[b]Sukhoigate: Politicization

Sukhoigate: Politicization
of weapons procurement

Bantarto Bandoro
Editor, The Indonesian Quarterly,
Centre for Strategic and
International Studies
(CSIS)
Jakarta
bandoro@csis.or.id

Is it wrong for a country with vast geographical area, high
degree of vulnerability of internal threat and strategic location
in the Asia Pacific region, like Indonesia, to acquire more
sophisticated weapons and use them in defending its territorial
integrity? The government's decision to defend the homeland, by
using a high-tech weaponry, will no doubt be supported by the
public at large. But when it comes to the buying of new military
equipments, everybody can turn out for or against such an idea.

The process of Indonesia's military modernization has recently
been the subject of heated discussion here. It is not only
because of the plan to procure more reliable and considerably
cheap Russian jetfighters, but it also because of the way the
decision to buy the jet was made.

The government signed last month the purchase agreement for
Russian Sukhoi jet fighters and helicopters worth US$192.6
million. The agreement marked a significant leap in the country's
military modernization process as well as a new era in Indonesia-
Russia military relationship. President Megawati Soekarnoputri
brought the deal home with the hope to inspire the Air Force to
improve its air defense system and performance.

When she returned home, President Megawati seemed to have no
problem with the deal until very recently when few members of the
House of Representatives (DPR) and other interested parties
brought to the fore of the deal, arguing that it did not follow
the right laws and regulations. The arms deal, unintentionally,
had drawn part of the government bureaucracy and legislative body
into a fighting arena. .

It was reported that the purchase of the arms equipment from
Russia involved only the Ministry of Industry and Trade and the
State Logistic Agency (Bulog).The Ministry of Defense, where the
deal should have come under its authority, was never involved in
the discussion to buy the Russian plan.

Here we can identify at least seven actors involved or related
to the defense deal, namely: Bank Bukopin, Ministry of Finance,
the Air Force, the President herself, Bulog, Ministry of Industry
and Trade , the House of Representatives (DPR), and Ministry of
Defense. These bureaucracies have their own interests that may be
different from the uniform national interests. In the Sukhoi
deal, Megawati is acting as a principal who wants something done
and whose policy is supposed not to be resisted by her people
down the line.

As the case has shown, the Ministry of Industry and Trade and
the Bulog, as instructed by the President, executed the policy on
the assumption that the deal will move smoothly without any
resistance from other bureaucracy and agency. Bulog, upon a
request from the Ministry of Industry and Trade, asked Bank
Bukopin to pay US$26 million to the Russian Rosoboronexport as a
down payment. The House however argues the deal violates
important laws on defense and budgetary, banking procedures and
regulations.

The President defended the Sukhoi deal, arguing that her
administration did not violate any laws whatsoever for the deal.
Here the power politics came into play, meaning that the decision
has been taken unilaterally by the President bypassed other
related agencies such as the Ministry of Defense, the House and
perhaps the Air Force .

What seems strange is perhaps the position expressed by the
Ministry of Defense and the Air Force. It is true that according
to Article 16 of the Defense Law, the defense minister has the
authority over budgets, recruitment as well as procuring defense
and military equipments for the Indonesian Military (TNI). But
such an authority seemed to be meaningless when faced with
"urgency" created by the President's decision. We hardly heard
the official view of the Ministry of Defense on the Sukhoi deal.

In their hearing with the Commission I of the House, Matori
and TNI Chief Gen. Endriartono Sutarto reportedly claimed that
they never involved in the planning of the warplane purchase.
Such confession reflects the fact that people down the line may
not know what the President wants. The lowerarchy may not know
the priorities of Megawati as the person at the top are. Or it
may be assumed that they cannot do anything because the decision
has already been made. The unilateral decision by Megawati, if
this is truly the case, can mean she may be less concerned about
something than the lowerarchy perceived to be.

The position of the Air Force, at least as reported by the
media, was not all clear. The view seems to be divided. Official
sources within the Air Force expressed objection to the deal. For
them it is more urgent for the Air Force to procure transport
planes, to replace the old Hercules C-130 , and anti-insurgency
helicopters, rather than jet fighters and helicopters.

However, Kusnadi Kardi, Air Force chief of staff's deputy
assistant for planning and budgetary affairs, defends the
government in the Sukhoi deal, saying that the fighters are
sophisticated and has more advantages than U.S. made F-16s. The
Air Force therefore should have at least one squadron (12 jets)
of Sukhoi to protect the country's airspace adequately.

The different views within the Air Force probably may have
something to do with reluctance, if not resistance, on the part
of the Air Force to do what the President wants them to do.
Factors at work can be self interest, policy differences and
professional judgment in and by the Air Force. Assuming that the
Air Force has no problem with the President's decision, it may be
attributed to the way the Air Force influenced the President that
the interest of the Air Force be promoted and protected. When it
comes to air defense business, the Air Force, after all, has
better and accurate information than the President.

The jet fighters are scheduled to arrive here early September
of this year and the Air Force hopes to show off to the public on
Oct. 5 when the TNI celebrates its 58th anniversary. This is the
time when the Sukohi deal will really become the real deal,
despite the move by the House to form a special committee to
investigate the deal.

The lessons we can learned from the Sukhoi deal is that every
public policy decision here , on military or non-military
affairs, tend to drag players into a fighting field, meaning that
policy decision is bound to be politicized. The play of power
politics in our policy formulation process cannot be avoided when
it comes to defending own's political, economic as well as
military interests.

2. Project -- Escaping from the deflation trap
2 X 30

Escaping the deflation
trap to stabilize economy

Michael Woodford
Professor of economics
Princeton University
Project Syndicate

Deflation will be the overriding topic when America's Federal
Reserve Board meets on June 24. Michael Woodford, one of the
world's leading authorities on central banking, offers a strategy
to break the grip of falling prices.

Alan Greenspan's recent speech to a conference of bankers in
Berlin -- admitting the desirability of "insurance" against the
risk of deflation in the U.S., even if it has not yet appeared --
focused attention on a crucial issue. What can be done to
stabilize an economy when nominal interest rates cannot be
lowered any further, but prices still fall and the output gap --
the difference between what it can produce and what it actually
does produce -- remains wide? What was a theoretical curiosity
raised by John Maynard Keynes in the 1930's has become the
fundamental issue confronting policymakers in the world's largest
economies.

Japan poses the clearest example of this problem. Growth there
remains anemic, and deflation lingers, suggesting a need for
monetary stimulus. But the benchmark interest rate in Japan has
been essentially zero for the past four years, so the standard
form of monetary stimulus -- reducing short-term nominal interest
rates -- is unavailable.

With the Fed's operating target now only 1.25 percent and
signs of recovery in the U.S. fragile, many now fear that the
U.S. is poised to confront a similar situation. The recent cut in
the ECB's policy rate amid warnings of possible deflation in
Germany lead some to fear that the euro zone may be equally at
risk.

Some economists recommend fundamental changes in the way
monetary policy is conducted to avoid ever reaching this "zero
bound" on interest rates. Paul Krugman, for example, calls
deflation a "black hole": Once you fall into it, monetary policy
becomes ineffective because no amount of monetary expansion can
further reduce interest rates. So policymakers must prevent
deflationary expectations from ever taking root by targeting a
sufficiently high inflation rate at all times.

But what if it's too late, and the zero interest rate bound is
reached while prices are falling? Is there any point in having an
inflation target that cannot be met? Kunio Okina, director of the
Bank of Japan's Institute for Monetary and Economic Studies,
resists inflation targeting for this reason. He argues that
"because short term interest rates are already at zero, setting
an inflation target of, say, 2 percent wouldn't carry much
credibility."

Wrong. The "zero bound" on short term rates does represent an
important constraint on what monetary stabilization can achieve,
but it is a more modest barrier than deflation pessimists insist.
Monetary policy is far from powerless to mitigate a contraction
in economic activity when deflation strikes, or when an economy
flirts dangerously with it.

The key is to create the right kind of expectations regarding
how monetary policy will be conducted in the longer term. For
expectations regarding policy in the future determine the
severity and duration of the output gap that results from hitting
the zero bound now.

If the Bank of Japan, for example, were to commit itself to a
target path for a broad price index, and credibly commit to
keeping interest rates low until that target is reached, this
commitment would influence investor behavior. For the more that
prices fall, the greater should be the confidence in future
inflation, and hence perceptions of lower real interest rates.

A commitment to a price-level target path above the current
level would imply a commitment to keep nominal interest rates low
for a time in the future, even after prices begin to rise again.
A commitment to hold down nominal interest rates for a longer
period of time should stimulate aggregate demand immediately.
This is true even when current rates cannot be lowered any
further -- and even if inflation expectations remain
unaffected -- owing to the effects of the expected future path of
short rates on current long term interest rates and on the
exchange rate.

The fact that an official price level target is not hit
immediately need not impugn such targets. The existence of an
official target is crucial, even when it is not being reached,
because it allows the private sector to judge how close the
central bank is to a point at which it would feel justified in
abandoning its zero interest rate policy. The current gap between
the actual and target price levels should shape private sector
expectations regarding how long interest rates are likely to
remain low.

But why should the private sector believe that the central
bank is serious about hitting its price level target, if all that
is observed in each period is a zero nominal interest rate and
another target shortfall?

Ideally, the best way to make its policy credible would be for
the central bank to demonstrate its commitment to the price level
targeting framework before the zero bound is reached. In
practice, and especially when deflationary fears are already
present, managing private sector expectations demands
considerable subtlety.

The private sector is likely to scrutinize the bank's current
actions for clues to its future behavior. So "signaling" effects,
such as shifts in the central bank's portfolio towards long term
securities, could help make the bank's price level target
credible. If, say, the central bank starts buying long term bonds
from the private sector at below market interest rates, this
should help convince the public that the bank intends to stick to
a future low interest rate policy.

Such asset shifts would work because the level of long term
interest rates is an indicator of the markets' faith in the
central bank's commitment to maintaining low short term rates
once inflation returns. So, if the private sector is skeptical
about the bank's commitment, long term rates will be too high.
But if the bank buys long term bonds, it will tend to show that
skepticism is unwarranted.

The stabilizing effect of such asset purchases is due not to
any mechanical consequence of the shift in portfolio balances,
but to a change in private sector expectations regarding future
interest rate policy. Any central bank facing deflation should
commit itself in advance to a price level target and pursue
actions that convince the private sector that the commitment is
genuine. Only that change in private expectations will make the
bank's policy effective.