THE ECONOMIC SITUATION IN SOUTH VIETNAM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700010065-8
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 16
• Document Creation Date: December 22, 2016
• Document Release Date: May 18, 2010
• Sequence Number: 65
• Publication Date: June 1, 1971
• Content Type: IM

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Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The Economic Situation In South Vietnam
Confidential
ER IM 71-113
June 1971
Copy No. 200
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GHOUI'
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WARNING
This document contains information affecting the national
defens". of the United States, within the meaning of Title
18, sections 793 and 79i4, of the US Code, as amended.
Its transmission or rcvelalion of its contents to or re-
ceipt by an iinanthorized person is prohibited by law.
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CONFIDENTIAL
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
June 1971
? INTELLIGENCE MEMORANDUM
The Economic Situation In South Vietnam
Highlights
1. During the past 18 months, a number of
foreign businessmen -- mostly Japanese -- have
submitted proposals for industrial projects in
South Vietnam. The projects approved by the
Government of South Vietnam (GVN) have been
criticized, however, because they focus on import
substitution -- particularly in luxury goods --
and often provide a related monopoly position in
importing.
2. Several economic stabilization measures
involving commercial credit and import procedures
are to be enacted prior to the elections this fall.
The question of another wage increase for GVN
employees, however, has not been resolved.
3. USAID officials have discovered that offi-
cial data have substantially understated rice
deliveries from the Delta to Saigon during recent
months. This discovery does not reduce the uncer-
tainty surrounding GVN ability to meet regional
rice deficits from domestic sources.
4. Saigon retail prices increased slightly
during flay, but by 7 June were still only 3% above
the level of December 1970.
5. 'lack market dollar prices fell during May
to the lowest level of the past 12 months both as
? a result of the international monetary crisis and
the crackdown on smuggling at Tan Son Nhut airport.
Note: Thia memorandum was prepared by the Office
of Economic Research.
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6. Charts on foreign exchange reserves, money
supply and prices, import licensing, gold and cur-,
rency prices, and the government budget follow the
text.
Discussion
Private Foreign Investment
7. During the past year and a half, security
and economic conditions in South Vietnam have sta-
bilized enough to have attracted inquiries from a
number of private foreign investors. Although
there is understandably no rush to invest in Viet-
nam, projects capitalized at perhaps 3 billion
piasters 1/ (or roughly 5% of total domestic in-
vestment)-have been authorized over this period.
Since the beginning of 1970 the GVN has approved
about a dozen proposals from foreign businessmen --
mostly Japanese -- to invest with Vietnamese part-
ners in local assembly plants for farm machinery,
trucks, radio and television sets, and sewing
machines (see the table). Two large American firms
Ford Motor Co. and R.J. Reynolds (tobacco) -- sub-
mitted project proposals this spring, but the Ford
proposal may run into difficulty because it pro-
vides for no Vietnamese participation.
8. The composition of the private foreign in-
vestment has been criticized on two counts. First,
it is argued that it is too much directed toward
import substitution. Many feel that the government
should be encouraging foreign investment in indus-
tries, such as fishing, with an eye to the export
market. Second, there is concern that the proposals
include facilities for the production of luxury
goods. Critics maintain that such import substi-
tution as takes place should be centered on essen-
tial rather than luxury goods. In the short run,
however, the government may believe that the best
way to interest foreign businessmen is to allow
1. Investment data are incomplete, but the GVN
requires a minimum investment of 200 million
piasters ($730,000 at the parallel market exchange
rate of 275 piasters per dollar) in plant and
equipment for each project.
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Private Foreign
Investment in South Vietnam a/
Product
Name of Firm
Foreign Partner b/
Status
Agricultural and fishing
VIKYNO
Kubota
equipment
VINAPRO
Yanmar and Nichimen
Under construction
FARMASSIN
Mitsubishi
Proposal approved
NOTICO
Shibaura
Proposal approved
Radio and television sets
Saigon Ky Nghe Dien
Sony
Proposal approved
Sanyo Industries,
Sanyo
Proposal approved
Vietnam
Vietnam National Co.
Proposal approved
Light trucks
CARIC
100% French including
Operational
Citroen
Proposal approved
Commercial and passenger
Ford Motor Co.,
100% American
Proposal submitted
vehicles
Vietnam
Cigarettes
R.J. Reynolds
R.J. Reynolds
Proposal submitted
Tobacco
Toya Menka/
100% Japanese
Proposal submitted
Kanegafuchi
Spinning Co.
a. Four sewing machine assembly plants also have been approved, but detailed information
is not available. Other projects may have been approved but not yet reported.
b. Less than 50`% ownership unless otherwise indicated.
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'CONFIDENTIAL
them to participate insetting up assembly plants
for their own products, including luxury products
for which demand is high.
9. Some of the issue of the direction of for-
eign investment could be solved by appropriate law.
A new, liberalized investment law was submitted to
the National Assembly in January, but it is not
clear what incentives it will provide for invest-
ment in particular industries. Even within the
framework of a new law, however, there is likely
to be scope for considerable administrative dis-,
cretion in project approvals. The granting of
investment privileges and incentives is especially
vulnerable to the sorts of corruption common to
South Vietnam. For example, a sewing machine
plant was constructed and equipped several years
ago, but was never opened. When the owners decided
to start production following the suspension of
imports of sewing machines, they were told they
must submit a completely new project proposal.
10. Several of the new industrial projects are
designed to take advantage of import restrictions --
such as those on sewing machines -- to secure a
monopoly position in the market. GVN regulations
for establishing new plants in fact encourage such
a development. Thus, during the 18 months allotted
for construction and installation of plant and
equipment, the firms are granted exclusive rights
to import the product approved for assembly. F____] 25X1
There apparently is widespread opinion
among Saigon businessmen that some foreign in-
vestors are interested only in securing the import
monopoly and that the proposed assembly plants
will never become operational.
11. Because most of the new industrial projects
will be assembling imported components, there also
is concern that the GVN is committing itself in
advance to a large expenditure of scarce foreign
exchange. The government requires that initially
20% of the value of the completed product must be
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manufactured locally and that over a five-year
period the share of domestic components be in-
creased to 80%. Even if the 80% goal is reached,
the government will be committed to these indus-
tries for a considerable period of time, and its
options for spending foreign exchange will be
correspondingly limited.
Economic Reform Efforts Continue
12. Vietnamese and US officials have agreed on
several key economic measures to be enacted prior
to the elections this fall. The pressing question
of another wage increase for government employees,
however, apparently has not been resolved. Most US
officials considered a wage increase unlikely be-
fore early next year, but the GVN may have other
ideas. President Thieu's final decision on this
issue will probably depend on how he weighs (1) his
prospects for reelection and (2) the risks of
renewed inflation.
13. The aim of the new measures -- which are
directed toward commercial credit and imports --
is to reduce the supply of money and thereby lessen
the risk of renewed inflation over the longer run.
Commercial banks will no longer be able to loan
out all of the new time deposits collected since
last September's interest rate reform, but will
be subjected to the existing 70% loan/deposit
ratio for "old" time deposits. Customs officials,
who apparently have been allowing importers up to
60 days to pay duties, must now operate strictly
on a cash basis.
14. The key change in importing is the intro-
duction of a new licensing regime designed to
simplify procedures and reduce opportunities for
graft. A so-called general licensing procedure
was decreed on 7 June for all imports coming in
at the parallel market exchange rate. Under
general licensing, licenses will no longer be
purchased for specific goods but can be used for
any item and are transferable to other authorized
importers. Moreover, importers may now bypass
the bureaucracy of the Ministry of Economy and
obtain their licenses directly from commercial
banks. Importers will buy licenses at the flat
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rate of 400 piasters per dollar (the parallel
market rate of 275 plus a perequation tax of 125
piasters), and customs and austerity taxes will
be collected as usual on each commodity when it
arrives. Under this system, some goods will come
in at higher and some at lower effective exchange
rates than now prevail. In general, however, the
system is expected to increase absorption of funds
through imports.
15. For goods eligible for import at the offi-
cial exchange rate of 118 piasters per dollar
(other than those under US aid programs), importers
will have the option of either buying a license
at the 400-to-1 rate or taking their chances on
obtaining it at the lower rate through normal pro-
cedures. Normal procedures, however, can be time
consuming, and importers may not be able to get
the licenses they want because, although nominally
unrestricted, licenses still are rationed to some
extent. The relative simplicity of the new pro-
cedure and the prospect of speedier processing,
therefore, may make it worthwhile for importers to
buy a general license despite the apparently higher
effective rate.
Rice Windfall
16. An investigation by USAID officials has
revealed considerable understatement, especially
during recent months, in the official data on rice
deliveries from the Delta to Saigon.. According to
official data, deliveries during the first four
months of this year averaged 37,000 metric tons
per month, whereas the USAID-revised series shows
average shipments of 47,000 tons. Data on de-
liveries for 1970 have been ,similarly increased
through revision from 399,000 tons to 469,000 tons
(or 18%).
17. The understatement was revealed by the
discovery of consistent differences in records at
a number of government checkpoints. Rice ship-
ments usually have been counted at one checkpoint
on Route 4 and at two harbor police checkpoints
near the Cholon rice warehouse complex. In ques-
tioning harbor police at the three checkpoints
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near the entrance of the Saigon-Cholon waterway
system, however, USAID representatives discovered
that substantially more rice is entering the water-
way than is being unloaded at the Cholon warehouses.
It still is not clear whether the discrepancy is
primarily the result of careless recording, poor
choice of location for the checkpoints, or losses
to theft; but an investigation reportedly is under
way.
18. This statistical windfall is not large
enough to allay concern for whether enough rice
will come out of the Delta this year to meet fully
the rice requirements in the deficit areas. De-
liveries still will have to be about 10,000 tons
a month larger if the domestic rice market is to
satisfy the needs of the entire country. Shipments
from the Delta were expected to reach the desired
level of about 60,000 tons in flay, but nay decline
in June because the I'inistry of Economy was late
negotiating what are supposed to be monthly pur-
chase contracts with the rice merchants. US offi-
cials estimate that present stock levels provide
a margin of safety through September, but are un-
willing to predict beyond that point because of
market uncertainties.
Prices
19. Saigon retail prices rose slightly during
PRay primarily because (1) heavy rains reduced sup-
plies of vegetables and (2) short-lived strikes at
both Esso and Shell pushed up the price of kerosene.
By 7 June, however, the USAID index still had in-
creased only 3% since the end of last year and only
8% since June 1970. 2/ The price index for imported
commodities, on the other hand, declined slightly
during early I"ay to reach a point at mid-month
about 7% above the level of December 1970. Through
April the money supply remained essentially un-
changed from the January level.
Currency and Goid
20. The black market price of dollars dropped
sharply in mid-May both as a result of the inter-
national monetary crisis and the more stringent
2. The comparable price increase for the year
ending in June 1970 was 50%.
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enforcement of customs regulations at Tan Son Nhut
airport. While the, rate for dollars declined, the
rate for gold increased as the tighter customs
controls -- aimed primarily at drug smuggling --
made it more difficult to get dollars out of the
country and gold into it. By 7 June the price of
dollars had risen somewhat (to 376 piasters per
dollar), but it still was lower than at any time
during the past year. The price of a dollar's
worth of gold leaf rose to 514 piasters in mid-May,
but had declined to 508 piasters by 7 June. The
rate for military payment certificates (scrip)
--
which generally followed that for dollars -- was
down to 261 piasters per dollar on 7. June (or
14 piasters below the legal rate).
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SOUTH VIETNAM
Foreign Exchange Reserves*
Million US Dollars
1965 1966 1967
'Excluding holdings of commercial banks
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GOVERNMENT BUDGET*
Billion Piasters
Foreign Aid
n?-tin rows
30.2
44.2
1970 1971
Preliminary Plan
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IMPORT LICENSING
Million US Dollars
Commercial haparl
111ll(111111%
395
Total
407
Total
660
Total
531
Total
624
Total
740
Total
64'
'January Ihiooijh
April only
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SAIGON
Free Market Gold and Currency Pi ices
Piasters Per US Dollar
600
AI'IJ MAY JUN
1971
GOLD Basis: gold leaf worth
$35 per troy ounce
US $10 GREEN
US $10 MPC Military Payment
Certificates (scrip)
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SOUTH VIETNAM
Indexes of Money Supply and Saigon ConSurn r
tloo
nnn
-,Ia,
;In
i I I I I I I I
Arad A+ AY )1R4t
1971
'USAID monthly .wr?1n11o -I.nl 11-
"Data aul? Inr enll of nnmih
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