Nickel Nationalism Working Well For Indonesia

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President Joko Widodo (third left) visits the PT Obsidian Stainless Steel (OSS) production line, during a series of events for the inauguration of the China-invested nickel smelter factory PT Gunbuster Nickel Industry (GNI) in Konawe, Southeast Sulawesi, in a file photo. Image: Twitter / Doc Palace / Agus Suparto

But while the export revenue gains are evident, the extent to which this revenue is retained and equitably shared within the country remains uncertain.

This is mostly due to the capital-intensive nature of the nickel sector, the high share of foreign equity and the sector's limited linkage with other parts of the economy beyond the primary sector.

Growth in gross domestic product may not directly translate into gross national product as export earnings by foreign investors may be entirely repatriated out of Indonesia. Yet the downstream industrial development strategy has contributed significantly to structural transformation.

Nickel-based manufactured products now stand as the
third-largest export commodities
behind coal and palm oil. The impact on regional economic development is also significant as the industrial areas are concentrated in eastern Indonesia, which generally lacks a large formal manufacturing sector.

A balanced evaluation necessitates weighing these benefits against the costs. Basic trade theory suggests that an export ban
will depress
domestic prices relative to global prices, resulting in winners and losers within the economy.

The nickel mining sector has borne the brunt of subsidizing the downstream industries, which may affect the incentive to explore new reserves.

The fiscal costs of tax holidays and forgone royalties may also be substantial. The environmental and social costs associated with nickel processing should also be considered. Nickel smelting tends to be emission-intensive due to a
reliance on coal-fired power plants . Industrial expansion has also been associated with deforestation and water pollution.

In terms of social cost, labor rights violations have been amply documented. The building of industrial areas has also been associated with the displacement of local communities traditionally dependent on agriculture and fishing.

As Indonesia contemplates extending the policy to other commodities, it is imperative to note that its nickel-based export success was highly contextual and whether comparable outcomes can be realistically expected for other commodities.

This underscores the necessity for the downstream industry development strategy to move beyond export bans and tariffs.

A nickel mine in Sulawesi, Indonesia. Image: Twitter

While harnessing market power through export restrictions has attracted investments, there is an inherent risk to this strategy due to its impact on global prices and supply. It potentially incentivizes the innovation of substitutes and provokes retaliatory trade measures from other countries.

Indonesia needs better policies to internalize the social and environmental externalities associated with nickel processing. Better enforcement of labor and environmental regulations will be key. Indonesia could also draw inspiration from certain aspects of the
US Inflation Reduction Act .