Recently the Indonesian Defense Ministry stated that they would implement a “defense support economy” principle in the country’s arms procurement business. The purpose of this principle is to synergize defense enforcement with improvements to the national economy. In other words, the Defense Ministry believes that defense and development have a positive relationship.
This positive relationship occurs because arms procurement stimulates economic activities. The defense industry creates a lot of new job opportunities. Further, the defense industry absorbs products from other industries.
For example, a ship consists of various things, such as computer systems, wires, steel, and so on. The defense industry therefore stimulates production in other industries, especially manufacturing. However, the end of the Cold War had an effect in reducing the defense budgets in most countries around the world.
The next knock-on effect was to the defense industry. Since demand was low, some companies in this industry closed or merged with other companies, resulting in the emergence of several mega-defense firms.
The companies are Lockheed Martin, Northrop Grumman, Boeing, BAE Systems, Thales, and DASA see Richard Bitzinger, “Introduction: Challenges Facing the Global Arms Industry in the 21st Century,” in Richard Bitzinger (ed.) The Modern Defense Industry: Political, Economic, and Technological Issues, (Oxford; Praeger, 2009) page 4.
Even though defense budget trends in recent years have been increasing, competition in the international defense market is generally tough for newcomers.
The global defense market has become an oligopolistic market, since there are only a few suppliers as a result of the mergers during the 1990s. Thus, the global defense market offers a promising income for every player in the industry as the global market provides a great many consumers.
In this environment, there are big challenges for Indonesia’s defense industry. Although the defense industry in Indonesia belongs to the government in the form of a company, the industry must keep its profits in balance in order to survive.
Further, there is the possibility that Indonesia’s defense industry will be working in a monopsony market, meaning a market that only has one buyer; in this case, the Defense Ministry. If this occurs, Indonesia’s defense industry will need strong regulations to ensure the business runs properly. Moreover, without making a profit, the defense industry will rely heavily on government assistance.
It will thus become a burden for the government. The relationship between defense and development will then become a negative relationship. Eventually, the classic issue of “guns versus butter” will appear.
Besides that, the commitment from the Indonesian government to use its own national products is crucial. The defense industry has a limited number of consumers and has tight relations with bureaucratic systems. With these characteristics, it provides room for corruption in order to smooth contract negotiations. The regulations must not only dictate terms for contract negotiations, but also policies to oversee competition in order to win contracts.
The other solution to this problem is to build joint-venture cooperation with other defense companies or larger, well-established global defense corporations. No one can escape from globalization; this condition also applies to the defense industry.
The creation of the European Aeronautic Defense and Spain Company (EADS) is one of the examples of globalization in the defense industry. The company’s latest project is the Eurofighter Typhoon, a fighter jet, which is part of Europe’s largest, collaborative military program in recent years.
In conclusion, there is a way to improve our defense industry. Although it is possible to mold the defense industry in order to strengthen the economy, the mismanagement of this industry would make it become a new burden for the government.
There are always risks with every policy, but they can be avoided depending on how we manage our potency in a proper way. Like the old, English proverb says, “Where there’s a will, there’s a way.”
The writer is a student at the S. Rajaratnam School of International Studies, Nanyang Technological University, Singapore.