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 (3) Requirements for United States economic aid are expected to increase from approximately $34 million in FY 1955 to $50 million in CY 1955, and to $66 million in FY 1956, or an approximate doubling from FY 1955 to FY 1956. The major increase is in transportation and communications, with smaller increases in agriculture, education and public administration, and public health.

(4) As shown by the above figures, during 1955 and 1956, economic aid requirements will increase and military aid requirements will decrease. Enclosure "B" shows graphically the magnitude of Vietnamese Government extraordinary expenses, the expected Vietnamese contribution, and the amount of United States aid recommended for military and non-military aid programs during 1955 and 1956.

. . The Vietnamese Government is about to sign a contract with Michigan State College, under the sponsorship of FOA, which will provide a much-needed school of public administration and specialized training in police methods.

5. . The normal problems of a divided country are enormously complicated by the existence in free Vietnam of two religious sects (Cao Dai and Hoa Hao) and a powerful band of "nationalistic" free-booters (Binh Xuyen). Each of these groups is rendered dangerous by its possession of armed forces and its control of a considerable portion of the national territory. The sects and the Binh Xuyen, although they have at various times played an anti-French role, are vestiges of the colonial policy of divide and rule. While no reliable statistics are available, these groups claim to embrace about one-tenth of the population of free Vietnam, and to have forces variously armed totaling 40/50,000. The French have incorporated some thousands of these armed forces into their Expeditionary Corps and have provided the financial means for the perpetuation of the sects as semi-independent principalities. French subsidies to the sects, however, which have steadily diminished over recent months, will, according to General Ely, be entirely suspended as of January 31. This development, while dangerous in the immediate future, is of long range advantage to the Vietnamese Government in that it offers the opportunity, if properly exploited, to end once and for all the a cute threat of the sects to an orderly central government. Lacking French support the sects will be obliged to turn to the national government. If the government handles them skillfully, they can be brought into line and shorn of their power to create serious trouble. However, if the government does not proceed cautiously in this matter, there is a possibility that the sects, or fragments of them, may resort to open banditry at a time when the national government and army are not prepared to meet this new menace. Rh