SOUTH VIETNAM: CURRENT DEVELOPMENTS IN THE ECONOMY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010046-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 28
• Document Creation Date: December 22, 2016
• Document Release Date: May 14, 2010
• Sequence Number: 46
• Publication Date: August 1, 1968
• Content Type: IM

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DIRECTO&ATE OF
INTELLIUENGE
Intelligence Memor~ ndum
-~outh i~ietnam: Current Developments in the Economy
~ee~~
ER IM 68-97
August 1968
Copy 11a
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WARNING
This document contains informatior_ affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and i94, of tie US Coda as amended.
Its transmission or r~~~~clation of its contents to or re-
ceipt by an unauthorized person is prohiUited Ly law.
OROUP 1
[7[CLUDRD FIIOM AVTOMATIC
DOw'N011~UIN0 AMU
O F.CLARRIFICATION
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
August 1968
INTELLIGENCE MEMORANDUM
South Vietnam:
Current Developments in the Economy
Summary
The widespread physical ~'amage and disruptions
resulting from the Tet and May-June offensives in
South Vietnam have led to an economic recession in
the urban areas and a decline in rural incomes. In
urban areas the recession s terns from a widespread
undermining of both busines s and consumer confidence.
It has occurred despite increased government expendi-
tures for reconstruction and mobilization which, to-
gether with lagging revenues, have increased the
money supply. Fearing for their personal safety and
the security of their material possessions, urban
residents have refrained from ail but the most
necessary spending. The result has been: (a) a
decline in retail sales of manufactured consumer
goods, (b) a near absence of new private capital
investment, (c) a drawdown in inventories, (d) a slow-
down in imports except of basic foods, (e) a lack of
recovery of industrial production and (f) near price
stability in the face of a rapidly rising money supply.
In rural areas, real incomes have declined mainly
because greater insecurity has increased the diffi-
culty and cost of transporting foods to Saigon and
manufactures from Saigon. The volume of rice
deliveries from the Delta to Saigon has declined
Note: This memorandum was produced soZeZz~ bra CIA.
It was prepared bzd the Office of Economic Research
and was coordinated witn the Office of National Esti-
mates, the Office of Curren t Intelligence, and the
Director's Special Assistan t for Vietnamese Affairs.
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25X1
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despite higher ripe output. There also has been
G sharp drop `.n prices received by farmers for their
products coup led with a sharp increase in the prices
they must pay for manufactured goods.
If security and confidence are not restored, the
prospects are for continued economic stagnaticn in
urban areas and the failure of plans to raise agri-
cultural productivity and real incomes. The basic
needs of the urban population would continue to be
satisfied by government imports, and depressed activ-
ity in the private sector would facilitate military
mobilization. If security improves and confidence
grows, business and consumer spending will accelerate.
Since the growth of imports and production would
probably lag well behind the growth of demand, rapid
inflation could be expected. Moreover, the recovery
of economic activity at a tame of mobilization would
lead to greater pressures on the labor market, and
inflation would be fed by rising wages.
Inflation can be minimized by monetary reforms
and government actions, such as a war risk insurance
scheme, to hasten the recovery of ~,rocuction and
increase imports. It appears that the government will
rely most heavily on increased imports to stem infla-
tion. Rural incomes will improve if transport. security
improves and/or retail prices of rice are raised in
Saigon.
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The Stabilization Effort
Developments During 1965-67
1. Strong inflationary pressures have persisted
in the war-torn Vietnamese economy since mid-1965,
but the joint United States/Government of Vietnam
(US/GVN) stabilization effort has succeeded in keep-
ing them within tolerable limits. Saigon prices,*
which increased n2 perrcent between June 1965 and
June 1966, leveled off after an initial rise follow-
ing the mid-June 1966 devaluation and rose only 4
percent during the last five months of 1966. As a
result of the June devaluation and related stabili-
zation measures, GVN revenues rose 64 percent during
1966. The blaclc market rate for dollars and gold
declined from predevaluation heights, indicating
increased confidence in the piaster, and the rapid
growth in the money supply was curbed.
2. Accelerated military and civilian snPnding
coupled with declining domestic output cat,sed in-
f.'lationary pressures to pick up again in 1'~~67.
~devertheless, the 34-percent rise in pricer durir_g
1967 was well below the 63-percent increase for
1966. The money supply increased only 26 percent in
1967, compared with increases of 37 percent and 74
percent in 1966 and 1965, respectively. The success
of the 1967 stabilization effort was due in large
measure to a dramatic increase in imports. Absorp-
tion of money via imports in 1967 was particularly
effective because the June 1966 devaluation had
increased the exchange rate from 60 piasters per
US $1 to 118 piasters per US $1 and imports were
available on an almost unrestricted basis.
The Situation Prior to the Tet Offensive
3. As 1967 drew to a close it appeared that the
inflationary process was under control and that 1968
would be a year of transition during which the
economic gains so painfully achieved since mid-1966
would serve as a springboard for further advances in
* NIS Consumer Price Index (without rent) for the
r~orking eZass in Saigon.
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economic stability, output, and productivity.
C;irrent indications, however, are that during 1958
resources will be stretched extremely thin. Shortages
of skilJ_ed labor will be widespread and monetary
pressures wi_~l intensify. Although the Viet Gong
winter-spring campaign and the heavy fighting in the
cities during the Tet and May-J~.~ne offensives aontri.b-
uted heavily to present economic problems, a careful
examination of monetary data far the months immedi-
ately preceding the Tet offensive shows that an
inflationary trend had already been under way. Mone-
tary data show a 19-percent increase in the money
supply during 1 November 1967 - 31 Ja:z~iary 1968
(equivalent to an annual rate of more than 100 per-
cent), compared with an increase of only 17 percent
a_tring the i0 months January-October 1967. Pri~~e
movements lagged behind this spurt in the money
supply, with the consumer price index showing a gain
of only 3 percent from 1 November 1967 through the
end of January 1968. Viewzd on a weekly basis, how-
ever, prices began to increase steadily during
January, and, although this upward trend partially
reflected seasonal pre-Tet buying, it appears that
money-supply-fed inflation had resumed.
Price Trends Since the Tet Offensive
4. ?rhis trend was interrupted by the Tet offen-
sive, which set in motion a series of deflationary
forces sufficient. to offset continued large increases
in the money supply. These forces still persist.
An analysis of price movements during the first half
of 1968 is illustrative. When the Tet offensive was
launched on 31 January, markets were closed for the
holidays, and, because households were stocked for
the festivities, the shock of the fighting on con-
sumers was cushioned. Subsequently, when consumers
ventured forth and found markets still closed and
most items scarce, prices soared, reaching a peak on
12 FAbruary of 70 percent above the leve 1 at the
beginning of the year. This peak was followed by an
almost uninterruptF:d decline during the next seven
weeks as supply conditions in Saigon and elsewhere
gradually improved. By the k~eginning of April,
prices were only 5 percent above those at the begin-
ning of the year. This price decline cannot be inter-
preted, however, as a return to normal supply and
demand conditions. In fact, supFlies of many goods
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remained lower than before the Tet offensive, and
prices fell only because consumer demand was greatly
reduced.
5. During April, food prices began to rise
again because of the continued interdiction of
traffic on Route 4 from the Delta and precautionary
buying by consumers in anticipation of renewed attacks.
Al+:hough prices of some locally manufactured nonfood
items increased as production failed to return to
pre-Tet levels, nonfood prices as a whole rose only
4 percent compared with a 10-percent increase in
food prices. Moreover, two items -- calico and
cigarettes -- accounted for all of the nonfood in-
crease. The prices of all other nonfood items
included in the sample either declined or held steady
during the month. Prices of selected imports showed
a gain of less than one percent. The renewed enemy
attacks launched on 5 May caused further interrup-
tions in the flow of goods and a renewed increase in
the general price level -- up 14 percent between
29 April and 3 June. As the accompanying chart shows,
higher food prices once again accounted for most of
this increase. Prices of nonfood items and imported
goods wert~ relatively steady. Since 3 June, prices
of both food and nonfood items have declined almost
without interruption, and prices of imported goods
generally are unchanged.
Factors Affecting Prices
6. Inflation has not been severe since the Tet
offensive because of a decline in business and con-
sumer demand. The entire private urban sector of the
economy has been depressed. This depression reflects
a loss of confidence: fear of loses from wur damage
and personal physical security and general uncertain-
ty about the future. Businessmen ar.e trying to
reduce inventories and achieve liquidity. Fixed in-
vestment has nearly ceased. Only a few foreign
firms -- whose risks are insured by their home
governments -- have announced expansion plans. Im-
port activity is greatly reduced as importers adopt
a wait-and-see attitude. Similarly, consumers are
cutting expenditures and holding cash. The relative
stability of black market currency ar~d gold prices
during the past six months indicates that for the
time being at least, most people are content to hold
their cash balances in the form of piasters. Demand
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for Hondas, sewing machines, and other formerly
fast-moving luxury items has fallen off sharply.
In early July the price of imported transistor
radios was 10 percent below that at the beginning
of the year, while the price of motorcycles was 12
percent lower. Moreover, no one has much desire to
acquire real estate.
7. The strength ~f these deflationary forces
has been sufficient to offset much of the substantial
new monetary .^.reation. The :Honey supply has con-
tinued to exp~.nd steadily since the end of 1967,
registering a 32-percent increase during the first
five months of 1968 compared with a 5-percent rise
during the comparable period of 1967. During the
first quarter of 1968, almost all of this increase
was accounted for by a growth in circulating currency;
demand deposits increased only slightly, as shown
by the following tabulation:
a/
Billion Piasters
Total
Notes
in Circulateion
Private Demand
Deposits
November
1967
80.1
60.6
19.5
December
1967
$l.6
62.1
20.5
January
1968
90.7
69.7
21.0
February
1968
96.5
75.3
21.2
March 1968
100.?
78.9
21.4
April 1968
101.7
N.A.
N.A.
May 1968
108.9
N.A.
N.A.
a. As of the end of each month.
While there has been no run on the banks, the people
have continued to express a preference for cash in
hand since the February offensive. As was the case
prior to Tet, the deficit of the public sector continues
to account for most of the increase in the money sup-
ply (see Table 1). Increased expenditures, primarily
for mobilization and reconstruction -- at a time when
tax receipts were held down by the slowdown in imports,
retail sales, and industrial output -- are the chief
factors behind the public sector monetary expansion.
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SOUTH VIETNAM
INDEXES OF WEEKLY MONEY SUPPLY AND SAIGON RETAIL PEtICES
JANUARY-JUNE 1968
January
February
Aprit
May
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Loans and a3vances to the private sector have con-
tributed almost nothing to the growth of money sup-
ply .
South Vietnam: Net Money Supply
November 1967 -March 1968 a/
Billion Piasters
1967
1.968
Nov Dec
Jan
Feb
Mar
Creati~ae factors
International
assets
21.2
21.4
22.,1
23.2
23.3
Financing
of government
70.0
73.5
79.5
83.4
88.1
Financing
of business
27.3
26.8
27.1
28.4
27.9
Total lreative
factors
118.5
121.7
128.7
135.0
139. 3
Neutralizing factors
Quasi-money
9.3
10.0
10.4
9.9
9.3
Government
deposits
10.7
12.9
10.0
8.9
11.9
US aid deposits
q .6
7.1
8.5
9.7
7. 7
Deposits of US
sector
0
0
2.6
2.2
2.6
Other items (riet)
8.8
9.1
6.5
7.8
7.5
Totat neutralising
factors
38.4
39.1
38.0
38, 5
39 . 0
Net monetary creation
80.1
82.6
90.7
96,5
100.3
a. As of the end of-each month.
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Nonagricultural Economic Acti vim Since the Tet
Offensive
8. Saigon and several other South Vietnamese
cities suffered considerab le physical damage and
disruption during the Tet and May-June offensives.
Some industrial plants were destroyed and othe_-s
damaged; inventories were lost as a rPS ult of the
attacks and from looting; transport, communications,
and trade were disrupted; housing losses were heavy;
and thousands became unemployed. The physical effects
of the offensive, however, were far less serious and
widespread than the psychological effects , which re-
sulted in a prolonged crisis of confidence that has
created an economic recession.
9 . Most industrial faci lities are located in the
Saigon area, which until February 1968 had been almost
untouched by the fighting. In 1967, industrial pro-
d~action increased by an estimated 12 percent, or very
close to the average annual rate of ir_crease since
1962. The only major brench of industry to register
a decline in output was texti les , which faced heavy
competition from imports. It was expected that over-
all output would con+inue to rise during 1968 at
about the same rate as in the past, with textile pro-
duction beginning to recover. as a result of import
restrictions. During the Tet offensives, however,
about one-third of the Vietnamese textile mills ,
including the two largest (why ch account for about
40 percent of total textile output), were demolished
or severely damaged. A total of 84 industrial and
commercial establishments were destroyed or damaged.
The cost of rebuilding and repairing or replacing
machinery, equipment, and inventories is estimated
at about $58 million, or one-third of the cost of all
physical damage resulting from the Tet offensive. As
a result, industrial production during the first
quarter of 19 68 was below that of the corresponding
period of 1967. Output of beer, ice, and oxygen was
off by 20 to 30 percent, while cotton yarn and fabric
registered declines of 57 and 68 percent, respectively.
Production of cement fell 61 percent and glass output
declined 56 percent.
10. Five months after the Tet offensive, there
was little evidence that the business community was
making serious plans to rebuild. Clean-up operations
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were under way at most of the damaged firms , but
many of their employees still had not been rehired.
Undamaged textile plants were not increasing output
despite the fact that half of their domestic compet-
itors were either slowed down or put out of business.
It is reported that this cautious attitude was even
more apparent in areas outside Saigon, particularly
among the people whose business is marketing and
transporting goods throughout the countryside.
11. Importers -- many of whom are industrialists
importing for their own use -- also have adopted a
cautious attitude. New orders were already low be-
fore the Tet offensive because of the high level of
inventories and have fallen off sharply since then
except for necessities such as foodstuffs , pharmaceu-
ticals, building materials, and petroleum products.
Some importers have stated that they are trying to
sell to wholesalers at cost in order to achieve some
decree of liquidity. This watch-and-wait attitude
has persisted not only because of the continuing in-
security which has reduced consumer demand but also
because the government has been slow to help business-
men get back or. their feet. Not until 27 April did
the government announce the establishment of a re-
con~truction loan fund, and a program for war risk
insurance was not approved by the National Assembly
until July. The reconstruction loan fund, with
initial capital of $8.5 million, will be supplemented
by a $10 million grant from the Uni. ted States to
provide loans for ;importing replacements for US-manu-
factured machinery and equipment destroyed or damaged
during the Tet offensive.
12 . These funds , however, provide only part of
the impetus necessary to restore business and confi-
dence. Probably very few firms will be willing to
rebuild without some assurance that they would be
indemnified against future loss . Nor will all
importers be willing to place substantial new orders
without some form of insurance for goods in s Forage
or in transit. In the past, truckers and barge
operators have been able to get a kind of insurance
by paying off the Viet Cong, but since the Tet ;.ffen-
sive the latter have begun deliberate mining of
civilian vehicles, especially in the Delta, where
commercial activity is greatest. The government has
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been forced to organize convoys of trucks and barges
in order to move goods in and out of Saigon. It
seems clear, therefore, that some kind of insurance
plan is essential to clear the atmosphere of uncer-
tainty, which mope than anything else has retarded
the return to normalcy. An insurance bill covering
risks of war damage was passed by the National
Assembly on 10 July, but insurance probably will
not be available to the business community before
September. Moreover, coverage will b~ limited to
losses up to 500 million piasters ($4.2 million)
and to those firms that the gover~ima~nt considers
essentia]. to the economy and will nat include loss
of life. Until the provisions fo.r in~r lementation
are announced, it will not be known what kinds of
acts of war are covered, and it is possible that
losses from terrorism or sabotage will not be
insurable.
The Rural Economy
Agricultural Output
13. Until the Tet offensive the prospects for
the agricultural economy during 1968 were relatively
encouraging. After a three-year decline, the 1968
rice crop* was expected to be slightly above that of
1967, and both US and Vietnamese officials were
planning to begin a program to increase rice produc-
tion dramatically during the next four years. The
relatively steady improvement in the life of many
rural Vietnamese during the last two years was ex-
pected to continue as prices for farm products in
urban markets remained high and agricultural inputs
and consumer goods were distributed more widely in
the countryside. The Tet offensive and ensuing
developments have changed this outlook considerably.
Indeed, it now seems probable that, although output
of rice increased this year, production of most
other agricultural products will be lower, and real
income and consumption will decline in much of rural
Vietnam.
* Data on rice output are for tite crop year, which
ends on 31 Math of the i~ear designated.
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14. ?.ice production was not directly affected
by the Communist att?cl~s during the Tet offensive.
Most of the rice harvest, particularly in the Delta
(IV Corps), which accounts for more than two-thirds
of the crop, was completed before the Tet offensive,
and agr_cultural officials report an increase of 8
percent above the 7967 crop (see Table 2).
South Vietnam: Production, Imports,
and Deliveries or Milled Rice
1964-68
Thousand Metric Tons
Year
Production a/
Delta Delive ies
Imports b/ to Saigon ~/
1964
3,196
0
505
1965
3,111
130
449
1966
2,893
434
321
1967
2,602
750
282
1968
1,813
725 c/
300
c/
a. Crop year.
b. Calendar year,
c. Estimated.
Almost all of the increase resulted from higher out-
put in IV, Corps, particularly in the provinces where
the 1967 crop suffered heavy flood damage. A survey
team which toured the Delta in mid-Apri 1 reported
that the surplus available for deliveries to Saigon
could total more than 300,000 tons* in 1968 compared
with 282,000 tons in 1967~if price incentives and
sufficient transportation were available. During the
first six months of 1968, however, deliveries totaled
only 116,000 tons, compared with 161,000 tons during
the same period of 1967. In order to stimulate the
rice trade the government purchased 40,000 tons of
rice in April from Delta merchants at a price above
the going market level.
Tonnages are given in metric tons.
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15. This purchase apparently was too small,
however, to have the desired effect. In mid-July,
therefore, the GVN decided to purchase another
60 ,000 tons of rice from Delta merchants and, once
this rice is shipped to Saigon, to annou.~ce a
guaranteed support price which will be maintained
indefinitely. By these measures officials hope to
draw about 200,000 tons of rice from the Delta
during the second half of 19 68 . Of course , in
addi tion to providing price incentives to farmers,
the GVN will have to ensure at least the present
degree of security on supply routes from the Delta.
16. The continuing uncertainty about the size
of Delta deliveries, which in normal times satisfy
mos t of the rice requirements of Saigon and the
urban areas in the northern part of the country, has
made it difficult to estimate how much imported rice
will be needed in 1968. In view of the increase in
production this year, officials currently are esti-
mating import requirements at about 725,000 tons
compared with 750,000 tons delivered during 1967.
If the government's purch ase and price measures are
not successful, however, in drawing more rice out
of the Delta, it is possible that somewhat larger
imports will be necessary. More than 90 percent
of V.~.etnamese rice imports will come from the United
States, either via the Food for Freedom (PL-480)
program or through purchases by the GVN with its
own foreign exchange.
17. Losses of livestock during the Tet offensive
were heavy, especially in the Delta. These losses,
caused mainly by the inability to transport live
animals to the Saigon markets, were estimated at
about $18 million , or roughly 10 percent of the cos t
of repairing all physical damage throughout the
country caused by the Tet offensive. Dinh Tuong
Province, which has one of the largest livestock
populations in the country, was hardest hit, losing
one-third of its hogs and about 10 percent of its
chickens and ducks. Vietnam's fresh water fishing
operations also suffered from the offensive as a
result of heavy damage to seven hatcheries. US
officials' most optimistic estimate is that fresh
water fish production this year will only equal that
of 1967.
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18. Production of most other important agricul-
tural products probably will continue to d~ cline.
Data for 1967 show that, of the major agri :ultural
products , only the output of green vegetables and
tobacco increased (see Table 3) . The high demand
:for vegetables by urban Vietnamese and US forces
presents truck farmers with such an inviting market
that many rice farmers have shifted either partly or
entirely into vegetable production. Vegetables and
tobacco have a higher rate of return than rice and
can be grown on small plots of land with comparative
ease and security.
South Vietnam:
Production of Selected Agricultural Products
1965-67
Thousand Metric Tons
1965
1966
1967
Vegetables
133
143
192
Manioc
236
280
26L
Sugar cane
1,093
936
770
Fruits
441
379
359
Peanuts
33
34
34
Tea
6
5
4
Tobacco
8
7
g
Rubber
n 5
49
43
Other Aspects of the Rural Econom
19. Although most agricultural output was not
immediately affected by the offensive, *_he attacks
have had widespread repercussions on the rural economy.
Peasants depend heavi ly for their livelihood on the
activities of merchants and tradesmen in the towns
and on the transportation routes linking rural areas
with urban markets . The Tit attacks abruptly reduced
the security of the roads and waterways and under-
mined the confidence of tradespeople . Because the
security status of most roads throughout the country
is changing constantly and reporting on these condi-
tions is erratic, it is impossible to make a meaning-
ful assessment of the entire transportation system.
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Nevertheless, it is clear that the tra-:~portation
system is less secure than it w.~s prior to the Tet
offensive. Government convoys of trucks and barges,
inaugurated after the Tet attacks, s ti 11 are required
to move goods between the Delta and Saigon as well
as in other parts of the country. Little is knowr_
about security on the secondary roads, but most
reportedly are receivi;~~g no maintenance and are
deteriorating.
20. It is possible, however, to make some
general assessment of condita.ons on the four national
roads that are the most crucial to economic activity.
Civilian traffic on the major commercial road in
Vietnam -- Route 4 from Saigon south to Ca Mau in An
Xuyen Province (see the map) -- revived slowly after
the Tet offensive and still is not moving as freely
or as heavily as in January. Since the Tet offen-
sive the road has become a prime Viet Cong target,
and allied military forces have had to conduct
frequen?~ clearing operations to keep it open. As a
result, most of the rice moving to Saigon from the
Delta is being carried by barge convoys, whereas
during 19 6 7 mos t rice was carried by truck via Route
4. Route 20 south from Da Lat apparently has not
been an enemy target and thus has been open through-
out almost all of the post-Te t period. This road,
the second most important in terms of Saigon's food
supply, connects the caf ~.tal with the center of
Vietnam's largest vegetable-producing area. Route 15
from Vung Tau also has remained open with only minor
disruption since Tet. Since February the importance
of Route l5 has increased because the closing of roads
from Rach Gia in Kien Giang Province resulted in the
movement of the larger fishing boats to Vung Tau,
making that city a more important source of Saigon's
fish supply . Unlike the other major roads , Route 1,
which runs from the Cambodian border through Saigon
and up the coas t to the DMZ , has not been open along
its entire length for several years . Interdiction
and closures still are frequent, and most areas .in
I and II Corps continue to rely on the movement of
goods by coastal vessels from Saigon and direct
arrivals of imported goods at the ports of Cam Ranh,
Nha Trang, Qui Nhon, and Da Nang.
21. The los s of security on the roads and water-
ways and in the towns during the Tet attacks resulted
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SOUTH VIETNAM
o ,oo
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in a drastic reduction in economic activity through-
u~~t the countryside. Witt, the waning of the offen-
sive and the restoration of some degree of normalcy,
urban market prices declined dramatically, and by
1 Apri 1 retail prices in S aigon were actually
slightl~l below the level prevailing before the Tet
offensive . It appears that prices paid to farmers
for per!.shable items such as hogs, poultry, vege-
tables, and fruit had fur the most part also re+:urned
to p.re-7'et levels by the beginning of April. Yet the
price of rice -- the most important farm product --?
still is depressed. As of the end of June the price
paid to the farmer for paady (unmilled rice) in the
Delta ranged from 9 to 11 piasters per kilogram,
compared with 12 to 15 piasters a year ago. The offen-
sive i~self and the insecurity since February have
made merchants reluctant to push ahead with the
normal post-harvest purchasing activity.
22. Because of the risks involved, transporta-
tion costs doubled after the Tet offensive and have
remained high. Probably most discouraging to the
rice trade is the fact that, because of ample sup-
plies of imported rice, retail prices of rice in
Saigon have remained relatively stable near the pre-
Tet level. At the end of June, government stocks
of imported rice in Saigon totale:i 156 ,000 tons , or
two months' supply of imported rice for Saigon and
the northern rice-deficit provinces. Retail prices
have not been high enough to tempt many merchants
to risk their lives and property in order to resume
deliveries to Saigon. As noted earlier, the govern-
ment recently decided upon new purchase and price
support measures in order to get rice moving into
Saigon and raise farmers' income. It is too early
to judge the effects of these measures, but US
offic~.als in Saigon consider them workable. In the
past, however, government intervention in the rice
market frequently has been bungled, and the current
program will place tremendous strain on the govern-
ment's administrative capabilities.
23. Some of the same factors that are keeping
the price of paddy law in the rural areas also are
pushing up the prices of goods from Saigon purchased
by the farmers. Fewer trucks are traveling the
roads , and the drivers who take the risk are charge ng
much highe-- fees. This situation is particularly
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true in the Delta and III Corps, which account for
two-thirds of the population, where the V9.et Cc~ng
are making a concerted effort to interdict lines
of communication. Prices of goods such as kerosene,
fertilizer, canned milk, and consumer durables, all
of which must be brought in from Saigon, reportedly
are 15 to 25 percent higher than before the Tet
offensive? Government truck and barge convoys are
moving some goods in both directions, but these con-
voys are inadequate substitutes for the volume of
commercial traffic that moved prig to the Tet
attacks .
24. In brief, the terms of trade have turned
sharply against the rural popula~~e: most farmers
currently are receiving less for their rice while
paying more for nonfarm products. During 1967 the
average price that farmers received for paddy rose
75 percent. Allowing for the increase in the cost
of living, the purchasing power of farmers' cash
income from rice still was about 18 percent above
that in 1966, and there probably was a substantial,
although smaller, increase in total farm income.
During the first half of 1968, farmers' cash earnings
from rice sales were below those of the same period
in 1967, and farm incomes from other agricultural
products also were lower. Since income from the sale
of rice and other agricultural crops and from the
performance of farm-based activities , such as milling
of rice and vending of produce, probably accounts
for roughly 75 percent of total farm money income,
however, it is clear that the decline in total farm
money income has been substantial. With the 15- to
25-percent increase in prices paid by farmers, more-
over, the purchasing power of. farm incomes is cer-
tain ly far below the level of a year ago.
Manpower
Mobilization
25. During the period from June 1965 through the
end of 1965 *~he labor situation in South Vietnam was
extremely tight, largely as a result of the US mili-
tary cons :ruction program. Although this situation
improved during :L967 and there currently is no general
manpower shortage , there continues to be a shortage
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of slcilled labor as evidenced by the large number
of third-country nationals (p.rimarily from Korea and
the Philippines) still employed in South Vietnam.
Whether the government's recent mobilization measures
tigh ten the labor market again depends heavily on
whether the current recession continues. Shortages
of technical skills cannot be relieved by the large
number of refugees or the persons temporarily unem-
ploye~? because of the Tet and May-June offensives .
Moreover, only in the US sector of the economy can
these positions be filled by third-country nationals,
and even the use of such workers in this sector is a
politically sensitive issue in Vietnam.
26. Population and labor force data are inade-
quate to permit any detailed analysis of the effects
of the mobilization measures on the various sectors
of the economy and the activities of government
agencies , but all reports indicate that the economy
could be affected adversely. To date, the most
damaging measures have been the Gallup of reserves
with less than five years' active duty and the
elimination of almost all deferments, both of which
actions were part of the speedup in mobilization
ordered by President Thieu in February. Many
employers had purposely chosen veterans for critical
positions in order to avoid losing es ser~tial person-
nel to the draft. The government originally had set
the Gallup date for 15 MarcY1 with no provision for
deferments. The hardships caused by this policy were
immediately apparent, however, and the government
postponed the date at least a month and set up some
interim procedures for decisions on deferments.
Several government agencies, such as the Directorate
of Civil l~viation and the Saigon metropolitan water
office, were about to shut down certain of their
facilities when they received last-minute deferments
for some of their most essential personnel.
27. The manpower drain will be aggravated further
by the implementation of the 19 June general mobili-
zation bill, which expands the draft age and provides
f.or the recall of veterans with less than 12 years'
service. This bill provides that deferments for a
limited period may be granted to police, Revolutionary
Development cadre, technical specialists, and tea.chGrs
who temporarily have no replacements as well as public
SF.C:R F.T
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health and education cadre serving in the country-
side, but it is not yet clear how this provision
will be implemented. Short-term deferments will
not provide much relief to employers in the private
sector, where as much as one-fifth of currently
employed manpower could be called up. The effect
of the mobilization bill on government services in
the provinces , where twa-thirds of the civil servants
arE located, could be especially serious. The
Minis try of Agriculture, for example, has estimated
that 600 of its employees could be drafted or recalled,
and the Ministry of Education expects to lose possibly
50 percent of the country's secondary school teachers
and 20 percent of the elementary teachers. By the
end of May, Phu Bon Province in II Corps already had
lost its information and finan~~e service chiefs and
was due to lose four more service chiefs in the
future. In addition, the Ministry of Health recently
was ordered by presidential decree not to replace
persons entering military service, and it is possible
that this order will be extended to all other
minis tries.
Internal Migration
28. The manpower situation in Vietnam also has
been adversely affected by the internal migration of
thousands of people, either by choice or as refugees.
As the mainstay of the economy, agriculture has
suffered most from this mass dislocation and migra-
tion of people. According to official estimates of
the labor force, the agricultural sector lost more
than 1.5 million workers between 1960 and 1966. Dur-
ing the same period the nonagricultural labor force
roughly doubled,. increasing its share of the total
civilian labor force from 12 to 28 percent. Most of
this movement probably has taken place sincE~ 1965,
when the tempo of the fighting picked up with the
increased commitment of US forces . During 1965-66,
about 1.5 million persons registered with the govern-
ment as refugees.
29. Moreover, the buildup of US forces meant a
rapid growth of nonfarm economic opportunities for
both skilled and unskilled labor. The opportunities
in construction, transportation, ~tnd other services
as well as the persistent insecu.r:~ty in rural areas
generated a large migration to urb an areas. During
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1967, this movement to urban areas continued, and,
in addition, another 400,000 persons entered the
ranks of refugees. Of the roughly 2 million persons
officially counted as refugees during 1965-67, a}gout
40 percent still were considered refugees at the end
of 1967, while 30 percent had been resettled and the
remaining 30 percent had returned to their original
villages.
30. The concentrated fighting this year in urban
areas has gene~:ated refugees at a much faster rate
but so far has produced no measurable exodus of
people out of the cities. During the high point of
the Tet offensive, almost 900,000 persons registered
as refugees throughout the cot:ntry, and another
180,000 registered in the Saigon area during the
May-June offensive. By the end of June, many of
these people were no longer on the refugee rolls,
having returned to their homes, resettled in govern-
ment housing projects, or received money, cement,
and roofing in order to rebuild. Yet on 28 June
1968
the government still was faced with the problems
of
feeding, housing, and trying to resettle almost 10
percent of the population, as shown in the following
tabulation of refugees
Thousand Persons
Regular
1,133
Tet
19 2
Pos t-Tet
170
Total
1,495
31. Except for agriculture, this large number of
refugees probably has little impact on the labor
market. Most of the Tet and post-Tet refugees are
located in urban areas , and many undoubtedly are
continuing to work despite the loss of thEi.r homes .
Studies on the so-called regular refugees -- those
not identified with the Tet or May-June offensives --
indicate that many refugees who had been employed
before their migration still were employed, although
the majority had been forced to change occupations.
These studies show that the percentage of unemploy-
ment among refugees varies considerably by area of
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the country. During 1967, for example, unemployment
among the refugee labor force in Phu Yen rose from
l to 33 percent after migration but from 1 to only
9 percent in Dinh Tuong Province. The impact of the
refugee population on the labor force is further
minimized by its age/sex ~~mposition. According to
an early 1967 survey of 22,094 heads of refugee
families representing 113,067 persons taken in 59
refugee centers through South Vietnam, the refugee
population was composed mainly of children and,
probably, more females than males . The survey
show,ad that children of both sexes up to 15 years of
age totaled almost half of the sample population,
with males outnumbering females in this group. Be-
yond 15, however, females were in the majority in
every age grouping.
Outlook
32. The Communist offensives during the first
half of 1968 have greatly changed the economic situa-
tion in South Vietnam and have made the economic
outlook highly uncertain. A great deal depends on
whether military and political developments bring
about a revival of confidence among the urban popu-
lation. It is now estimated that during 1968 the
money supply will increase by about 50 billion pias-
ters, or roughly 60 percent, compared with 26 y~ercent
in 1967 and an original 1968 estimate of 24 peg:cent.
Such a large monetary overhang poses an obvious
threat of renewed inflation. But if the enemy con-
tinues or intensifies the offensive in the Saigon
area, business confidence will not be restored and
the economic depression will continue. In such a
case, incomes and the supply of domestic and imported
goods in the cities would decline and the urban
population would for the first time begin to experience
some degree of austerity. Military mobilization,
however, would be facilitated as depressed activity
in the private sector of the economy resulted in
reduced demand for manpower.
33. Deteriorating security conditions also will
mean the failure of plans to raise agricultural pro-
ductivity and rural real incomes. Late in 1967, US
and GVN officials adopted a plan to make Vietnam a
self-sufficient rice producer again by late 1971.
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Such a goa:i would require about a 50-percent increase
in production in only four years, relying mainly on
the use of the new, more productive IR-8 and IR-5
rice seeds developed in the Philippines. The program
probably was too ambitious under the conditions
existing in late 1967; it looks even less realistic
now. The maximum benefit from the use of the new
seeds requires a massive reeducation of farmers and
depends upon afar greater use of fertilizer, pesti-
cides, and water control than now prevai ls. Continu-
ing insecurity will make it difficult for US and
GVN technicians to provide the services that must
accompany the use of the seed. Moreover, the neces-
sary inputs require large cash expenditures by
farmers , but the low paddy prices of the last five
months plus losses of other crops and livestock mean
that farmers will have less money to spend and less
incentive to seek credit for these expenditures.
There reportedly still is considerable interest on
the part of both peasants and local officiate.. ~n the
IR-8 program, but the 110 ,000 acres scheduled to be
planted with IR-8 this year already have been cut
back: to about 92,500 acres , and it is doubtful that
even this goal will be achieved.
34. Increased insecurity and the concomitant
failure of the government's new rice program would
mean an additional decline in real income for farmers
as rice prices remain low and transportation costs
for goods procured from urban areas remain high.
The decline in real incomes will be most severe in
III and IV Corps , where farmers depend heavily on
Saigon as their primary market and major source of
agricultural inputs and consumer goods. The peas ants
in I and II Corps, which are not surplus-producing
areas, undoubtedly will continue to be poorer than
their southern counterparts, especially if comriler-
ci al traf f i c on the major roac:s in the northern half
of the country remains at low levels . Nevertheless,
it i5 unlikely that there will be any food shortages
in I and II Corps, which contain four major ports
through which additional food and other necessities
can be moved.
35. If, on the other hand, security and a norma 1
business atmosphere are restored, rapid inflation is
likely because of the growth of the quantity of money
in the hands of the population and a probable lag in
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the growth of imports and productions. The labor
shortages expected to result from increased mobili-
zation will further feed the inflationary process .
36. Faced with growing requirements for recon-
struction and mobilization, the GVN is being forced
to increase its expenditurPS . Accordingly, it has
been attempting to cut purchasing power by increas-
ing taxes. An increase in tax rates on imports was
enacted by decree on 1 April, and a 20-percent sur-
charge on most domestic taxes was signed into law on
4 July. In addition, plans have been made to increa:;e
POL taxes in the near future. Although collections
of revenues during the first five months of 19 6 8 were
somewhat higher than during the same period of last
year, it seems unlikely that total tax revenues
during 1968 will exceed last year's collections.
Collections of domestic revenues so far this year
have been higher, primarily because of higher income
tax collection. But the increase in income tax
receipts is a nonrecurring one . It almost certainly
reflects t-.he withholding of income tax by US private
contractors and US government civilian and military
agencies, which did not commence until July 1967.
The taxes withheld from current income were paid in
addition to those based on the previous year's in-
come . There is no reason to believe that revenues
from income taxes during the remainder of 1968 will
be above those of ~TUly-December 1967, when withhold-
ing was in effect, and they could be lower in view
of the adverse effects of the offensives on income.
Customs revenues, which account for 30 percent of
national revenues , also will decline because imports
during the remainder of 1968 will be below the 1967
leve 1. Revenues both from customs and from taxes on
domestic production and sales will rise as these
activities pick up, but it is likely that they will
rise less rapidly than demand. The seriousness of
the inflation that will result from a recovery of
economic activity will depend, of course, on the
timing of the economic reversal. In order to allow
time for an orderly response of imports and prod~lc-
tion to increased demand, a gradual restoration of
security and business confidence would be best.
37. There are other measures that the GVN could
take to minimize inflation. Tax collections could
be improved, but this is a difficult process which
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is unlikely to bring in much revenue soon. The
most effective way of getting rid of the excess
money in circulation would be to call in all cur-
rency and issue new piaster notes with limitations
on the amount of new currency issued to any one
individual. Such a reform, however, would encounter
strong political opposition and might further under-
mine public confidence. Another method of stemming
inflation would be to provide attractive interest
rates -- exceeding or adjusted for the rate of price
inflation -- in order to increase savings. This
reform, which has long been urged by US advisers,
has met with no encouraging response from the GVN.
38. Action could also be taken to minimize the
lag in the adjustment of the supply of goods to grow-
ing demand. Imports probably are the most important
way of absorbing the new inflationary pressure, and
the GVN has ample foreign exchange reserves with
which to finance imports. Although it takes two to
three months to order and receive imports from near-
by sources and much longer from the United States
and Europe, measures could be taken to speed up the
process by eliminating much of the red tape involved
in the granting of import licenses. Moreover, the
government could ens~;re that ample credit and war
risk insurance are avai lable to importers .
39. The decline in the s tandard of living in
rural areas will be halted if security, particularly
on the roads, improves and merchants are able to
insure themselves against losses . Improved trans-
portation combi:~ed with a government program to
guarantee a high price of rice would be a boon to
farmers. An increase in the retail price of rice in
Saige*~ probably would add to wage pressure in the
cities, especiall~~ if the current recession were
ended, but the urb an consumers have borne none of
the increased costs of marketing rice since the Tet
offensive. Rice prices in Saigon still are at the
pre-Tet level, while paddy prices are well below
that leve 1.
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