[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.