Vietnam: Policy and Prospects, 1970

I would like to talk first about the economic problems of stabilization and Vietnamization.

THREAT OF INFLATION

Most of the assistance AID has provided South Vietnam has been given to prevent runaway inflation. Without external aid to support the necessary expansion of South Vietnam’s national budget, its economy would have succumbed to a destructive inflation. The threat of such an inflation emerged in 1965 as defense spending rose, as U.S. base building began to put strains on manpower and as Vietcong interdiction of transport curtailed the distribution system.

Domestic production fell as farmers were drafted for military service, were driven from their land, or sought the security of the cities. Those who remained on their farms produced less, as their access to markets was cut. In all, over % million Vietnamese in the private sector who had been engaged in economic pursuits were mobilized to the public payroll and service in the nation’s defense.

The most costly declines in production were those in rubber, the nation’s leading export, and in rice, the foundation of the rural economy. By the end of the 1966-67 crop season, rice production had fallen by more than one-fifth, requiring South Vietnam to import more than twice as much rice that year as she had exported only 3 years earlier.

In addition to falling production, there were dangerous increases in money supply as Vietnam’s defense budget and spending by United States and other free world forces grew.

These three trends — falling production, the mobilization of manpower to the public sector, and rising expenditures — created a classic inflationary situation in which too much money competed for too few goods.

It was necessary to contain this inflationary threat, not just to avoid the kind of economic chaos which has stricken other countries in similar circumstances, but to preclude the human suffering, despair, and political instability which would have ensued. To have failed in this would probably have meant to have failed in the total effort, just as allied troops were arriving to help South Vietnam avert a military defeat.

STABILIZATION EFFORT: THE IMPORT PROGRAM

A major feature of the stabilization effort which was begun in 1965 has been a combination of United States and Vietnamese Government (GVN) financed import programs which eased the inflationary pressure of the growing money supply by making goods less scarce. At the beginning of the period, the volume of U.S. imports — that is. Public Law 480 food for peace and food for freedom, and {p.572} AID imports — was greater than that of GVN imports. These U.S. imports were substitutes for goods, such as rice, which could no longer be produced in sufficient quantities, and they met new and essential demands within the economy created by the war. They also generated revenues to finance the national budget.

United States financed commercial imports peaked in 1966 when AID and the Department of Agriculture provided $335 million in commodities. In succeeding years South Vietnam’s foreign exchange receipts rose with an increase in spending by free world forces. This was largely dollar spending by the U.S. Department of Defense for its piaster needs. As this occurred, AID import financing was cut back to shift more of the import bill to the Vietnamese to avoid unwarranted buildup of their foreign exchange reserves.

Total commercial imports financed under both programs rose from $282 million in 1965 to $659 million in 1969. During the same time, Mr. Chairman, government revenues derived from these imports which were needed to finance the wartime budget shot up eightfold, from about 6 billion piasters in 1965 to about 52 billion in 1969, the latter amounting to some 36 percent of the national budget.

A second major feature of the early stabilization effort was devaluation of South Vietnam’s currency in June 1966, to a new rate of 118 piasters to one U.S. dollar, roughly one-half of its previous worth. This increased the price Vietnamese importers were required to pay in piasters for the same amount of goods, lowered demand for imports, and reduced the need for foreign aid to finance them.

The Chairman.  What is the black market rate?

Mr. MacDonald.  Pardon, sir?

The Chairman.  What is the black market rate?

Mr. MacDonald.  The last quotation when I left last week was, I believe, 356 last week. I do not know what it is today. We can supply that sir.

(The information referred to follows:)

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BLACK MARKET RATE FOR U.S. DOLLARS (AID)

The black market rate as of Mar. 9, 1969, was 362 piastres to the dollar.

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A third feature of the overall stabilization effort has been a continuing improvement in the administration of internal taxes, as distinct from revenues from imports. There have been improvements in collections and revenues have increased substantially from 11 to 37 billion piastres in the last 4 years, but most of this increase is attributable to inflation. Much obviously still remains to be done. The Ministry of Finance is introducing improvements and striving for better performance. A 35-percent increase of 13 billion in revenues from internal taxes is expected in 1970.

STABILIZATION EFFORT: DOMESTIC PRODUCTION

A final feature of the overall stabilization effort has been the series of measures which the South Vietnamese have undertaken with our {p.573} help to encourage domestic production, to restrain imports, and check their reliance on foreign aid. Imports financed under AID’s commercial import program include, in addition to essential consumer goods, basic raw materials and selected capital equipment to maintain and increase domestic production. Among the most important of these, as an example, has been fertilizer. It has been subsidized to induce farmers to use it, and during the last 3 years its importation and distribution have been transferred from less efficient bureaucratic hands to the private sector. The use has doubled in that time.

But Vietnamese policy actions have also been required to achieve domestic production increases. In 1967 and again in 1968 the Government of South Vietnam raised the price of rice, a politically difficult move, in order to provide incentives to farmers to grow more of it. These price incentives and — for the first time in history — the ready availability in markets throughout South Vietnam of agricultural inputs of all kinds, of fertilizer, pesticides, and pumps — combined to make possible in late 1967 a dramatic new program to increase rice production through the introduction of the now well-known miracle rice seeds from the Philippines. The ambitious goals the Vietnamese set for the rapid introduction of these miracle seeds, despite the substantially complicated cultivation procedures they require, are being met. Production of all kinds of rice for the current crop year is expected to be 5.1 million metric tons, the best since 1964, and the Vietnamese foresee self-sufficiency beginning in 1971.

RESULT OF STABILIZATION MEASURES

What has been the result of these stabilization measures?

The basic result has been to avoid the runaway inflation that was threatened and to slow the rate of price increases. From July 1966 to January 1970, a period of 3-1/2 years, the average annual rate of increase in the cost of living in Saigon was held to 27 percent. That is a lot of inflation, but it is strikingly less than the 150 percent annual rate of increase which occurred in Korea in the comparable period from 1950 to 1953, bringing with it in that country and at that time not just austerity, but widespread suffering.

In contrast, there has been no hardship from purely economic causes for most South Vietnamese families since 1965. If anything, price inflation has probably been exceeded by an increase in average family real income, as the old economy of traditional underemployment — which was further depressed by heavy migration to the cities at the beginning of this period — to one of full employment with jobs for all employable members of a family. I cannot pretend that good statistics are kept on all these things, but it is clear, I think, that more South Vietnamese are gainfully employed than ever before; they have a more varied and nutritious diet, and they have access to a range of producer and consumer goods which have expanded their social and economic horizons.

From the foregoing you might conclude, Mr. Chairman, that we are overly content that efforts we made to maintain relative stability in Vietnam’s economy have been successful. We are not. There have never been grounds for complacency in my time, at least, nor are there in the rime ahead. Fighting inflation in wartime is like running a high-hurdles race; there is always a new obstacle just ahead. The economic impact of Vietnamization is the next hurdle. {p.574}

ECONOMIC IMPLICATIONS OF VIETNAMIZATION

Decisions taken in June 1969, setting higher South Vietnam force levels, made possible the beginning of the reduction of U.S. troop levels. But they called for a projected increase in the GVN defense budget of almost 40 billion piasters, nearly a doubling of the defense budget, and this immediately intensified inflationary pressures. As a corrective measure, in October 1969 the Government decreed heavy increases in import taxes on less essential goods. In 1970 these austerity taxes will nearly double revenues derived from imports by raising an additional 30 to 35 billion piasters, and in so doing will be a major factor in financing the initial costs of Vietnamization. But, they will not be enough. As American servicemen leave, South Vietnam’s troop levels and its defense spending will necessarily continue to go up. The defense budget will grow further still as U.S. military base facilities, naval vessels, aircraft, and artillery are transferred to Vietnamese forces, introducing heavy new maintenance and operation costs to the budget.

We believe it is essential that the Vietnamese prepare to do as much as they can themselves to meet these rising costs of Vietnamization. They have been doing a great deal to cut least essential activities from their budget and to increase their tax collections; they can be expected to continue these efforts. And their success in reversing the decline in domestic production triggered by the war has already been remarkable, I think. But there should be renewed emphasis, despite the war, on the development of domestic production to begin to reduce the need for imports and for foreign aid in the time ahead. There are several opportunities to increase domestic output and some export potential as well, even in the relatively short run. Naturally, however, with 1.1 million men out of a population of some 17 million soon to be under arms — and I would interpose here, Mr. Chairman, that this is a defense force in the magnitude of 13 to 14 million people in American population terms — with such a force soon to be under arms and with the economy already in the condition of over-full employment, increases in domestic output and export expansion will come slowly.

A high level of U.S. economic assistance will be needed in the next few years to help finance the cost of Vietnamization. We have not yet determined the levels of assistance which will be required. When the conflict will end, how it will end, the rate at which U.S. forces will be withdrawn, the level of Vietnamese forces that need to be retained after the war, are all questions which have a bearing on these requirements and which we do not have answers to today.

EFFORTS TO ACHIEVE RAPID SOCIAL CHANGE

Let me turn now to another facet of the AID program, our assistance to the South Vietnamese and their efforts to achieve rapid social change.

Colonialism established economic and social patterns inadequate to the needs of an independent Vietnam. The French left a limited range of social services, established to support and perpetuate their position as the occupying power. They left a French-oriented school system providing French education to children of the Vietnamese elite: health services largely limited to the capital and province towns, {p.575} administered by French or by French-trained Vietnamese; a system of government administration geared to a colonial society, staffed by Vietnamese trained more to control than to serve. These Government functions had three things in common: They were highly centralized, preserving authority in a few hands; they were static, drawing on the experience of the occupying power, without the potential for self-evaluation or constructive change, and they were intended to perpetuate the privileged position of the elite.

With independence, South Vietnam was hard-pressed to maintain even these limited kinds and levels of administration. Partition had denied it most of the nation’s industrial base and much of its ability to school and train its manpower. Moreover, South Vietnam’s leadership came to the task of nation-building with a sense of aspiration, perhaps, but with few clear goals, and it tended to think in terms of continued centralization, autocracy and privilege.

Yet, that leadership sought foreign technical assistance to help begin a process of evolutionary change. And in 1965, even as the war intensified, the nation’s leaders consciously converted that process of evolutionary change to an attempt at social revolution. During a time of war, when government services are traditionally curtailed, the Government sought to create a system of universal free education. During a period when it was swamped by the problem of caring for refugees and the war injured, it nonetheless embarked on programs to develop a capacity to deliver health services to all Vietnamese. During a period of widespread insurgency when, on the evidence of history, the Government might have been expected further to centralize power, there was a restoration of constitutional authority and the delegation of governmental power to newly elected — not appointed — village officials.

During a period of budgetary deficit, the central Government chose to share with people in local communities control over national resources and the means to modify the environment in which they lived. All these efforts were undertaken as invasion and externally stimulated insurrection threatened the very existence of the nation.

I cannot, Mr. Chairman, in my opening statement, cover the full array of government services being developed in South Vietnam, so I will limit my comments to two key areas — education and land reform — and attempt to deal with other areas as you may wish later.

EDUCATION

Vietnam has adopted education as a vehicle of economic and social change, as a visible evidence of government responsiveness to public demand, and as a force for national unity. The full effort encompasses the training of teachers and the creation of a normal school system to accomplish that, the preparation and printing of Vietnamese textbooks, the revision of an old French curriculum to one based on the needs of today, and the construction of classrooms and schools.

As a result, the number of children enrolled in primary school has risen since independence from about 400,000 to 2.3 million today — or nearly 82 percent of the primary school age population of the country. These are obviously not only the children of the elite.

This revolution in education has received the support and active participation of the population at large. Since 1966, some 2,000 {p.576} Student-Parent Associations have been formed, with one-half million members. People in local communities are contributing their own resources — their money and labor — to the construction of additional classrooms. A threefold effort has been launched to further decentralize this national education. This effort is encompassed in a decision taken by the Ministry of Education last year to delegate to local communities administration of primary and secondary education, in efforts of the Government to revitalize the collection of local taxes by local communities, and in a delegation of authority for them to spend the revenues they collect, and finally, in the installation of a nationwide community school program involving participation by the school in the life of the community.

We realize that numbers alone do not tell the whole story. The system is numerically strong, but still qualitatively weak, inadequately staffed and struggling to handle its swelling tide of students. But it is also a system possessing a leadership capable of distinguishing between planning and dreaming, which has made a breakthrough in mass education that many countries at peace in the world are yet to begin. And it is a system already working on the next generation of problems — the problem of keeping children in school longer, of evolving a pattern of secondary education which matches the nation’s needs for skills; of modifying the university system further to produce the engineers, agricultural scientists, and business administrators who still largely seek their training abroad.

The Vietnamese have, of course, received a great deal of help from us in realizing these accomplishments, but I would stress very much that the end product is wholly Vietnamese. The primary school system is now a matter of some 40,000 Vietnamese teachers instructing 2.3 million Vietnamese children in 32,000 Vietnamese classrooms, using 16 million Vietnamese textbooks.

AID once had 20 primary school advisers working with the Ministry of Education. Now there are two.

LAND REFORM

Another matter of great economic, social and political importance is land reform. The Government of Vietnam has given increasing attention in the last 2 years to long-standing programs intended to transfer the ownership of more of the nation’s rice lands to those who till it. Of more recent vintage is President Thieu’s revolutionary land-to-the-tiller bill, which would abolish tenancy completely in Vietnam. This bill has been passed by the Senate and will soon be sent to the President for confirmation and promulgation.

The current emphasis on land reform is a logical extension of policies which have been carried out — sometimes vigorously, sometimes not — over the past 17 years. Prior to independence, most of the land in agricultural production was owned by the French or the Vietnamese elite. The first significant reforms were taken by decrees in 1953 and 1955 to protect the security of tenants under rental contracts and to limit rents to 25 percent of the value of the crop. These regulations were difficult to administer and were not uniformly applied. But they had a good effect, strengthening the tenant in his relations with his landlord and generally lowering rents, which had been {p.577} in the range of 45 to 55 percent of crop values, to an average of about 35 percent.

Next, in 1956, the Government, by expropriation, reduced to 250 acres the amount of rice land which any individual could retain, and in 1958 it acquired the rice land holdings of French citizens. In total, the Government took ownership of about 1.7 million acres. By 1961, the program of redistributing the cultivable portion of these lands — which had gotten off to a reasonably good start in the fifties — fell prey to maladministration, deteriorating security, and the preoccupation of successive national leaders with political survival. The distribution of these lands became painfully slow; only 6,000 acres were distributed annually from 1962 to 1967.

Then, as security improved in 1968, the Government gave renewed priority to land reform. With some technical and financial assistance from AID, it revamped its administrative machinery. Procedures were simplified; purchase payments by cultivators were waived, and a nationwide freeze on occupancy and rents was decreed by the President. In the ensuing 2 years, a quarter of a million acres were distributed. Distribution of the approximately 185,000 remaining cultivable acres held by the Government is planned to be completed this year. These programs will have reduced the percentage of rice lands tilled by tenants from 77 percent in the mid-1950’s to 58 percent at the end of this year.

However, the land-to-the-tiller bill just passed by the National Assembly calls for the redistribution of 3.2 million acres to at least 600,000 farm families comprising about 4 million of South Vietnam’s 17 million people. When enacted into law and if successfully carried out, it may eliminate tenancy in South Vietnam within 5 years.

The foregoing is not to say that a social revolution, American-style, has been accomplished or even that the end result can be fully discerned. But the leadership of South Vietnam has begun and is pursuing a process of enlightened social change.

PROSPECTS FOR DEVELOPMENT IN POSTWAR PERIOD

Mr. Chairman, I would like to comment briefly, last of all, about South Vietnam’s longer-range prospects for development in the postwar period. Whatever the uncertainties about when the conflict will end and what kind of peace will follow, there are several constants in this longer-range equation.

The first constant is the constant of facilities. Vietnam will need to reconstruct damaged facilities and repair others which have deteriorated from lack of maintenance. Secondary roads and bridges, irrigation canals, and salt water intrusion barriers will need early attention.

The problems of inadequate public utilities and housing in urban centers whose populations have doubled since 1965 are becoming urgent and will be difficult. Difficult, also, will be the traditional dislocations in the transition to peace, particularly the problem of unemployment.

On the other hand. South Vietnam is generously endowed with natural resources. The fertility of the rich delta soil is unsurpassed in Southeast Asia. Double cropping and extensive crop diversification practices are already under way and can be steadily extended when {p.578} peace comes. The forests in the highlands are largely unexploited and offer excellent prospects for timber and processed wood production. Rubber, once Vietnam’s leading export, could rather quickly, we believe, regain a position of importance. Fisheries offer another area of a known but as yet virtually untapped resource. I have already mentioned rice, which is approaching self-sufficiency in 1971 and may again become a significant export. These are only a few. The whole gamut of potential Vietnamese exports in the 1970’s is really very favorable. A study completed for AID just last December by David Lilienthal’s Development & Resources Corp. suggests potential export earnings in 1980 could be as high as $425 million compared to the meager $15 million in 1969, or prewar peak earnings of $84 million in 1961. And exports should be just the “top of the development iceberg,” supported by more extensive domestic production substituting for many of today’s imports and answering domestic consumption needs.

Moreover, South Vietnam will possess many excellent infrastructure assets for a country of her size and at her stage of development. First-class seaports, airports, warehousing facilities, and excellent major road arteries will be in place and in use.

And South Vietnam will inherit from the war years, also, a large reservoir of literate manpower, trained to comparatively high levels in diverse military-civilian technical and management skills.

Finally, the GVN is trying to put its planning house in order. The President of South Vietnam last fall appointed a Special Assistant for National Planning, who is now working up relatively short-term development projects. And the Vietnamese and we have already looked further ahead to a period when it will be possible to engage in projects of broader economic development. The committee has been furnished copies of the three-volume study of March 1969, entitled “The Postwar Development of the Republic of Vietnam: Policies and Programs,” prepared jointly by a group of Vietnamese Government and private American experts, which I would be pleased to discuss later, if the Committee wishes.

FOREIGN AID REQUIRED FOR POSTWAR DEVELOPMENT EFFORT

Foreign aid will be required by the Vietnamese in their longer range development effort.

I must not give you the impression, however, that only American help should or will be sought. The Vietnamese and we are in frequent consultation with the Asian Development Bank, the World Bank, the several technical assistance agencies of the United Nations, the Japanese and other governments about development and investment opportunities. We are very much encouraged by the interest others have shown recently in playing a role in the development of Vietnam when peace comes.

From a purely economic point of view, this should be an exciting decade for South Vietnam. Given a chance at peace, it could, I believe, be the transitional decade in which South Vietnam could attain a state of self-sustaining growth without the need for continuing, con-sessional aid thereafter. {p.579}

PRESENT U.S. ECONOMIC ROLE IN VIETNAM

Therefore, Mr. Chairman, I conceive of the U.S. economic role in Vietnam today not only as one of assistance to Vietnam to carry the burdens of a costly military conflict, but, simultaneously, to help Vietnam plan for economic self-sufficiency.

Mr. Chairman, there are many things about our aid to South Vietnam I have not mentioned. I have tried to spare you a too-long recital of facts and figures and confine myself to the main purposes and elements of the Vietnamese efforts we assist, in the expectation that members of the committee will have many specific questions, and I the opportunity to respond to them.

This concludes my statement, Mr. Chairman. I am very appreciative for having had the opportunity to make it.

The Chairman.  Thank you, Mr. MacDonald.

BACKGROUND OF WITNESS

Tell me, Mr. MacDonald, how long have you been in the AID organization?

Mr. MacDonald.  I joined it in 1952, Mr. Chairman.

The Chairman.  How long have you been in Vietnam?

Mr. MacDonald.  1966, the late summer of 1966.

The Chairman.  Where were you prior to that?

Mr. MacDonald.  I served a very short tour in Nigeria, where I had been assigned, expecting to stay for several years, and then was asked to come to Vietnam.

Prior to that time, sir, I served as the AID Chief in Pakistan. I was in Pakistan about 4 years.

The Chairman.  You have been approximately 4 years in Vietnam.

Where are you from in the United States, Mr. MacDonald?

Mr. MacDonald.  I am a resident of the State of Vermont.

The Chairman.  That is a coincidence. [Laughter.]

Senator Aiken.  Now be careful.

The Chairman.  I did not know you had been so successful in staffing the agency. [Laughter.]

U.S. OBJECTIVE IN VIETNAM

Mr. MacDonald, since you have been there 4 years, I wonder if you could tell me what do you think is the purpose of the U.S. efforts in Vietnam? What is the ultimate objective? Why are we there?

Mr. MacDonald.  Well, in pursuit, Mr. Chairman, of national interests.

The Chairman.  Whose national interests?

Mr. MacDonald.  In pursuit of what the Administration conceives to be American national interest.

A shorter and more direct answer to your question is that in 1965, the beginning of the period that I am discussing, our great effort was to attempt to help the South Vietnamese avert defeat which seemed—

The Chairman.  To do what?

Mr. MacDonald.  To avert defeat in 1965 and 1966.

The Chairman.  Defeat by whom? {p.580}

Mr. MacDonald.  By their enemies, Mr. Chairman.

The Chairman.  Who are their enemies?

Mr. MacDonald.  Mr. Chairman, the North Vietnamese and those within South Vietnam externally stimulated by the North Vietnamese are their enemies.

The Chairman.  I did not anticipate your going back to 1955, but were there substantial numbers of North Vietnamese in South Vietnam in 1955?

Mr. MacDonald.  Mr. Chairman, my reference was not 1955.

The Chairman.  You said 1955.

Mr. MacDonald.  No, sir; I said 1965. I am sorry.

The Chairman.  You do not have to lean over. Pull the microphones closer to you and it will be much easier to hear you. Both of them are movable and it will make it much easier for you to speak into the microphone.

This story you give of what you are doing there is, of course, a very appealing one. I still do not quite understand why my constituents have a vital interest in what happens in Vietnam. I wondered if you could enlighten me a little because they ask me all the time in letters and I find it very difficult to justify the taxes that they pay to support the Vietnam AID program. I wondered if you could give me an idea of what you would say to a farmer in the Ozarks as to his great interest in what takes place in Saigon.

Would you help me on that?

Mr. MacDonald.  Well, Mr. Chairman, with your indulgence, I would recall that I am the Director of the U.S. economic and technical assistance program in Vietnam.

The Chairman.  Correct.

Mr. MacDonald.  This is my responsibility. It is also my competence and I am prepared to provide you all the information that I possibly can on that.

I would respectfully suggest, sir, that the questions that you are addressing to me are of a political nature that are not in my field of competence or responsibility.

The Chairman.  That is a perfectly valid answer and I accept it.

I do not think it is in my competence either. I do not know of anyone who has been here who could explain it satisfactorily to me, but I thought you might give it a try. You have been there 4 years. You have observed it and you are better prepared than most of them.

AMOUNT OF FISCAL YEAR 1970 AID PROGRAM IN SOUTH VIETNAM

Coming to your statement, you say this statement is to give us what was within your competence. I do not believe you gave in your statement the amounts involved in the current fiscal year in the AID program in Vietnam. Is it in your statement?

It seems to me you carefully, or at least inadvertently, avoided giving any figures about our current amounts.

Mr. MacDonald.  Yes. As I said in my conclusion, I said I had hoped to spare you too full a recital of facts and figures. I have these figures.

The Chairman.  I wish you would give them. You might suspect that we would be interested in the amounts. Nearly all legislators are

Mr. MacDonald.  Yes, sir.

I have come fully prepared. {p.581}

The Chairman.  I wondered why you avoided that in any of your statements. There are no amounts about the current or past year. Would you read them now?

Mr. MacDonald.  Yes.

The amounts that we estimate for the current fiscal year of 1970 broken down by—

The Chairman.  What is the total?

Mr. MacDonald.  The total is $498.5 million, excluding an allocation to my mission of about $1 million from agency-wide administrative appropriations.

The Chairman.  $498 million in economic assistance. That has nothing to do with military assistance?

Mr. MacDonald.  That is correct.

The Chairman.  Does that include Pulbic {sic: Public} Law 480?

Mr. MacDonald.  That includes Public Law 480.

The Chairman.  Then if you wish to break it down, into what is it broken down?

Mr. MacDonald.  The AID portion of that total figure is $352 million. I can break that further, Mr. Chairman. There is $132 million devoted to project activities of the sort that I referred to in my discussion of technical assistance in such fields as education and land reform, and an additional $220 million to finance the commercial import program that I cited in my statement as a major tool in the anti-inflation and budget revenue generation effort, for a total of $352 million under AID.

Under Public Law 480, there is $107.1 million for title I commodities which, as you know, are sold within the commercial community of the country, and another $39.4 million of title II commodities which are not sold but granted to needy people in South Vietnam.

It is a grand total of $498.5 million.

SPENDING BY UNITED STATES AND OTHER FREE WORLD FORCES

The Chairman.  You say in your statement that the “spending by United States and other free world forces grew,” but you do not give the levels.

What was the level of spending by United States and other free world forces? What are the free world forces you are thinking of?

Mr. MacDonald.  Well, I do not have every year at my fingertips, but this year our expectation is that U.S. spending will be $354 million, and if my memory is clear, about $45 million of these purchases will go for personal piaster purchases, and the remaining $309 million will go for official requirements to service American-based facilities, and things of that sort, $354 million this year.

The Chairman.  Who are the other free world forces? I did not follow that.

Mr. MacDonald.  The allied countries who have forces fighting.

The Chairman.  Do you mean the Koreans?

Mr. MacDonald.  I mean the Australians and the—

The Chairman.  There are very few Australians. The Koreans are the only substantial force in numbers; are they not?

Mr. MacDonald.  They are the largest.

The Chairman.  Is that whom you mean? {p.582}

Mr. MacDonald.  I mean all the allied forces who are there, the Koreans and the Australians and others.

The Chairman.  You are counting this as the money they are spending, but all the money they are spending we are furnishing them; are we not?

Mr. MacDonald.  Not all, Mr. Chairman, not all. Not the Australians.

The Chairman.  No, not the Australians. Are we not furnishing the Koreans their expenses?

Mr. MacDonald.  I have no competence in that.

The Chairman.  OK.

Mr. MacDonald.  I think that is a military question. I do not know the arrangements.

U.S. AGREEMENT CONCERNING KOREAN TROOPS IN VIETNAM

The Chairman.  We have had evidence. I thought I would like to put it in here. We made an agreement with the Koreans to transport them to Vietnam, feed them and pay them.

I thought you knew that. The famous Brown letter has been widely publicized, but it is not directly your responsibility.

EXCHANGE RATE OF PIASTER

With regard to monetary reform you say in your statement that the piaster was devalued in 1966 to a rate of 118, and today the black market rate you said is 386.

Mr. MacDonald.  I said 356 last week.

The Chairman.  356. Do you think there should be a further devaluation?

Mr. MacDonald.  Well, the exchange rate is not a terribly complicated thing, but it is not quite that simple.

As a practical matter, the Government of South Vietnam has what can only be described as a multiple exchange rate system. There is not a single exchange rate against which all imports come into the country.

For instance, in my opening statement I made mention of the emphasis that we gave to the importation of fertilizer, and I think I added that it was subsidized to induce farmers to use it. Fertilizer enters the economy at the very, very low rate of 80 piasters to 1 dollar. That is even lower than the 118 which is legally the official rate.

I might as an aside say that the 80-to-1 rate is probably a little too low.

The other end of the spectrum, Mr. Chairman, will take you all the way to, for a car for instance, something on the order of 1,005 to 1,010 piasters to 1 dollar. They have a series of customs and austerity taxes which are applied over and above the basic 118 rate, so there is in effect a multiple system.

FISCAL YEAR 1970 ECONOMIC AID TO SOUTH VIETNAM IS A GRANT

The Chairman.  Before I move away from it, the $498 million is not loans; that is a grant? {p.583}

Mr. MacDonald.  Yes, all these figures, sir, that I have given so far are grants. In an earlier time there were a few dollar loans made.

PAYMENT FOR IMPORTS

The Chairman.  Is the United States paid in piasters for the imports at all?

Mr. MacDonald.  Not for AID; but Public Law 480 title I foods are sold by the United States to South Vietnam for piasters, 20 percent of which are returned for U.S. uses.

The Chairman.  When you ship in televisions, are you paid for them or are they given to the people or the recipients?

Mr. MacDonald.  AID does not finance TV sets in its commercial import program. All of the goods which enter Vietnam under import programs enter through normal commercial channels under businesslike procedures.

The Chairman.  Do they pay at the official rate?

Mr. MacDonald.  They pay at whatever the effective rate is for the article. As I have indicated to you the farmer will pay but 80 piasters for—

The Chairman.  It is a variable rate; there is no definite rate.

Mr. MacDonald.  There is an official basic rate of 118 per dollar.

The Chairman.  What is the significance of that if it is not used in imports?

Mr. MacDonald.  It is a base from which one can depart to subsidize a particular commodity which it is important to make available for widespread use, or to restrict the importation of other goods by putting on very high austerity taxes.

1971 BUDGET REQUEST

The Chairman.  What is the estimate of next year’s budget? What is next year’s budget request?

Mr. MacDonald.  1971 has not yet been finally determined, Mr. Chairman. I believe that my superior, Dr. Hannah, is scheduled to make an appearance, if not tomorrow, early next week before the Subcommittee of the House Appropriations Committee. Decisions have not yet been made as to the levels that will be sought.

U.S. ECONOMIC ASSISTANCE NEEDED TO HELP FINANCE VIETNAMIZATION

The Chairman.  You say in your statement that “a high level of U.S. economic assistance will be needed in the next few years to help finance the cost of Vietnamization.” What is your estimate of that?

Mr. MacDonald.  Well, as I indicated, Mr. Chairman, it is not really possible to provide a single estimate. I need a whole series of givens in the first instance. I need to know the rate of U.S. force withdrawal to calculate the effect that that will have on foreign exchange earnings of South Vietnam. I would need to know the intentions of the enemy and what that implies for the size of South Vietnamese force levels in the years ahead.

These are unanswerable questions, Mr. Chairman. I am not avoiding your question. If I were given a series of hypothetical assumptions, I and my staff could come up with estimates. {p.584}

The Chairman.  I based the question on only your own statement. I thought you had some idea of which that high level would be. It is quite all right if you haven’t made such an estimate.

AMOUNT OF U.S. AID TO EDUCATION

You talk about the help to education. You say the Vietnamese have received educational help. What amount have they received for education?

Mr. MacDonald.  The dollar amount of our assistance, Mr. Chairman?

The Chairman.  Yes.

Mr. MacDonald.  If you will give us a moment I think we can probably supply that or would you prefer that we supply it for the record?

The Chairman.  Yes, supply it for the record if you don’t have it.

(The information referred to follows:)

________________

A.I.D. EDUCATIONAL ASSISTANCE TO SOUTH VIETNAM

The total AID dollar obligations for assistance to South Vietnam in the field of education from fiscal year 1954 through fiscal year 1970 are $62.2 million.

________________

FINANCING OF SOUTH VIETNAMESE BUDGET

The Chairman.  Can you give an estimate of the percentage of the Vietnamese national budget derived directly or indirectly from U.S. assistance or U.S. military spending?

Mr. MacDonald.  Yes. Let’s see, it is something in excess of 50 percent. 53.4 or 53.6 percent of the total piaster budget of the Government of Vietnam is supported by American aid, whether that be denned as direct economic aid or as indirect economic aid, about 53 percent, sir.

If you would like a discussion on this point, I would be pleased to carry it further. I even have a chart.

Let me answer you by giving you the figures in this way: The way in which the 1969 budget was financed, if you will permit me to deal with 1969 rather than 1970 — I was reading the Wall Street Journal a couple of weeks ago with an editorial to the effect that projections of U.S. inflationary estimates are like snowflakes, they melt before they hit the ground — I would be more comfortable with the firmer 1969 figures.

There are five sources of funding of the South Vietnamese budget. The first is counterpart with which you are familier {sic: familiar}, I know, and also local currency—

The Chairman.  Describe it. Counterpart are the funds generated by our imports; is that right?

Mr. MacDonald.  In part. It is only in part the piaster generated—

The Chairman.  As a practical matter it is no different from a direct grant; is it? They are not going to repay any of it.

Mr. MacDonald.  This is very clearly an American contribution to the budget.

The Chairman.  That is all I wanted to say.

Mr. MacDonald.  Yes. Counterpart. {p.585}

The Chairman.  Counterpart is a word generated years ago and it has a kind of a mystical feeling. It has a disguise so that people won’t understand how much we are throwing away.

Mr. MacDonald.  Let me explain it. When a dollar’s worth of AID-financed commodities are imported into South Vietnam, counterpart to the extent of 118 piasters to a dollar are generated and put into a special counterpart account of the Government of Vietnam for their use with the concurrence of the United States. That is the first category of sources of budgetary funds.

The Chairman.  That is about one-third of the going black market rate; isn’t it?

Mr. MacDonald.  Yes.

The Chairman.  About one-third.

Mr. MacDonald.  Yes. I will come to the austerity taxes which will get the proceeds up to a level commensurate with the so-called black market rate.

In addition to counterpart there is also, Mr. Chairman, the local currency sales proceeds of Public Law 480 commodities, which come in at the same rate of 118 piasters to the dollar.

The second category of funds available for financing the Vietnamese budget are customs duties on commercial imports financed by U.S. aid, duties over and above the 118 piasters which are extracted and put into the counterpart fund.

The Chairman.  Who pays the customs duty?

Mr. MacDonald.  The importer who imports the goods. As I have said, in the case of a car, which we do not finance under the AID program, the customs duties would bring the rate to 1,000 piasters or something in that magnitude.

The third source of financing for the budget is customs on GVN financed imports, imports which they bring in with dollars from their own treasury.

The fourth is the generation of tax revenues from income taxes, direct taxes, excise taxes, the receipts of government agencies, such as the post office, these sorts of things.

The fifth, Mr. Chairman, is deficit financing to finance budget activities. This is in a very real sense a direct taxation of the people of Vietnam because it redeploys resources within the economy; it reduces their consumption of resources.

I would like, if you are interested, to show you a chart which lays this all out, I think it does it—

The Chairman.  I think that is enough. I don’t believe we need a chart.

AID PROGRAMS IN SOUTH VIETNAM: PERSONNEL AND PAYMENT

I wonder, Mr. MacDonald, how many people are employed in the aid programs in Vietnam, direct hire, contract, and foreign nationals. Don’t you have that available?

Mr. MacDonald.  Oh, yes, sir.

The Chairman.  I have it here, but there are so many pages I can’t count them up. There are 10 pages in this booklet. I have not counted the numbers.

Mr. MacDonald.  Well, let me give you the total at the outset and remind you in doing so that I am not talking just of Americans but of Vietnamese and other nationals as well. {p.586}

Our employment peaked last June at 10,272, including all categories. Now, of those—

The Chairman.  Are they all on your own payroll? Those are not contract or do they include contract?

Mr. MacDonald.  This is the universe: Vietnamese, American, third country nationals, direct hire, contract employees, personal service contracts, and employees of contractors whom we engage.

We had at that time 2,183 direct hire Americans of that 10,000 total.

The Chairman.  In South Vietnam.

Mr. MacDonald.  In South Vietnam. Plus 787 contract employees.

In addition to that the Americans—

The Chairman.  Could I clarify one point? Is the upkeep of these people included in the figure of $498 million or is that in addition to that as a cost of the Vietnam program?

Mr. MacDonald.  The $498 million figure that I gave you, sir, is a dollar figure, and it includes all of the dollar expenditures which we make.

The Chairman.  Including the pay and support of all these people.

Mr. MacDonald.  Including the dollar portion of pay for these people.

The Chairman.  For example, is your salary paid out of that—

Mr. MacDonald.  Yes; if you include the administrative allotment I referred to at the outset.

The Chairman.  Out of that aid?

Mr. MacDonald.  Yes; the only salaries not paid out of those dollars are the salaries of people who receive piasters, the Vietnamese. We have arrangements with the South Vietnamese Government under which we use counterpart funds to pay our local staff.

The Chairman.  That is in addition to the $498 million.

Mr. MacDonald.  No. It is this year’s manifestation of last year’s dollar input which generated those piasters. It is not additive, Mr. Chairman.

The Chairman.  What do you expect to have a year from now? Do you have an estimate of that in personnel?

Mr. MacDonald.  Let’s see, now, we are going down and we will be down in June of this year, a year since the high of 10,272, to about 9,410. I would expect, Mr. Chairman, that it would continue to drift down over the next 2 or 3 years.

The Chairman.  The pacification program is quite apart from the aid program; isn’t it?

Mr. MacDonald.  No, sir. One of my responsibilities is to provide the dollar, piaster, and staff resources that Ambassador Colby requires to conduct his several programs in the pacification field. These are gross figures for AID including the support we give Ambassador Colby’s program.

The Chairman.  How much is that?

Mr. MacDonald.  Well, let’s see. I have a breakdown. Do you want personnel figures? {p.587}

BREAKDOWN OF CORDS/AID PERSONNEL AND FUNDING

The Chairman.  I want the personnel figures and the amounts in dollars to see how it breaks down between your and Ambassador Colby’s operations.

Mr. MacDonald.  Somewhat less than half of the American personnel are provided to Ambassador Colby.

The Chairman.  About a thousand?

Mr. MacDonald.  About that, sir. Also roughly 90 percent of the counterpart budget that we Americans support in our project operations is turned over to pacification programs under Ambassador Colby’s purview. On a dollar basis a relatively small amount goes to CORDS. The great bulk of the dollar amount, of course, goes into our commercial import program, the Public Law 480 program and other nonpacification projects. Mr. Chairman, I can submit this for the record in full detail.

The Chairman.  Could you indicate roughly without the details? I mean there is a substantial part of it and I thought you could indicate in round numbers about what it is.

Mr. MacDonald.  I would like to submit the exact figures.

The Chairman.  Yes, you can do both. That is right. Indicate roughly what this is and then correct it for the record so we will have it exactly.

The Chairman.  What is the cost of what you contribute to the CORDS program?

Mr. MacDonald.  Well, you will recall my saying that within the $352 million that AID proposes to spend in 1970, $132 million of it would be spent on projects. Of that $132 million, roughly $46 million will be administered by agencies to which Ambassador Colby is accredited. The remainder will be spent by other agencies of the Vietnam Government to which I am accredited.

(The information referred to follows:)

________________

USAID/CORDS BREAKDOWN

1. Personnel.— As of January 31, 1970, the breakdown of A.I.D.-funded American personnel was as follows:

	Direct hire	Contract	Total
USAID, in Vietnam	943	413	1,356
CORDS, in Vietnam	799	332	1,131
In training and processing (USAID and CORDS)	170	—	170
Total	1,912	745	2,657

 

2. Funding.— Estimated A.I.D. dollar obligations for the FY 1970 project program are broken down as follows:

	Millions
USAID	$85. 9
CORDS	46. 1
Total	132. 0

________________

The Chairman.  Do you supply any cover or money to the CIA?

Mr. MacDonald.  Mr. Chairman. I have been instructed to say that all comment on such questions must be made in executive session and by other appropriate officials than myself, sir.

The Chairman.  All right. {p.588}

AID PAYROLL AND ALLOWANCES IN SOUTH VIETNAM

What is the total cost of AID’s payroll, including allowances, in Vietnam?

Mr. MacDonald.  I can supply that for the record, Mr. Chairman.

The Chairman.  Could you indicate it roughly? Is it in the neighborhood of a hundred million or 50 million?

Mr. MacDonald.  I can’t at the moment, but I can supply it. We believe it is in the range of $50 million in 1970.

The Chairman.  $50 million. The Senator from Tennessee wishes to ask questions and I yield.

(The information referred to follows:)

______________________

A.I.D. fiscal year 1970 direct hire personnel costs for USAID/Vietnam and CORDS are estimated at $56.9 million.

________________

U.S. AID TO EDUCATION IN SOUTH VIETNAM

Senator Gore.  Since I have another committee to which I must go, I found considerable interest in your statement with respect to the aid to education. How much money has the United States contributed to aid education in Vietnam in the past decade?

Mr. MacDonald.  I can furnish that information for the record, Senator Gore.

Senator Gore.  What were the expenditures last year for education?

Mr. MacDonald.  Let me describe to you the componentry of expenditures by AID in such a field as education. Primarily we are talking of technical assistance which we provide to the Vietnamese in their efforts to modernize their educational system. This entails the recruitment of professionally qualified Americans to work with the Ministry of Education.

Senator Gore.  I know what it is. I am trying to find out.

Mr. MacDonald.  And at our peak, we had about 29. The total cost of aid for education from 1954 to 1970 was $62.2 million, Senator.

Senator Gore.  Aid to education,

Mr. MacDonald.  Yes.

Senator Gore.  Is this an inclusive figure?

Mr. MacDonald.  Is this what, sir?

Senator Gore.  Is this an inclusive figure?

Mr. MacDonald.  Yes, it is a gross figure of all costs to AID.

Senator Gore.  That provides classroom aid, supplement to teachers’ salaries, textbooks.

Mr. MacDonald.  This is the dollar figure, Senator Gore. The salaries of our advisers who have worked with the Ministry of Education, the cost of certain imports such as cement and reinforcing steel with which schools are built, the costs of contractors3 services who work with the Vietnamese in the development of a modern instructional materials center — things of this sort. These are dollar costs, Senator Gore.

QUALITY OF SOUTH VIETNAMESE EDUCATION

Senator Gore.  Do you have an evaluation of the quality of education of the Saigon schools?

Mr. MacDonald.  As I mentioned in my opening statement, we know that numbers don’t tell the full story. The quality of primary {p.589} education in South Vietnam is not good by modern standards. It is steadily improving.

Senator Gore.  How does it compare with the District of Columbia standards?

Mr. MacDonald.  I am not currently familiar with the District of Columbia standards, Senator, but in rough comparison I suggest to you that in level and quality, primary education in Vietnam today is something on a par with standards of 1890 to 1910 in our country where, typically, there was a small one-room schoolhouse, filled mostly by children in the primary grades, and taught by a young girl who perhaps the previous September had been a student at that school and then had been given brief training to become a teacher.

There is a very aggressive program being carried out by the Vietnamese, now that they have met their quantitative goals, to improve the quality of education.

I mentioned there were some 40,000 elementary school teachers. About 26,000 of these are 90-day wonders, to use the parlance of World War II military training in our country, or others who are less than fully qualified teachers. The remainder are graduates of 2-year normal school courses. Over the next 7 years, I think it is, Vietnam will be producing a sufficient number of graduates from the normal schools to place a fully qualified elementary school teacher in every classroom in the country.

Senator Gore.  Some member of our audience sent me up a note that he lived in the District of Columbia and had to spend 15 percent of his annual income to send his children to a private school because of the inadequacy of the public schools in the District of Columbia, which suffer a lack of funds. I draw no parallel. I merely say we need funds for education everywhere.

Thank you, Mr. Chairman.

PERCENTAGE OF AID PERSONNEL ABROAD IN SOUTH VIETNAM

The Chairman.  Mr. MacDonald, what percentage of the total AID personnel abroad are in Vietnam?

Mr. MacDonald.  I will have to confirm the estimate I will give you for the record later but I believe it is on the order of 40 percent. I am speaking, sir, of direct hire professional people.

The Chairman.  Are you now talking of the Americans or everyone?

Mr. MacDonald.  Americans.

The Chairman.  You don’t include in other words the 10,272. You are only talking about the 2,183.

Mr. MacDonald.  That is correct; yes, sir. I have no knowledge off hand—

The Chairman.  You think that 2,183 is approximately one-third of all Americans abroad in the AID organization?

Mr. MacDonald.  Direct-hire Americans abroad, yes. This is my estimate and I must have the opportunity to correct it.

(The information referred to follows:)

________________

PERCENTAGE OF AID PERSONNEL ABROAD IN VIETNAM

The exact figure is 40.3 percent as of June 30, 1969. {p.590}

________________

IMPORTANCE OF QUESTION OF JUSTIFICATION FOR U.S. INVOLVEMENT IN VIETNAM

The Chairman.  You see this is the sort of thing, Mr. MacDonald, that prompted my question. I respect your right to say that it is not your concern and you have no competence to give a reason why we are in Vietnam but when we have to be concerned not only with Vietnam, as you are, but with Arkansas and Tennessee and the United States, and Latin America and other places, whether or not what we are doing there is justified is a very important question. You take a third of the total AID personnel in the whole world in this little country of 16, 18 million people. This is why the question recurs, even though you don’t wish to comment on it, as to whether or not this effort is justified at all. You are very fortunate in not having to bother about that. If you can accept it and go along and do the best you can, it is all right. I don’t criticize you for it because obviously you didn’t make the decision to go in there, but you can see how it is a very important question to those of us who do have a responsibility for other areas than Vietnam, and especially our own areas in our own country.

Mr. MacDonald.  Yes, sir.

The Chairman.  What is bothering me and a number of others is that we are destroying our own country in order to go off after this will-o-the-wisp 10,000 miles away and it has no real relevance to our own country, our children, or our own lives. It is very difficult to find anyone, you see, who will take this responsibility other than the President of the United States. The military people have no responsibility because they only have military responsibilities. Yet I suspect very strongly that the military reports, your reports, Mr. Colby’s reports, all of them, converge to influence the President’s view because all of these reports, just as yours is, are quite optimistic about the success of your individual operations. This is not any criticism of you. I am quite sure you believe what you have said about the success of your program. We have heard for, I guess, at least 6 or 8 years how remarkably successful the land program is. It always is about to come to fruition and everyone is going to have his own garden. It never quite reaches that point, but it is about to and it’s been about to do that for 10 or 12 years. I don’t criticize you. I am quite sure you believe it will, but his does raise very serious problems. The purpose of these hearings is simply to emphasize just how deeply bogged down we are in Vietnam and whether or not it is in the national interest to continue it.

PAY AND ALLOWANCES OF DIRECT-HIRE EMPLOYEE

How much does the average direct-hire employee receive in pay and allowances in Vietnam?

Mr. MacDonald.  We have that, sir.

Mr. {sic: The} Chairman.  In order to save time your aides may interject. It isn’t so formal that you have to answer it all. Your assistants are quite free to give answers in order to save time.

Mr. MacDonald.  The average wage would be somewhere within the range of $28,000 to $34,000 total average cost.

The Chairman.  What is the highest?

Mr. MacDonald.  $67,000 at the highest and $16.000 a the lowest.

The Chairman.  Do you get $67,000 dollars a year? {p.591}

Mr. MacDonald.  No, sir; I suspect that perhaps the Government spends that much maintaining me there, but that is not my salary.

The Chairman.  What is your salary?

Mr. MacDonald.  $38,000.

The Chairman.  And the difference between that and $67,000 what — your perquisites?

Mr. MacDonald.  Perquisites are housing and transportation of the few sticks of furniture I took with me.

The Chairman.  Do they furnish you with a house?

Mr. MacDonald.  I have a house; yes.

The Chairman.  They pay the rent on it?

Mr. MacDonald.  My house happens to be owned by U.S. AID.

The Chairman.  They bought it?

Mr. MacDonald.  It is one of the few cases in which that is so. We bought it back, I think, in 1953.

EARLY U.S. AID PRESENCE IN SOUTH VIETNAM

The Chairman.  I didn’t know we had a presence there in 1953.

Mr. MacDonald.  There was an AID mission to—

The Chairman.  In 1953?

Mr. MacDonald.  Yes, sir; in 1953, there was an AID presence. I believe it started in 1952, Mr. Chairman.

The Chairman.  The aid to the French?

Mr. MacDonald.  Yes.

The Chairman.  Under the Truman regime, there was an aid program. I think we gave them about $2 billion in trying to retain control of Vietnam.

FORMER ALLEGIANCES OF WITNESS’ SOUTH VIETNAMESE ASSOCIATES

As a matter of fact, most of these government people that you associate with fought for the French; didn’t they?

Mr. MacDonald.  I do not know that to be the case.

The Chairman.  You don’t know that?

Mr. MacDonald.  Mr. Chairman—

The Chairman.  You don’t know Mr. Ky was an aviator for the French?

Mr. MacDonald.  You said most of the people with whom I deal, Mr. Chairman. I am not sure that is the case. I know many who were on the other side during the earlier years. One of my counterparts, a man with whom I deal perhaps more than any other, the Minister of Economy, was a Viet Minh in those early years. He is a man of great courage and competence.

SOUTH VIETNAMESE REACTION TO CASE OF TRAN NGOC CHAU

The Chairman.  Did vou ever meet Mr. Chau who has recently

been imprisoned?

Mr. MacDonald.  I have never met Mr. Chau.

The Chairman.  Do you know about him?

Mr. MacDonald.  I know of the case; yes.

The Chairman.  Did that case attract any interest in Vietnam?

Mr. MacDonald.  Yes, it did. {p.592}

The Chairman.  It did?

Mr. MacDonald.  It did, Mr. Chairman.

The Chairman.  Was it favorable to the regime?

Mr. MacDonald.  Mr. Chairman, I am not able, I am afraid—

The Chairman.  You don’t wish to answer that. That is the safest answer.

Mr. MacDonald (continuing).  To improve your knowledge or understanding of the case.

The Chairman.  That is the safest answer, all right. I think you are quite wise in not commenting. I wanted to see what you thought.

SALARY DIFFERENTIAL OF U.S. PERSONNEL IN SOUTH VIETNAM

How much salary differential do U.S. personnel get for serving in Vietnam as against another country?

Mr. MacDonald.  Oh, let’s see, the same as they do for serving in Nepal and half a dozen other places, a 25-percent differential.

The Chairman.  As opposed to Washington — over Washington.

Mr. MacDonald.  Pardon?

The Chairman.  Over Washington or over, say—

Mr. MacDonald.  Over the basic salary, 25 percent of one’s basic salary.

SOUTH VIETNAMESE INCOME TAXES

The Chairman.  You mentioned income taxes. Do they have an effective income tax system? Do they have an income tax system?

Mr. MacDonald.  Oh, yes. As a matter of fact, the income tax rates imposed under the Vietnamese system are in some cases stiffer than those called for in the United States. They don’t have as good a record of collections obviously as we do here. I think you will recall, Senator, that Vietnam after all is a country in a relatively underdeveloped stage and it faces all sorts of difficulties in the collection of its taxes.

In the first place the pattern of business there is markedly different from what it is in the United States. Private businesses are very small businesses there. For the most part they are family owned. Most of the transactions in the commercial community are made in cash. Many businesses literally do not keep books, not so much to avoid the payment of taxes as that they haven’t traditionally required them.

Vietnam has had additional difficulties in the administration of its tax system during the war. Mobilization has taken many of the staff of the Director of Taxation in Saigon and the provincial tax agencies. The fighting in the countryside has made it difficult and in some cases literally impossible to collect taxes in the less secure areas.

The Chairman.  How much of the budget comes from income taxes?

Mr. MacDonald.  Well—

The Chairman.  Ten or 20 percent?

Mr. MacDonald.  Well, let’s see. Mr. Sharpe would have it. About 20 percent of all domestic tax revenues are income tax revenues.

The Chairman.  Twenty percent of domestic tax revenues. Does that include 20 percent of the revenues derived from customs, import taxes?

Mr. MacDonald.  No, no, purely domestic. Only those that can be reasonably attributed to Vietnamese resources.

The Chairman.  That is less than 50 percent of the budget. {p.593}

Mr. MacDonald.  Yes.

The Chairman.  It would be in the neighborhood of 10 percent, I guess, of the total budget; would it not?

Mr. MacDonald.  Well, let’s see, only 4 percent, actually, of the total budget comes from income taxes. The remaining 44 percent, roughly, of the total budget borne by the Vietnamese is made up of other revenue — indirect taxes, government receipts for services, and deficit financing, which is a form of taxation.

The Chairman.  Four percent. You said it is much higher than in America. What would a man with a $50,000 income pay in income tax, assuming he paid his tax?

Mr. MacDonald.  We have a schedule on this, a comparative schedule, Mr. Chairman. Here I have it. A single individual who is earning 50,000 U.S. dollars in the U.S. system would pay, what, $23,700. A Vietnamese would pay $23,200. But a married man with two children would pay $22,650 in Vietnam; in the United States he would pay $16,900.

The Chairman.  What percentage of those earning $50,000 pay any income taxes?

Mr. MacDonald.  Pay; what percentage?

The Chairman.  Yes; do you have any way of knowing that?

Mr. MacDonald.  No, we do not really know that. We can furnish you the numbers of people actually paying income taxes.

The Chairman.  It would be interesting. What is that number?

Mr. MacDonald.  I don’t have it here.

The Chairman.  Can you furnish it?

Mr. MacDonald.  Yes, I can for the record.

The Chairman.  It would be very interesting.

(The information referred to follows:)

________________

1969 PAYMENT OF INCOME TAXES IN SOUTH VIETNAM

In 1969 a total of 169,000 corporations, businesses, and individuals filed income tax returns or had income taxes withheld from their salaries.

________________

SOUTH VIETNAMESE PERCENTAGE OF TOTAL U.S. ECONOMIC AID BUDGET

The Chairman.  Did I ask you what percentage of the total economic aid budget goes to Vietnam?

Mr. MacDonald.  The worldwide aid?

The Chairman.  Yes, the economic aid budget.

Mr. MacDonald.  No, you did not. I don’t have that figure but I can have it furnished for the record.

The Chairman.  If one of your assistants knows that, what is it?

Mr. Ellis.  We do not, sir.

The Chairman.  It isn’t difficult. You said it is $498 million and all you need to know is your total for 1970. The $498 million is what percentage of your total? Is it a billion, a billion and a half?

Mr. MacDonald.  I think it is $1,600 million worldwide when you deduct military assistance, Mr. Chairman.

The Chairman.  I meant economic. It is not too hard to figure that out. I have forgotten what your aid figure was.

(The information referred to follows:) {p.594}

________________

AID PROGRAM IN VIETNAM: PERCENTAGE OF TOTAL

The AID-funded program in Vietnam of $352 million in fiscal year 1970 represents 19 percent of total AID programs worldwide. The worldwide total, $1,878 million, includes use of estimated carryover and recoveries from prior years in addition to new fiscal year 1970 appropriations.

________________

PUBLICATION OF
“VIETNAM, THE VIEW BEYOND THE BATTLE”

The Chairman.  Here is a booklet. It is a rather unusual way of publishing it, but it is an AID booklet. Are you familiar with “Vietnam, the View Beyond the Battle”?

Mr. MacDonald.  That is a booklet of 1966 vintage, I think.

The Chairman.  The staff says 1967. Why do you print it without any attribution or any date? Is that deliberate?

Mr. MacDonald.  I could not tell you that. I believe I saw that when I first came on the job, Mr. Chairman. I haven’t seen it since.

The Chairman.  You haven’t seen it since. It is a slick paper job, a very good looking job.

Mr. MacDonald.  Not produced by my mission. It is a pamphlet put out in Washington here.

The Chairman.  A staff member who was recently in Vietnam brought this back. He told me it was an AID publication and he thinks it was published in 1967. It is rather strange that there is no attribution and no indication of when it was published.

Mr. MacDonald.  To my knowledge, Mr. Chairman, it was not published by the AID mission in Vietnam. I can ascertain for you when it was and where it was published. It might be an AID publication; I assume it is an AID publication.

The Chairman.  It is all about AID. I can’t imagine anyone else publishing it.

Mr. MacDonald.  Well, the U.S. Information Agency does have certain responsibilities for publicizing these programs abroad. I am not suggesting that that is a USIA document, but it may be. It is only that I do not know.

The Chairman.  For some reason the staff member thinks it was put out in 1967 although there is nothing to indicate that.

Mr. MacDonald.  I am at a disadvantage, sir. I don’t have the document and there seems to be some question of how to identify it.

(The following information was subsequently supplied by AID:)

________________

PUBLICATION OF BROCHURE,
“VIETNAM, THE VIEW BEYOND THE BATTLE”

The Brochure: Vietnam, the View Beyond the Battle was published at USIA Regional Service Center, Manila, in March 1967 at the request of USAID/ Vietnam. It was funded from JUSPAO Vietnam impression account. In total, some 100,000 copies were published in Vietnamese and 68,500 copies were published in English.

______________________

The Chairman.  It says, “More men were coming and more American expenditures.” It doesn’t even have a page number; I didn’t know that but anyway—

Mr. MacDonald.  I also provided your staff member, I think, a copy of the report I put out about the AID operation in Vietnam. I think it bears a date. {p.595}

PROPORTION OF U.S. ECONOMIC AID RECEIVED BY SOUTH VIETNAM

The Chairman.  This doesn’t; I don’t know why. It says, “During 1966, Vietnam had passed India as the foremost recipient among 82 nations receiving U.S. economic aid.” Is that an accurate statement?

Mr. MacDonald.  I do not have in mind the AID figures for India, Mr. Chairman. May I go back for a moment? You asked me to estimate the proportion of total U.S. economic aid around the world with reference to the $498 million in Vietnam.

The Chairman.  Yes.

Mr. MacDonald.  I cited to you my recollection about the total amount being available as would be $1.6 billion. I would recall that the $498 million that we were earlier talking about includes Public Law 480 in it; $1.6 billion does not include Public Law 480 and there are a series of other items.

The Chairman.  Leaving out the Public Law 480, how does it break down?

Mr. MacDonald.  Well, $352 million is the AID portion against $1.6 billion.

The Chairman.  That is the figure I wanted in the record.

Mr. MacDonald.  There are, I believe, however, other addons to the $1.6 and I will ascertain what they are and supply them for the record. I believe the Congress in the last session, Mr. Chairman, authorized the President to return payments on principal and interest, if my recollection is correct, on loans made in prior years for use in the AID program. So I think it is a higher total figure and, therefore, a lesser percentage that Vietnam commands.

PROPORTION OF U.S. AID RECEIVED BY SOUTH VIETNAM AND INDIA

The Chairman.  I thought this was a very interesting statement. I wish you would comment on this if you will, not now but for the record, because I have never seen before that Vietnam passed India in 1966 as the foremost recipient among 82 nations, when you consider India has some 500 million people.

The Senator from Missouri is not here and I hesitate to speak in his absence, but he and others have been under the impression that India got the big end of our aid. I had never seen this statement before.

Mr. MacDonald.  Well, could I put that into some context, Mr. Chairman, by recalling that there is a conflict taking place in Vietnam? I would like for the committee to understand that the people of Vietnam are producing at all time record highs despite the war; 1969 was a record year for agricultural production.

Second, the Government of Vietnam, through its various programs, is able to support from wholly and genuinely Vietnamese resources a civilian budget adequate to a country of her size at her stage of development were she not at war. The extraordinary assistance that we give Vietnam both on the military side and indeed on the economic side is occasioned by the fact of the conflict, by the fact that the South Vietnamese have found it necessary to have an army of 1.1 million people, the equivalent of a 13 or 14 million man force in U.S. terms.

I can assure you, sir, that the job of development which is my agency’s traditional job, could bo accomplished in Vietnam at much less cost were there not these nondevelopmental problems that afflict the country. {p.596}

The Chairman.  I am quite sure the war does add to the difficulty and the cost.

SOUTH VIETNAMESE BUDGET IN PIASTERS

Mr. Reporter, I will put in the record a table here with regard to the Vietnam budget in piasters just for our consideration here.

(The information referred to follows:)

______________________

In regard to the actual and estimated customs and austerity taxes for CY 1967, 1968, and 1969 on commercial imports, 34, 33, and 35 percent respectively are a result of duties on A.I.D.-financed imports. Total revenues derived from A.I.D. and Public Law 480 programs (import duties plus counterpart) were for CY 1967 and 1968, VN$28.12 and VN$21.77 billion, or 59 and 47 percent, respectively of budget revenues. For CY 1969, total revenues derived from U.S. sources are estimated at VN$44.3 billion or 50 percent of budget revenues.

GOVERNMENT OF VIETNAM BUDGET

[In billions of piastres, U.S. $1 = VN118 at import rate]

Line item	Calendar year 1967	Calendar year  1  1968	Estimated calendar year 1969
1. Expenditures	86.19	105.19	147.8
2. National revenues	47.57	46.35	88.9
a. Domestic revenue	32.40	32.64	36.9
Direct taxes	(2.97)	(4.17)	(5.4)
Indirect taxes	(4.94)	(5.14)	(7.4)
Excise taxes	(6.25)	(6.51)	(8.3)
Registration and other	(9.38)	(7.48)	(15.8)
Preequation and equalization taxes 2	(8.86)	(9.34)	—
b. Custom duties and austerity tax	15.17	13.71	52.0
GVN imports	(10.08)	(9.15)	32.0
U.S.-financed imports	(5.09)	(4.56)	20.0
3. AID (counterpart)	23.03	17.21	24.3
Commodity improvement program	(13.23)	(4.11)	(15.6)
Public Law 480, title I	(9.8)	(13.1)	(8.7)
Net deficit	–15.59	–41.63	–34.6

 

1  Includes only expenditures for the 1st 13 months chargeable to the budget for the fiscal year. Budgeted expenditures may be incurred up to 6 months after the end of the fiscal year. The influence of the remaining 5 months upon the magnitude of the deficit will be slight.

2  In calendar year 1969, the revenue from these taxes are inlcuded {sic: included} within item b (customs and austerity taxes).

______________________

Budgetary financing by the Government of South Vietnam for the deficit after foreign aid, by source, for CY 1967, 1968 and 1969 (est.), is presented below:

______________________

(VN Billion Piastres)

Line item	Calendar year 1967	Calendar year 1968	Estimated calendar year 1969
A. Net deficit	–15.59	–41.63	–34.6
B. Sources of financing:
Advances from national bank	14.92	35.45	30.0
Change in Treasury bonds outstanding	.67	6.18	4.6
Total	15.59	41.63	34.5

 

______________________

The Chairman.  Senator Aiken, do you want to ask any questions? {p.597}

EFFECT OF INFLATION ON AID COSTS IN SOUTH VIETNAM

Senator Aiken.  Have you any idea to what extent the increasing amount of salaries, retirement and inflationary costs have increased the AID costs in South Vietnam? Has that been a major contribution to increased costs?

Mr. MacDonald.  No, sir. On the contrary, inflation hits those one can least afford to have it hit. Inflation is quickly overcome by the private sector that has the opportunity to raise prices, raise salaries, and to whatever levels are necessary to command personnel.

Senator Aiken.  I am referring to the $220 million worth of commercial imports. Don’t they cost more now than they did 2 or 3 years ago?

Mr. MacDonald.  Within the country?

Senator Aiken.  Yes.

Mr. MacDonald.  I am sorry, Senator Aiken. Yes; oh, yes. Four years ago, those goods were sold at 60, 70, 80, 90 piasters for each dollar’s worth. Today they are being sold to the people of South Vietnam at something between 250 and 300 piasters per dollar for the same goods.

Senator Aiken.  We also have increased costs of material and goods in the United States.

Mr. MacDonald.  Oh, yes; there has been a distinct inflationary factor over the last several years, which averaged 4, 5, 6 percent.

Senator Aiken.  I think at least that.

1969 SOUTH VIETNAMESE INVESTMENT IN PRIVATE ENTERPRISE

I understand that last year there were South Vietnamese themselves who invested some $40 million in private enterprise. Is that figure about accurate?

Mr. MacDonald.  Yes, I believe it was $39 million, nearly $40 million of various industrial investments in 1969 alone which is, I think, an indication of a measure of confidence.

Senator Aiken.  I asked a witness yesterday if that indicated that some, if not many, of the South Vietnamese investors found the war rather profitable?

Mr. MacDonald.  Senator Aiken, obviously intense business activity, whatever its cause, provides the opportunity. I can assure you the management methods we have applied and the policies we have negotiated with the South Vietnamese have controlled the situation as far as it affects United States aid. Years ago there was an essentially monopolistic condition that existed in the import community of South Vietnam. There was a relative handful of importers. There was no competition. They could decide how much to bring in and how fast to sell it and how long to hold it and thereby realized very large markups.

As I recall the markup average prior to 1966 for imported goods was on the order of 70, 75-or-greater percent, and obviously that was exorbitant. We were able at the time that we were designing the present import program and negotiating with the Vietnamese whether there would be one or not to persuade the Vietnamese to introduce improved procedures and a liberalized import policy.

Today the American taxpayers’ goods go into Vietnam and there is a markup on the order of 15 percent, which is a legitimate business {p.598} markup. No one is becoming a millionaire, out of AID’s business, Senator.

Senator Aiken.  Then this investment of $40 million in private enterprise in Vietnam would be made from normal earnings.

Mr. MacDonald.  Yes.

Senator Aiken.  Of the investors, we will say.

Mr. MacDonald.  Yes.

EFFORTS TO CONTROL BLACK MARKET PROBLEM

Senator Aiken.  Is the black market problem being brought under control at all?

Mr. MacDonald.  There is no doubt that there is a black market in Vietnam in money. The chairman has cited the black market rate for the dollar. A great deal of attention has been given to the problem both on the American side and on the Vietnamese side. In 1967 I recommended to Ambassador Bunker — and he accepted my recommendation — that there be a U.S. missionwide committee called the Irregular Practices Committee in order to maintain a continuing surveillance over our operations to see if there were loopholes in our regulations or our practices or procedures that enabled people to circumvent them. Over the past 3 years we have had great success, I think, within the U.S. mission to tighten up, to limit the amounts of PX goods made available in the commissaries and the post exchanges to proper levels, a variety of things of this sort, including currency control procedures within the military banking system.

More importantly, I think, Senator Aiken, are the efforts of the Vietnamese themselves. It is sometimes little noticed that the constitution of South Vietnam calls not only for the traditional three branches of government, but for what in effect amounts to a fourth branch of government, the Censorate, which is somewhat akin to our General Accounting Office but has wider responsibilities. The Censorate is not fully organized or fully operative, but it does have the responsibility to develop controls to minimize and preclude corruption and irregular practice within the South Vietnamese Government itself.

Also, the South Vietnamese executive has recently set up an Irregular Practices Committee of its own chaired by the Minister of Finance. Its membership includes the Minister of Economy, the governor of the national bank, the national director of police, and two or three other positions. The two American and Vietnamese Irregular Practices Committees meet regularly to see what can be done to tighten up.

EFFECTIVENESS OF LAND REFORM BILL

Senator Aiken.  I notice in this morning’s paper that the South Vietnamese Senate has passed the land reform bill. Are you familiar with the kind of bill they passed?

Mr. MacDonald.  Yes.

Senator Aiken.  Will it work?

Mr. MacDonald.  I believe so, Senator Aiken. I was very pleased to see the paper today. As I indicated in my opening statement this is a truly revolutionary piece of legislation, it is a sweeping bill that {p.599} will abolish tenancy in its entirety. This means there will be no absentee landlords in Vietnam. Only people who till land can own it. I think it is an unprecedented bill in my somewhat limited knowledge of other situations in the world.

Senator Aiken.  You are glad we don’t have that law in Vermont; aren’t you?

Mr. MacDonald.  Yes, sir.

Senator Aiken.  Or would you like to go home and start tilling? [Laughter.]

FINANCING OF LAND REFORM PROGRAM

You may recall that some time ago a suggestion was made in the Senate here in Washington that the United States finance the land reform program. Do you think we are expected to contribute rather heavily to that?

Mr. MacDonald.  The Vietnamese and we both regard the problem of financing this program internally in South Vietnam as a Vietnamese problem. That is what it is and how it should be handled. The Government will pay landlords for the land it will take. However, Senator Aiken, to be quite clear, the injection into an already very large money supply of over 50 billion additional piasters — and that was the tentative price tag of the President’s bill, the minimum price tag — is going to generate additional inflationary pressure, which will have to be met in part by an increase in imports to generate additional piasters as customs and other payments are paid when they come in.

The United States has given every indication to the South Vietnamese that it realizes there is this exchange problem and that we will study in the years ahead what foreign exchange requirements the program will generate.

BORROWING CREDIT OF SOUTH VIETNAMESE GOVERNMENT

Senator Aiken.  Does the South Vietnam Government have borrowing credit?

Mr. MacDonald.  What?

Senator Aiken.  Does it have borrowing credit from the banks?

Mr. MacDonald.  In the world market, sir?

Senator Aiken.  In the local market, any market.

Mr. MacDonald.  Well, it has; yes. It can borrow from its national bank as it does each year. This year we are expecting it to borrow something on the order of 28.6 billion piasters.

U.S. INVESTMENT BANKERS IN SOUTH VIETNAM

Senator Aiken.  Three or four years ago I notice there was some competition among our investment bankers here in the United States to see who could get over there and get located first. Have they done

a pretty good business?

Mr. MacDonald.  Oh, yes. The Bank of America and Chase Manhattan are doing rather nicely, I think, sir.

Senator Aiken.  I don’t think I have any more. There isn’t much use in asking questions if you already have the answers to them, although I find it is a pretty good idea to know the answer yourself before you ask a question in this town. {p.600}

SOURCE OF COMPENSATION FOR LAND OWNERS UNDER LAND REFORM PROGRAM

The Chairman.  You were speaking of land reform. How are the owners of the lands to be compensated? Are we going to pay them?

Mr. MacDonald.  No, sir, that was my point. This is a Vietnamese problem. It would not be appropriate, we feel, for the United States to enter directly into that kind of a transaction between a tenant and a landlord.

The Chairman.  How can we avoid it when we are paying 52 percent of their budget? It seems to me an illusion. If we are paying or supplying, as you have already testified, over 50 percent. I think it is 52 percent.

Mr. MacDonald.  Well, Mr. Chairman, as I said—

The Chairman.  How in the world can it be done without our having helped?

Mr. MacDonald.  We start with the plain fact that something more than 50 percent of the national budget is financed from U.S. sources.

The Chairman.  That is right.

Mr. MacDonald.  There is no question about that, sir. I suppose it is possible from that point to proceed to attribute, in part, the U.S. contribution to the total budget to each expenditure of the Government. I didn’t mean to negate my having acknowledged the heavy share of financing that the United States puts into the budget. I merely meant to say, sir, that the Vietnamese Government will deal with the problem of paying landlords. The United States is not going to interfere in that process.

The Chairman.  I didn’t phrase my question properly. I didn’t expect that you would give the check for the money directly to the landlord. I am sure some agency of the Vietnamese Government will be the paying agent, but the source of the funds will almost inevitably be the United States up to 50 percent.

Mr. MacDonald.  There have been those who suggest a much more energetic American involvement in the land reform process. There have been those who suggested that we take the counterpart funds, funds which have already accrued to the Government of Vietnam accounts which cannot be spent without our approval, and use that to pay landlords. We are not certain that is appropriate.

SECTION 620(G) OF THE FOREIGN ASSISTANCE ACT

The Chairman.  Dp you recall section 620(g) of the Foreign Assistance Act? I will read it. I think the record ought to show it. It says:

I wonder if that would create an obstacle to your continued operations in Vietnam?

Mr. MacDonald.  Two comments, Mr. Chairman: First, as I recall the legislative history of that particular provision it had to do with {p.601} the protection of American investments in countries abroad. Perhaps its application is broader and does pertain also to expropriation of non-American assets or indigenous assets. I don’t recall at the moment.

The second comment is that I am not, as I sit here, entirely clear as to whether the bill on President Thieu’s desk today does in fact entail expropriation. I honestly do not know this. As I understand it, the Senate in voting last week altered the provision having to do with the methodology of taking land from the landlord. It is quite possible that the procedure will be one where the landlord turns his land over to the tenant and the Government comes in and finances it. I don’t know whether legally and technically it constitutes expropriation in terms of the meaning of section 602.

The Chairman.  620.

Mr. MacDonald.  620.

The Chairman.  The method of doing it would have something of course to do with it. I don’t think there is anything in the law to indicate it was intended for Americans. I rather thought that this was a prohibition against our paying foreign investors in a company. Supposing a government expropriates a telephone company of which the Americans own 60 percent and someone owns 40. I thought one of the principal objectives of this was that we were not going to pay the foreign national, for his expropriated property even though under our guarantee program which is designed to protect American investors.

Mr. MacDonald.  I am quite sure, sir, there is a sufficiency of piasters in the national budget which come from non-U.S. sources to cover the costs of the land reform bill.

LOSSES OF AND ENEMY ACTIVITY AGAINST AID PERSONNEL

Senator Aiken.  I omitted one question I was going to ask you. We have in the neighborhood of 10,000 Americans and native people engaged in the AID program in South Vietnam at this time.

Mr. MacDonald.  That was the high last June. We are going down to something over 9,000 this year, sir.

Senator Aiken.  What are the personnel losses, killed, wounded, and missing, and are the