343. Telegram From the Embassy in the Republic of China to the Department of State 0

54. Further to Embtel 52,1 I reviewed general economic situation with Vice President-Premier in hour’s conversation late yesterday. I reflected our concern over certain aspects of situation, pointing particularly to unbalanced budget, prospects for further price rises and inflationary pressures, continuance of disproportionately heavy military expenditures and declining private investment growth. At same time, I complimented Chen on numerous measures taken in past few months to improve business and investment climate and remove institutional impediments. I said we realized many beneficial changes were difficult to bring about, especially those involving Legislative Yuan sanction. I reminded him of our interest in accelerated economic program and voiced expectation that pace of reforms would be maintained so that accelerated program could move ahead.

Chen, who only recently returned from ten-day trip to Chinmen and appeared out of touch with current developments, spoke in general terms. He said two-thirds of nineteen points are already in various stages of consideration or implementation. He voiced confidence all points would sooner or later be applied though he expressed some uncertainty about Legislative Yuan attitudes and progress in dealing with legislation.

Regarding FY 1961 budget, Chen admitted difficulty of bringing it into balance, but said he would strive to obtain “relative balance”. He voiced his determination to exercise control over military spending. He said retirement of ineffectives is big problem, especially from viewpoint of resettlement and maintenance of social stability. He expressed hope planned economic upsurge could help alleviate retirement problem.

Comment: Chen spoke with obvious sincerity and determination. As I survey and reassess situation, I cannot but be impressed with will to move ahead and indeed with net progress to date. Prospects for future cannot be definitely gauged at this point, especially enactments required to be undertaken by legislature. From available information, it appears that Legislative Yuan reaction is better than might have been expected [Page 703] and omnibus incentive legislation has good chance of passage by October.

I believe it would be safe as of now to consider that GRC is moving toward desired economic reforms and that further reforms can be confidently expected, though they may not measure up to our expectation. On this basis, I think we should move ahead with Nanpu power loan and perhaps other smaller productive projects. I believe very large Tachien project should be given careful study as to its practical feasibility and economic benefit before taking final decision.

In any case, some measure of accelerated industrial progress is needed to keep up with population growth. Without our stimulus and resources, I can see Taiwan failing behind in race for survival unless it is willing to effect drastic military retrenchment. I do not believe it is militarily or politically possible today.

I believe we should avoid illusion that our accelerated economic program if carried out on envisaged scale will produce wonder of self-sufficiency within next few years. Unless there is sharp cutback of military burden I think we will find it necessary to contribute to upkeep of this island for long time to come.

  1. Source: Department of State, Central Files, 893.00/7–2860. Secret; Priority.
  2. Telegram 52 from Taipei, July 27, assessed prospects for the accelerated development program. It concluded that developments in the past few months had not been favorable but that it was too soon to discuss abandoning the program, and it recommended that U.S. policy should remain flexible so that additional increments of aid could be given when they could be put to good use. (Ibid., 893.00/7–2760; see Supplement)