipients until
the 1980s. The only development which conceivably could shorten
this e period appreciably would be major oil discoveries in
areas under South Vietnamese control'
de e
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 C O N F I D E N T I A L
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The Political Factor
35. In Vietnam as in the rest of the world, it is impossible
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 experience serious political
instability. In the case of South Vietnam, there are two diametrically
opposed schools of thought within the intelligence 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 would provide
enough aid to give reasonable', assurance of political
stability in South Vietnam, and to prevent the Communists
from gaining an advantage in the continuing political
struggle with the GVN.
36. Analysts who support the School A case argue as follows:
A. South Vietnam is in many ways relatively well
equipped to face substantial economic dislocation
without political breakdown. South Vietnam has with-
stood intense military, political and economic
pressures in the past. There is no sign that Thieu's
tight control and political strength is weakening and
no particular reason to question his ability to handle
any political repercussions with his usual skillful
blend of political finesse and, where necessary, tough
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 C O N F I D E N T I A L
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security measures. It seems unlikely that even the
economic conditions projected under the low case option--
the continuance of the present level of US assistance--
would pose unacceptable political risks regarding sur-
vivability and reasonable effectiveness of the GUN.
V.The increased assistance assumed by the medium and
high case options would of course further reduce the
possibility of serious political unrest and would further
improve the relative position of the GVN vis-a-vis the
North Vietnamese Communists.
C.South Vietnam's current economic problems are not
new. The country has been in a recession since shortly
after the start of the Communist Easter Offensive in
March 1972. During this economic slump, the government
has steadily increased its involvement in regulating
the economy to help check the worsening-situation. It
has regularly informed the public that the economic road
ahead will become rougher. President Thieu also has
stated repeatedly that Saigon must work at solving its
growing domestic economic problems with lesser amounts
of US assistance.
There has been almost no indication that such bleak
forecasts and repeated calls for belt tightening have
triggered serious popular dissatisfaction with the
government, and there has been nothing approaching
panic by the people over the prospect of even darker
days ahead. While all sectors of society have expressed
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the prevailing attitude has been one of acceptance, if
only for want of a feasible alternative. The South
Vietnamese population generally recognizes that con-
ditions and prospects in Communist-controlled areas are
even more bleak and unacceptable.
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 for fear of losing all forms of US assis-
tance and support. Military officers would be quite
hesitant to move against Thieu unless they were certain
that the US wanted a changeover and would support it.
In any event, there are now no signs of unease within
the military over economic problems and Thieu is using
promotions to ensure the loyalty of his senior officers.
/. A more realistic concern is the likely effect of
worsening economic conditions on ARVN effectiveness.
As belts are further tightened within ARVN the familiar
problems of curruption and moonlighting are bound to
intensify, as they are in other government services.
This will probably take some toll in morale and it
may contribute to a perceptible decline in combat
effectiveness, but it is unlikely to result in a
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substantially adverse shift in the existing military
balance in the South. As long as US military assistance
is not diminished, as long as South Vietnam faces an
immediate military threat from the north and as long
as the GVN is controlled by President Thieu and the
military, ARVN is almost certain to remain a relatively
privileged organization. ARVN rank and file have
little incentive to desert or to transfer their loyal-
ties to the other side because of their comparatively
advantaged position.
C,, The Buddhists have traditionally dealt with political
rather than economic issues. They have some potential
for fomenting local unrest but factionalism and other
problems probably would prevent them from rallying
any widespread antigovernment support. The Buddhists,
in fact, might serve as a stabilizing rather.-than a dis-
ruptive force. They are strongly anti-Communist and
thus might view any political exploitation of economic
hardships as ultimately serving Communist ends.
//,Organized labor is potentially the most volatile
of the three groups. The workers are already bearing
the brunt of South Vietnam's high unemployment and
inflation. Historically,however, labor has tended to
support the central government. Such support is likely
r
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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 support and the lack of an acceptable
alternative. While labor leaders can be expected to
encourage local protests to publicize shortages on
perceived regional discrimination, they have the
capability to keep such demonstrations under control.
Consequently, the Thieu government is not likely to face
a nationwide challenge from organized labor.
I. Hanoi's perception of the GVN's economic situation
could be more significant than the actual domestic
reaction to worsening conditions. The North Vietnamese
are clearly alert to Saigon's economic problems. COSVN
has in fact warned its cadre to be ready for "sudden
developments" arising out of the economic situation
that may present an opportunity to "destroy the enemy."
Just as clearly, however, the economic situation is
only one factor--and not the most important one--that
Hanoi must consider in determining its strategy in the
southern struggle.
Through the end of FY 1975 the South Vietnamese
economic situation seems uhlikely by itself to present
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Hanoi with many easily exploitable opportunities. The
Communists currently lack the assets either to exacerbate
any economic troubles or to turn them to their direct
political advantage. Basically they must wait until
economic difficilties have 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.
SCHOOL B: This school holds that under the Low Option the
would run an unacceptable risk of serious adverse
political reactions in FY 1975. These reactions could
cause instability, weaken the control of the central
government, and encourage Hanoi to advance
for another large-scale military offensive in the south.
Even under the Medium option there would be some risk
of such developments.
37. Analysts who support the School B case argue as follows:
A. The present government in South Vietnam has enjoyed a high
degree of political stability since the late 1960's.1 It has also
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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 of e UN's political
~
achievement must be attributed to the
economic stability of the period and the economic opportunities
enjoyed by a rather large segment 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 transformation in
the last decade. The dramatic shift in population from rural to urban
areas has created a new situation in which it is very difficult to judge
the impact of economic privation. Belt tightening, the traditional
Vietnamese reaction to hardship, may have new limits under these
circumstances.
B,In the past two years the economic situation has begun to deteriorate,
and South Vietnamese society has experienced a rather 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
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control of the political scene remains. intact. However, virtually all
Vietnamese government officials, starting with President Thi6t; 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 fo face serious
political reactions. The 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 political 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 if its back is to the wall. RVNAF's capability to protect
rural areas and to conduct offensive and counter-offensive operations,
however, could be seriously reduced.
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-- Corruption is likely to become a serious political problem
for the GVN. Saigon will almost certainly institute more government
controls which will result in a growing black market and widespread
;illegal payoffs. The GVN will not be able to Increase civilian
and military salaries adequately to keep pace with inflation; the
resulting decline in real wages will result in.more corruption.
There have recently been an increasing number of reports of
troops selling their equipment and in some instances even selling
ammunition to the other side. There are also increasing incidents,
especially in MR. I, of armed robbery by ARVN troops. Continued
corruption could begin to impact seriously upon the morale and
combat efficiency of ARVN.
-- Declining military and civil service morale and growing corruption
will adversly affect the implementation of GVN programs at all
levels.
-- There is likely to be increasing criticism of GVN economic
policies and further cabinet changes in the economic ministries,
producing a loss of confidence and uncertain policy direction.
-- The Communists could make some psychologically important
political gains by taking advantage of-GVN vulnerabilities.
Recruitment.of Communist sympathisers in the cities and rebuilding
of the rural infrastructure might be easier, and increasing numbers
of South Vietnamese might opt for a neutral stance.
-33-
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D. Hanoi's Reaction: The North Vietnamese are counting on Saigon
having major economic problems this year. They are certain to exploit the
situation in some form. Communist cadre will step up`+activities if
there is rural economic dislocation and urban disorder. Indications that the
GVN was seriously weakened by economic and political problems could
encourage Hanoi to advance its timetable for military dL{f~c~t,S` n
~er'~.n
the south.
E. Long Term Implications: While the Thieu government will
probably survive the political consekuences of the adverse economic
situation in FY"(75, a low level
of aid could set in motion a process which ultimately might threaten
the existence of the government. Such a process may be difficult to
reverse even with increased US assistance in FY 76.
F. The South Vietnamese police and rank-and-file military men, rho
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 become critical for the GVN if elements of the
police and army were to participate in demonstrations and strikes or
to engage in their own organized protest measures. Incidents of-police
and military involvement in civil disorder occurred in the mid 1960's
in South Vietnam post notably in MR I in 1966. There would be little
the Thieu government could do to lessen the economic plight of these
groups.
-3t+--
C O N F I D E N T I A L
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 C O N F I D E N T I A L
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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 military at this time, the political
developments outlined above,:
could during FY create dissension within the officer corps. Middle
grade officers, caught between the declining morale and discipline
of their men and the unabated corruption and ineffective performance
of senior ARVN officers and poiiticans, could pose a serious threat to
the present government. A "Colonels' coup," designed to establish an
austere, disciplined, nationalistic South Vietnam prepared to continue
the struggle against the Communists, seems unlikely now, but after
a period of severe 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
c-elMaiorpe;+Fb I consequences. There might be a period of
several 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 arrest these before they became
serious.
I. Under the Medium Aid Option, the consequences would be more
difficult to assess. There would be continued 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 th~ ~i tase
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ANNEX -7
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).
-- 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).
-- Import.prices will rise by 35 percent in doZZar terms
during CY 1974 and by 10 percent during the first half
of 1975.
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.
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eKt-N w-hOtto, fie. P;.&4 Dpt'',
-- The private sector wil actually us he available
aid; i.e., South Vietnamese 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.
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