INTELLIGENCE MEMORANDUM THE ECONOMIC SITUATION IN SOUTH VIETNAM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700030044-9
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 13
• Document Creation Date: December 22, 2016
• Document Release Date: November 1, 2010
• Sequence Number: 44
• Publication Date: March 1, 1972
• Content Type: IM

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Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The Economic Situation in Soutb Vietnam
Confidential
ER IM 72-44
March 1972
Copy No.2
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP 1
Excluded hom ou,om011C
downgrading and
dedanif Dalian
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
March 1972
INTELLIGENCE MEMORANDUM
THE ECONOMIC SITUATION IN SOUTH VIETNAM
Hi li hts
1 ? More rice was shipped out of the. Delta during January and
February than in any comparable period during the last nine years. As a
result, farm incomes increased dramatically. The increase should provide
funds for a large increase in agricultural investment, but it also may
encourage rice market speculation later in the year.
2. In early March the government once again enacted some
stabilization measures - this time to dampen the demand for imports by
reestablishing advance deposits on import orders and devaluing the piaster
slightly.
3. The plastics industry is in many ways typical of much of
manufacturing activity in South Vietnam. A significant portion of output
is provided by handicraft enterprises, and the few large producers suffer
from a shortage of skilled labor. The industry is dependent on imports
to provide raw materials and requires foreign technical assistance. It has
few prospects for exporting until the product mix is diversified.
a? Retail prices in Saigon rose nearly 2% during the first two weeks
in March to yield an increase for the year to date (13 March) of about 6%.
5. Black market currency prices increased steadily from
mid-February through rnid-March under the influence of recent piaster
devaluations and the rising world price of gold.
6. Charts on foreign exchange reserves, money supply and prices,
import licensing, gold and currency prices, and the government budget
(Figures 1-S) follow the text.
Rote: This memorandum was prepared by the Office of Economic
Research.
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Discussion
Rice Pours from the Delta
7. The vagaries of the rice market in Vietnam have once again
confounded those who are attempting to ensure its orderly operation. Only
last fall a crisis developed largely because deliveries of surplus rice from
the Delta were too small to maintain adequate stocks in the rice-deficit
areas of the country. Recently, however, there has been a remarkable
turnaround. Large government purchases and strong private demand at the
start of 1972 generated the highest monthly level of Delta deliveries in
nine years. In January - and again in February - almost 82,000 metric
tons of rice were delivered to Saigon, compared with 32,000 tons in
December and average monthly deliveries of 43,000 tons in January and
February 1971.
8. With this phenomenal outpouring of rice from the Delta, farmers'
income soared during January and February.(') In these two months alone,
farmers earned the equivalent of about 40% of their 1971 cash income
from rice and more than three times the amount earned during the same
months last year. The increase resulted not only from the extremely large
amount of rice sold but also from the fact that paddy prices during
January-February were 80%-85% above those for the same period last year.
The tremendous increase in farm income should provide sizable funds for
investment to allow major production gains. Along with the elimination
of rents as a result of land reform, the solid gain in agricultural sales should
enhance the political acceptability of taxing farmers, who have been virtually
tax-exempt for many years.
9. The current extremely good cash position of the farmers, however,
may bode ill for the rice market later this year. Speculation has been a
continual factor in rice marketing, and, if farmers feel they can afford to
sit on their rice for several months, shortages might recur in the northern
part of the country. To forestall such a development and at the same time
to reduce its role in the market, the government is revising its rice policy.
Last year the government purchased rice periodically at steadily higher
prices. This year, however, government purchases will not be unlimited and
will take place only between now and the end of June. The government
plans to buy only enough rice to maintain stocks at a comfortable level
throughout the year, and the price will remain the same throughout the
purchase period. Since there will be no government purchases after June,
there will be no prospect of government intervention raising t vices as in
1. It is estimated that rice probably accounts for about two-fifths of total income
from sales of agricultural products.
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the past. Market reactions to the new purchasing policy, which is to be
announced shortly, will indicate just how strong the farmers think their
position is.
Stabilization Measures
10. The government recently took steps to keep import demand
within the limits of projected foreign exchange availability for this year
and to reaffirm its intent to make prompt economic policy changes as
needed. On 2 March, advance deposits on impo:cts, which had been
eliminated last November, were reestablished at the rates of 25% for imports
financed under the US Commercial Import Program and 100% for
government-financed goods. This action was followed on 4 March by
another small devaluation of the piaster. The exchanges rate for US-financed
imports rose from 280 to 285 piasters per dollar and the rate for
government-financed imports from 405 to 410 piasters per dollar.(2) Thus
the rate for government-financed goods is now the same as the so-called
financial ,narket rate, which applies to exports, personal currency
conversions, and most other invisible transactions.
11. Advance deposits and the devaluation were deemed necessary
because the pace of import licensing during December-January indicated
that the demand for imports might exceed the funds available this year.
US and Vietnamese officials estimate that $680 million will be available
for import licensing during 1972, for a monthly average of about $57
million.(3) Actual orders for imports in December and January, however,
averaged $73 million.
Vietnam's Plastics Industry
12. Although Vietnam's plastics industry is small (probably
accounting for no more than about 1% of the value of manufacturing
output), its short history highlights some little-known, but fairly typical,
facets of industry in South Vietnam. Certain problems in the development
of plastics manufacturing also point up some of the constraints on future
industrial growth.
13. The processing and fabricating of plastic products was Vietnam's
fastest growing industry during the peak years of the war, but production
has fallen off considerably since 1969. Between 1964 and 1969, output
of plastic products increased about 800% as the result of the rapid expansion
of urban markets and the ready availability of foreign exchange to import
2. Exchange rates have been changed twice since the adoption of a flexible system
in November 1971. Merchandise import rates were also raised five piasters in February.
3. Actual licensing during 1971 totaled $683 million (see Figure 3).
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the necessary raw materials. The small capital investment required to start
operations stimulated a large cottage industry in plastic products. From
only three producers in 1960, the industry grew by 1969 to about 300,
of whom three-fourths were classified as small handicraft enterprises. The
domestic market apparently became saturated with the current mix of
products by 1969, however, and production has declined steadily since then.
14. Located almost exclusively in the Saigon-Cholon area, the industry
produces a wide variety of simple products ranging from dishes ant raincoats
for consumers to containers, drain pipe, and fish nets for commercial and
industrial use.(4) The largest firm, the privately owned Ufiplasti. Company,
produces almost 20% of total output. Many fa>ricators operate on a
household enterprise basis, however. Typically, they invest a relatively small
sum to set up one or two molding machines in a backyard shed or a home
to make bowls or sandals. Four or five workers arc employed, frequently
family members, and the producer sells the product himself. It is estimated
that this type of cottage or handicraft operation accounts for almost 15%
of the total productions of plastic products in Vietnam.(5) The remaining
65% of output is produced by small and medium-size firms. Only 13 of
these employed more than 50 workers in 1969.
15. The plastics industry is completely dependent on imported raw
materials because none of the basic chemicals are manufactured in-country.
Raw materials imports, mainly resins such as polyethylene and polyvinyl
chloride (PVC), more than tripled during 1964-69. In fiscal year 1969, they
reached a peak of about $18 million, or 2.5% of total imports.(6) By fiscal
year 1971, imports had fallen to about $10 million because of the slowdown
in production. The only significant processing of imported materials is
carried out by Ufiplastic and five other firms, which import PVC and mix
it with plasticizers and other agents to sell to fabricators of such products
as sandals and garden hos.. Ufiplastic is the only firm equipped to
transform PVC powder into plastic sheeting, which it then sells to fabricators
producing such finished items as handbags and tablecloths. According to
recent estimates, raw materials costs (in this case, imports) account for about
70% of the value of plastics production, while the value added by domestic
producers accounts for less than 20% - lower than in most other branches
of industry.
4. Specialized, high-quality products must be imported, out these amount to less than
a half million dollars a year.
5. Most handicraft output in Vietnam is not included in official production data,
and thus the role of handicrafts in manufacturing output is generally understated. In
the case of plastics, it can be seen that cottage industry contributes a significant portion
of total production.
6. Data refer to import licensing for US fiscal years.
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16. Despite the current slump in production, the larger manufacturers
predict a bright future for the industry. They see no prospects for exports
of the plastic products currently being produced but believe the domestic
market could expand significantly with better marketing and distribution.
Consumer education also will help create demand for products, such as
styrofoam for insulation. Diversification into such items as fiberglass
products, furniture, and construction materials should also improve the
outlook for the domestic market as well as provide possibilities .or export.
Ufiplasti.c alreac:y is trying to work out technical rroblems in developing
plastic wall covering. In this effort it is getting advice from technicians
employed by the foreign suppliers of resins.
17. In addition to technical assistance, the larger plastics firms need
skilled workers as well as young unskilled males. Ufiplastic hires Taiwanese
to operate its machinery. Because of the military draft, the average company
worker is more than 40 years of age, and there is a shortage of young
men for the jobs requiring heavy lifting.
18. Future plans also call for replacing imports with domestic
production of low-density polyethylene and PVC. The basic chemicals will
be much less expensive to import than the resins manufactured from them.
A feasibility study completed for USAID in 1970 on the polyethylene
project found all market factors favorable. It recommended, however, that
the project be delayed until security improves because the necessary
investment (about $10 million) would be difficult to raise at this time,
especially from foreign sources. A Vietnamese firm already is clearing a
site at the Bien Hoa Industrial Estates north of Saigon for a PVC plant,
but the start of operations reportedly is still several years off.
Prices
19. Following the usual post-Tet decline, retail prices in Saigon
increased nearly 2% during the first two weeks in March. By 13 March
the USAID index had increased about 6% since the beginning of the year
and 22% since mid-March 1971. Recent increases in official prices - the
result of higher taxes, reduced government subsidies, or higher production
costs - have affected a large number of products including kerosene, rice,
cigarettes, beer, sugar, fertilizer, and electricity. In addition, the two small
devaluations of February and March have had an unsettling effect on the
market.
20. Prices of imported commodities have risen somewhat faster than
the overall price level. As of 29 February the price index for imports was
up about 8% for the year, compared with 4% during the same period of
1971.
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Currency Black Market
21. Influenced by the recent devaluations as well as the rising world
price of gold, black market currency prices in Saigon increased steadily
from mid-February through mid-March. The price of dollars reached 442
piasters per dollar on 13 March, up almost 7% from the 1971 yearend
level. A dollar's worth of gold leaf was selling for 694 piasters, up almost
17% for the year to date. The rate for MPC (scrip) also has shown a gradual
upward trend, but, at 392 piasters per dollar on 13 March, it was still
below the legal rate of 410 piasters per dollar.
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1000
900
800
700
SOUTH VIETNAM
Foreign Exchange Reserves*
Million US Dollars
1966 1967 1968 1969
*Excluding holdings of commercial banks
513339 3.72
SOUTH VIETNAM
Indexes of Money Supply and Saigon Consumer Prices
January 1965=100
*USAID monthly average retail price index for Saigon
**Data are for end of month
613340 3.77
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Figure 1
Figure 2
13 Mar
844
LIIIII1F
JAN FEB MAR
1972
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SOUTH VIETNAM
Import Licensing
Million US Dollars
Commercial Import
Program
PL-480, Title 1
Total
680
1967
Total
631
1968
Total
624
Total
740
Total
641
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Figure 3
Total "January only
683
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SAIGON
Free Market Gold and Currency Prices
Piasters Per US Dollar
Figure 4
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
Government Budget*
Billion Piasters
Deficit"
Foreign Aid and
Import Taxes'
Domestic Taxes
-rte
1971
Preliminary
Figure 5
1972
Plan
.Data include extrabudgetary revenues and expenditures.
"Residual. Financed primarily by borrowing from the National Bank.
'Includes customs duties and other import taxes, counterpart funds
generated by US-financed import programs, and profits from foreign
exchange transactions. A major result of the November 1971 reforms
was to make explicit a greater share of US aid to the budget that ear-
lier took the form of high customs duties on aid-financed imports.
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