890.00R/3–1650
Memorandum by the Officer in Charge of Economic Affairs, Office of Philippine and Southeast Asian Affairs ( Shohan ), to the Deputy Assistant Secretary of State for Far Eastern Affairs ( Merchant )
Subject: Economic Problems in South and Southeast Asia
Mr. John B. Nason1 of the ECA has asked that I make available to him in memorandum form the substance of a discussion I had with him on March 6.2 At that time I made the following comments on the economic position of countries in the “general area of China”.
General Observations: Each of the countries is in quite different economic circumstances and stands in a separate and unique relation to possible United States economic aid. Therefore, it is best to summarize first the position of each country and to conclude with general observations on the entire area. Since British dependent territories are under ERP, they need not be discussed.
(1) Philippines: The Department believes that Philippine economic problems are primarily problems of internal management and development of their resources, involving particularly emphasis on agricultural development and possible agrarian reforms, and on fiscal policies and their administration. Without determined efforts by the Philippines to attack these problems, there is nothing United States financial aid can do without encouraging the dangerous illusion that they can become permanent pensioners of this country. Technical advice from the United States can be of assistance, although the major problems and major lines of attack upon them are reasonably well-known to many Filipinos. Economic assistance from the United States cannot replace or itself produce good management, nor is it needed in large sums for agricultural development. In any event, agricultural development in such peasant economy is necessarily a longish-run affair, and cannot be counted upon to produce substantial results in the short run.
However, we may find it desirable and necessary to assist the Philippines in order to make it politically possible for its Administration to undertake necessary measures of internal reform. This will, however, depend upon proper undertakings by the Philippine Government. Both governments have agreed to the despatch of a U.S. mission to the Philippines in the near future to survey the problem and make specific recommendations for governmental action. The Department proposes to avoid any indication of our preparedness or willingness to grant economic assistance of the sort familiar to the ECA until this mission has completed its survey and until we have exhausted every possibility of getting the Philippine Government to take action on its own. In fact, the outlines of a program of economic assistance have been blocked out, which on a maximum basis would not require the expenditure of more than $20 million during its first year of operation. [Page 59] Actually there is some doubt whether the economic position of the Philippines would require even this expenditure from any economic or political viewpoint except that of gaining adherence by the Philippine Government to a program of sound management.
(2) Indonesia: The Department believes that Indonesia can pay its own way, and can and should primarily rely on Dutch technicians (except probably on broad policy matters). Balance of payments estimates indicate that on the present austere level Indonesia can maintain a viable economy without dollar loans. In fact, small dollar surpluses are envisaged. Her desirable reconstruction needs, however, appear to require dollar loan assistance. Her payment problems are largely with soft currency areas, and particularly with the Netherlands. We expect the Dutch to make extensive offers of credit, if for no other reason than to protect her investments. Essentially, the Dutch would be doing little more than financing current out-payments to Dutch nationals. We would expect considerable revival of trade between Indonesia and the Japanese, particularly in textiles, and are now working on the establishment of credit to this end. There is little doubt in any quarter that given reasonable political stability Indonesia has a wealth of productive and profitable investment opportunities, and little doubt as to her capacity to repay loans. This is borne out not only by the Export-Import Bank and Dutch offers of credit, but by offers the Indonesians are understood to have entertained from Belgian, French and Swiss sources.
We will, of course, be prepared to offer Indonesia technical assistance under Point Four. However, we cannot as a practical matter replace the many technically qualified Dutch in Indonesia and substitute for their intimate knowledge of local conditions. Nor as a political matter would we wish to. Without abstracting ourselves completely or wishing to appear disinterested, or neglecting our own interests, we must act in the light of our desire that the Netherlands-Indonesian Union succeed if it is at all possible.
(3) Indochina: We view the missing component in Indochina as political. Only as the Annamese are convinced that present or future French concessions satisfy their nationalist aspirations can there be a satisfactory political and military solution. With such a solution, we would expect Indochina’s foreign economic position to improve rapidly and, in the fairly short-run, with little added equipment or outside aid. This is simply because their major export, rice, is even now being produced in far larger quantities than can be safely transported, milled, and shipped abroad. Furthermore, under reasonably stable conditions, it can be very readily produced, transported, milled and shipped abroad in still larger quantities.
Indochina’s dollar deficit is at present fairly small (it is incorrectly exaggerated by taking Indochinese piastre figures and converting at the official rate of exchange). We may find it necessary to assist her, particularly as additional dollar imports may stimulate useful economic activity. True, this may not so much directly help Indochina as partly relieve the French of the financial burden they are incurring. This is, of course, not an unworthy objective, but it is definitely necessary that our economic aid to Indochina be an obvious and direct sign of our support of the three States. (The drain on the French economy through the maintenance of an artificial piastre-franc rate [Page 60] is a critical economic problem which may have to be examined separately.)
It should be noted that as in the case of Indonesia the return of relative stability would result in considerably increased private or semi-public investment by the French, occasioned by the necessity of protecting their private investments.
The requirements and programs so urgently advanced by Bao Dai require largely local currency funds and therefore present mainly a problem of fiscal management. Therefore, we must keep an open mind on the possible need and desirability of giving Vietnam some budgetary assistance.
Possibilities of far-reaching intensive work on agricultural technology, through extension and demonstration work of the JCRR type, remain uncertain both as to practicability and necessity. French agricultural work had been fairly advanced before the war and some of it has been reconstituted. The areas in which it would be safe and desirable for American agricultural personnel to operate is a matter on which judgment cannot be passed at this time.
(4) Thailand: Thailand is in the soundest economic position of any country in the area. It has experienced continuing prosperity of a character unknown for 20 years. It has substantial gold reserves and relatively little inflation since 1946. Its currency and foreign exchange position is so sound that the International Monetary Fund is recommending that import controls and multiple exchange rates be dropped and the baht stabilized in terms of dollars. Its substantial loan applications before the IBRD are regarded as economically sound, although there may be some question of Thai ability to repay in dollars. With the cessation of dollar purchases of rice for relief programs, her dollar receipts will be smaller. Thailand should increasingly have recourse to trade with Japan, which can supply much of the equipment needed for implementation of the projects submitted to the IBRD.
The Department would be loath to see unnecessary and extravagant grants made to Thailand and similarly to see her encouraged to make use of other than normal credit sources. However, if massive aid programs to Southeast Asia were to become the order of the day it would be impossible to discriminate against Thailand and simple enough to transfer her present sound projects to any such program.
(5) Burma: The movement of Burmese agricultural and mineral resources depend upon and support Burma’s river, rail and road transport systems. Before the war, these activities were financed, managed and operated largely by British and Indians, with very little development of Burmese capabilities for these functions. Since the war Burma’s economy has been run down because of widespread insurrectionary activity and because of the new Burmese Government’s program of nationalizing mineral resources, agricultural land and extractive industries.
If the political situation could be stabilized and if the Burmese Government were willing to permit prewar investors to reactivate their enterprises in Burma, it seems likely that a significant part of the economy would very quickly revive. The Burmese, however, will not be willing to permit the reestablishment on prewar terms of British firms [Page 61] and Indian landlords. As Burmese capital and technical skills are insufficient for effective rehabilitation, there might exist under stabilized political conditions a possibility for effective U.S., UN and Commonwealth technical aid on a larger scale than is now contemplated, and for development and rehabilitation loans to the Burma Government.
Despite superficial similarities, Burma is in a somewhat different position from Indochina. Her territory is even more chopped up by civil war. There is no Russian recognized Kremlin-dominated “government”. Burma is about to receive a sterling loan from the Commonwealth.
The basic problem now is to build up Burmese willingness to make an aggressive effort to solve their own internal problems and to make use of technical and military advice from the U.K. and the Commonwealth, as well as from the U.S. and the UN. At the moment, we are not prepared to undertake the economic support and development of Burma as a major responsibility, which we believe should be borne by the British, but we have prepared a program embodying various types of limited assistance for application in a limited area. This program is expected to be implemented shortly from funds other than those appropriated to the ECA.
General Problems of the Area: Two major problems affecting the entire area are (1) trade with Japan and (2) agricultural development. Because of Japanese food deficits these are interrelated.
Japan needs primary products from Southeast Asia, and particularly rice, and is in a position to pay for these with her textiles and machinery, both of which are badly needed in the area. Many elaborate schemes have been developed inside and outside of the United States government and in UN organizations to assist in this problem. Actually the log-jam is beginning to break up with improved supply and trading conditions in Japan and in Southeast Asia.
However, all the various schemes and studies devised to meet this problem point to one major deficiency—a lack of normal intermediate credit facilities for financing Japanese exports. This is a major problem that is probably preferably attacked directly but it may have to be attacked as part of one or another of more elaborate schemes designed to increase Japanese trade with Southeast Asia.
Agricultural technology in the area is poor. It is agreed without question that a major line of endeavor by the U.S.—through Point Four or otherwise—must be to start the development of demonstration and extension work designed to improve agricultural yields. As important as this is, and it is basic to all economic problems of each of the countries both domestically and in its international economic relations—we must not be deluded by the notion that rapid results can be obtained in any peasant economy, and particularly in Asia. In addition to the technological problems of agriculture, we are concerned with institutional problems of agricultural reform, not only for their economic significance, but because of their import for political stability.
[Page 62]To these ends the Department of State has prepared what technically qualified authorities believe to be a limited program for the institution of agricultural extension and demonstration work in the rice producing areas of Southeast Asia. Its major limitation has been imposed by prospective lack of personnel. Including the cost of materials, this program would cost about $8 million in its first year of operation, and probably smaller sums in later years since some of the materials needed would not have to be imported each year. As for agrarian reform, in respect of leading problems such as land tenure and agricultural debt, fairly intensive investigation and discussion during the last six months suggests that this is only a critical problem in certain limited areas of the Philippines, in Tonkin (where the problem is debt and not tenure) and in parts of Cambodia (where there is a tenure problem) and possibly in the administration and working out of legislation already on the Burmese law books.
With respect to technological programs, Point Four legislation and appropriations would be a natural recourse although to be sure such programs could presumably be authorized and financed under other legislation similar to that under which the JCRR program has been conducted.
However, we must be cautious both as to the countries and the types of program with which we operate bilaterally, as contrasted with operations through the UN and its specialized agencies. In general, there is a strong disposition in all these countries, with the possible exception of the Philippines, to have Point Four activities conducted through the UN rather than bilaterally with the U.S. Without prejudgment as to particular countries and programs, we are clear that we must not bring pressure to have all this work done directly by the United States.
In this connection, it is a fairly sound if unpleasant generalization to state that the U.S. is feared throughout the whole area, and much of the fear is based upon the notion that our interest in the area originates in large part from conscious programs of economic imperialism. Neither British nor French nor Dutch imperialism is regarded by the sensitive and somewhat xenophobic native nationalism as a serious barrier to their ambitions. We, however, are regarded with considerable apprehension. Even our assistance in the mediation of disputes with metropolitan areas is viewed in part by native populations and always by Moscow as being based upon our desire to replace western European hegemony. For this reason, as badly as these countries need our technical assistance and however eager we may be to furnish it, we must be extremely careful not to overwhelm them with elaborate supervisory missions.