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Defense Spending and Defense Industry

Indonesia is unique among developing countries in the relatively low priority given to defense spending. Having fully supported the basic concept of the Suharto regime, namely, that national defense and security depended on the country's economic development, the armed forces endorsed the principle that scarce domestic resources and foreign aid could not be diverted for military use without slowing the progress of national development. The armed forces accepted their low priority for development funds from the national budget (see Government Finance , ch. 3). Although currency reforms undertaken in the late 1960s and general accounting practices under both Sukarno and Suharto make absolute comparisons impossible, it is evident that military expenditure dropped dramatically during the first two years of the New Order government (1966-67)--perhaps by as much as 75 percent--and that defense spending was held to fairly low levels thereafter. This resulted in a rapid decline in inventories of functioning equipment in all services and an overall decrease in armed forces manpower and combat readiness that continued into the 1990s.

By the late 1970s, military hardware, particularly Sovietbloc systems left over from the Sukarno era, was approaching decrepitude. National and military authorities became convinced that the armed services must be upgraded, although on a gradual basis. During the period between 1977 and 1982, national allocations to Hankam doubled in absolute terms, and modest upgrades were made in all three military services. In the same period, however, the total budget rose at a higher rate, so the military share actually declined each year--from 14 percent of the total in fiscal year (FY--see Glossary) 1977 to 12 percent in FY 1982, and down to 4 percent in FY 1991. This period saw such equipment purchases as the F-5 (1978), the A-4 (1981), and the F16 aircraft (1988), several used frigates and destroyers, as well as tanks, armored personnel carriers, and towed howitzers.

The armed forces budget was divided into two categories of expenditure: one for routine matters, such as pay and allowances, maintenance, and travel, and the other for development of forces and infrastructure, including the purchase of new equipment. Although a more detailed breakdown of the budget was not made public, it can be said that in the early 1990s, routine expenditures accounted for some 70 percent of the total. The balance covered installment payments for several naval vessels and for scheduled payments for the F-5, A-4, and F-16 fighter aircraft.

Historically, the publicly released figures in the budget have not reflected actual military expenditures, since extrabudgetary funds contributed significantly to military expenditures (see Participation in the Economy , this ch.). However, the degree to which actual spending was understated was a matter for conjecture. For example, extrabudgetary funds were used to purchase a squadron of A-4 combat aircraft and four landing ship-tanks (LSTs) in the late 1970s. Moreover, most observers agreed that the portion of the budget devoted to routine matters was insufficient to maintain the armed services at their current subsistence level. The shortfall of funds between actual expenditures and the official budget plus foreign military credits was believed to be made up by the earnings of the military business enterprises and diversion of funds from other state enterprises.

Parliamentary mandate in 1978 encouraged the development of a domestic defense industry to lessen Indonesia's dependence on foreign manufacturers and to reduce the use of scarce foreign currency reserves on weaponry. In keeping with these guidelines, domestic capacity to maintain, repair, and produce military equipment was improved. Large naval vessels and fighter aircraft still had to be purchased abroad, but the Indonesian aircraft and shipbuilding industries, detached from the armed forces in the early 1980s, had been upgraded by the early 1990s. They produced helicopters, light aircraft, transport aircraft, landing craft, patrol boats, small arms, and a variety of spare parts for these systems, taking advantage of offset production and other licensing agreements with foreign firms. Defense industries attended to a greater amount of routine as well as local-level maintenance, such as installing new engines in helicopters and combat vehicles that had been retired from service because of a shortage of spare parts. Several electronics firms were established to support defense matériel production. The government continued to seek defense-related technology transfer from the United States, Japan, and several European nations. For example, certification of the P.T. PAL shipyard, starting in 1992, to perform certain types of en route repairs for United States Navy warships on a commercial basis brought a new level of sophistication to that facility.

Despite these efforts, Indonesia was far from self-sufficient in the production of weapons and defense-related matériel. Domestic facilities remained inadequate for the repair of certain complex weapons systems, and equipment inventories often represented considerable overstatements of what was in functioning order. Moreover, although defense guidelines favored the standardization of weaponry and defense matériel, the armed forces still possessed and continued to procure equipment from a number of other countries, presenting serious problems in obtaining and stocking spare parts and training technical maintenance personnel. Progress on regional cooperation in defense maintenance began to show results in the mid-1980s, with cooperative agreements for aircraft and maritime repairs and maintenance established with both Singapore and Malaysia.

Civilian utilization of defense industry plants has benefited the national economic base. The major defense industries were transferred from the armed forces in the 1980s and in 1992 were managed by the minister of state for research and technology. Under a new policy these plants also produced matériel for the commercial and civilian sectors. The aircraft industry produced parts and equipment for commercial aviation, for example, and the army's former munitions plants manufactured commercial explosives for the mining and petroleum industries. The P.T. PAL shipyard also manufactured commercial ships and maritime equipment.

Data as of November 1992

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Indonesia Table of Contents