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Declassified per Executive Order 13526, Section 3.3 NND Project Number: NND 63316. By: NWD Date: 2011  confidence in South Vietnam. The cumulative effect of all these developments could be inflation, particularly if the government were to undertake large scale deficit financing of its budget. One of the encouraging factors in South Vietnam has been the fact that the price level has not risen commensurately with the money supply, reflecting increased private holdings of piasters. Impairment of this confidence could bring out of hoarding 3 to 4 billion piasters which would create serious inflation.

Unless the security and defense situations deteriorate appreciably further, development of South Vietnam's light industry, concentrated in the Saigon-Cholon area, probably will continue at about the present pace. Most of the effort, however, may be directed toward the completion of plants currently under construction or in the planning stage. The GVN can also be expected to give high priority to the Da Nhim hydroelectric project and to increasing coal production.

The security situation has thus far not prevented an increase in the export of rubber which, along with rice, is the mainstay of South Vietnam's foreign trade. The trade gap, although still substantial, has been progressively narrowed in recent years and can be further decreased in the short run only by maintaining the availability of rubber and rice for export. he short-run outlook is not bright, however, in view of the adverse effects of Communist insurgency on rice exports and increased Communist harrassmentharassment [sic] of rubber plantations. In the long run South Vietnam will probably have to rely increasingly on agricultural diversification which, as in the cases of pork and kenaf, leads to nww exports and on increased consumer goods production which, as in the cases of coal and textiles, replace imports or substitute the importation of raw materials for finished goods respectively. In any event, South Vietnam will continue for the foreseeable future to require extensive US aid to finance its large balance of payments deficit.

D.

Recent increases in US assistance, a jointly agreed plan to combat Communist insurgency, and manifestations to Diem of US sympathy and backing, have provided a basis for a continuing close relationship between the US and South Vietnam. To a considerable extent, however, Diem and his advisors appear to regard recent US decisions toward South Vietnam as a vindication of the wisdom of their basic approach to political and economic problems, as a recognition of their long-standing efforts to get special US consideration of their appraisal of the seriousness of the Communist threat, and as a reward for South Vietnam's steadfast support and anti-Communist orientation. The Vietnamese leaders, therefore, will almost certainly continue to press for increased aid, further expansion of the armed forces, and a clear priority of military over political and economic efforts to undercut the Communists. Moreover, Diem will be Rh