THE NATURAL RUBBER INDUSTRY OF SOUTH VIETNAM : A POTENTIAL TROUBLE SPOT IN THE ECONOMY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP78T02095R000800070014-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 16
• Document Creation Date: December 20, 2016
• Document Release Date: April 12, 2006
• Sequence Number: 14
• Publication Date: July 1, 1964
• Content Type: IM

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N? 131
Economic Intelligence Memorandum
THE NATURAL RUBBER INDUSTRY
OF SOUTH VIETNAM:
A POTENTIAL TROUBLE SPOT
IN THE ECONOMY
CIA/RR EM 64-24
July 1964
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
SECRET
GROUP 1
Excluded from automatic
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SECRET
Economic Intelligence Memorandum
THE NATURAL RUBBER INDUSTRY
OF SOUTH VIETNAM:
A POTENTIAL TROUBLE SPOT
IN THE ECONOMY
CIA/RR EM 64-24
WARNING
This material contains information affecting
the National Defense of the United States
within the meaning of the espionage laws,
Title 18, USC, Secs. 793 and 794, the trans-
mission or revelation of which In any manner
to an unauthorized person is prohibited by law.
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
SECRET
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CONTENTS
Tables
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
I. The Rubber Industry . . . . . . . . . . . . . . . . . . . 3
A. Importance . . . . . . . . . . . . . . . . . . . . . 3
B. Location and Organization . . . . . . . . . . . . . . 3
C. French Rubber Estates . . . . . . . . . . . . . . . . 4
D. Trends in Rubber Production and Investment . . . . . 4
A. Decline in the Price of Rubber . . . . . . . . . . . 5
B. Adverse Economic Actions by the Government . . . . . 5
C. Harassment by the Viet Cong . . . . . . . . . . . . . 7
III. Plight of the French Producers . . . . . . . . . . . . . 8
1. South Vietnam: New Rubber Planting by French Estates,
1955-63 . . . . . . . . . . . . . . . . . . . . . . . . 6
2. South Vietnam: Volume and Value of Rubber Exports,
1960-63 . . . . . . . . . . . . . . . . . . . . . . . . 6
Page
Illustrations
Figure 1. South Vietnam: Natural Rubber Industry and the
Distribution of Its Labor Force, 1963 (Map)
4 25X1
following page
Figure 2. South Vietnam: Production of Natural Rubber,
1942-63 (Chart) following a e 4 25X1
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THE NATURAL RUBBER INDUSTRY OF SOUTH VIETNAM:
A POTENTIAL TROUBLE SPOT IN THE ECONOMY*
Summary
While attention has focused on the internal military struggle in
South Vietnam, a potentially serious economic problem has been develop-
ing. The natural rubber industry, traditionally the most important
source of foreign exchange earnings in South Vietnam, has declined in
the past few years. This decline is demonstrated by the fall in rubber
production, earnings, and investment. Although still the world's fifth
largest producer of natural rubber, South Vietnam will lose its com-
petitive position in the world market unless it restores the conditions
essential for investment in replanting and expanding the stock of rubber
trees.
The major potential for investment lies with the French-owned rubber
plantations which, although few in number, account for most of the rub-
ber acreage and about nine-tenths of the country's output of natural
rubber. Along with other producers, these large French estates have
undergone financial hardship from the abrupt fall in prices of natural
rubber, from the stringent economic measures of the government, and
from the harassing tactics of the Viet Cong. The French firms, more-
over, have been affected economically by the government's withdrawal
of financial aid and by other selective measures. They also face the
threat of outright nationalization as a result of the strained rela-
tions between France and the Republic of Vietnam.
If the rubber industry, or a large segment of it, should fail,
South Vietnam would stand to lose a major source of foreign exchange
earnings. This loss, in turn, would aggravate-its already unfavorable
balance of trade.** Rubber exports, on the average, have accounted
for about 57 percent of South Vietnam's total annual export earnings
during the past 4 years. In 1963, these exports amounted to US $33.5
million, from which the government netted about US $13.4 million in
the form of direct taxes on such exports. Although loss of the rubber
industry would not have a serious impact on gross national product, it
would have a significant effect on employment and incomes in several
of the key provinces of South Vietnam. Moreover, it would eliminate
one of the more important industries on which South Vietnam stakes part
of its plan for economic expansion, once the internal conflict has
subsided.
* The estimates and conclusions in this memorandum represent the best
judgment of this Office as of 1 July 1964.
** In 1963 the trade deficit of South Vietnam amounted to US $201.6
million; imports were US $284.9 million, and exports were US $83.3 mil-
lion. Dollar values throughout this memorandum are based on the offi-
cial exchange rate of 35 piasters to US $1.
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I. The Rubber Industry
A. Importance
The rubber industry of South Vietnam is small but highly de-
veloped. Ranking fifth in world output, it furnishes only about 3
percent of the world's annual supply of natural rubber. 1/* (Malaysia
and Indonesia together account for two-thirds of the world's total
output.) Most of the rubber produced and exported by South Vietnam,
however, is of the highest grade, and accordingly commands premium
prices.** In 1963, South Vietnam produced about 72,000 tons*** of
natural rubber, most of which was exported at a value of US $33.5
million. 2/
Earnings from the export of natural rubber normally exceed
those from any other connnodity and, for the past 4 years, have provided
on the average about 57 percent of South Vietnam's annual earnings of
foreign exchange. 3/ Although rubber contributes only about 2 to 3 per-
cent of the country's gross national product, it is a major form of
income in several provinces and a fairly important source of govern-
mental revenue. From its tax on rubber exports the government is
estimated to have acquired about US $13.4 million, or about 4 percent
of its estimated total revenue, in 1963.
B. Location and Organization
In spite of its commercial importance, natural rubber is grown
on only about 3 percent of the country's cultivated land. Most of the
rubber trees are planted in the southern part of the country within a
narrow belt of fertile red soil that extends from the South China Sea
northwest to the Cambodian border. This region is shown on the map,
Figure l.t
Because of the large average investment required for clearing
land and planting rubber trees in this once heavily forested area,
enterprises of the plantation type have become dominant in the rubber
industry of South Vietnam. In this respect the industry differs from
that in Malaysia and Indonesia, where large numbers of small, family-
type rubber holdings exist. In 1961, South Vietnam had 335 rubber
plantations with a total employment of slightly more than 1+1,000. L+/
Roughly half of the rubber industry apparently is concentrated in the
two provinces of Binh Long and Bin Duong. The distribution of this
25X1
On the contrary, rubber exports from Indonesia are generally or
lower quality and therefore command a lower average price than those
from South Vietnam.
Tonnages are given in metric tons throughout this memorandum.
Following p. 4.
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Work force (and indirectly that of the industry),* by province, is
shown on Figure 1.
C. French Rubber Estates
The largest, most productive segment of the rubber industry is
formed by about 23 large estates that are owned and managed by French
interests. These estates, which have the highest yield in rubber trees,
embrace about three-fourths of the land under rubber cultivation and
provide most of the processing facilities and technical support for the
rubber industry. The output for export from these estates in 1963
amounted to an estimated US $30 million, or about 90 percent of the
total value of rubber exported by South Vietnam. 5/
D. Trends in Rubber Production and Investment,
Production of rubber in Vietnam over the last two decades is
shown on the chart, Figure 2. Output dropped off sharply in 19+5 and
196 because of the widespread destruction of the estates and the
general insecurity that prevailed at the close of World War II.** At
the height of this insecurity, employment in the rubber industry de-
clined about 40 percent, the area from which rubber was gathered was
reduced almost 73 percent, and planting of rubber trees almost came to
a standstill. 7/ Although the small, more vulnerable plantations re-
portedly sustained the greatest damage during this period, it is evi-
dent from the degree of the decline in output that the large estates
also lost heavily. Not until 1953, or almost a decade later, did the
rubber industry regain and surpass the peak level of output reached in
the prewar period. This fact illustrates the great difficulty involved
in reviving the rubber industry once it has encountered an appreciable
loss of its trees, facilities, and personnel.
The subsequent restoration of internal security and confidence
in the industry resulted in an expansion of both production and invest-
ment. The Republic of Vietnam, which came to power in 1955, helped to
promote this expansion by providing financial aid to all planters of
ribber and by maintaining a reasonably low level of taxation. The
general rise in world rubber prices up to 1960 also promoted increased
prosperity and investment in the rubber industry by the large French
estates, as shown in Table 1.***
* The actual land area under rubber cultivation in each province can
be approximated from the figures on employment, using the factor of one
employee to two hectares.
** Although data on production for the period before 195+ apply to
the whole of Vietnam, virtually all rubber in Vietnam is grown in the
south. J
*-* P. 6, below.
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NORTH
VIE TNA
r" DEMARCATION LINE
C ..----- I Ho Su 'g Tri
Hue
..2THVA
1 O
~w~Sarooane
i ')~Ha Tien %None
PERCENTAGE FIGURES INDICATE
DISTRIBUTION OF RUBBER
WORKERS BY PROVINCE *
F I . 2.5 50 75 iQo Miles
0 25 50 X 75 j Kilometers
SOUTH VIETNAM
Natural Rubber Industry and the Distribution of Its Labor Force, 1963
*Figures on percentage distribution of labor force
exclude 2 percent located in other scattered areas.
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OUTH VIETNAM
10
0
Production of Natural Rubber; 1942 - 63
1963
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In addition to the added investment by the large estates, a
special program to create some 90,000 hectares of small rubber hold-
ings (of about 5 hectares each) by 1966 was inaugurated by the govern-
ment in 1957. 8/ Although a seemingly impressive amount of land has
been planted in rubber under this program (about 25,000 hectares by the
end of 1962), these efforts generally have been negated by the poor
cultivation methods, inadequate training and supervision, and general
lack of enthusiasm of the farmers. 9/ It seems doubtful, therefore,
that this governmental program will produce more than a token increase
in the total output of rubber in the years ahead. Accordingly, the
future of South Vietnam's rubber industry seems to rest heavily on the
investment attitudes of the large producers.
II. Recent Problems
In the past few years, the rubber industry of South Vietnam has
been in a decline, as manifested by the decrease in production, earn-
ings, and new plantings shown in Tables 1 and 2* and in Figure 2.
This reversal is attributable to a loss of confidence and to a feeling
of insecurity on the part of the French estate owners resulting from
the decline in world rubber prices, adverse actions of the Vietnamese
government, and harassment by the Viet Cong.
In common with the world's other primary producers of natural
rubber, South Vietnam has suffered financially from the sharp decline
in prices of natural rubber during the past few years due primarily
to the intense competition from synthetics. The effect of falling
prices, indicated by the drop in export value per ton of rubber, is
shown in Table 2. Table 2 also indicates the quantity of rubber ex-
ported and the earnings during the period 1960-63. The decline in the
world price of natural rubber in 1961 completely negated the potential
gain from increased volume of exports, and total returns declined by
US $4.1 million. In 1962 and 1963 the decline in total earnings came
about because of both the fall in prices of rubber and the reduction
in the volume of exports. This situation appears to be continuing in
1964, and the probability is that total export earnings from rubber
will continue their downward trend in 1964.
B. Adverse Economic Actions by the Government
Although the South Vietnamese government has indicated its
interest in helping the rubber industry, some of its actions in recent
years seem to run counter to this objective. A notable example of such
actions is the apparent high tax that the government has levied on rub-
ber exports while problems from the falling prices of natural rubber
P. 6, below.
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South Vietnam: New Rubber Planting
by French Estates a/
1955-63
1955
130
1956
590
1957
1,500
1958
2,100
1959
3,900
1960
4,248
1961
2J54
1962
1,o6o
1963
6oo
a. Extension and new planting each year. 10/
South Vietnam: Volume and Value
of Rubber Exports a/
1960-63
Year
Net Exports
(Thousand
Metric Tons)
Value
of Exports
(Million
US
Export
Value
per Ton
us )
1960
73.9
1+8.0
650
1961
83.4
43.9
526
1962
74.5
37.9
505,
1963
70.3 b/
33.5 C/
1476
a. Except where otherwise indicated, all data are fron
source 11/.
b. 12
c. 13
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have been plaguing the industry. Since 1960 the tax on rubber exports
has been raised to the present rate of 40 percent. The current effec-
tive tax on rubber exports, however, probably is 23 to 24 percent,
because the government gives a subsidy on all exports. By comparison,
Malaysia's estimated tax on rubber exports is only 14 percent, and
Ceylon apparently did not collect any export tax on rubber during most
of 1963 because of the price drop.* In spite of complaints that the
present tax imposes a significant financial burden on rubber producers,
the government currently shows no inclination to reduce the tax rate
or to adopt a sliding scale, similar to those of Malaysia or Ceylon,
that would permit tax rates to fluctuate with the price of natural
rubber. 16/
Difficulties also appear to stem from the government's admin-
istrative procedures and, in particular, its stipulations regarding ex-
port of rubber. One reported obstacle is the certificate of ownership
that the government has required of exporters in order to keep export
rubber from falling into the hands of the Viet Cong. L7/ This measure,
however, reportedly is costly and cumbersome to the rubber industry
and, moreover, has been termed of no value. The industry also objects
to the short validity period of government export licenses on rubber,
claiming that it does not allow the spacing out of deliveries over a
sufficient length of time to take advantage of price changes of natural
rubber. 18/
A few of the government's recent actions have affected primarily
one sector of the rubber industry -- the large French estates. In re-
cent years the government has reversed its earlier policy of providing
financial assistance to the large estates to help defray the cost of
planting rubber trees. 19/ Smallholders, however, still receive a form
of this assistance from the government. The withdrawal of this assist-
ance is considered to be one of the reasons why the large estates have
cut back on investments in rubber planting in recent periods. 20/
Another measure likely to affect the costs and investment attitudes of
the French firms is the government's fiscal reform of 1962, which both
limits the percent of profits that can be remitted to investors abroad
and requires such remittances to go through the government's currency
exchange office where, in effect, they are taxed. 21
C. Harassment by the Viet Cong
The Viet Cong exercise an element of control throughout the region
where rubber is grown. These forces have engendered an air of insecurity
and uncertainty among the rubber producers, although to date they have
not engaged in any mass destruction of rubber facilities. The Viet Cong,
* Ceylon's tax on rubber exports takes effect when the price of rubber
exceeds 0.94+ rupee (Ceylon) 1)/; the average price in 1963 was 0.927
rupee. 15/
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however, have interfered with efforts to extend these plantations and
have engaged in economic harassment, including the taxing and exacting
of other tribute from plantation owners. Another Viet Cong tactic,
which has become increasingly frequent and costly, is the kidnapping
for ransom of plantation officials. 22/ These harassments have reached
such serious proportions in recent months that a few owners have abandoned
their rubber plantations, and many others now question the feasibility
of continuing their operations. 23/
The Viet Cong undoubtedly realize that they would lose an im-
portant source of revenue if their harassing actions caused the rubber
industry to fail, but they are aware, however, that the Republic of
Vietnam also would suffer considerably from failure of the rubber in-
dustry. The Viet Cong may reason, moreover, that the large numbe:r of
unemployed plantation workers not only would add to the government's
cost but also would make recruiting easier for the Viet Cong. 24/ For
these reasons, therefore, it seems unlikely that the Viet Cong will
relax its economic harassment of the rubber producers.
III. Plight of the French Producers
Although all rubber plantations, regardless of size, are having
difficulties at the present time, the plight of the large plantations,
owned by French interests, seems to be more serious and immediate. For
the various reasons indicated in II, above, it appears that these plan-
tations are finding it difficult to meet production costs and to make
a profit.* Some producers indeed appear to be losing money. 25/ This
financial hardship is evidenced not only by the decline in earnings
shown in Table 2 but also by the report that owners recently were
forced to draw down their normally large bank deposits. 26/ In an
effort to meet costs, some plantations reportedly tried to cut this
wages of their workers; but this measure was thwarted by the local
authorities.
In addition to their current economic difficulties, the French
plantations face possible nationalization by the government. This
Although it is not possible to arrive at a complete analysis of
costs, an estimate based only on labor and capital expenditures indi-
cates that there is little, if any, margin for profit from production
of rubber at current prices. According to this estimate, the large,
efficient producers must meet costs of upwards of 8.98 to 10.22 piasters
per pound of rubber -- returns from the sale of such rubber approximate
10.89 piasters per pound in 1963 after deduction of the government's
tax of 40 percent on exports. Although there is an implied profit of
21 percent, at the lowest cost range, it is likely that the inclusion
of other governmental taxes and assessments and Viet Cong taxes will
eliminate most of this profit. The inclusion of such additional costs
will bring total costs for some producers beyond the amount received.
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action reportedly is being considered as an economic reprisal for the
French proposal to neutralize Vietnam. With this possibility in the
offing, French interests appear to have little incentive for expanding
their investment in the rubber industry.
IV. Outlook and Prospects
The present outlook for the rubber industry is gloomy. As indi-
cated previously, the current tide of economic and political events
seems to be working against the rubber producers. The decline in
world prices of natural rubber is expected to continue, according to
most forecasters. This means that output of natural rubber must in-
crease by an equal percent if total returns to producers are to remain
unchanged. But, as pointed out previously, South Vietnam's production
of natural rubber has been on the decline since 1961, and there are no
indications that this trend will be reversed.
The unfavorable economic climate has affected investors' attitudes
and in turn has clouded the competitive future of the rubber industry.
It is recognized that without sufficient efforts at replanting and im-
proving the yield of rubber, South Vietnam will not be able to hold
its place in competition for world markets. To hold its on at present
levels of production, it is estimated that plantings and extensions
each year should amount to at least 1,700 hectares.* During the past
few years, however, new plantings have fallen well below this level and
may continue to decline.
The small body of French firms, on which investment prospects
heavily rely, are not likely to expand their holdings in the rubber
industry. On the contrary, the prospect is that these firms will
gradually disinvest by continued exploitation of existing holdings
and by refraining from making improvements. Their complete withdrawal
from the rubber industry, therefore, would be simply a matter of time.
As indicated earlier, the demise of the French firms might come about
abruptly if the government carries out its rumored plan to nationalize
all French investments in South Vietnam.
In the event of French withdrawal from the rubber industry, the
government faces a seemingly hopeless prospect of operating these
French plantations. In the first place, the government lacks a cadre
of experienced personnel to replace the estimated 150 French technicians
and managers. Moreover, it would take considerable time to import or
* As a general rule, replanting should be done at an annual rate of 3
percent of the existing trees in order to maintain a proper turnover of
new trees and to keep production at a uniformly high level. 27 Based
on the area of 57,813 hectares under exploitation in 1963 on French
estates, 28/ an annual requirement to replant a minimum of 1,700 hec-
tares is indicated.
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train the necessary replacements. As the government moved in to
operate the plantations, the Viet Cong undoubtedly would counter with
efforts to destroy the trees and other facilities. Even if the govern-
ment were able to divert troops to the defense of the plantations, it
is unlikely, on the basis of earlier experience in 1945 and 19).6, that
it would be successful in preventing severe damage to the exposed rub-
ber plantations.
The prospect exists, therefore, that if the French firms withdraw
from the rubber industry, severe economic losses will develop. In its
most extreme form, this would mean the loss to South Vietnam of its
most important form of foreign exchange earnings. Besides creating
additional unemployment and weakening the government's financial
capacity to conduct the current struggle, it would eliminate one of the
major industries on which the government stakes its plans for postwar
reconstruction.
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