Out of Business and On Budget

Out of Business and On Budget: The Challenge of Military Financing in Indonesia

Lex Rieffel
Jaleswari Pramodhawardani
Copyright Date: 2007
Pages: 147
  • Cite this Item
  • Book Info
    Out of Business and On Budget
    Book Description:

    Indonesia has the fourth largest total population and the largest Muslim population of any nation on earth. Indonesia's transition to democracy, thus, is critically important at a time when the West's relationship with much of the Muslim world is problematic and the push for greater democracy worldwide is a U.S. priority. A major impediment to democracy in Indonesia and several other nations is a military establishment that is not financially accountable to civilian leaders and thus nearly impossible to control. This new study examines what is necessary to bring the Indonesian military "on-budget" -what policies are required, what Indonesia can learn from other nations (e.g. China, Turkey), -and what a realistic timetable looks like. More than half of what the Indonesian armed forces spend is believed to come from sources other than the national budget. These sources include a vast array of commercial enterprises, non-profit foundations, cooperatives, and rent-seeking activities. Lex Rieffel, who began doing research in Indonesia in 1968 and has extensive experience in economic development and international finance issues, is impressed by the commitment of Indonesia's new government to reduce the role of the armed forces in the economy and make it a fully professional institution. The concise treatment considers not only the requirements but also the ramifications of success -or failure -in this endeavor and can serve to inform similar efforts in other "democratizing" countries, such as Pakistan and Nigeria.

    eISBN: 978-0-8157-7448-8
    Subjects: Political Science, Finance, Business

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Foreword
    (pp. vii-viii)
    Alphonse F. La Porta

    The United States-Indonesia Society, USINDO, is pleased to sponsorOut of Business and On Budget: The Challenge of Military Financing in Indonesia.Over the years there has been great public interest, not only in Indonesia but also in the United States and elsewhere, in the role of the Indonesian Armed Forces (TNI) in the economy and the operation of its money-making enterprises.

    Redefining the role of the TNI and providing the budget support required to carry out this role is one of the most complex challenges facing the government of President Susilo Bambang Yudhoyono. We believe that this fresh and...

  4. Acknowledgments
    (pp. ix-x)
  5. Words and Abbreviations
    (pp. xi-xii)
  6. 1 Policy Objectives: Out of Business and On Budget
    (pp. 1-12)

    Indonesia has been called the world’s largest unknown country. Certainly few Americans can locate it geographically. Even fewer know that it has a population of almost 250 million, exceeded only by China, India, and the United States. Images that come to mind relate to Aceh’s devastation after the tsunami of December 2004, Bali’s picturesque beaches and rice paddies, the recent spate of terrorist bombings, gamelan music, batik textiles, the Borobudur temple, the flamboyant President Sukarno, and the “Smiling General,” President Suharto.

    The image we would like to start with is hard to capture. It is Indonesia’s remarkable transition—beginning in...

  7. 2 Policy Context: External and Internal Factors
    (pp. 13-26)

    Indonesia’s decision to end the off-budget business activities of Tentara Nasional Indonesia (TNI) and put the military entirely on the budget by 2009 is a vital yet ambitious one, considering the dynamic context in which it must be implemented. At least six external factors and six internal factors will have a bearing on the outcome.

    Three of the external factors have to do with geopolitical developments: the end of the cold war, the growth of regional cooperation, and the intensification of nonmilitary threats. Three others relate more narrowly to military matters: the experience of other countries in establishing civilian control...

  8. Part I: Getting Out of Business and Ending Off-Budget Funding

    • 3 The Legacies of Sukarno and Suharto and the Shock of Reformasi
      (pp. 29-36)

      As mentioned earlier, the military’s business activities began from the moment independence was declared in 1945, expanded steadily during the Sukarno era, reached their apex in the 1980s under President Suharto, and then unraveled in the financial crisis of 1997, which also triggered the collapse of the Suharto regime. They were further weakened by developments during Reformasi, most notably the passage of the TNI Law of 2004, which set a deadline of 2009 for the TNI to fully divest its business activities and rely solely on funding from the central government.

      In the nation’s struggle for independence during 1945–49,...

    • 4 The TNI’s Current Business Activities
      (pp. 37-49)

      The first comprehensive study of Tentara Nasional Indonesia (TNI) business activities appeared in 1998. It was conducted by Indria Samego and a team of eight researchers based at the National Institute of Sciences (LIPI).¹ The study identified thirty-one distinct businesses linked to the army command, eight linked to the navy command, eight linked to the air force command, and ten linked to the police command, for a total of fifty-seven units. It was followed by a rich assortment of studies, some of which have attempted to refine or update the LIPI list, but none have produced what can be considered...

    • 5 The TNI’s Off-Budget Revenues and Expenditures
      (pp. 50-60)

      Two fundamental questions about the business activities of Tentara Nasional Indonesia (TNI) have yet to meet with satisfying answers, even from the minister of defense or the TNI commander: how much money is generated and what is this money used for? We approach these questions by examining the “conventional wisdom” about the TNI’s off-budget funding and then estimating the amount of income from formal, informal, and illegal business activities in 2006, along with the share of this income available “for operational purposes.” We also examine two other off-budget sources of income that are distinct from the TNI’s business activities, as...

    • 6 From Starting Point to Finish Line
      (pp. 61-74)

      Law 34 of 2004, which provided for transferring the TNI’s business activities to the government, was enacted in early October. Two weeks later, Susilo Bambang Yudhoyono (SBY) was sworn in as Indonesia’s sixth president. These two events mark the starting point, point A, for the reforms that are the subject of this policy study. Point B is the twin goals of ending the TNI’s business activities and putting the TNI fully on budget by 2009. The policy challenge is to get to point B from point A. This chapter focuses on the issues surrounding the first part of the goal:...

  9. Part II: Fully Funding a Professional TNI

    • 7 Designing a National Defense and Security Strategy
      (pp. 77-94)

      Without a clear national defense and security strategy, it is impossible to assess how much budget support the TNI needs to fulfill its missions. As explained in this chapter, twelve major policy issues will have to be addressed in the process of designing and implementing a credible strategy. They are numbered in sequence with the issues discussed in chapter 6. Without examining the availability of budget resources and evaluating key cost components of the defense budget, it is impossible to identify a feasible time path to the goal of full funding. Issues related to the defense budget are examined in...

    • 8 Budget Realities
      (pp. 95-114)

      After developing a credible defense and security strategy, a major challenge for the Indonesian government will be ensuring that the military budget is large enough to implement the chosen strategy. To find a feasible path to this end, the government will have to resolve various issues related to the budget, including their impact on “the welfare of soldiers.”

      As a share of the central government’s budget and in relation to GDP, the defense budget dropped sharply in the 1970s, fell further during the 1980s, held steady at a lower level through the 1990s until Suharto resigned in 1998, and has...

  10. Part III: The Way Forward

    • 9 Observations and Implications
      (pp. 117-120)

      Our intention in this study has been to avoid recommending specific policies for winding down the business activities of Tentara Nasional Indonesia (TNI) en route to full budget funding. Instead, we have concentrated on the essential background information required to identify alternative policies, analyze the implications of these alternatives, and make sensible policy choices.

      We adopted this approach for three reasons. First, the process of putting the TNI fully on budget is complex and involves parts of the government beyond the Ministry of Defense and the TNI. At the present time, the government’s desire to undertake reforms in this area...

  11. APPENDIX A A Brief History of the TNI and Its Current Structure
    (pp. 121-130)
  12. APPENDIX B Methodology for Estimating the Gross Revenue and Net Income of the TNI’s Off-Budget Activities
    (pp. 131-134)
  13. References
    (pp. 135-140)
  14. Index
    (pp. 141-148)