THE SOUTH VIETNAMESE ECONOMY AND U.S. AID

• Document Type: CREST
• Collection: Library of Congress
• Document Number (FOIA) /ESDN (CREST): LOC-HAK-59-2-2-2
• Release Decision: RIFLIM
• Original Classification: S
• Document Page Count: 13
• Document Creation Date: January 11, 2017
• Document Release Date: January 4, 2011
• Sequence Number: 2
• Publication Date: January 14, 1975
• Content Type: MEMO

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NATIONAL SECURITY COUNCIL
aid to the Vietnamese economy. It makes a strong case for the con-
tinuing requirement for economic aid over the rest of the decade,
while noting differences among agencies as to the necessary level.
The report is deficient in failing to point out the link between military
aid and economic development.
ON-FILE NSC RELEASE
INSTRUCTIONS APPLY
INFORMATION
January 14, 1975
SECRETARY KISSINGER
A. DENNY ELLERMAN
0146
The South Vietnamese Economy and
U. S. Aid
The attached intelligence memorandum addresses the relation of U. S.
(1) The Vietnamese economy has adjusted to the withdrawal
of U. S. troops and declining aid levels much better than
anyone would have expected two years ago. On this basis,
it is judged unlikely that economic factors alone will lead
to political unrest in the near future.
(2) The requirement for substantial economic aid will
continue for the rest of the decade. Estimates of the needed
amount vary with assumptions concerning the resilience of
the economy and security conditions. The lowest estimate
is $500 million annually.
The memo contains a further useful clarification concerning potential
oil revenues. If the current finds turn out to be commercially feasible,
it will be at least 1980 before important revenues start to flow. Oil
will not reduce the aid requirement in the 1970's.
SECRET/ SENSITIVE
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to eliminate food imports, and the movement of labor back to me
right direction. Private consumption had been squeezed without
political consequence, agricultural production had increased enough
Until very recently, it could be said that everything was moving in the
The opportunities for employment in the countryside have even begun
a process of reverse migration from city to country. This move-
ment is central to the development of the food production and export
potential of the Mekong Delta, which is South Vietnam's best prospect
for reducing its dependence on aid.
increased agricultural production has brought South Vietnam to the
threshold of food self-sufficiency after a decade of food imports.
or (3) domestic production increases. Increased domestic production
is the safety valve which permits the GVN to alleviate the political
and military costs that otherwise would be associated with declining
aid. Over the past two years, this safety valve has worked well as
expenditures are trimmed; (2) private consumption is diminished;
Economic aid can be reduced to the extent that (1) GVN military
The Economic Significance of Military Aid
support an increased defense burden with diminished external
assistance, then the current hostilities will surely bring out what the
North likes to call the "internal contradictions" of the Thieu govern-
of labor from city to country. If the increased violence tends to keep
labor from moving to the countryside, while also forcing the GVN to
military expenditures; it also makes problematic the reverse migration
increased level of violence removes the possibility of reducing GVN
seem an increasingly hopeless game as the economic foundations of
an independent South Vietnamese economy were laid. The recently
This situation rested upon a military stalemate which, while not per-
mitting the reduction of military expenditures immediately, did
suggest the possibility should the adversary ever tire of what would
countryside had begun.
rnent.
economic aid to promote the development which alone holds out the
as they have in the past; but aid of this sort is only disguised refugee
support. It keeps people eating without providing employment. A
better solution would be to recreate the status quo ante which permits
The contradictions could be circumvented by increased economic aid,
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promise of reduced aid. The hallmark of the earlier situation was the
military stalemate. It needs to be recreated either by providing the
GVN the arms and munitions to reestablish the balance or by persuading
the North to desist, or more probably both.
It is still early for a definitive prognosis, but the signs indicate that
the continuation of the encouraging economic trend since the ceasefire
depends on a level of military aid that will maintain the stalemate. A
deteriorating military situation causes economic aid to provide pro-
gressively less development and more relief. We need now to recognize,
as has not been in the attached memorandum, the economic importance
of adequate military assistance.
The development of a more self-reliant South Vietnamese economy
depends on two conditions: (1) adequate economic aid to support the
level of military expenditures and to provide investment for the
employment of idle urban labor in the countryside, and (2) security
conditions that permit reverse migration. Economic aid addresses
the former, while military aid conditions the latter. The South Viet-
namese economy is equally dependent upon both.
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Secret/Sensitive
SUPPLEMENTAL RESPONSE TO
PART I OF NSSM 213:
Secret/Sensitive
DCI/NIO 025.75
7 January 1975
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The Soutb Vietnamese Economy and US Aid
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INTERAGENCY INTELLIGENCE MEMORANDUM
SUBJECT: Supplemental Response to Part I of NSSM 213: The
and most city-dwellers have been cut sharply and much of exist-
... 4a v vaa baize -_ Liu J ua 44.~.a wGi. I %W ca vu1. .k %-y J1 1411 ac 41.. 1i.1 14j
changes over the past decade and is likely to avoid substantial,
political unrest from economic factors alone in the near future.
,Nevertheless, real incomes of the military, public servants
sary at least until then to assure the political survival of
ing industry is severely depressed.
-- A marked deterioration of security conditions would obviously
create a situation requiring more US economic (as well as mili-
tary) aid. Even assuming no significant decline in security
through 1980, however, major US economic support will be neces-
- A gradual phase-down of US economic aid to $100 million or
less by 1980 would place the survival of the GVN in serious
jeopardy, though the government would not necessarily collapse
rthe Government of Vietnam (GVN).*
quickly.
cause of South Vietnam's advances in agricultural production.
Here and throughout this memorandum all values are in 1974 US
PL-480 economic aid will be limited by Congress to $450 ., mi lli_on,
and PL-480 shipments are unlikely to exceed $100 million be--
present political and economic structure would survive.
U economic assistance in FY 1974 amounted to some $650 million,
.including appropriations of some $350 million in aid grants, a
$50 million development Loan, and $250 million in PL-480 ship-
ments of agricultural products from the US., For FY 1975, non-
Should US support drop sharply to an annual level of $100
million or less much before 1980, it is doubtful that the GVN's
dollars,
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-- There are different views among observers on precisely what
- The Central Intelligence Agency believes, assuming no further
t ditions that this objective would
amounts of US aid are needed to permit at least a slow rate or
economic progress. Since the South Vietnamese population grows
at about 3 percent a year, a 3 to 4 percent rate of growth in
GNP would be necessary to allow even a small (less than 1 per-
cent) increase in per capita incomes.
decline in secure y con ,
require average US economic aid of some $700 million annually.
The Department of the Treasury believes that per capita in-
comes could at least be maintained roughly at the 1974 level
\C',, ' from now through 1980 with average annual US economic aid on
Agency-believe that security conditions will deteriorate further
- The Department of State/INR and the Defense Intelligence
the order of $500 million.
and preclude any early economic recovery or sustained growth,
and that substantially more than $700 million per annum in US
economic aid will be required for the foreseeable future.
-- All agencies of the intelligence community agree that the GVN
over the next 5 to 6 years can best cope with reduced aid levels
by giving priority to expanding agricultural output in order to
replace food imports and develop exports.
- The Department of the Treasury sees 1974 as an important
INR believe that the circumstances surrounding the 1974
crops were exceptional, and that higher imports of ferti-
lizer and other producers' goods will be necessary to assure
continuing agricultural expansion.
- The Central Intelligence Agency and the Department of State/
turning point in achieving rice and sugar self-sufficiency
and believes this strong performance can be repeated without
substantial additional growth in imports if security condi-
tions are no worse than in 1974.
-- Regardless of how much aid is pumped into South Vietnam from
p
economy have permanently changed key features of Vietnamese
1975 to 1980, security conditions, large-scale relocations o
ulation and a greater degree of integration into the world
no
society. Any program designed to return South Vietnam to the
peasant economy of the early 1960s in the interest of reducing
.the country's dependence on US aid would have little prospect
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jdeterminant. of South Vietnam's political stability over the rest
of aidneeded Tto insure survival of the Government of Vietnam (GVN)
The weather, changes in security conditions, political trends not
directly related to economic conditions, and the GVN's ability to
implement sound economic policies all affect aid needs. Moreover,
the demonstrated ability of the Vietnamese people to cope with ad-
versity forces great caution in estimating their political "break-
ing point." Owing to these uncertainties, there are differences
within the intelligence community on the question of appropriate
US aid levels to South Vietnam. These views are presented in the
following paragraphs.
I. THE SETTING
2. Since the mid-1960s the South Vietnam economy has been
wrenched by many sharp changes that have affected output and living
standards. These have included large-scale mobilization, major
Communist military offensives, a rapid buildup and then somewhat
slower drawdown of the US presence, and rapid inflation. Although
US economic aid long provided the means largely to offset these
shocks, that aid has been declining in real terms for several
years.
3. Because of the cumulative impact of such changes, South
Vietnam almost certainly will not return to the sort of economy
that prevailed in the early 1960s before the major step-up in US
military involvement. At a minimum, certain of the new features
in the economy will persist at least through the rest of this decade.
long as there is no major commun.su ozi i i-vw
to strain the national budget and to draw off large
cities, and will provide a basis for continuing high
__ An unusually large share of the population will
Security conditions will prevent full use of all
arable land, although there will be continuing slow
migration out of the cities an&back to the land as.
urban unemployment rates.
-- A standing army of some 1 million men will continue
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tional defense and away from the production of
numbers of technically qualified young men to na
goods.
4. The rapidity of recent changes and a lack of firm data
$60 million for 1973 and appeared on their way to $100 million in
1974, slipped in recent months and will now only reach $80 million
in 1974.
ence are working sharply below capacity or are out of business.
Real incomes in urban areas are still falling, and there is wide-
spread urban unemployment. Exports, which grew rapidly to reach
make it difficult to determine where the Vietnamese economy'is now.
During 1971-1972 major economic reforms were undertaken to give
South Vietnam a greater chance of success in meeting its own de-.
velopment costs over the longer run, and these had a short-term
deflationary impact. At the same time, the process of US military
withdrawal, underway since mid-1969, was accelerated.''Before
either of these.factors had worked their way through the economy,
the 1972 Communist spring offensive uprooted large numbers of Viet-
namese and further depressed consumer demand. The industrial re-
cession deepened and unfavorable weather contributed to a,decline
in crop production in late 1972. Since then, soaring world market
prices have spurred both domestic inflation and recession by push-
ing up import costs.., and leading to a reduction in import volume..
.5. Currently the economy shows elements of all these strains
and some signs of recovery. Many industrial firms and most of the
services that were directly or indirectly supported by the US pres-
prices for the whole of 1974, but prices have risen very little in
the last few months. Moreover, large-scale urban unemployment is
encouraging a continued -- albeit small -- movement of people back
to rural areas, where there is the best prospect of production in-
creases that will both meet South Vietnam's food needs and allow
of 1974, now appears under better control. The outlook now is
for something on the order of a 40 percent increase in consumer
6. On the other hand, agriculture, which is the mainstay of
the economy, has had two good years in succession, and the current
rice crop apparently will be a record 7 million tons. Foreign ex-
change reserves are about $200 million, up from $150 million at
the start of the year, although much of the increase came from one-
time signature bonus payments by oil companies and repatriation of
funds held abroad by liquidity-tight businesses. Inflation, which
reached a rate of 65 percent last year and in the first few months
substantial exports.
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7. Although there is general agreement throughout the intel-
ligence community concerning the major features of South Vietnam's
economic situation, there are differences on some specifics which
have implications for assessing future aid needs. Some of the dif-
ferences result at least in part from the decline in GVN statisti-
cal reporting and the total absence of hard information on such
important questions as rice and chemical stocks.
8. For example, despite the anticipated excellent 1974-1975
rice harvest, estimates of future agricultural performance are
greatly influenced by what is assumed about the levels and the
use of existing chemical fertilizer stocks. CIA and State/INR
believe that in spite of relatively low import levels for fertilizer
in 1974, high application rates for fertilizer and other chemicals
were sustained in the current crop year by drawing down in-country
stocks. Considering that there are fairly immediate limits to
such stock drawdowns, the position of CIA and State/INR is that
larger imports of agricultural chemicals will be necessary to
maintain yields in the future. Treasury believes that a substantial
increase in imports of fertilizer would not be required because
adequate agricultural progress also could be achieved through
reclamation, double cropping and.reversion to traditional methods
including greater use of animal fertilizer for domestic strains
of rice.
9. Estimates of Vietnamese import needs are also strongly
influenced by how great a change in South Vietnam's industrial struc-
ture is considered both desirable and feasible. The Department
of the Treasury believes that to the extent South Vietnam develops
manufacturing industries, these should be better adapted to its
needs and be less dependent on imported materials. 'Although CIA
and State/INR agree that this is an appropriate development
strategy, they note that existing and new Vietnamese industries
will be heavily dependent for some time on foreign suppliers of
machinery, fuels, metals, chemicals and fibers; consequently,
CIA and State/INR believe that even modest industrial recovery
in keeping with steady agricultural growth leads to larger imports.
10. Despite these differences, most observers agree that
South Vietnam is at best at the beginning of an economic recovery.
The focal point of future growth will be the agricultural and
related sectors, which have shown great. flexibility in adapting
to disruptions and have the best prospects for providing in the
short term the bulk of incremental output, employment, and exports.
The unusually largy service sector (including the armed forces)
SECRET
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 output would be inevitable. In these circumsances.
u
$100 million annually by 1980, large furt er c
of GNP, will be hard-press 7 lies.
of stringent financial conditions and tight foreign exchange supplies.
II. SUPPORT LEVELS
11. Continued large-scale US economic aid will be important
to the survival of the GVN in the next five years and beyond. If,
for example, US assistance were phased down gradually to about
tc in national
h
e
o
is on a plateau an
ties into more traditional, viable pursuits will of necessity be
a slow process. Industry, which accounts, for roughly 10 percent
ed to ad'ust to' the likely continuation
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ment of labor away from war-oriented activi-
A m
v
-- The South Vietnamese would not be able to
substitute for a reduction of US aid of this
Such developments would place the survival of the GVN in serious
jeopardy, especially if security conditions do not improve, though
the government would not necessarily collapse quickly. If, how-
ever, US economic aid were cut abruptly and soon to a $100 million
annual level, it is doubtful that the GVN's present economic and
political structure would survive.
12. There are, however, different views on precisely what
amounts of US aid are needed to permit at least a slow rate of
economic progress. The Department of State/INR and the Defense
Intelligence Agency believe that security conditions will deteriorate
further and preclude any early economic recovery or sustained growth
without substantial increases in US economic assistance beyond $700
million per annum for the foreseeable futiire.* The relative degree
NIE 53/14.3-2-74 of December 23, 1974, entitled "Short Term
Prospects for Vietnam," states that "at a minimum the Communists
will sharply increase the tempo of fighting" in the next six
months. The estimate also expresses the judgment that ...the
r serve to exploit
They could not obtain offsetting aid from third
parties.
Per-capita import levels, already low, would
be further reduced.
magnitude.
major vulnerabi Zltzes in the ou
maintain the momentum of their military effort." Furthermore,
the estimate states that there is a possibility of an all-out
Communists will commit part of their strategic
S th Vietnamese position or to
NVA/VC offensive in 1975 or 1978..
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i
stmating that exports, other foreign aid, and foreign private
investment will probably average some $300 million annually,
CIA concludes that the US will be called on to provide the re-
maining $700 million.* Such assistance would underwrite Vietnamese
imports of at least $1 billion for machinery, raw materials, and
fuel for a recovery and growth strategy centered on agricultural
expansion and export development. Food aid, until this year an
important part of US support, would probably be unnecessary; and
substantial increases in food and other primary exports would
become possible. Domestic industry could recover somewhat to
meet the demands of growing incomes in the farm sector and
avert a rise in consumer imports. Both through its direct effects
on production and its signal effect on potential foreign donors/
investors, who increasingly believe the US has written South Vietnam
off,. this level of aid would enhance the prospect of other kinds
of capital inflows that would ultimately permit substantial US
annual imports of $1 billion (1974 prices) would be required to
permit modest (one percent or less) increases in per-capita incomes
between now and 1980, assuming no sharp changes in security condi-
tions. (Since the South Vietnamese population grows at about 3
percent a year, a 3 to 4 percent rate of growth in GNP would be
necessary to allow even a slow increase in per capita incomes.)
E
13. The Central Intelligence Agency believes that minimum
city conditions and their effects on Vietnamese priorities and domes-
tic and foreign business attitudes will leave the GVN at least as
dependent on US economic assistance in the foreseeable future as
in the past.
ers
g o
refugees and will largely inhibit expansion of the agricultural sec-
tor and ancillary activities, export growth, and the securing of
lines of communication. In these circumstances unfavorable -
p
n
e
military developments that will robabl e ace of
P Y Produce tar numb
f
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of stability resulting from stringent economic measures adopted
by the GVN during 1974 will prove only tern
ora i
th
f
aa.u reduction without adverse impact.
affect significantly the $700 million average.
what is needed to assure. sustained agricultural growth, to
.If security and weather conditions remain '6favorabIle, the path
of the aid use would be a rather modest decline from the $700
million annual Level toward the end of the period. CIA does
not believe this decline would be large enough, considering
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14. At the same time, CIA believes it is im
ortant t
no
p
o
te
that certain broader objectives could not be met with this level
j+4VUUVL.,U? 1t notes also a return of some workers back to the
farm region, feels that rice and sugar self--sufficiencyhas es-
sentially been achieved and that South Vietnam has a fairly early
a ees) would probably not exceed $125 million in 1980, with
related private sector inflows adding perhaps $75 million.
16. The Department of the Treasury believes that the CIA
and State/INR positions do not adequately allow for the extent of
economic readjustment back to the urban consumption patterns of
the 1950s and early 1960s which has occurred since the US departure.
Treasury notes the continuing prosperous conditions in the delta
asis for projecting major revenues from this source during 1975-
1980. Considering security problems, normal engineering lead times.,
and some of the administrative difficulties experiences so far,
there is a strong possibility that crude oil will not be produced
in appreciable quantities in this period. Under an optimistic
scenario, substantial earnings from oil probably could not begin
until 1978, and such earnings (including those from production
and 11 f
i4i 1576 Jw.+0L_u1i~_tully Lne.a_Lreaay aepressed mili-
buildings and remote bridges, roads and power
rebuild non-vital facilities such as some public
tart' and civil service salaries;
"nes, damaged during the war;
initiate major make-work projects for the unemployed;
expand public services in the areas of veteran
benefits, education, public health, and provisions
for the aged and infirm.
relax what are now among the stiffest tariffs and.
controls in the world on consumer imports;
15. CIA and the Department of State/INR recognize the poten-
tial importance of oil discoveries but feel that there is still scant
b
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holdings, it concludes that the GVN's need for US economic aid over
the next few years probably could be closer to $500 million annually,
given sound GVN economic policies. Aid of this magnitude, in
Treasury's opinion, would not only maintain per capita incomes at
about the 1974 level, but would also allow some income redistribu-
tion from the agricultural sector to soldiers, civil servants and
evidence with recent observed improvements in foreign exchange .
countryside and the beginnings of small-scale public works projects
that will help alleviate employment problems. Combining this
urban dwellers.
SECRET
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