Adjusted national income accounts of the Republic of Vietnam indicate that real income rose at an annual rate of about 4 percent per year from 1956 through 1974. Allowing for population change, this rate of growth would be 1.4 percent per year. To anyone familiar with national income accounting practices in underdeveloped countries, figures such as those quoted should be read with some skepticism. Hence, in the first part of this chapter there is an attempt to remove some of the preconditioned mistrust that a reader might have for our figures by discussing sources of error in the Vietnam national income accounts and making adjustments when they can be justified by other information. The second part of the chapter describes income growth over time and the contribution to growth by sector of origin.

3.1 Economic activity, 1956–72

We are interested in knowing how fast the South Vietnamese economy grew and how major sectors shared in that growth over the two decades ending in 1975. Our search for this knowledge and answers to other questions pertaining to national income was frustrated by known inadequacies in official Vietnamese national income data. At first it seems advisable to present alternative data sets on growth in order to establish a range of estimates that will seem reasonable to many readers. Here are three such sets: (1) The official statistics on gross national product (GNP) as compiled by the National Bank of Vietnam (NBVN).

The wartime economy of South Vietnam was foremost an aid economy. This relatively underdeveloped country could not possibly have met the demands of a long and destabilizing war out of its own resources, and the glue used to hold the country together was foreign aid. Foreign aid is a concept, like charity, with which almost everyone is familiar, but its meaning in the Vietnam situation is not clear. The reason is that the United States reserved some of what it reportedly gave to the Vietnamese for its own purposes, and whether or not this kind of “gift” should be called aid is a controversial issue. In this chapter we propose a concept of aid that is at variance with officially recorded statistics and attempt to measure it by that definition. In the next chapter we shall discuss the efficiency of aid in Vietnam public finance.

10.1 Defining aid

In discussing Vietnam aid, two kinds of problems arise: (1) the conceptual problem of specifying what aid is, and (2) the problem of accounting for aid, or measuring it. The following discussion will show that neither of these problems has a neat and definitive solution.

Among other things, aid can be considered as international charity. In giving charity, the donor presumably expects no reward other than the satisfaction gained from helping someone else.

In this chapter we attempt to measure the value of the Vietnamese piaster, or dong (d), for the period up to 1972, when, for all practical purposes, it was allowed to float to seek its market value. Specifically, “international value” means the price of the piaster in terms of dollars or its exchange ratio. A method for deriving an approximation for the market value is laid out, rationalized, and employed later to compute a series called the “approximate market clearing rate of exchange” for the period 1964–70. Our calculated exchange rate series is then compared with a reported black market rate series. For those periods in which a marked difference is observed, an explanation is sought. Both series are then subjected to a test of consistency that utilizes national income data. Finally, a judgment is made on how the two rates, along with another derived from national income accounts, might be fused together to establish one series, the dollar “value of the piaster.” This series has already been used to translate piaster national income into its dollar equivalent, and it will be used subsequently in estimating the value of foreign aid to the Vietnamese economy.

9.1 The official exchange rate and misinformation

It is difficult to think of any major economic problem in wartime Vietnam that was not related in some way to the foreign exchange rate.

The State of Vietnam became an independent nation when conferees at Geneva in July 1954 partitioned the former French colony of Indochina. It began as a monarchical state, but that condition lasted only fifteen months, until its emperor, Bao Dai, was ousted in a plebiscite by Ngo Dinh Diem in October 1955. From this referendum, which was “a test of authority rather than an exercise in democracy” (Karnow 1984, p. 223), emerged the Republic of Vietnam. The republic survived as a nation for about twenty turbulent years, until April 30, 1975. This chapter traces the rise and fall of an economy shaped by the most expensive foreign aid program in history and buffeted by the tides of a very long and destructive war.

The beginning economic assets of the new nation can be listed quite simply: an adaptive and industrious population of about 11 million, a number of highly productive foreign-owned and -operated rubber plantations, much potential in rice production, and not much else. At the onset of World War II, throughout Vietnam there was a prosperous rice economy able to export 1.2 million metric tons out of its production of 7.7 million tons, or 1,025 pounds of rice per person (Fall 1963, p. 292). By contrast, in 1956 the South portion reported rice production of 2.6 million tons, or 525 pounds per person, and exports of 162,000 tons.

In this chapter we shall take a more detailed look at some of the economic and social development indicators that lie behind the figures on economic growth presented in the previous chapter. Although it is not really possible to define “economic development” (Little 1982, p. 6), a writer nevertheless has an obligation to make explicit the criteria by which he judges whether or not satisfactory development is taking place. Sustainable growth in per capita income was the focus of attention up to about 1970. Since then, the concern for equity has moved to center stage in the development literature. Both are important criteria for evaluating Vietnam economic development, and two concepts, income distribution and saving, that are important for both concerns are discussed, respectively, in Chapters 5 and 6. A third criterion that we stress is movement toward economic independence. This criterion is not suggestive of the dependency school of development; rather, it is intended to be a reminder that self-sustained growth must imply a lessening of dependence on concessional aid, but not mutually beneficial trade and finance. By this third criterion, Vietnam had made little progress at the time of its demise.

4.1 Economic development and economic independence

In the early literature on economic development, writers rarely distinguished between it and economic growth. For example, the overview article on “economic growth” in the Encyclopedia of the Social Sciences (Easterlin 1968) uses the terms “growth” and “development” synonymously.

Saving and investment have lost much of their luster in the development literature since the 1950s, when Sir Arthur Lewis declared that saving was “the central problem in the theory of economic development” (1954, p. 155). Their place in the literature needs to be reconsidered, and defining economic development as growth plus improvement in income distribution is a good starting point. It would be unsatisfactory, indeed, to insist that a country was developing if its per capita growth rate were 5 percent per year while the poorest 20 percent of the population were becoming relatively poorer. It would be equally unsatisfactory to insist that a country was developing if its per capita growth rate were negative regardless of what was happening to the relative position of the poor. Saving promotes growth, and that establishes it as a causal factor in development. Thus, saving need not be the “central problem” in development, but as the “engine of growth” it must be a major factor.

6.1 Growth in domestic saving as an indicator of development

One purpose of this chapter is to call attention to the distinction between domestic saving and total saving and to argue that neglect of this distinction is responsible for confusion with respect to the relationship between saving and development. Total saving is the wrong variable of focus.

The principal “rent-seeking” activity in wartime South Vietnam, and particularly in the period 1965–70, was importing. Continually rising domestic prices in a regime of a fixed foreign exchange rate and controlled interest rates allowed a Vietnamese entrepreneur to reap huge windfall gains in the relatively riskless enterprise of importing. The system permitted these privileged traders to buy goods at subsidized prices and sell them later at inflated prices. Foreign aid played a major role in this operation.

Most of the economic aid received by Vietnam was channeled through relatively few private importers who were licensed by the government. They purchased the foreign exchange from the government, placed orders for imports, and sold the imports many months later at inflated prices. Under competition and free market interest rates, this possibility would not have existed. However, given the institutional arrangements that did exist, the financial incentives in importing completely dominated those in production, attracting the cream of Vietnam's entrepreneurial pool, as well as their capital, to the importing business rather than to other enterprises that might have contributed more to long-run economic development of the country.

It was thought that 85 to 90 percent of all lending by Saigon banks until August 1970 was for the purpose of importing (AID 1976, pt. A, p. 59). Understandably, importers preferred low interest rates, and it is assumed that they used their considerable influence with their friends in government to delay needed interest rate reforms.

In this chapter we trace the history of land reform in South Vietnam during the war and assess how the various programs affected the material well-being of the rural population. A full analysis of income distribution in wartime Vietnam would be a welcome addition to our knowledge of how war policies affected development. In particular, we would like to know if these policies were effective in eliminating relative inequality or absolute poverty as they are usually measured, but an analysis of this sort is not possible because of lack of data. It is possible, however, to infer from nonincome data the progress made in reducing rural poverty and the changes that took place in the relative economic positions of farmers, landlords, and urban wage earners as groups. In addition to its descriptive value in the overall development picture, this kind of information is a useful input to explaining the dynamics of popular support for the government in its political struggle with the Communist forces.

5.1 Income distribution and economic development

At least up to the 1970s, research in economic development stressed growth in per capita income. Development policy, therefore, was concerned primarily with manipulating those variables such as foreign aid that were thought to be effective in speeding up the growth rate in per capita income. In comparison with growth, the concern for equity took a back seat, or it was simply assumed that rapid growth would promote equity, a kind of trickle-down approach.

One of the long-standing arguments during the Vietnam war concerned the prospects for economic development while the war was in progress. In essence, the pessimists thought that the combined military-political problem had to be resolved in advance of economic development, because the latter depended on a stable military-political environment. Optimists thought that substantial development could occur while the war was being fought. On this view, foreign aid could stabilize the economy and promote development simultaneously. To the optimists, the relevant question pertained to the amount of aid required to put Vietnam on the path of self-sustaining growth, and studies were commissioned to determine the amount of aid needed.

We have argued that not much economic development occurred during the war. If this is correct, should one then conclude that the pessimists were right? We do not think so. A demonstration that significant development did not occur during the war is no proof that it could not have occurred.

This chapter deals with a wider question than the one that concerned Vietnam optimists and pessimists. Here we face the general question whether or not it is reasonable to expect significant economic development to take place over a relatively short period of time, say two decades, in an environment of high military threat if other conditions are favorable.

Two major themes on the purpose of foreign aid are expressed throughout the literature. One is highly pragmatic, realistic, and, in the view of some, even contemptible. The other is idealistic. The first is that foreign aid is (and should be) one instrument of foreign policy used to advance the goals of the donor in the world arena. The second theme is that foreign aid should be given generously to promote economic development in poor countries. Because the first theme can easily encompass the second, they are not necessarily inconsistent. However, it is important to separate these themes, because they suggest the use of different criteria for the purpose of evaluating the effectiveness of a given aid program. The first section of this chapter is given to a discussion of the goals of foreign aid in general, without reference to Vietnam aid.

Next we attempt to define the goals of the massive U.S. economic aid program to South Vietnam. A year after the fall of Saigon, the Agency for International Development (AID) completed a major review of its twenty years of aid to Vietnam (AID 1976). Unfortunately, that report contains no coherent discussion of the criteria by which the effectiveness of the various programs was to be judged. Thus, a necessary first step in our analysis of aid is to identify the principal objectives of U.S. economic aid to South Vietnam, and that is undertaken in Section 2.2.

As relations between the two Vietnams grew increasingly hostile, a major fiscal problem in the South became its chief dilemma. Fiscal and other unpopular measures in self-reliance, it was thought, would alienate the population in the short run and reduce the probability of survival of the government. Yet, postponement of those measures would cause more serious problems eventually, because self-reliance is essential to economic development and viability of democratic governments in the long run. The options open to the Vietnamese government were to make the first move toward self-reliance, and then proceed step by step, or to become more and more dependent on aid. Both appeared to be risky and unpromising.

In the late 1950s and early 1960s, South Vietnam was a relatively poor country. Though almost self-sufficient in food, it had a large trade deficit that it was able to manage thanks to U.S. aid. The country had a poor central administration, with little skill or motivation to cope with internal financial problems. The internal war in the early sixties, and later the external war, brought insecurity to the countryside, along with a siphoning of manpower and other resources to military operations.

A major political concern in South Vietnam was that an escalating Vietnamese war budget would cause a rampant inflationary condition promoting serious discontentment among the people. Under the worst scenario, they might rise up against the government, or, at best, they would be ripe for political manipulation by the enemy. Thus, economic policy stressed inflation control rather than long-run development. No one knew exactly what rate of inflation would be politically destabilizing, but it was thought that a rate of around 30 percent would be safe. Hyperinflation was to be avoided.

The history of inflation in South Vietnam is usefully separated into two distinct periods: an early period beginning with the founding of the republic and extending through 1964, and a late period lasting until the end of the war. The dividing line between these two periods is, just coincidentally, about the halfway mark in the political life of the Republic of Vietnam. The real divide, of course, is marked by the significant escalation of the war in South Vietnam in early 1965, when U.S. combat troops were introduced on a large scale. In the early period, the rate of inflation was 4.5 percent on average. It hardly seems to have been a problem. In the late period it varied between 16 and 60 percent and was a major concern of Vietnamese officials and U.S. advisors.

Introduction

The value added tax (VAT), a relatively new type of tax, is a major form of taxation in Europe. In addition to the European Economic Community (EEC), which now requires its members to have such a levy, Finland, Norway, and Sweden all have value added taxes. Most of the Latin American countries also use a VAT.

The rapid ascendancy of the VAT in so many countries has contributed to a growing interest in its possible use in the United States, and a lively debate has emerged between proponents and opponents. Advocates first proposed it as a replacement for all or part of the tax on corporation income. President Nixon proposed the VAT as a way of reducing property taxes used to finance local schools (Strout 1978:5). Richard W. Lindholm, an economist and perhaps the leading proponent of the VAT, suggested that its chief advantage would be to boost exports and thereby help solve balance of payments problems (Halverson 1979c: 11). It has also been considered as a principle source for additional income to finance rapidly expanding government expenditures and more recently as a means of alleviating the rising burden of social security and income taxes (Long 1978:7), as well as the national debt.

The economic history of the world's nations reveals short-run fluctuations in the purchasing power of money with a persistent long-run upward trend of inflation. Governments from ancient China, Egypt, Greece, and Rome to those that exist today simply cannot resist paying their bills by debasing their currency through inflationary policies. The United States is no exception, and these policies have had a profound effect on our income tax.

Bracket creep

For purposes of calculating income tax liabilities, Congress has constructed numerous tax brackets, each normally including small ranges of income and an associated amount of tax on a given income that is due the government. Because the federal income tax is progressive, that is, the higher the level of income the greater the average rate of taxation, higher incomes that are in higher brackets are subject to higher rates of taxation.

Congress has defined these income tax brackets in current or nominal dollars. They are unadjusted for inflation. This means that as wages and prices increase, taxpayers are automatically boosted into higher tax rate brackets, even though their real incomes may remain constant or even decline. This phenomenon, in which individuals' taxes increase more rapidly than their current income, is known as bracket creep. An important consequence of bracket creep is that taxpayers find themselves paying larger and larger shares of their earned income over to the federal government.

Expenditure taxation has a long and noble lineage. Thomas Hobbes is generally credited with fathering the modern view of the levy on expenditures. His idea was honed and developed further by several of the most notable economists in the history of the profession.

John Stuart Mill, Alfred Marshall, A. C. Pigou, Irving Fisher, Luigi Einaudi, Nicholas Kaldor, J. E. Meade (Davies 1961:584), John Maynard Keynes (Kaldor 1955:12), and Martin Feldstein “Why Washington Likes …” 1983:80–2), all of whom bring impeccable credentials to the discussion, are proponents of the expenditure tax. The main reason for their advocacy is the strong technical appeal of the tax. An appropriately designed expenditure levy is superior to an income tax on both efficiency and equity grounds. This notion will be developed further in this chapter.

Issues in income and expenditure taxation

Cursory examination of the arguments for and against an expenditure tax indicates that it, more than an income tax, could approximate the ideals of efficiency and equity. There is even general evidence that a cash-flow tax would be easier to administer than a comprehensive income tax, although account must be taken of the potential transition and international problems arising from a switch in the tax base.