Foreign Relations of the United States, 1958–1960, Vietnam, Volume I

92. Telegram From the Ambassador in Vietnam (Durbrow) to the Department of State¹

Saigon, October 10, 1959—2 p.m.

1270. Depcirtels 149² and 410.³ Following is my assessment US programs in Vietnam:

Objectives. Basic US objectives in Vietnam continue to be A) maintenance Vietnam’s independence by keeping it from falling prey to Communist aggression or subversion, B) preserving its present close association with free world and C) helping it enhance strength free world through development stable government and self-sustaining economy which will enable it eventually to carry its own budgetary burden.

Role US and non-US programs in FY 61. Achievement these objectives requires adequate and balanced programs for security, economic stability, development material and human resources and dissemination information.

1. Security. Analysis FY 61 MAP now underway by Country Team in response circular airgram 1776⁴ will be sent separately⁵ as suggested Depcirtel 410. Military budget support component of defense support and PL 480 assistance reduced from $144 million equivalent in FY 59 to proposed $111 million equivalent for FY 61. This drastic reduction results from application balance of payments approach to determination as aid level and desirability using portion DS generated piasters ($19 million equivalent) to finance local costs DS economic projects for which GVN budgetary contribution inadequate. I hope that it will be possible to reduce overall GVN military budget below $174 million approved for CY 1959 in order alleviate impact on GVN finances of projected reduction in our DS contribution thereto. Possibilities in this respect may be clearer after MAAG review of GVN-proposed CY 1960 budget completed. Nevertheless I feel confident our action will not affect Vietnamese force level as GVN has several other feasible means of covering gap: increased tax revenues, exchange rate adjustment or deficit financing. If GVN does not choose to meet gap by these methods it might decide to cut back on investment component rather than reduce force levels.

2. Economic stability. Reduced FY 61 DS contribution to military budget should compel GVN seriously consider tax and exchange rate measures for purposes maintaining financial stability. We are aware there is calculated risk GVN could decide meet budgetary gap solely through deficit financing, and that financial stability which was attained by 1957 through aid and fiscal measures could be upset. It is also possible that, while GVN may adopt tax or exchange rate measures, political factors (such as effect of price increases on regime’s popular support) may prevent those measures from being of sufficient scope to meet entire budgetary gap and deficit financing may therefore still be required. However our estimate is that budget deficits in prospect should not cause economic instability of any consequence.

3. Development of material and human resources. FY 61 defense support project aid of $35 million is based on expected availability and readiness for financing of projects falling within DS realm, excluding projects for which non-US Government funds are expected be available as well as self-liquidating projects deemed eligible for DLF financing.

In addition to DS projects, certain projects will be financed out of Japanese reparations and French aid. Happily, GVN is also planning growing use own resources for financing projects such as road and airport construction, cement and paper plants. GVN will undoubtedly apply to DLF during course next two years for financing still other projects, such as possible joint government-private industrial projects. While as result reduced DS aid level GVN might decide meet its increased contribution to military budget through cutback in investment rather than through tax, exchange rate or deficit financing measures, we believe this is risk we should take. Such GVN measure would represent temporary tactical countermove against our strategy and if we hold firmly would probably not be adhered to for long.

Technical cooperation is proposed at level $5 million for FY 61, same level it has approximated during past few years. Together with IES exchange persons program, it plays major role in training leaders and technicians required by Vietnam.

Committee chaired by PAO and including Embassy, USOM and MSU membership coordinates activities regarding exchange persons, English teaching and textbook translation programs. Committee also keeps account activities in these fields by non-US Government sponsors. In other technical assistance fields USOM program division follows Colombo Plan, French, German and UNTAA activities in order to avoid duplication.

4. Information. Recently approved USPS country plan supports our objectives and other programs. USIS and USOM work together closely in publicizing aid activities and in gaining psychological support for objectives of aid program.

Problems.

[1.] While I am convinced our programs are soundly conceived to achieve our objectives and well coordinated with each other and with non-US Government programs, there are certain problems directly related for the foreseeable future cannot develop sufficiently to carry this heavy burden without outside assistance.⁶ Furthermore as long as GVN believes he [we] will pick up most of military budget tab, it will resist taking necessary financial and tax measures which would permit it to shoulder more of this burden. This constitutes added reason to adopt balance payments approach.

2. Defense support aid level. While I have approved $160 million CID budget proposed for FY 61, I wish draw attention to certain factors which might change proposed level. It is predicated on PL 480 program of $10 million for FY 61. Any reduction in that program will lead to corresponding increase in DS requirements. In addition since proposed DS level represents calculation based essentially on estimates of commercial import requirements and Vietnam’s own foreign exchange earnings, serious changes in those estimates of requirements for DS funds [sic]. There are two principal ways in which estimates might err. First, since GVN now exhibiting increasing tendency finance foreign exchange costs of projects out of its own resources, this could become substantial claim on foreign exchange earnings and reduce amount such earnings estimated in CPB to be available for financing commercial imports. Second, since CPB assumes GVN financing of local currency costs of these projects as well as DLF projects and a small portion of reparations projects which may require financing in 1961, GVN may find it necessary resort to inflationary methods financing to meet burden. This in turn might increase demand for imports thus increasing balance of payments gap. If either happens, US must be consistent in applying balance payments approach to DS aid and be prepared increase level if required.

3. Rate of economic development. While commendable development progress being made particularly in agriculture and transportation and a few industrial projects under way (glass, textiles and sugar), development rate is still below that required enable Vietnam compete successfully in economic race with North Vietnam and advance materially toward economic stability. While Diem has become more conscious of need for economic development, he still gives first priority to security. In addition, private individuals desiring establish small industries often find it difficult to obtain necessary government approval, licenses, etc., because of mistrust entrepreneurial group in general, suspicion of foreign business groups and tendency reserve field for those in favor with government.

We shall do what we can bring about change in these attitudes and shall continue efforts expand role private enterprise. It is necessary recognize frankly however that GVN economic philosophy, based on past history of colonial exploitation, fear of Chinese economic domination and reinforced by certain recent instances of less than satisfactory encounters with foreign private capital (Parsons and Whittemore, Pan American Hotel), will admit only gradual and partial acceptance private enterprise for time being. We should therefore be prepared finance joint government-private industrial projects in selected fields which represent GVN compromise between capitalism and state enterprise.

4. DLF. After two years of DLF operations US finds itself in position of not having consummated single loan agreement with Vietnam, which is presumably one of countries DLF created to assist. GVN’s own hesitations have delayed water and electric power projects, railway and bus loans pending before DLF and problem of exchange rate for repayment loans still not settled to GVN satisfaction. We believe it urgently necessary both US and GVN move ahead at faster pace than to date so that DLF as instrument US policy can play necessary role in promoting Vietnam’s economic development.

5. PL 480 rice. PL 480 sales of rice for local currency in markets of Asian producers represent in our view major deterring element in US policy objectives and programs to achieve them in Vietnam and other Asian rice producing countries. These rice sales are directly contrary to one of fundamental purposes of our aid program in Vietnam—development of prosperous economy progressing toward viability, thus reducing its dependence on US taxpayers’ support. Favorable political impact which we receive from spending millions is vitiated by rice sales policy which snatches from these producing countries opportunities to increase their self-support (witness recent case of Indonesia). Such sales thus frustrate objectives our other programs.

Durbrow

1. Source: Department of State, Central Files, 120.171/10–1059. Secret. Repeated for information to CINCPAC PolAd.

2. In this circular telegram, August 19, the Department requested from each recipient Chief of Mission the following:

   “Would appreciate your succinct, overall analysis of U.S. objectives and role U.S. (both MSP and other) and non-U.S. programs in FY 1961 in achieving them. Such report from you as responsible supervisor all U.S. activities considered essential to give proper perspective to separate programs. Form and organization of report left to your discretion, but it is hoped that it will include evaluation of effectiveness of coordination among MSP elements and between MSP and other U.S. and non-U.S. programs.” (Ibid., 120.171/8–1960)

3. In this circular telegram, September 29, the Department informed recipients that it was not necessary to repeat information on military programs as requested in circular airgram 1776. (Ibid., 120.171/9–2959) Circular airgram 1776 is described in footnote 4 below.
4. In this circular airgram, August 21, the Department outlined procedures for coordination between Unified Military Commands and Country Teams in developing, in accordance with specified fiscal ceilings, military assistance programs for submission to Washington for review. (Ibid., 700.5–MSP/8–2159)
5. Sent in despatch 123 from Saigon, October 15, not printed. (Ibid., 751G.5–MSP/10–1559)
6. Apparent missing word or phrase.