Downstream Industry and Paradox of Competitiveness

SALOMO TOBING

A Prasetyantoko

Indonesia's 2022 economic growth of 5.31 percent is better than many estimates. Export growth in the past year of 16.28 percent became the main driver of the economy’s performance. Meanwhile, household consumption grew only 4.93 percent, while investment grew 3.87 percent.

Although this economic growth rate is remarkable, it has tended to fluctuate with the rise and fall of prices as well as demand for export commodities on the global market. Our exports are still dominated by two main commodities, namely coal and palm oil. The prices and demand for these two commodities are very volatile (commodities super-cycle).

In 2023, the demand for and prices of export commodities are not as good as last year, so economic growth has the potential to decline. Mitigation is needed so the slowdown in the export sector is compensated by growth in other sectors. There is potential to encourage investment, besides maintaining domestic consumption. It is time for government spending to return to conservativeness with a budget deficit of below 3 percent.

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The policy to ban exports of several raw minerals and the issuance of regulation in lieu of law No. 2/2022 on job creation are designed to encourage investment. If investment increases, labor absorption improves, and people's incomes will grow automatically.

Increasing investment in the long term, in addition to optimizing growth in the short term, can also help improve people's welfare. The condition is that this policy must be managed and implemented properly in an inclusive and sustainable manner.

If not, it will instead increase the income gap across the population and erode competitiveness. The reason is that industries that grow are not activities that rely on innovation and greater productivity, but those that rely on government facilities handed out in a hurry in pursuit of investment targets by pushing the downstream industry development program. Moreover, this policy was implemented ahead of the 2024 general election.

Success story

The government is obsessed with repeating its success from banning nickel ore exports. Since the export ban was imposed on 1 Jan. 2020, processed nickel exports have jumped sharply. To compare, nickel exports in 2014 were valued around only Rp 17 trillion (US$1.12 billion), whereas it had risen to Rp 326 trillion in 2021. In 2022, it further grew to exceed Rp 400 trillion, or an increase of over 20 times compared to eight years ago.

Even though this policy was legally challenged and defeated in the court of the World Trade Organization, the government did not back down from continuing the policy of banning the export of other commodities. This year, the target is to stop bauxite ore exports. The processing of the bauxite ore is projected to boost exports from Rp 21 trillion to Rp 62 trillion. Downstreaming will increase enormous added value for the domestic economy.

However, is it true that the success story of nickel industrialization can be replicated for all types of commodities? It seems difficult, considering that every industry has its own heterogeneity. Nickel industrialization has been successful because Indonesia is the world's largest nickel producer and has the largest nickel reserves in the world.

KOMPAS/MOHAMAD FINAL DAENG

A Worker inspect ferronickel products from nickel ore processing at the PT Aneka Tambang (Antam) factory in Pomalaa, Kolaka Regency, Southeast Sulawesi, Friday (11/5/2011).

Investors, especially foreign investors, did not hesitate to invest. Meanwhile, investors' investment appetite for other commodities is not the same. Therefore, various rules and incentives must be relaxed to make them more attractive.

Until 2021, a total of 21 raw mineral processing facilities (smelters) were operating. Theses consisted of 15 smelters for nickel, two for bauxite, two for copper, one for iron, and one for manganese. The government is targeting the development of 53 smelters for various minerals by 2024.

The investment required is over Rp 400 trillion. Downstreaming requires huge capital, so it cannot rely on domestic investors. The involvement of global investors, as well as their funds, is urgently needed.

At the annual meeting of the Financial Services Authority (OJK) last week, President Joko “Jokowi” Widodo encouraged national banks to not hesitate in funding the construction of smelters. The problem is that, as most smelters are in the form of foreign investment projects, national banks cannot fund them. Involving foreign funding is inevitable. Risk mitigation is necessary from the outset so that an increase in private foreign debt does not cause financial insecurity in the future.

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Industrial policies are often taken because the market is deemed to have failed in answering the problem (market failure). However, if not careful, industrial policies can actually lead to government failure.

We need to learn from the experience of old school industrial policies in which the government takes on the role of choosing winners. In the new style of industrial policy, the government selects incompetent players out of the industry (let the losers run).

Downstreaming needs to consider various aspects. First, even though the economic intervention regime is returning in almost all parts of the world, it is necessary to avoid excessive subsidies and protectionist trade wars. Downstreaming must be carried out gradually while still considering market mechanisms in order to create innovative, productive and competitive industries.

Second, intervention in the context of pushing downstream industries must consider visions related to future sustainability. Even though it is urgent, smelter development and industrialization must still pay attention to the social and environmental aspects.

Indonesia has long had the opportunity to become a big country. However, its power to execute and implement policies always has been the problem.

Social conflicts, illegal mining, and environmental pollution must be mitigated from the start. The Green Industry policy, including its funding scheme (green financing), needs to be elaborated in the 2025-2045 National Long-Term Development Plan that is already being drafted.

Third, strategic plans for the industrial ecosystem must be elaborated systematically with policies that support one another. The downstream mining industry needs to be integrated with Indonesia's efforts to become an important player in the global supply chain of electric vehicle batteries.

Indonesia has long had the opportunity to become a big country. However, its power to execute and implement policies always has been the problem.

Don't let the downstreaming program actually lead to a paradox in competitiveness by carrying it out in a rush ahead of the 2024 election, and consequently, the shared prosperity of a great nation remains a mere potential.

A PRASETYANTOKO, Rector of Atma Jaya Catholic University of Indonesia.

This article was translated by Hendarsyah Tarmizi.