2016/17 Knowledge Sharing Program with Indonesia Sharing Program 2016/17 Knowledge 2016/17 Knowledge Sharing Program with Indonesia: The Role of the State Treasury for Industrial Competitiveness and Civil Service Pension Reform in Indonesia 2016/17 Knowledge Sharing Program with Indonesia 2016/17 Knowledge Sharing Program with Indonesia Project Title The Role of the State Treasury for Industrial Competitiveness and Civil Service Pension Reform in Indonesia Prepared by Samjong KPMG ERI Inc. Global Development Institute Korea Credit Guarantee Fund (KODIT) Supported by Ministry of Strategy and Finance (MOSF), Republic of Korea Korea Development Institute (KDI) Prepared for The Government of the Republic of Indonesia In Cooperation with Ministry of Finance (MOF), Republic of Indonesia Program Directors Kwangeon Sul, Executive Director, Center for International Development (CID), KDI Siwook Lee, Professor of KDI School of Public Policy and Management, Former Executive Director, CID, KDI Project Manager Kyung Doug Kwon, Director, Division of Policy Consultation, CID, KDI Project Officers Min Je Joo, Research Associate, Division of Policy Consultation and Evaluation, CID, KDI Kwang Ryeol Yi, Partner, Samjong KPMG ERI Inc. Doo Been Yim, Manager, Samjong KPMG ERI Inc. Sookyung Kim, Senior Analyst, Samjong KPMG ERI Inc. Min Joo Cho, Analyst, Samjong KPMG ERI Inc. Authors Chapter 1. Jong-Woon Kim, Professor, Hannam University Jin Wook Choi, Professor, Korea University Cornelius Tjahjaprijadi, Ministry of Finance Ali Moechtar, Ministry of Finance Chapter 2. Chang Kil Lee, Professor, Sejong University Agustinus Prasetyo, Ministry of Finance Chapter 3. Jong-goo Lee, Director, Korea Credit Guarantee Fund Myoungho Song, Director, Korea Credit Guarantee Fund Siswanto, Ministry of Finance Yohanes P. Satrio, Ministry of Finance English Editor International Writing Services (IWS), Korea University Government Publications Registration Number 11-1051000-000790-1 ISBN 979-11-5932-249-5 94320 ISBN 979-11-5932-227-3 (set) Copyright ⓒ 2017 by Ministry of Strategy and Finance, Republic of Korea Government Publications Registration Number 11-1051000-000790-01 2016/17 Knowledge Sharing Program with Indonesia: The Role of the State Treasury for Industrial Competitiveness and Civil Service Pension Reform in Indonesia Preface With the global economy slowing down, sustaining growth by generating, collecting, and disseminating relevant knowledge has become more important than ever. The Knowledge Sharing Program (KSP) was launched in 2004 by the Ministry of Strategy and Finance (MOSF) and implemented by the Korea Development Institute (KDI). The KSP program seeks to share the development experience and knowledge that Korea has accumulated over the past few decades to assist in the socio-economic development of partnering countries. The 2016/17 KSP with Indonesia aims to utilize the knowledge and experience of the Korean government to help Indonesia devise new policies and increase the efficiency of existing ones in order to boost its overall economic growth and the development of specific industries within the economy. After the successful completion of the KSP with Korea in 2015/16, the government of Indonesia took the initiative in 2016/17 to work with Korea again in order to receive guidance in formulating and implementing viable policies that will eventually allow Indonesia to develop a strong economy. The demand-driven KSP project with Indonesia this year focuses on the role of the State Treasury for Industrial Competitiveness and civil service pension reform in Indonesia. The project involves sharing Korea’s experiences related to three main issues that currently affect Indonesia: (1) strengthening the role of fiscal policy to enhance the manufacturing industry as a sustainable economic growth engine, (2) implementing pension system reform for government employees, and (3) the establishment of the Credit Program Information System (SIKP) to support Small and Medium-sized Enterprises (SMEs). As the end of this project approaches, I would like to use this opportunity to thank all of the stakeholders and specialists who have contributed and shared their knowledge to help ensure the successful completion of this year’s project. Samjong KPMG ERI will continue to actively engage in the KSP and to seek other opportunities to assist Indonesia in achieving its economic growth targets. Kyo-Tae Kim CEO Samjong KPMG Contents 2016/17 KSP with Indonesia .................................................................................................. 013 Executive Summary ............................................................................................................. 015 Chapter 1 Strengthening the Role of Fiscal Policy to Enhance the Manufacturing Industry as a Sustainable Economic Growth Engine in Indonesia Summary .......................................................................................................................... 018 1. Introduction ............................................................................................................ 020 1.1. Importance of Fiscal Policy ................................................................................... 020 1.2. The Role of the Manufacturing Industry ................................................................. 025 2. Indonesian Industry .................................................................................................. 027 2.1. Industry Analysis for Indonesia .............................................................................. 027 2.2. The Manufacturing Industry in Indonesia ............................................................... 031 2.3. Analysis of the Competitiveness of the Manufacturing Industry .................................. 032 2.4. SWOT Analysis of the Manufacturing Industry ......................................................... 034 3. Industrial Policy in Indonesia ...................................................................................... 035 3.1. Required Policy .................................................................................................. 035 3.2. Support Programs for the Manufacturing Industry ................................................... 037 3.3. Effectiveness of the Support Programs ................................................................... 046 4. Fiscal Policies for Industrialization in Korea ................................................................... 049 4.1. Industrial Policy Focus and Structure ...................................................................... 049 4.2. Fiscal Policies for Manufacturing ........................................................................... 053 4.3. Effectiveness of Korea’s Industrial Policies ............................................................... 057 5. Policy Recommendations ........................................................................................... 058 5.1. Introduction ...................................................................................................... 058 5.2. Selection of Priority Industries and Establishment of Long-Term Plans ......................... 059 5.3. Selection of Promising Enterprises ......................................................................... 061 5.4. Incentive Programs ............................................................................................. 063 References ........................................................................................................................ 069 Chapter 2 Implementing Pension System Reform for Public Sector Employees in Indonesia Summary .......................................................................................................................... 072 1. Introduction ............................................................................................................ 073 1.1. Background ...................................................................................................... 073 1.2. Research Objectives ............................................................................................ 074 2. Current Pension System for Civil Servants in Indonesia .................................................... 074 2.1. History and Regulations ...................................................................................... 074 2.2. Current Pension Schemes ..................................................................................... 079 2.3. Governance of the Pension System ........................................................................ 086 3. Challenges Facing the Current Civil Servant Pension System in Indonesia ........................... 089 3.1. Predicting the Long-Term Balance of the Pension Fund ............................................. 089 3.2. Challenges for the Pension System and Individual Schemes ........................................ 092 3.3. Pension System Governance ................................................................................. 101 4. The Civil Servant Pension System in Korea .................................................................... 102 4.1. Basic Structure and History of the Pension System .................................................... 102 4.2. Civil Servant Pension Reform in 2015 ..................................................................... 104 4.3 Pension Governance ............................................................................................ 106 4.4. Policy