INTRODUCTION

Importance of Formosa to the United States

Formosa is important to American security interests in the Far East because it forms an important link in the offshore defense line stretching from Japan down through the Philippines and serves as a rallying point for Free China.

Current Situation

The dominant fact in Formosa is that its productive facilities are inadequate to support the economy without outside assistance.

An island area of the size of the combined states of Vermont and Connecticut with only one-fourth of its area cultivable is required to support a population of 7 million Formosans, a refugee population from the mainland of about 2 million additional persons plus an armed force of approximately 600,000 men together with the procurement of equipment and the erection of installations that are essential to the success of the present military program. Population growth is at the annual rate of 2.4 percent. It also supports two levels of government, national and provincial, of whose combined budget, 60 percent is required for military costs.

This cannot be done except with sizable amounts of United States aid in the form of military equipment and training as well as economic aid ultimately affecting every segment of agriculture, industry, transportation, communications, education and public administration and welfare related to the total economy.

The island could readily support with a good standard of living, its civil population. It cannot, in addition, pay, feed, clothe and house this large number of troops and build the installations needed in the present effort to create an effective military force out of the troops now living there. Accordingly, there results a deficit both in the internal budget and in balance of international payments. Since the deficit is the result of necessary expenditures for military purposes, the economic aid program almost in its entirety is a program in support of military effort.

A balanced budget is essential to economic stability in Formosa. Public borrowing to make up deficits is impossible to any considerable extent since funds on which the Government can draw for such purposes are extremely limited. Resort to the printing press has led to

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inflation. Austerity policies, maximum reductions in deficits where possible, and vigorous tax collections have aided in keeping inflation under control. Counterpart funds from aid commodities have played a vital role in this operation.

The deficit in foreign exchange arises because the amount received from exports although registering large gains from year to year is insufficient to obtain the commodities that the island has to import including military items imported by the Chinese Government itself. Supplies needed include fertilizer, soy beans, petroleum products, chemicals, and cotton, as well as machinery and parts for the development of industry. Since the Chinese Government itself has no other resources on which it can draw for these purposes, the deficit must be made up by outside aid or by private investment.