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What is Indonesia’s US$125 billion arms procurement budget plan about and what does it need to do?

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The Indonesian Defence Ministry’s plan to seek up to US$125 billion in loans to modernise the country’s military was leaked to the public earlier this month.

The news created a stir. The number translates to around Rp 1.7 quadrillion (it’s a 16-digit number). By comparison, the Indonesian government planned to spend a total of Rp 2.75 quadrillion ($185.19 billion) in its 2021 budget.

The ministry said that since the procurement would be financed by foreign debt it would not burden the state budget. That statement has also raised more than a few eyebrows.

So, does the number make sense?

The plan – drafted in a presidential regulation – outlines an overall defence procurement budget intended for a 25-year-period of 2020–2044.

Indonesia’s defence planning is usually done in a five-year medium term and is called the strategic plan (“rencana strategies” or renstra).

Longer-term planning is usually done by combining several renstra.

For example, the Minimum Essential Force (MEF) arms modernisation policy planned for 2010–2024, or 15 years. It is divided into three renstra, covering 2010–2014, 2015–2019 and 2020–2024.

The leaked draft combines the third renstra of the MEF (2020–2024) with four new renstra up to 2044, which are still being finalised.

The Indonesia Defence Ministry and the Armed Forces will then discuss which weapon systems are to be procured within each renstra.

According to an analysis by Andi Widjajanto and colleagues of Lab 45 research institute, the planned number makes sense. Their analysis is based on a technocratic budget planning approach, using conservative macroeconomic assumptions in calculating an economic growth projection.

The budget shows the Defence Ministry is not planning a sharp increase in the budget for weapon systems procurement.

Allocating a big enough budget for weapon systems procurement is crucial to improve the military’s capability to ensure Indonesia’s national security.

It is even more essential considering the long list of accidents involving Indonesia’s ageing weapon systems, including the recent Nanggala submarine tragedy.

Nevertheless, arguments against the budget persist, citing the guns versus butter trade-off.

The term “guns versus butter” refers to the macroeconomics model based on the idea that a country must choose between guns (defence/military) or butter (civilian goods) when deciding how to spend its finite resources.

The more it spends on defence, the less it can spend on civilian production, which would improve economic growth, and vice versa.

Proponents of the guns versus butter model see military spending as having adverse effects on economic growth. Therefore, they propose the government limits its defence budget to maximise its spending on goods that increase social welfare.

Others have argued that military spending can have positive effects on the economy. This proposition is known as “guns and butter”.

Proponents of this argument see military spending as important to guard national security, which is vital to support economic activities.

They also believe military spending can boost aggregate demand in the economy, create employment, lead to spin-offs of military technology to civilian goods, support human capital development and stimulate the economy.

Which model is more relevant in the Indonesian context?

A study I did with my colleagues in 2013 found Indonesia’s military spending positively affects the country’s economic growth. It was most possibly due to human capital development as an effect of military expenditure.

Similarly, another study in 2016 found Indonesia’s defence spending correlates positively with its economic growth.

The findings that Indonesia’s military spending has positive effects on the economy have led the government to focus on a strategy of defence investment.

President Joko “Jokowi” Widodo first raised the term during the fourth round of presidential debates against Prabowo Subianto in March 2019. After Jokowi was elected president for the second time in October 2019, he named Prabowo as his defence minister.

Defence investment has since been the central policy of the Defence Ministry. Weapon systems procurement is part of the defence investment strategy.

Overall, Indonesia’s arms procurement aims to fulfil the nation’s defence needs and establish a self-reliant defence industry. To this end, Indonesia has required offset and technology transfer in foreign purchases.

Regardless of how big a budget number it involves, one thing is for sure: weapon systems procurement needs to observe principles of good governance, accountability and legislative oversight.

This might be the public’s most relevant concern about the recent weapon systems procurement budget plan. After all, Indonesia’s past arms purchases have often been riddled with irregularities.

Transparency International placed Indonesia in Band D of its 2015 Government Defence Anti-Corruption Index, meaning Indonesia’s defence sector had high risk of corruption.

According to the index, Indonesia has problems in scrutiny and active enforcement of military-owned businesses, scrutiny of off-budget expenditures, and in procurement systems.

An example was the procurement of an Italian-made AW101 helicopter in 2017.

The Indonesian Defence Industry Law obliges the Armed Forces to prioritise purchase from the domestic defence industry if it could produce similar products. In this case, state-owned aircraft maker PT Dirgantara Indonesia could produce helicopters with equal capabilities.

The procurement had been vetoed by Jokowi, then Armed Forces Commander Gen. Gatot Nurmantyo, and then Defence Minister Ryamizard Ryacudu.

Still, the helicopter arrived in Indonesia in February 2017. How come? Four years later now, it is still a mystery. An investigation by the Corruption Eradication Commission has stalled since 2019.

These irregularities can also be very deadly and costly. Some of Indonesia’s weapon systems accidents have involved secondhand systems received from problematic procurement.

For example, on March 10 2018, the Army’s M113 armoured vehicle sank in a river in Purworejo, Central Java, while carrying preschoolers, killing two people. It was a secondhand vehicle from the Belgian Armed Forces.

To prevent future irregularities, especially with a budget number so huge, civil society organisations have proposed that weapon systems procurement needs to be made publicly accountable. Its financing should be transparent. Military court reform is also urgently needed.

I could not agree more.

Accountability in arms procurement is essential to avoid another deadly, costly incident – as well as ensure Indonesia gets its money’s worth in terms of the performance, operability and serviceability of its weapon systems.

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