SOUTH VIETNAM: SHORT-RUN ECONOMIC PROBLEMS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700050059-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 16
• Document Creation Date: December 20, 2016
• Document Release Date: March 13, 2006
• Sequence Number: 59
• Publication Date: October 1, 1973
• Content Type: IM

 'J~~~ /,mil 7164A Approved elease 200: CIA-RDP85T00875R001700 0059-1
Secret
Intelligence Memorandum
On file Department of Agriculture
release instructions apply.
South Vietnam: Short-Run Economic Problems
DOcUMENT SCRVICES BRANcH
Y
DO NOT &STROY
Secret
ER IM 73.62
October 1973
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South Vietnam:
Short-Run Economic Problems
For South Vietnam's economy, such important projects as reconstructing war-damaged
infrastructure and productive facilities, reabsorbing refugees in the economy, and
overcoming a recession that has persisted since early 1972 have in recent months had
to take a back seat to the more urgent day-to-day issues of rapid inflation and an almost
certain impending rice crisis. Prices have increased by nearly 50% since the start of this
year, while production and incomes have remained relatively constant. Rice stocks are
likely to run out before the end of this year, with serious shortages expected in some
localities. Popular dissatisfaction has been fairly widespread and is likely to get worse.
Although Saigon cannot solve these problems over the next several months, it feels
obligated, for political and psychological reasons, to take immediate steps toward their
solution. At the same time, the once-close relationship between US and South Vietnamese
economic advisers has become somewhat strained as receipts from US aid and spending
and the purchasing power of Vietnamese holdings of dollars decline and the government
strives to formulate uniquely Vietnamese solutions to its problems. The difficulties in
adjusting to reduced foreign financing, moreover, are being worsened by an internal dispute
within South Vietnamese circles. Those advisers most responsible for the economic reforms
of recent years - all tending to reduce controls and make the economy more responsive
to natural market forces - are reportedly in a shrinking minority. Although compromises
have thus far been effected in ways that nullify the most radical proposals of their
opponents, a trend toward more government control of the economy is apparent.
The current economic problems will probably not overwhelm the government, but
South Vietnam's policy responses to the current situation could have lasting adverse effects
for longer-term economic growth and US development assistance. While the government
should be able to suppress any disruptive manifestations of popular discontent, greater
use of force and of direct controls would make the private sector even less cooperative.
Further needed reforms in administration and tax collection would then be all the more
difficult. Moreover, the private incentives that have already had substantial favorable impact
on exports, domestic saving, and other key factors in development would be seriously
damaged.
Note: Comments and uerihs regarding this memorandum are welcomed. They may be
directed to 25X1
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DISCUSSION
The Economy at the Cease-Fire
1. By the time South Vietnam signed the cease-fire agreement in
January 1973, its economy was displaying relatively good growth prospects
after years of disruption. Although the modern sector was still in recession
and crop plantings were off somewhat because of the 1972 offensive, several
developments and indicators augured well for the future. Inflation had
slowed considerably in 1971-72; the banking system was growing rapidly,
particularly in rural areas; black markets, in both commodities and
currencies, had declined in importance; and, despite the increase in military
activity, exports doubled in 1972 with a further doubling expected in 1973.
These accomplishments provided the psychological basis of a very optimistic
set of development projections presented by the South Vietnamese in April
to President Nixon at San Clemente and to members of Congress.
2. The remarkable resiliency of the South Vietnamese economy
during 1968-72 had been facilitated not only by large-sC,ile US aid but
also by continuous US policy advice, which was particularly instrumental
in the reforms of 1970-72. These reforms provided for:
? More realistic foreign exchange and interest rates, tending
to produce a more efficient allocation of financial and capital
resources;
? Development of government-sponsored rural banking systems
with a much wider base than in the past;
? Major tax reforms, simplifying the structure and providing
for more energetic and efficient collection of domestic taxes;
? Revision of government rice-control policies to allow for
increased private-sector marketing and more realistic returns
for the producer; and
? The beginning of serious planning for the government's sale
to the private sector of its ownership in major industrial
enterprises.
3. But also at the time of the cease-fire, several factors were coming
into play to make immediate economic progress exceedingly difficult. The
prospects for receiving enough US aid to cover South Vietnam's import
requirements at present production levels and living standards became more
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uncertain. Moreover, the value of the aid dollars was declining in real terms
because of the depreciation of the dollar relative to other major currencies,
and at the same time, global commodity shortages and devaluations of the
piaster relative to the dollar were driving import prices up very rapidly.
Added to this was the complication that assistance from other potential
donors to Indochina, although extensively discussed in the world press, in
most instances had not yet been committed.
4. Compounding the basic problem of a persistent industrial and
commercial recession, these new developments -- many with external
causes - have raised some important questions about the long-run stability
of the Thieu administration. In the course of 1973, economic problems
have become more pressing as popular concern over rice availabilities,
inflation, declining real incomes, corruption, and foreign aid have grown and
the Thieu government has groped for effective policies.
5. In the spring of 1973, with production levels still depressed
because of the 1972 offensive and ensuing uncertainty, new economic
problems began to emerge. One of the most pressing was the return of
serious inflation. Inflation had been a major problem since the
intensification of the war and growing American involvement in the
mid-1960s. The huge inflows of US spending associated with the increased
American role had brought about rapid increases in incomes, money supply,
and spending. Despite a sharp increase in imports of US-financed
commodities, the Saigon consumer price index increased at an average
annual rate of 35% during 1966-70. After two years of moderate rates of
inflation (1971 and 1972), prices began rising rapidly in the spring of 1973.
Unlike the past, however, this time there is not even an apparent link
between increases in money supply and prices. Indeed, money supply has
actually declined since January of this year.) Nor has domestic consumer
or business demand been a factor. Commercial bank credit to the private
sector, a rough indicator of domestic demand, has, in real terms, remained
about constant through the first half of this year.
6. Security and reconstruction goals, needed reforms, and current
domestic pressures have combined to require some government measures
that worsened the inflation. Despite a major reform objective of reducing
the huge public sector deficit, government spending - dominated by defense
payrolls - proved difficult to cut, and the 1972 offensive added a large
bill for refugee relief. To offset these problems, a concerted effort was
thus made to increase revenues, primarily through more indirect taxation,
1. Even adding private savings deposits - easily converted to cash - to money supply produces
only a 10% increase in the first half of 1973, well below the rate of inflation.
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.the first-round effects of which proved inflationary. Government attempts
to cut imports included devaluations and administrative increases in the
official prices of many imported goods, further fueling inflation.
7. Even more important in the recent surge in prices, however, have
been the unsettled conditions in world financial and commodity markets.
Dollar devaluations, yen revaluations, and successive piaster adjustments
have led to a wave of increases in prices for imports, which account for
about one-half of the commodities sold in Vietnam's markets. During late
1972 and early 1973, these were compounded by steady rises in world
prices of agricultural commodities. The Saigon retail price index for
imported commodities rose more than 60% in the first eight months of
this year, compared with a 40% increase in the retail price index for
domestic goods. The import price of rice approximately doubled over the
past year. Prices of petroleum products rose more than one-third, and those
of other major US-financed imports such as fertilizer, wheat, and cotton
also increased sharply. As a result of higher import prices and government
action, prices of gasoline, kerosene, cement, and sugar have more than
doubled since the beginning of the year.
8. The effects of inflation on real incomes have been severe. In
agriculture, the prices received by farmers have probably kept up with the
rising costs of the goods farmers buy, so that their real incomes probably
have held their own. Nonfarm real incomes have fallen, however, and those
of government military and civilian employees have perhaps been hardest
hit. From September 1972 through July 1973, the salaries of some 1.5
million government employees, constituting (with dependents) perhaps
one-quarter of the nation's population, remained constant while consumer
prices increased 38%, for a decline in real incomes of approximately
one-fourth. A 25% pay raise on 4 August and an increase in the volume
of subsidized goods available in the commissary were largely offset by a
simultaneously announced 55% increase in the government's selling price
of US rice, plus increases in official prices of petroleum products and sugar.
Including the pay raise, the real incomes of government employees are still
roughly 15% below those of September 1972, the date of the previous
raise (see Figure 1).
The Rice Problem
9. A projected rice shortage later this year hAs even more serious
implications than does inflation for political conditions in South Vietnam.
After three years of increased rice production, greater military activity and,
poor weather resulted in a small decline in the 1972 harvest. Continued
poor weather in some areas, uncertainty as to market access, and much
higher prices for fertilizers and pesticides apparently have reduced this year's
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figure 1
South Vietnam: Government Wages
and Consumer Prices
Index: July 1969-100
crop as well.2 South Vietnam
earlier published a 1972-73
crop projection of 6.4 million
metric tons; US observers now
estimate a harvest more on the
order of 5.9 million tons. Thus,
not only have retail rice prices
soared in recent months, but
also, by November (just prior
to the end-year harvest) there
may be little rice available for
the northern two-thirds of the
country at any price. In late
August, US officials in Saigon
made the following projections
of rice stocks in non-Delta
areas:
Thousand
Tons
Actual
July
120
August
122
Projected
September
123
October
89
November
41
December
63
The November 1973 projection, representing about two weeks' supply, is
the lowest end-of-month stock figure in two years (see Figure 2). More
important, the December figure includes an assumptioi, of large imports
of US rice early in the month. This now appears impossible, with additional
shipments from the United States not arriving until late December or
possibly even January. If this is the case, stocks will run out by
mid-December, or sooner if more hoarding and panic buying occurs.
10. There has been some sort of end-of-year rice crisis in virtually
every year since the mid-1960s, and the Vietnamese have been conditioned
to being bailed out at the last moment. This time, however, eleventh-hour
2. Paradoxically, the recent high rice prices paid farmers may also have contributed to lower
production figures than expected. In an imperfectly monetized economy, instead of providing greater
production incentives, the increased cash income from a first crop may induce some rice farmers
to forgo the additional work and expense required to harvest a less lucrative second crop. Another
factor may be a peaking out of opportunities to increase production through the introduction of
the new "miracle" rice varieties. In many countries where these varieties have been used for several
years, productivity eventually begins to decline, possibly because of more general use in areas less
suited to the more rigid soil, water, and climate requirements of these varieties.
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SEC RE]'
South Vietnam:
Total Rice Imports and Non-Delta Stocks
thousand metric tone
60
imports
(A
A _00 A W
88 69 70 71 72 73
'Private and government stocks In Saigon and the northern deficit provinces (end of month).
"Protected.
5INM 10.73
rescue appears unlikely because the world rice market is too tight to permit
the additional imports until early 1974. Contributing to the shortage will
be:
? A possible slowdown of Delta deliveries in anticipation of
higher future prices;
? Military activity, road interdiction, or other marketing
bottlenecks, which can create serious local supply problems
even if the countrywide level of stocks is adequate;
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? Reported sharp increases in Communist rice purchases;
? Illegal private rice sales to Cambodia; and,
? Perhaps most important, greater speculative purchasing and
hoarding resulting from increased awareness of the potential
shortage.
11. Some manifestations of the napending rice problem became
apparent in July. In that month, Da Nang rice prices soared and government
stocks in the area were virtually depleted in an attempt to stabilize prices.
A shipment of 11,000 tons in early August caused a sharp one-week decline
in prices and predictions of at least short-term stability in the market. In
Saigon, however, no such relief appeared in sight. On 13 August, retail
rice prices were 75% higher than at the start of the year and nearly 50%
higher than on 1 July. Speculative buying was being increasingly reported,
as was stockpiling in the Delta as farmers and merchants held out for further
price increases.
12. Some efforts to solve the rice probler i are under way. On
16 August the government announced a new rice control program that
includes: (1) provisions for additional sales from official stocks to
government employees; (2) a ceiling for domestic wholesale rice prices;
(3) a' new system of province exit permits whereby private inter-province
rice movements are allowed only to Saigon; (4) removal of the value-added
tax on rice transactions at all levels; and (5) application of informal - but
extremely heavy - pressure on Delta merchants from police and province
officials to sell more rice to the government. The new measures were
compromises with much more radical proposals for military-controlled
collection and distribution, tighter rationing for the general public, and
additional issuances of rice from government stocks at about twice the rate
finally decided. In an effort to assure compliance with the agreed measures,
President Thieu met with all the Delta province chiefs later in August to
consolidate the control system; to improve data collection on rice prices,
production, stocks, and deliveries; and to instruct officials to crack down
on hoarders, speculators, or anyone selling rice to the Communists.
13. Success of the new program depends on whether it can increase
significantly the quantity of rice shipped from the Delta to Saigon over
the next few months and whether the government can convince the
population that supplies of rice are adequate and will remain so through
the rest of the year. Initial results showed some improvement. Immediately
following the 16 August announcement, a relatively large increase in rice
shipments was reported, and the rice market in Saigon softened a bit, with
retail prices declining about 10%.
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14. The salutary effect of the new rice-control measures, however,
was short-lived. Rice consumption in August was estimated to be some 15%
above average levels, indicating that hoarding by consumers had begun. In
addition, after about a month of stability in the rice market, Saigon retail
rice prices - despite the ceilings - began soaring again in September. In
sum, it appears unlikely that the government measures will turn up
quantities of domestic rice sufficient to improve significantly the stock
estimates noted above.
15. The government's recent measures in some respects may have
weakened its defenses against future speculation and heightened the risk
of strong public reaction. Greater sales from government stocks will reduce
the government's maneuverability if massive speculation develops. And the
price ceilings are already under great pressure, with merchants pressing for
a higher wholesale price - at present lower than the price they are paying
farmers. The result has been retail purchases in anticipation of further price
increases. Another natural outgrowth of the situation is the recent
appearance of a black market for rice - the first one in many years --
with prices now about 50% above official retail prices. The government's
response was also predictable. In late September, rationing of retail
purchases was started. Even tighter controls, more corruption, and marketing
bottlenecks, with further public outcries over the rice issue, are almost
certain.
16. Complaints of rising prices have been increasingly reported
throughout the country. Thus far, however, organized protests or cohesive
political action have been rare. Instead, the continuing decline in real
incomes, particularly for the army personnel and civil servants, has produced
further erosion of morale and an apparent increase in corruption. More
military checkpoints and "taxation" have been reported, and the fact that
some of the newly trained - and presumably more reliable - tax collectors
were collecting a much larger fee for the value-added tax than the law
required was at least one factor in its revision in early August.
17. While inflation is troublesome, the prospect of real food shortages
over the next few months, especially of rice, will likely put the Thieu
government to its most serious political test since its formation. It is quite
possible that the government will have no rice to disburse for a month.
Those in the army, the police, and the civil service and others in the
government's power base will probably be able to obtain enough rice for
themselves and their families. Rice will also be available to those who can
bid high enough for it. Farmers, for whom Thieu has made many important
concessions in recent years, will doubtless be able to provide for themselves.
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Even in urban areas, many families in Vietnam try to keep a month's supply
of rice in their homes. But many of the poor, who eat little but rice and
live from hand to mouth, will probably have difficulty finding substitutes
that they can afford. The impact of the shortage also will vary from city
to city because of a likely breakdown in distribution. Saigon is likely to
have adequate supplies, for example, but other areas could be very hard
hit. Further government actions could include the sacking of some
government ministers, confiscation of rice, and some show trials and possible
executions of speculators or illegal traders. Chinese businessmen -- long a
source of envy for their energy and skill - are likely to be singled out
as scapegoats. Scattered violence or rice riots are certainly possible.
18. Because of Thieu's firm control of the military and police, the
government will likely withstand the crisis. But all of this will contribute
to a greater universal reaction that the government is guilty of economic
incompetence. Many businessmen, for example, are upset not just with
current problems but also with the transitional costs of economic reforms
and the government's failure to effect a quick business recovery from the
recession. Pressures on the government to deal with these problems will
increase.
US Withdrawal and Vietnamization
19. The psychological impact of US withdrawal is adding to South
Vietnam's difficulties in coping with its unaccustomed burden of severe
economic pressures. Some of the material assistance and most of the
psychological prop provided by a large US presence and frequent policy
advice is now gone. Heightening government policymakers' anxieties is the
realization that many South Vietnamese look to the government to provide
not only policy solutions and infrastructure and reconstruction funds, but
also guaranteed markets, additional protection and subsidies, and initial
productive investment:
20. The Vietnamese have also been counting on greatly increased
foreign investment and non-US aid to tide them over a period of declining
US aid and expenditures. Although the prospects for increased capital
inflows from these sources remain good over the medium and long term,
hopes for immediate relief have largely been abandoned. Earlier in the year,
it appeared that both Japanese and French balance-of-payments aid would
be arriving before the end of this year. Now, a promised US $50 million
aid package from the Japanese, although still expected, has been delayed,
probably until next year. The French are also moving slower than had been
hoped, and even the $30 million French project loan for expansion of the
Ha Tien cement plant has run into some snags.
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21. The governnnt thus feels isolated both politically and
economically at a time that it is feeling heavy pressure to come up with
policies to cope with inflation and rice shortages. To some extent at least,
it feels it has to seek uniquely Vietnamese solutions to economic problems.
Government Policy Options
22. Important differences over economic policy and government
organization are surfacing in a round of intense political infighting. The
basic disagreement centers around wheti er the government should apply
more controls and intervene more energetically in the market or whether
it should rely more on natural market forces to solve the short-term
problems. This has led to a rough split between the mostly older and
French-educated bureaucrats - favoring more controls -- and the primarily
younger, US-educated "technocrats," who would prefer to continue the
thrust of the 1970-73 reforms. Internal politics and rivalries, however, are
probably more important than ideology as determinants of who belongs
to what faction.
23. External pressures on domestic prices and commodity availabilities
thus could not have come at a worse time for the South Vietnamese
policymakers. Sympathetic to US counsel, South Vietnam had begun to
set its exchange rates and to devise domestic monetary policies more in
keeping with market conditions. But no sooner had these policies been
implemented than inflation and rice shortages - to a large degree outside
the government's control - under nined their support and strengthened the
position of the French-trained officials who believe in import controls and
exchange-rate stability.
24. The compromise decisions on the rice problem are a clear example
of the strange, unstable wedding of radically different economic philosophies
in the interests of political expediency. An increased government role in
rice marketing will, at a minimum, probably lead to decreased producer
incentives and output - as it did in the past in South Vietnam and as
it has in virtually every country where applied. Moreover, it is clearly at
variance with all earlier notions published on Vietnamese development plans
and will probably be poorly received by Delta farmers and Chinese
merchants, two of the most important entrepreneurial groups in the nation.
25. Those advisers who are most receptive to US economic
recommendations -- particularly the Minister of Economy, Pham Kim Ngoc,
and the Minister of Finance, Ha Xuan Trung -- have thus far been able
to head off the most radical proposals made by a group apparently led
by President Thieu's closest adviser (and cousin) Hcang Duc Nha and
including most of the military and seve--al civilian advisers opposed to Ngoc
and Truing. However, the positions of both Ngoc and Trung are tenuous.
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SEIT
21. The government thus feels isolated both politically and
economically at a time that it is feeling heavy pressure to come up with
policies to cope with inflation and rice shortages. To some extent at least,
it feels it has to seek uniquely Vietnamese solutions to economic problems.
Government Policy Options
22. Important differences over economic policy and government
organization are surfacing in a round of intense political infighting. The
basic disagreement centers around whether the government should apply
more controls and intervene more energetically in the market or whether
i2? should rely more on natural market forces to solve the short-term
problems. This has led to a rough split between the mostly older and
French-educated bureaucrats - favoring more controls -- and the primarily
younger, US-educated "technocrats," who would prefer to continue the
thrust of the 1970-73 reforms. Internal politics and rivalries, however, are
probably more important than ideology as determinants of who belongs
to what faction.
23. External pressures on domestic prices and commodity availabilities
thus could not have come at a worse time for the South Vietnamese
policymakers. Sympathetic to US counsel, South Vietnam had begun to
set its exchange rates and to devise domestic monetary policies more in
keeping with market conditions. But no sooner had these policies been
implemented than inflation and rice shortages - to a large degree outside
the government's control -- undermined their support and strengthened the
position of the French-trained officials who believe in import controls and
exchange-rate stability.
24. The compromise decisions on the rice problem are a clear example
of the strange, unstable wedding of radically different economic philosophies
in the interests of political expediency. An increased government role in
rice marketing will, at a minimum, probably lead to decreased producer
incentives and output - as it did in the past in South Vietnam and as
it has in virtually every country where applied. Moreover, it is clearly at
variance with all earlier notions published on Vietnamese development plans
and will probably be poorly received by Delta farmers and Chinese
merchants, two of the most important entrepreneurial groups in the nation.
25. Those advisers who are most receptive to US economic
recommendations - particularly the Minister of Economy, Pham Kim Ngoc,
and the Minister of Finance, Ha Xuan Trung -- have thus far been able
to head off the most radical proposals made by a group apparently led
by President Thieu's closest adviser (and cousin) Hoang Duc Nha and
including most of the military and several civilian advisers opposed to Ngoc
and Trung. However, the positions of both Ngoc and Trung are tenuous.
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Ngoc has for several years been the architect and manager of South
Vietnam's rice policies. He was relatively successful in reducing the
government's role in marketing domestic rice and in allowing more realistic
prices and thus cutting government subsidy expenditures. Now, largely
because of circumstances beyond his control, he may become the political
victim of the present rice problem. Trung's difficulties stem from his
Ministry's advocacy of the ill-fated value-added tax, junked at the retail
level after six weeks of widespread confusion, soaring prices (with the tax
only partly responsible), and universal complaints.
26. These squabbles within the cabinet, and between cabinet members
ar_d palace advisers, have thus far had very little effect on Thieu's own
position or power. Thieu's position has been strengthened as a result of
tha recent senate election. The Senate, in which Thicu now has more than
a two-thirds majority, has in the past been one of the President's major
sources of organized opposition. Because Thicu already held a wide majority
in the House, the National Assembly appears certain to become a virtual
rubber stamp for government Icgislation if he chooses to enact new
economic measures via this r' ute.
27. Thus, government policies will depend on Thieu and, more
specifically, on the advisers in whom he has confidence. The signs are not
encouraging. Those favoring increased controls Pre in the ascendancy. Their
proposals include military control of rice at all levels and much more
government intervention in production and distribution of other major
commodities, as well as a campaign to blame Vietnam's economic problems
on the Americans, the Chinese - who control much of the financial and
marketing systems in South Vietnam - or the Viet Cong. A noisy campaign
to blame the Communists for rice shortages and inflation has already started,
and there are increasing press items critical of the Americans, French, and
Japanese for reneging on promises of increased aid. A ban on foreign
investment has also been advocated by some members of the government.
28. Economic difficulties will impact strongly on the Thieu
administration over the next few months, even though they are unlikely
to bring down the government. In addition'to the politically sensitive issues
of inflation and rice availabilities, government reserves of gold and foreign
exchange have fallen by nearly one-half thus far this year and at the end
of August had reached their lowest level since July 1965. Clearly, the
government in any event faces some months of reduced imports, and this
will be compounded between now and year's end by shortages of key
commodities and further inflation. Beyond these basic problems, the
government may create further difficulties through extensive ,,se of direct
controls that foster black marketing and reduce producers' incentives.
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29. The outlook should brighten somewhat in early 1974. Non-US
foreign aid has been promised in significant amounts for next year, and
the foreign investment outlook could continue to improve. Rice imports
will also once again be available as larger US exports become possible.
30. Over the longer term, economic issues will nevertheless remain
a major concern. Until there are signs of revival, with increasing job
opportunities and economic growth, the government will continue to face
political problems arising from the economic situation. Moreover, the
policies adopted to deal with present problems are palliatives that could
slow economic recovery and growth and significantly lesser., the prospects
for additional foreign aid and investment.
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