The war has altered things dramatically, producing both impediments to and facilitations of development.

(3) One of the permanent legacies of the war will be the increase in the expectations of the Vietnamese people. That is the other side of the Honda phenomenon. The Honda is a handicap from the cost and saving side. But it may also be a strong force motivating the economy to exert itself. Economic development depends on rising expectations and on the ability and the willingness of the country to expend effort. Despite the fact that government policies have militated against national saving, the attitude of the individual, as one observes him in the country and the cities, is directed to industry rather than idleness.

Furthermore, the great possibilities opened up by the Green Revolution may have profound effects on human attitudes. Increasing agricultural productivity will make the expenditure of human effort worthwhile.

As a new generation grows up, the horrors of war will fade, as they have in Japan and Korea. But the profound changes in the economic life of the country, wrought by the war will remain.

The conclusion of this section is that the war has produced great distortions in the Vietnamese economy, chiefly reflected in its external trade. At the same time, at fantastic cost, it has fulfilled some of the necessary "preconditions" for development. A combination of sound domestic policies with a substantial infusion of external resources should have a better chance of success in Vietnam than it would in many other underdeveloped countries. On the other hand, the external gap is such that niggardliness in the provision of external resources can have more damaging effects in Vietnam than it would elsewhere.

III. Policies for Development.

In the opinion of virtually all analysts who have examined the matter recently, the future of Vietnam should lie in the world economy rather than in economic parochialism. This is true of almost all small underdeveloped countries. Their internal markets are too small to realize the benefits of division of labor. They must specialize to be efficient; and specialization is only possible if they trade beyond their own boundaries. But this argument implies that Vietnam cannot stick to its exports of primary commodities, like rubber, but must seek the benefits of the division of labor for its industries. This is the spectacular lesson that has been taught to the world by Korea, Taiwan, Singapore and Hong Kong--to say nothing of Japan. They can be successful exporters of manufactures, even though they will almost certainly encounter protective barriers against them.

In this context a successful development policy can consist as much in refraining from doing the wrong things as in doing the right ones. It must avoid the restrictions and licensing arrangements that have hampered development and have bred corruption in the past. It must resist domestic pressures to set up high cost import substitution industries. It must resist the pressure of labor to establish real wages that are so high that the country cannot take advantage of its plentiful labor supply....

Impediments

(1) Mobilization. It is estimated that the military budget of Vietnam amounts to about 30 per cent of its GNP. It is inconceivable that without foreign assistance the country would be able to bear that economic burden, let alone have any resources left over to devote to development. Even though some reduction of the size of the forces may be possible as time passes, other budgetary items must increase. Military wages have been held down in a misguided attempt to limit inflation. In the future they must increase in real terms. There will also be a depressingly large and increasing item for veterans' benefits in the budget. Consequently it would be imprudent to assume that the military burden will be appreciably relieved in the near future.

In addition to the sheer size of the military budget, the risks and uncertainties associated with continuing military operations must be taken into account. These factors will unquestionably affect the rates of return that investors, domestic or foreign will require; the total may consequently be limited or investors will be induced to temper their economic decisions heavily by considerations of security.

(2) Foreign Trade. One of the most notable effects of the war has been its effect on Vietnam's foreign trade. Exports of commodities have virtually disappeared and imports have nearly doubled during the last decade....

The import deficit need not be regarded as an impediment to development, provided some external source is prepared to finance it. It is too much to expect that the US or other countries will provide say $700 million a year in financing for the indefinite future. And if the potential deficit remains, while the sources of financing dry up, there can be no doubt that development will be retarded, and may degenerate into stagnation.

Reduction of the import surplus must therefore be regarded as an important component of development. It must not be thought that reduction is quick or easy matter. As one example Korea still only pays by exports for two-thirds of its imports--twenty years after the end of the Korean war. On the other hand, once Korea set its mind and political will to the problem, it achieved remarkable success, during the last five or six years.

(3) Real wages in the private sector. The shortages of labor caused by mobilization, combined with the increased demand for labor for military construction, together with the abundant import policy have resulted in a level of real wages that is high in relation to the country's productivity and stage of development. If the market system is allowed to operate, and exchange rates are relied on to achieve international balance, wages could find their appropriate level....