Defense Spending Under Pressure: An ARDL Study of Indonesia’s Economic and Strategic Realities

Abstract This study examines the economic and geopolitical determinants of Indonesia’s defense expenditure from 1984 to 2022 using the Autoregressive Distributed Lag (ARDL) model to capture both short-term and long-term dynamics. Recognizing the contextual relevance of Indonesia’s Total People’s Defense and Security System (SISHANKAMRATA), the analysis relies on conventional military expenditure data (% of GDP) due to the absence of consolidated multi-ministerial records. The results show that in the short run, defense spending is highly sensitive to macroeconomic shocks: inflation, exchange rate volatility, and foreign direct investment exert negative effects, while debt, trade openness, and regional military expenditure strengthen budgetary allocations. In the long run, macroeconomic fundamentals (debt, growth, inflation, and foreign investment) together with neighboring countries’ military spending drive defense expenditure, whereas regional average spending has a negative effect and U.S. military expenditure does not show a structural impact. These findings underscore the dual pressures of fiscal fragility and regional security competition in shaping Indonesia’s defense budget. Policy implications highlight the importance of inflation-adjusted and exchange rate–resilient budgeting, sustainable financing mechanisms such as defense bonds or a Defense Sovereign Wealth Fund (D-SWF), and deeper ASEAN defense cooperation to balance security needs with fiscal discipline. This study contributes a macro-level perspective on defense economics under conditions of institutional fragmentation, offering a framework for future comparative and panel-based research across decentralized security systems.