Mr. MOORHEAD. Page 4 of the statement indicates that by shifting the commodity import financing from the U.S. commodity import program to the Foreign Exchange Operations Fund that we were able to absorb 480 kip for each dollar the U.S. taxpayer supplied for Lao commodity imports in 1970 as contrasted to 353 kip for each dollar supplied in 1964. It would therefore appear that, based on the 1964 absorption rate, we received a dollar and thirty-six cents ($1.36) worth of kip for each dollar the U.S. taxpayers contributed for Laos imports in 1970. Is this the point you are making?

Mr. O'CONNOR. The point we intended to make is that there has been an upward shift in the average rate of all official rate and open market foreign exchange transactions so that the Lao consumer is generally paying more for imports now than he was in 1964. To this extent there has been a "de facto devaluation" and a partial shift of the cost of inflation to the Lao consumer. When gasoline was transferred from USIP to the open market, for example, the effect was to raise the price of gasoline and reduce consumption. Mr. MOORHEAD. In 1964, the U.S. taxpayers had to contribute enough dollars to absorb seven billion kip; whereas, in 1970, he had to contribute enough dollars to absorb 14 billion kip. The 36% increase in the value of the dollar in Laos since 1964 doesn't go very far when the U.S. taxpayers are faced with a 100% increase in the amount of kip he's expected to absorb, does it?

Mr. O'CONNOR. I would suggest that 1964 is not an ideal year to use as a base for comparisons. In 1964 Royal Lao Government (RLG) salaries and expenditures had only begun to adjust to a very drastic devaluation-changing the official rate from 80 kip to 240 to the dollar and establishing an open market rate of about 500. As an inevitable response to this drastic devaluation-300% in the official rate alone-Lao Government budget expenditures rose about 80% in FY 1965 over the previous year, and about 42% in FY 1966. By 1966 this adjustment had been substantially completed and we find in that year total Foreign Exchange Operations Fund contributions were $19.6 million. In 1970 total contributions were $22.2 million, a difference of $2.6 million over the 1966 figure. Mr. MOORHEAD. Page 3 of the statement indicates that the Laotian cost of living indices show that the Foreign Exchange Operations Fund has been very effective in controlling inflation in Laos. How can we arrive at this conclusion when the Mission Director in Laos stated less than two years ago that the statistical data collection system in Laos is far from reliable and that it will be many years before truly adequate information is available upon which to base decisions?

Mr. O'CONNOR. Some areas of statistical data collection are indeed far from reliable in Laos. Production and consumption, especially in the non-monetized sectors of the economy, can only be roughly estimated; trade statistics must be partly extrapolated from trading partner data; even population figures can only be estimated. On the other hand, it has been possible to develop quite reliable cost-of-living data by sampling prices in the market-place regularly.

Mr. MOORHEAD. Also, how can it be said that we are controlling inflation in Laos when in a six-year period the amount of kip we have to absorb has increased by 100 percent?

Mr. O'CONNOR. The stabilization program in Laos has been quite successful in bringing price inflation under control. It has not controlled or reduced the sources of inflation to the extent we would like, but on the other hand the situation has not deteriorated significantly. Taking fiscal year 1966 as the first representative post-devaluation budget, we find the deficit at a level of 9.7 billion kip; the fiscal year 1970 deficit was 10.1 billion kip-an increase of about 4 percent.

Mr. MOORHEAD. The only monetary input into the Lao economy is the Lao Government spending and the foreign aid donors local currency spending in Laos. Can you tell us how much the Lao Government's budget has increased since 1964, especially their military and civil payrolls?

Mr. O'CONNOR. As I have indicated in response to another question, the large increases in Lao Government budget expenditures in the fiscal years 1965 (80%) and 1966 (42%) were inevitable salary and expenditure adjustments to the very drastic devaluation of January 1964. Taking 1966 as the base year for postdevaluation budgets, by FY 1970 the civilian budget had increased by 77%, but the police and military budgets had increased very little-2.3% and 1.6% respectively.

Mr. MOORHEAD. Page 3 of the statement indicates that the stabilization strategy for Laos has concentrated on the improvement of the Lao Government's fiscal

performance. How do we exercise any control over the Lao Government's expenditures: do we audit their governmental expenditures; do they have an auditing group similar to our General Accounting Office and, if so, how long have they had it and do we look over the work of their auditors; or just how do we exercise any control?

Mr. O'CONNOR. During the annual negotiations between the Lao Government and the donors to the Foreign Exchange Operations Fund (FEOF), there are extensive discussions concerning the levels of expenditures, revenues, and the resulting deficit of the Royal Lao Government (RLG). These discussions set the general parameters of the performance targets for the RLG. There are several experts of the USAID with offices in the Ministry of Finance who work closely with officials of the Ministry in monitoring the execution of the Lao Government budget. In August 1969 a new unit was created in the RLG with independent status and broad powers-similar to the mandate of our General Accounting Office. Frankly, we have been disappointed with the slow progress in getting this office on a functional basis. However, we understand that the RLG is about to announce the appointment to this office of a director who should be able to show some real results.

Mr. MOORHEAD. Items in the Lao daily newspapers in late 1969 indicated that certain Lao officials had been arrested for embezzling large amounts of funds from the Lao Government. Also, at that time, the Lao Government was paying as much as 20% more than the regular prices for locally-purchased commodities. The reason for this was that the local merchants needed to make kickbacks to the Lao Government officials not only to get the order but also to get paid after delivery of the merchandise. Have these practices been eliminated and, if so, how do you know they have?

Mr. O'CONNOR. Four Lao Government employees are now in jail awaiting trial (expected to take place in August, or September, 1971) as a result of the 1969 incidents. The investigations which resulted in these arrests were conducted by the new Treasurer-General appointed in 1969. In addition, the Lao Government in 1969 established a special unit ("Service du Visa") to improve control over government expenditures. This office has instituted controls such as ceiling prices for standard items and a requirement that all vendors submit vouchers from the Royal Lao Government before being paid. Further, current Lao law requires public tenders for contracts and purchases over 500,000 Kip (equivalent to $1,000). The awards are made after review by a committee presided over by the Minister of Finance or his representative. This committee examines not only the terms of the bids but also the qualifications of the bidder, rejecting those who do not have the appropriate qualifications. While it is impossible to say that such procedures and actions prevent any and all fraudulent action by government employees, they show a serious effort by the Lao Government to prevent recurrence of the kinds of practices to which you refer.

Mr. MOORHEAD. Page 3 also states that "Success along these lines has not been uniform, but we believe that the principal effort should continue to be in these areas if there is to be any long-range solution to the Lao fiscal problem." We've been pumping money into Laos for about 20 years now and yet, less than two years ago, the Mission Director in Laos stated that the Lao Government centralized procurement office, established during the period 1958 through 1960 with U.S. Government assistance, "does not now possess the honest and efficient managerial personnel needed to carry on a government-wide procurement service." How much longer is it going to take us to solve this long-range Lao fiscal problem-or is it really unsolvable?

Mr. O'CONNOR. We do not believe that Lao fiscal problems are unsolvable, but they are certainly long range and, as I remarked in response to another question, the prime requirement is peace. Development of the tax base, improvement of the tax collection system, and training of Lao in managerial skills will all be limited until the destruction stops, Lao manpower can be demobilized and employed in productive efforts, Lao refugees can be settled into permanent com. munities or returned to their original homes, and Lao natural resources--still largely unexplored-can be intensively developed.

Mr. MOORHEAD. In the table on page 5 of the statement, the 1965 column does not add up-there's a difference of $2.8 million. Now in the Presidential approval required for our participation in the Lao Foreign Exchange Operations Fund, the President specifically approved the U.S. Government's participation subject to the Lao Government holding its budget-particularly defense expenditures—at

the then current levels. Did the Agency for International Development permit the Lao Government to transfer $2.8 million to the Foreign Exchange Operations Fund which the U.S. taxpayers had previously provided to pay for Lao import needs and then did the Agency immediately provide an additional $2.8 million to the Lao Government for imports?

Also, did the Lao Government then use the kip it received in exchange for the $2.8 million to pay for a portion of its military expenditures in order for the balance of its military expenditures to stay within the limits expressed by the President in his approval of our participation in the Foreign Exchange Operations Fund?

Mr. O'CONNOR. Thank you for calling our attention to this matter. We neglected to add a Royal Lao Government contribution of $2.8 million in CY 1965. This contribution came about as the result of the liquidation of a working fund for USIP. Prior to September 1964, imports under USIP were financed through a Working Fund which was periodically replenished. In September 1964 this working fund method of operations was replaced by the Special Letter of Credit (SLC) procedure. A liquidation agreement at that time between A.I.D. and the Lao Government provided for the disposition of the existing balance in the Working Fund. One element of the agreement was that of the total amount, which A.I.D. had originally given to the RLG as cash grants for budgetary support and to generate counterpart, $2.8 million was to be released by the RLG for sale by FEOF.

The RLG was permitted to use the proceeds from the sale of these funds as "extraordinary receipts". Nevertheless, even deducting these proceeds, the RLG met the approved terms for U.S. participation in FEOF, i.e., it met the FEOF deficit targets for both FY 1965 and 1966. These targets did not distinguish between defense and non-defense expenditures, but rather set an overall target for the difference between total expenditures and total revenues.

You also asked if A.I.D. gave an additional $2.8 to the Lao Government for imports at this time. The answer is no, and in fact the amount shown as the U.S. FEOF contribution consists of $4 million as the original contribution in addition to $1.2 million which was a special contribution to offset the effects on the free market of a reduction in the USIP.

Mr. MOORHEAD. Also, the table on page 5 of the statement shows a $400.000 supplementary contribution by Japan. Will you please tell us the balance of the story on the $400,000 contribution?

Mr. O'CONNOR. In 1968 there was pressure on all of the donor governments to make an additional contribution to meet an end-of-the-year shortfall in Foreign Exchange Operations Funds (FEOF) resources. The Japanese Government of fered, in lieu of a cash contribution to FEOF, a contribution of $400,000 in commodities under the then recently-signed international Food Aid Convention as an aid to the refugees in Laos. The USAID was in turn enabled to release an equal amount of dollars from its refugee program to relieve the foreign exchange pinch on FEOF. We therefore gave the Japanese Government qualified credit for a stabilization contribution.

Mr. MOORHEAD. In 1964, the U.S. Government provided slightly more than $10 million for the U.S. commodity import program for Laos. Five years later, the U.S. commodity import program had been cut to $2.5 million at the same time the Foreign Exchange Operations Fund was developed in Laos by the Agency for International Development to which the U.S. taxpayers are now contributing almost $20 million. The Agency for International Development has, in fact, substituted the Foreign Exchange Operations Fund for the U.S. commodity import program as a means of providing the foreign exchange needed by Laos to pay for its imports. Is it true that in providing the import funding required by Laos, through the Foreign Exchange Operations Fund, the Agency for International Development has created a situation whereby there is no requirement that the funds we grant to the Lao Government be spent for U.S. exports?

Mr. O'CONNOR. It is true that there is no requirement that our contribution to the Foreign Exchange Operations Fund (FEOF) be spent for imports from the U.S. Neither are the other donors' contributions tied to imports from their countries.

But we believe that FEOF has been advantageous to the U.S. interest in Laos because of its effectiveness in achieving economic stabilization. It has eliminated the black market in dollars and avoided the problems and costs of policing a large A.I.D.-financed import program.

Our current non-project (or stabilization) program in Laos-FEOF and the relatively small U.S. Import Program (USIP)—is costing less per year than the average annual cost of our non-project program prior to the inception of FEOF. Mr. MOORHEAD. Is it also true that the majority of the funding the U.S. taxpayers are providing to the Foreign Exchange Operations Fund to finance imports for Laos is being spent for imports from developed countries other than the United States?

Mr. O'CONNOR. This is true. However, commercial imports from Thailand, a developing country, approximate those of Japan, the leader among the developed countries. It has always been recognized that for the efficiency and effectiveness of FEOF we pay a price in dollar drain, perhaps as high as 95 percent.

Mr. MOORHEAD. If the $20 million the U.S. taxpayers are contributing to pay for Laos' imports were purchased from U.S. sources, would this provide additional needed jobs for the U.S. labor force?

Mr. O'CONNOR. I assume you are talking about tying the U.S. contribution to the Foreign Exchange Operations Fund (FEOF) to the financing of imports from the U.S. If this whole amount were used for imports from the U.S., there presumably would be increased U.S. production and-to a degree depending on the industries involved-increased employment. But a substantial portion of the U.S. dollars might remain unused for lack of Lao demand for U.S. goods at U.S. prices, especially if the 505:1 rate were used. If the 240:1 rate were used, the stabilization effect of our dollars would be lessened by more than 50 percent.

Mr. MOORHEAD. If U.S. dollar contributions to Laos are tied to U.S. exports, how will completion enter the picture?

Mr. O'CONNOR. I assume that competition among American firms for the resulting business would be free and open.

Mr. MOORHEAD. In importing goods into Laos with foreign exchange provided through the Foreign Exchange Operations Fund, what control does the Agency for International Development exercise to ensure that only essentials are imported with the $20 million being provided by the U.S. taxpayer?

Mr. O'CONNOR. The Foreign Exchange Operations Fund, which as I have indicated receives foreign exchange from the U.S. (through A.I.D.), the U.K., Japan, France and Australia, does not exercise any control over the kinds of imports financed with the funds. As I have also indicated, the Royal Lao Government tariff structure levies much higher duties on non-essential than on essential goods.

Mr. MOORHEAD. The banking institutions in Laos obtain their foreign exchange requirements from the Foreign Exchange Operations Fund. Does the Agency for International Development exercise any control in Laos to prevent the Pathet Lao or North Vietnamese from converting Lao currency into dollar credits which can then be transferred through the banking system to banks in other parts of the world?

Mr. O'CONNOR. The territory controlled by the Pathet Lao and North Vietnamese and the territory controlled by the Royal Lao Government (RLG) have essentially separate and independent economies, although we can suppose there is some interchange at the fringes. The Pathet Lao have their own currency which is not honored in RLG-controlled areas. There is, of course, no way to guarantee that some customer presenting RLG kip at a Vientiane bank might not be a Pathet Lao agent.

Mr. MOORHEAD. In hearings before the House Appropriations Subcommittee, it has been repeatedly stressed that U.S. contributions to Laos are not to be used to finance the cost of the Lao Embassies. What control does the Agency exercise to ensure that foreign exchange required for Lao Government use is not obtained from the Foreign Exchange Operations Fund?

Mr. O'CONNOR. I believe that what has been stressed is that the U.S. no longer provides direct reimbursements for Royal Lao Government expenditures abroad; the so-called "Invisibles" program was terminated in FY 1969. With respect to the Foreign Exchange Operations Fund (FEOF), during the years 1964 through 1970 the RLG agreed to limit its expenditures abroad to foreign exchange acquired at the official rate and for essential purposes as explicitly prescribed in its annual Foreign Exchange Budget. In other words, the RLG agreed not to purchase foreign exchange on the open market-the FEOF market. In the CY 1971 FEOF agreements the donor governments recognized that RLG official exchange receipts-about $2 million-would be insufficient for all of its legitimate expenses abroad and therefore they agreed to language providing that RLG

expenditures shall be limited to exchange acquired at the official rate "except for those expenses, such as student and scholarship costs abroad, agreed between the RLG and the donor governments."

Mr. MOORHEAD. Page 2 of the statement indicates that the local currency acquired by the sale of foreign exchange by the Foreign Exchange Operations Fund is retired from circulation. Don't we in fact authorize the transfer of the local currency acquired as a result of the U.S. taxpayers' contribution to the Foreign Exchange Operations Fund to the Lao Government for the purpose of retiring its debt to the Lao National Bank?

Mr. O'CONNOR. The major portion of the local currency generated by our contributions to the Foreign Exchange Operations Fund (FEOF) is turned over to the National Bank of Laos, the monetary authority of Laos, which retires it from circulation by placing it in a vault. The National Bank cancels an equivalent amount of the Royal Lao Government debt.

Mr. MOORHEAD. Shouldn't we treat the entire amount of local currency generated as a result of the U.S. taxpayers contributions to the Foreign Exchange Operations Fund as U.S.-owned local currency? The bookkeeping exercise of transferring this local currency generation to the Lao Government doesn't effect stabilization; it simply permits the Lao Government to reduce its national debt while the U.S. Government's national debt climbs higher and higher. Wouldn't sterilization of this local currency generation in U.S.-owned accounts accomplish the same stabilization effects as are now being accomplished and, at the same time, provide the U.S. Government with maximum leverage in future long-range development of Laos?

Mr. O'CONNOR. As you know we do acquire from our Foreign Exchange Operations Fund (FEOF) contribution, under the Kip Purchase arrangement, sufficient local currency for our project needs. In order to justify accumulating in a U.S. account the kip we do not spend, i.e., the amount that is withdrawn from circulation, one would have to visualize the circumstances in which they could eventually be spent. As we see it, these circumstances would have to include Lao Government revenues substantially equal to expenditures so that there would be no sizeable deficit nor any need for a stabilization program; further, the economy would have to be dynamic enough to absorb U.S. expenditures of kip balances without serious inflationary or other destabilizing effects. Quite frankly, we do not see this combination of circumstances in the very near future. However, we certainly can say that we will continue to review this situation and should it appear that some accumulation would be advantageous, we will reexamine our current policy.

Mr. MOORHEAD. Over the past 10 years, the Agency for International Development has provided over $35 million in assistance to the Lao refugees. Additionally, over $70 million in costs for inland transportation within Laos have been incurred. A large portion of these expenditures also relate directly to the Lao refugee program. Of this assistance, only about $5 million has come from Public Law 480 surpluses of the United States. Section 201 of the Agricultural Trade Development and Assistance Act of 1954, commonly known as PL 480, authorizes the President to use surplus agricultural commodities to meet the relief requirements of friendly but needy populations. Why has the Agency for International Development been unable to use our agricultural surpluses to fill the commodity needs of its refugee relief programs in Laos?

Mr. O'CONNOR. A.I.D. has made a concerted effort in the Laos refugee program to utilize PL 480 commodities. Cornmeal, bulgur, wheat, wheat flour and cotton cloth are in use; and significant gains have been made recently in the use of the new concentrated protein supplement mixes available under PL 480. The basic staple in the diet of the Lao people is glutinuous rice which is not available under PL 480. Although the Mission's refugee officers have been successful in substituting PL 480 for some of the rice commodities, acceptance has not been high enough to effect complete replacement. Another factor which precludes complete substitution of PL 480 foods is that great difficulty has been experienced in scheduling deliveries of PL 480 commodities to Laos. If the program were fully dependent on PL 480, there might be periods of weeks when food would be unavailable to feed refugees.

Mr. MOORHEAD. Have most of the commodities used in the refugee relief programs been obtained from non-U.S. sources? Why is this considered necessary? Mr. O'CONNOR. The commodity used in the largest quantity in the refugee program is glutinous rice which is purchased from the only sources from which it is