of fire protection services at 26 centers, hospitals, or domiciliaries. Reports to the Congress on these reviews were in process at the end of the fiscal year. Also, a review of inpatient dental care at 10 hospitals was in progress at the end of the year.

During the year we submitted two reports to the Congress and we issued a report to the St. Louis Area Medical Director on management of inventories at the Prosthetic Distribution Center.

One of our reports to the Congress, issued in January 1963, covered our review of rental charges, costs, and other matters relating to quarters provided employees at selected stations. The report included our findings and recommendations on inadequate rental and utility charges made to occupants of Government quarters, the maintenance of more nonhousekeeping quarters in readiness for occupancy than were reasonably needed, and certain other matters. Rental charges to occupants of Government-owned quarters were significantly lower than rentals prevailing for comparable private housing. The lower rentals resulted from allowing reductions for residing on a hospital reservation, based on restrictions, extra health hazards, or other factors. We recommended that these factors be eliminated in establishing rental rates because applicable Bureau of the Budget instructions do not include such conditions as reasons for deviating from the principle that rents should be set at levels similar to those prevailing for comparable private housing in the area.

Based on our recommendation, the VA eliminated the forementioned factors from consideration in establishing rentals and informed us that it planned to reappraise all of its quarters for the purpose of establishing rental charges consistent with the Bureau of the Budget's expressed policy. With respect to our findings on inadequate utility charges and excessive nonhousekeeping quarters, the VA told us that appropriate action would be taken in accordance with our recommendations.

Also, in January 1963, we reported to the Congress on the expenditures of $73,000 by the VA to renovate and modernize a dwelling over 80 years old and used as a Station Director's residence. We stated that in view of the age, the seriously deteriorated condition, and the obsolete design of the dwelling,

we believed that the decision to restore the dwelling to an acceptable conditon was unsound. The VA agreed that the renovation of the dwelling was an unwise expenditure and took action on our proposals to strengthen mangement controls over the financing of repairs, maintenance, improvements, alterations, and renovations.

Veterans Canteen Service.-During the year we completed our audit of the Veterans Canteen Service for the fiscal year 1962 and submitted a report to the Congress in May 1963. Our audit included a review of procedures, tests of financial transactions of the revolving fund, and an examination of the financial statements. Audit work was performed at the Washington central office, at 3 of the 5 field offices, and at 15 canteens.

The Veterans Canteen Service is required by law to return to the general fund of the Treasury, funds which are excess to its requirements for the ensuing fiscal year. The Veterans Canteen Service computed that $40,039 of the funds available at June 30, 1962, were excess to its requirements for the fiscal year 1963. We commented in our report that in determining this amount, the Veterans Canteen Service reserved funds of about $2.5 million for payment of most of its current liabilities recorded at June 30, 1962, without regard to the funds to be generated by fiscal year 1963 operations. We proposed that these funds be considered when computing the excess funds to be returned to the Treasury. The Deputy Administrator of Veterans Affairs concurred in our proposal, and we were informed that $1.5 million was paid into the Treasury in April 1963 as the amount which, at June 30, 1962, was excess to the Service's requirements for the fiscal year 1963.

Supply program.-During the fiscal year 1963 we completed a preliminary review of procurement activities at selected hospitals and VA supply depots. Based upon the results of this work, we plan to initiate a further review at the Somerville, N.J., depot on the lack of coordination between the VA and the Defense Medical Supply Center in the procurement of drugs and chemicals.

At the close of the fiscal year we had in process a report on our review of the procurement of inoperable X-ray film-processing machines. We also had in progress a preliminary survey of static, slow-moving, and obsolete inventory supply items at the Hines, Ill., depot.

CHAPTER NINE

Department of State and Related Agencies

DEPARTMENT OF STATE

During the fiscal year 1963 we continued to devote a major part of our audit efforts in the Department of State to the nonmilitary foreign assistance program administered by the Agency for International Development (AID). We also made selected reviews of programs and financial activities of other offices of the Department.

AGENCY FOR INTERNATIONAL DEVELOPMENT

Our examination of economic and technical assistance activities under the foreign assistance program as administered by the Agency for International Development and its predecessor agencies was performed principally at the Agency's Washington office and was supplemented by examinations at certain of the Agency's oversea missions.

In September 1962 we issued a report to the Congress on our examination of the economic and technical assistance program for Korea for the fiscal years 1957 through 1961. We also issued several reports to officials of AID on matters designed to strengthen and improve payroll procedures and other financial practices.

During the year, we completed reviews of (1) the economic and technical assistance programs for Vietnam, Turkey, and the Central Treaty Organization; (2) the economic aspects of a loan for the construction of a water supply system in Saigon, Vietnam; (3) the earthquake reconstruction and rehabilitation program in Chile; and (4) assistance granted to a hospital in Poland. Reports to the Congress on these reviews were being prepared at June 30, 1963.

Economic and Technical Assistance Program for Korea

For the period covered by our examination (1957-61), the program for Korea was the largest individual country program for economic and technical assistance financed under the Mutual Security Act of 1954. Total aid obligated from mutual security funds, including loans of $22 million from the Development Loan Fund, aggregated close to $1.2 billion for the 5-year period. This aid was supplemented by more than $250 million worth of surplus agricultural commodities made available under Public Law 480.

Measured in relation to this financial outlay, the progress achieved in the economic development of Korea was considerably less than was reasonable to expect. A variety of interconnected causes accounted for this disparity. At the center of these causes were (1) a level of aid averaging more than $200 million annually which the Korean economy could not absorb productively nor the Korean Government administer efficiently, (2) limited technical skills in Korea, and (3) failure of the responsible U.S. agencies to recognize sufficiently these limitations in the annual programing of aid. The availability of such relatively large resources was a disincentive to fiscal prudence and tended to encourage personal and governmental standards out of proportion to economic realities.

The causes of the program's poor economic showing were attributable mainly to deficiencies in certain sectors of the Korean economic structure, lack of cooperation by the Korean Government, and poor program planning and administration by the predecessor agency of AID. These causes deal with areas of the Korean economy, the betterment of which is vital to Korean economic development and the success of the aid program. We expressed the opinion that only if these causes were eliminated or greatly minimized was it logical to expect that economic development in Korea and the productive utilization of aid funds through better administration would be attainable in any degree reasonably commensurate with the amount of aid. We stated further that the responsible U.S. agencies should take an active part and have a meaningful voice in the policies, practices, and operations of those segments of

the Korean economy which bear significantly on the country's economic stability and development.

The more specific factors discussed in our report which led to the program's poor economic showing are noted below:

Inadequate long-range planning.—The aid program was not carried out within the framework of any comprehensive economic plan or geared to specific long-range objectives.

Unproductive utilization of Korean resources.-Korean foreign exchange was unwisely used or not used at all, thereby accumulating more foreign exchange than was needed. Aid funds were used to import commodities which could have been produced in Korea.

Need for tax reform.-An inequitable tax system combined with an unsound collection system was responsible for widespread tax evasion and other illegal practices which resulted in low government revenues and created barriers to expansion of business activity and foreign investment.

Corruption in Korea.-Large-scale corruption within the Korean Government was recognized by U.S. authorities as a major deterrent to economic progress and, according to the Revolutionary Government which came into power in May 1961, was largely responsible for what it considered a condition of economic stagnation.

Excessive cost and unwise use of investment funds.-Extremely high interest rates on agricultural and industrial loans impeded efforts to channel funds into productive uses and thus retarded development of the economy. The consequences of usurious interest rates perpetuated heavy debt, low living standards, and minimal purchasing power in the agricultural community which comprised more than half of the population of Korea, and channeled funds into nonbasic but profitable enterprises rather than essential industrial undertakings, thereby discouraging industrial growth.

Commodity imports not conducive to economic development.-In recent years an increasing proportion of commodity assistance was devoted to consumable goods despite Korea's need for capital investment. Significant amounts of aid funds were earmarked for comparatively low-priority consumer goods or, at the time of our review, were not being used, while essential