approximately $650,000 annually and provides for a maximum of 30 American nationals chiefly senior engineers of which 25 are currently employed and in service in Formosa. It originally employed nine persons. This organization has a dual function in that it acts in an advisory capacity to both the Chinese Government and to the USOM of FOA in Formosa. In recent months it has been increasingly involved in the engineering of many defense projects with 4 or 5 of its total staff of 25 devoting full time to these projects. The Industry Officer of the USOM staff acts as liaison officer to the J. G. White Corp. The availability of this diversified engineering advice has proved useful to both the Chinese Government and FOA.

X. Economic Problems

As viewed by the Department of State, the current economic problems on Formosa as distinct from military and political problems include:

(1) The optimum degree and pace of industrialization,

(2) Exchange rates and inflation,

(3) The status of trade with Japan,

(4) Implementation of recommendations made by the United States sponsored Economic Advisory Group on modernizing fiscal and tax practices,

(5) The expansion of private investment and farm credit. Economic problems stem basically from the political situation which has imposed some 2 million refugees upon a small island with an already large population, limited natural resources, and a colonial economy. The island has been required to maintain an abnormally large military establishment and to attempt to operate as the base of an independent state.

The island is relatively rich in sugar, rice, and certain other agricultural products, but the investment required to produce additional yield is high.

Formosa has only a small industrial base. Post-World War II development of industry has concentrated on the need to reduce certain types of imports, and there has been practically no manufacturing for export. Furthermore, development of new industry is handicapped by the obsolescence of most of the machinery and methods already in use. Capital required for development generally is very limited and the investment rate is low, partly because of the drains of the large military establishment and partly due to the poor investment climate. The Chinese Government has been making efforts to improve the situation and has passed a recent law regulating foreign investment which should provide some encouragement to capital from abroad. United States aid has been directed largely to military expenditures and day-to-day economic support of the military establishment.

The island has a substantial deficit in its foreign trade and payments balances. United States aid has had the effect of making up this difference from year to year. (For example, the foreign trade deficit and the figure for United States economic aid were both about $60 million in 1953.) This situation also goes back to the history of Formosa as a dependency of Japan and China. There is a marked lack of diversity in agricultural production, sugar and rice far out

stripping other products. This places the small economy at the mercy of the world market prices for these products, which have recently shown a tendency to decline. The role of the island in the world sugar market is limited by its participation in the Sugar Agreement, which has set an export quota somewhat below its recently demonstrated ability to produce. An immediate problem is the necessity to market and even store a bumper rice crop in the face of surpluses occurring elsewhere in the area and the United States surplus disposal program.

In attacking these problems the United States Embassy Economic Section works closely with the staff of the Foreign Operations Administration mission (and with members of the Military Assistance Advisory Group with regard to aspects of military aid). The four primary objectives of our aid program to the Republic of China may be briefly described as follows: (1) To stabilize the economy, (2) to support the necessary military effort, (3) to develop the island's capacity for economic self-support, and (4) to assist the Chinese Government in increasing efficiency in its economic functions. The detailed plans of our aid effort are made and carried out by the FOA mission, with the economic section of the Embassy acting in an advisory and coordinating capacity with particular respect to policy functions correlated to those carried on by the Department of State and FOA in Washington.

An Economic Stabilization Board has been established in Taipei by the Chinese Government. On it sit United States Embassy, FOA, and United States military personnel as advisers. This body and its subcommittees meet regularly to recommend measures to improve the status of the whole economy. It is principally through this organ that United States aid plans are worked out with the Chinese Government.

Multilateral Economic Programs

The participation by the Government of the Republic of China in such multilateral economic organs as ECAFE, GATT, and the Sugar Agreement primarily involves the Embassy in matters concerning the continuing representation of Nationalist China in these bodies, since it has been a cardinal policy of the Communists to attempt to unseat the GRC and substitute representatives of the Communist regime in Peking.

Public Enterprise

The term "public enterprise" is loosely used to apply to a variety of commercial-type activities, governmental functions, banks, etc., under a diversity of forms of management and supervision. Following is, we believe, a comprehensive list. The China Broadcasting Corp. is owned by the Kuomintang, which makes it, too, a form of government enterprise.

Organization of Public Enterprises (According to Chinese Sources)

1 All companies, corporations, banks, the Central Trust of China, the Taiwan_Fisheries Rehabilitation Administration, The Taiwan Travel Service and the Shin-Sheng Pao Daily News have board of directors which in turn appoint general managers. The Taiwan Salt Works is controleld by a Readjustment Committee, and the Provincial Government Printing Works by a Director Committee. All others have managers or directors appointed by their supervising agency.

2 The China Merchants Steam Navigation Co., the Central Trust of China, the Central Bank of China, the Bank of China, the Bank of Communications and the China Textile Development Corp. have all moved from the mainland with their assets. The Taiwan Fisheries Rehabilitation Administration, the Taiwan Steel Works, the Sin-chu Coal Mining Administration, the Bureau of Mechanical and Engineering Services, the Taiwan Agricultural and Chemical Works, the Kaohsiung Ammonium Sulfate Plant, the Agricultural

The above list in its original form gave the total rated capital of the entire list at NT$2,031,167,000 and total personnel at 131,631. The current legal rate of exchange is approximately NT$16 for US$1 but with the sizable black market considerably higher and wide fluctuations in exchange rates over a period of years, no acceptable or meaningful equivalent of this capitalization can be given in United States dollars or any other firm currency. Even an acceptable explanation of what is meant by "rated capital" would be difficult. The total personnel figure is also of highly questionable accuracy. The chief value of the list is that of showing that practically all essential industry, utilities, and services are government controlled. All have been the major recipients of United States grant aid funds in the form of materials, equipment and technical services. Sizable grants and loans of counterpart funds have been made to them.

Practically all of these operations have certain common characteristics: They are overstaffed with 2 or 3 times the number of employees necessary for the operation; the accounts and records follow no standard practice making it generally impossible to determine actual comparative costs, expenses, profit or loss; surprisingly many, if not most, have very competent technical talent on their staffs but this technical competency is given no authority or opportunity for managerial improvement; sales promotion is an unknown art. It is generally believed that to drastically reduce the payrolls of these organizations to rational size would create such unemployment as to present a social and political problem of great magnitude, the solution of which probably involving costs far outweighing that of the uneconomic losses inherent in their continued employment. Since local private capital in sizable amounts is entirely lacking and the climate for foreign investment (including that of overseas Chinese) is unfavorable, no means presently exist for the transition from public to private enterprise. A scheme to redistribute large landholdings and use equity shares in Government corporations in part payment for the land has been considered with little progress to date. Obviously under current conditions little progress can be expected in giving impetus to private investment.

All other

Processing Factory and the Taiwan Supply Bureau are all new investments. enterprises are former Japanese assets rehabilitated and reorganized by the Chinese.

Originally the Ministry of Economic Affairs directly supervised the Salt Work and Fisheries Rehabilitation Administration only. The other enterprises under this category were directly supervised by the National Resources Commission which was nominally under this ministry. To streamline administration the N. R. C. was abolished and its functions transferred on September 1, 1952.

NOTE. The China Broadcasting Corp. is owned by the Kuomintang which makes it a recent addition to the above list of Government enterprises.

XI. Overseas Chinese

Since Formosa is intended to serve as a rallying point for Free China, a brief mention of the 122 million Chinese, exclusive of those on Formosa, living in Far Eastern countries outside of China, is in order. Their distribution is as follows: Japan---

Vietnam__

Cambodia.

Thailand

Malaya and Singapore___.
Burma.

Indonesia..

Philippines.

Sarawak..

British North Borneo‒‒‒.

44,000 (about 20,000 are Formosan Chinese;

most of the remainder are second- and thirdgeneration Chinese born in Japan). 1,000,000 (about 5 percent of population). 300,000 (about 10 percent of population). 3,000,000 (about 16 percent of population). 2,750,000 (about 45 percent of population). 300,000 (about 1.5 percent of population). 2,000,000 (about 3 percent of population). 300,000 (about 1.5 percent of population). 150,000 (about 25 percent of population). 75,000 (about 22 percent of population).

Their presence poses problems for themselves as well as for the governments within whose jurisdiction they live. The policies of the Chinese authorities with respect to overseas Chinese affect the National Government's and the Communist regime's relations with the countries of Southeast Asia, all of which countries are inclined to be fearful of the extension of Chinese political influence from whatever source. Political activities among the overseas Chinese by either the Chinese Communists or the National Government tend to impair their relations with the Southeast Asian countries.

While numerically a distinct minority in most of the Southeast Asian countries, except Malaya, the economic position of the Chinese and their concentration in urban areas have given them an importance far beyond that suggested by their numbers. In contrast to the agricultural orientation of the bulk of the Chinese on the mainland, the overseas Chinese by and large are concerned with business and nonagricultural pursuits. Sociologically, they represent a large part of the middle class in the countries of their residence.

With the rise of nationalism and the emergence of independent governments in Asia, the political position of the Chinese minorities has become increasingly precarious. The policies of the Southeast Asian governments toward resident Chinese minorities vary, but in general they have moved toward increasing economic, political, educational, and social restrictions. To protect themselves from possible Chinese domination and potential subversion, local governments have pursued policies which have engendered a sense of insecurity among overseas Chinese.

The overseas Chinese are caught in a highly ambiguous position as the following elements suggest: