Beyond Widodo’s Neomercantilist Nickel Plan

Illustration of President Joko Widodo. Photo: Getty Images

“The nation must sacrifice some present advantages in order to insure itself future ones.” – Friedrich List

There is no country that has ever successfully developed without some form of economic protection and massive industrialization. Excluding the aberrant offshore financial hubs such as Hong Kong and Singapore, along with the sparse-populated, high-value agricultural producers such as Denmark and New Zealand, there are no economies in the world that have developed to the economic ‘big boy table’ through the policies of pristine laissez-faire and anti-industrialism (Studwell, 2013). It was Tudor Britain in the 16th century that pioneered protectionism and subsidies in the textile industry to protect its export-oriented woolen and calico industry from imported cheap textile products from Bengal. The newly independent United States fought the objections of southern plantation owners who preferred to export cash crops and import manufactured items to pursue protectionist industrial policies and high tariffs. From the times of Prussia’s Frederick the Great in the 18th century to the unified Kaissereich in the 19th—Germany has refined and expanded interventionist industrial policy in Europe and beyond (Studwell, 2013). The four biggest industrial economies in Asia, such as Japan, South Korea, Taiwan, and China, have copied similar dirigiste approaches in their successful pursuit of prosperity (Amsden, 1989). In short: protectionism and industrialization have always been the golden ticket to economic development.

But how specifically did protectionism help those countries step through the developmental ladder? As a means to the long-term end of industrial learning, protectionism makes the acquisition of strategically vital technology and knowledge possible—at a cost that is only temporary. The subsidies inherent in protection help shift the structure of an industrializing economy from a lower level of value-adding to a higher one (Studwell, 2013). For doing such policies, the government needs to embrace the neo mercantilist model of development. Neomercantilism is depicted by some degree of trade protectionism, export encouragement on good (value-added) products, and the strict control of capital movement. The combination of those policy regimes allows the majority of economic decisions in the hands of a central government. Neomercantilism doesn’t promote economic autarky. Instead, the goal was to boost the wealth and power of a state within an integrated world economy through trade restrictions of a particular kind that were strategically designed to support specific domestic economic sectors, mainly local industry (Helleiner, 2021).

And that’s exactly what Widodo is doing with Indonesia’s nickel reserve. 

The Curse of Abundance

Now, to fully understand Widodo’s tendency, we must take a look back at the economic history of Indonesia. There’s a consensus among developmental economists that a strong dependency on natural resources can cause a backfire and eventually hinder the development of the said country: let there be the natural resources curse (Rahma et al., 2021). Indonesia had experienced such a ‘curse’ from the early 2000s to the early 2010s when the demand and prices for natural resource commodities such as coal and palm oil increased drastically. As a result, investment funds and human resources from the manufacturing sector were “crowded out” to the extractive sectors. Until today, natural resources such as coal and palm oil became the primary export commodities that drove Indonesia’s economic growth  (Wihardja, 2016). Meanwhile, the industrial and manufacturing base of the nation is still too low, to say nothing about the absence of major non-commodity export sectors (ADB & Bappenas, 2019). Without sufficient industrial scale-up, Indonesia’s economic growth is expected to stagnate, and it is unlikely for Indonesia ever to escape the middle-income trap, if the pattern persists.

Nickel, Energizing the New World

In a world strangled with the climate crisis, the demand for nickel will only increase every year. Electric vehicles (EV) and renewable energy, the two backbones of the green transition, require a lot of batteries in order to be optimally utilized, and, surprise surprise, the battery industry needs nickel as one of its essential materials. Fitch Solutions (2021) expects nickel demand for battery manufacturing to experience an annual average growth rate of 29.2% over 2021-2030. Rystad Energy’s (2021) analysis has stated that global nickel demand is forecasted to climb to 3.4 million tonnes (Mt) in 2024. Looking at current existing mines, projects, and development plans, the analysis estimates that global supply will fall short of demand in 2024, with the production of 3.2 Mt.

With the biggest nickel reserve in the world—roughly 21 million tonnes or 25 percent of world nickel supply—Indonesia is also the biggest nickel producer with 800,000 metric tonnes of mine production in 2021. As a former major raw nickel ore exporter, they started to ban shipments of the said commodity in 2020. The ban is imposed with the enactment of the Minister of Energy and Mineral Resources (MEMR) Regulation No. 11/2019.  The president’s reaffirmation of protectionist nickel policy comes after the EU official request to establish a dispute panel at regular meetings of the World Trade Organization (WTO). Indonesia is ready to fight any lawsuit over its policy banning raw material exports, Widodo has said. “Do not drag us to the WTO for our (policy) to stop exports of raw materials. We will fight for it in any way,” he remarked at the Kompas100 CEO Forum on November 18, 2021. However, Widodo said he is open to countries that want to invest or establish downstream facilities in Indonesia. “We are open to that. But we do not want to continue sending raw materials,” he remarked.

Go Big or Go Home

Widodo’s nickel policy is a classic example of a good commodity neomercantilism. When a country depends solely on the trade and export of raw commodities—let alone a commodity that has a massive role in the making of the new future economic paradigm—the impact on the country’s socio-economic conditions would be net negative by escalating the risk of the natural resource curse and concomitantly harm the country’s industrialization and technological learning process. So, the main goal of the policy is to spur industrialization in the country and further develop the national nickel downstream industry, which will add more value to the commodity and create more job opportunities for the people.

The developmental (and industrial) level of a country determines its prosperity and overall societal progress. So the job of the government of a developing country—and so, Widodo’s administration—is to try to get everyone to ignore easy profits (from the extractive commodity) in favor of the industrial-technological learning process. Industrial activities in developing countries aren’t just about profit: they’re about learning. Who benefit the most from a developing country’s industrial process aren’t the owners or investors but the country itself: in the sense of gaining capacity of the higher technological-industrial dimension. A country that predominantly invests in high-value industries will step up the development ladder. Take a look at South Korea and its car industry: the industry produces a significant positive externality by raising its level of development. Beyond automobiles, South Korea is now one of the leading champions in numerous high-value and novel sectors such as electronics, computers, machinery, robotics, biotechnology, and even green technology (Ha & Byrne, 2019). 

The Equatorial Emerald

Indonesia has the potential to be the next South Korea—even better, a green and new-world-embracing version of South Korea. It has the fourth biggest population in the world, is the third-largest democracy, and is currently in a demographic boom teeming with globally-connected, aspiring young generations. And concomitantly, it needs a lot of jobs to ascend most of the population of the poverty line. Banning raw commodities—again, a commodity that has immense utilization potential and is highly essential for the future—export is the first baby step that every resource-rich developing country needs to take before pulling off to the sky of developmental progress. And for further steps, Widodo has to make sure to develop policies that provide incentives so that such high-value industries can thrive expeditiously. For example, by channeling the private entrepreneurs and investors towards its developmental end. And eventually, propelling the indigenous entrepreneurs and technology to compete internationally in a cut-throat, highly cyclical business (Studwell, 2013). Indonesia could never be a developed country by basing its economy on natural resources extraction and raw commodity export. Policymakers need to step up the industrial development game or otherwise, they will trap their country into a global economic race to the bottom: forever pursuing a fruitless economic ‘growth,’ infested with rampant systemic environmental and socio-economical problems

References:

Amsden, A. (1989). Asia’s Next Giant: South Korea and Late Industrialization. Oxford University Press.

Asian Development Bank & Bappenas. (2019). Policies to Support the Development of Indonesia’s Manufacturing Sector during 2020–2024: A Joint ADB–BAPPENAS Report.

CNBC Indonesia. (2021). Eropa Gugat RI Soal Larang Ekspor Nikel, Jokowi: Kita Lawan. Berita CNBC Indonesia. Retrieved from https://www.cnbcindonesia.com/news/20211118133610-4-292538/eropa-gugat-ri-soal-larang-ekspor-nikel-jokowi-kita-lawan 

Fitch Solutions. (2021). Global Mining Week Commencing 15th March.

Ha, Y. H., & Byrne, J. (2019). The rise and fall of green growth: Korea’s energy sector experiment and its lessons for sustainable energy policy. WIREs Energy and Environment, 8 (355).

Helleiner, E. (2021). The Neomercantilists: A Global Intellectual History. Cornell University Press.

Kontan. (2021).Alasan Jokowi tetap larang ekspor nikel meski digugat di WTO. Kontan Nasional. Retrieved from https://nasional.kontan.co.id/news/alasan-jokowi-tetap-larang-ekspor-nikel-meski-digugat-di-wto  

Minister of Energy and Mineral Resources (MEMR) Regulation No. 11/2019 Concerning the Second Amendment of Minister of Energy and Resources Regulation No. 25/2018 Regarding Mineral and Coal Business.

Rahma, H., Fauzi, A., Juanda, B., & Widjojanto, B. (2021). Fenomena Natural Resource Curse dalam Pembangunan Wilayah di Indonesia. Jurnal Ekonomi Dan Pembangunan Indonesia, 21(2), 148-163.

Rystad Energy. (2021). Nickel demand to outstrip supply by 2024, causing headaches for EV manufacturers. Rystad Energy Press Release.

Studwell, J. (2013). How Asia Works: Success and Failure in the World’s Most Dynamic Region. Grove Press.

Wihardja, M. M. (2016). The Effect of the Commodity Boom on Indonesia’s Macroeconomic Fundamentals and Industrial Development. International Organisations Research Journal, 11 (1), 42-43.

Rayhan Prabu Kusumo adalah seorang mahasiswa Fakultas Ilmu Sosial dan Ilmu Politik Universitas Padjadjaran. Dapat ditemui di Instagram dengan nama pengguna @rayprabu.k

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