The next chapter of Indonesia’s “recycling and recycling” program – Diplomat

In the 19th century, Peru’s economy flourished because the country had an abundance of guano, a substance used as fertilizer. However, in 1909, Peru’s advantage disappeared overnight when German scientists found a way to artificially create ammonia, allowing them to produce fertilizer on a large scale. Similarly, in the 1970s, rubber was an important pillar of Malaysia’s economy. When other countries discovered and began to commercialize synthetic rubber, it dealt a significant blow to our neighbor’s economy.

The story of guano, rubber and many other commodities is a cautionary tale for resource-rich countries, including Indonesia, which has come to dominate the world nickel market. Nickel is neither guano nor rubber, and is arguably more important than many other commodities. However, nickel is not immune to the obsolescence described above, given that electric vehicle battery production may shift to a different technology that requires less nickel.

This possible scenario does not undermine the idea of ​​”refining,” the Indonesian government’s policy of adding value to its abundant natural resources, including nickel, but it does demonstrate the need to do so more efficiently. The economic benefits of this policy have so far been unmistakable. Oil refining has led to a surprise increase in exports and investment, as well as double-digit economic growth in some regions of Indonesia.

Moreover, beyond the macroeconomic statistics, the downward flow had enormous implications for the lives of many people. Tens of thousands of people in regions far from the economic center of the country, previously unseen or unheard of, are now clearly better off because of recycling. For example, average labor income in Morowali and Halmahera, two downstream epicenters, was respectively 54 percent and 13 percent higher than the national average in 2022. For Indonesia, retreating from the downstream policy would be like shooting itself in the foot.

In this regard, President Prabowo Subianto, who took office on October 20, was right in deciding that power recycling would remain a priority for his administration. There are areas that need improvement where the government already has the tools. For example, there are provisions for environmental protection and labor rights that the government should better ensure.

However, intervention in the fields is not enough. For oil and gas refining to realize its full potential as an engine of transformative development and prevent Indonesia from becoming a victim of technological change, a paradigm shift is needed. Despite the positive impact of downstream, Indonesia’s role in the downstream ecosystem is still largely limited to ore supply, while downstream technology remains monopolized by foreign investors. This status quo is untenable.

As the World Bank’s 2024 Global Development Report highlights, to escape the middle-income trap, developing countries need more than investment; they also need infusion, namely the diffusion of foreign technology throughout the domestic economy. Without an infusion, the impact of investment on long-term economic transformation will eventually run out. The use of technology will also secure the future of our processing industry. While EV batteries may require less or even no nickel in the future, technology will still ensure Indonesia has everything it needs to produce EV batteries.

Again, this does not mean that Indonesia should abandon oil and gas refining; this means the government must take this to the next level. Indonesia must use the process industry as a springboard for its people and businesses to embrace the technology of process industries. In Downstreaming 2.0, the Indonesian people, not the country’s resources, should be in the driver’s seat.

Contrary to popular belief, technology adoption is not just about R&D. What is needed is not just innovation, which many Indonesian researchers have proven they are quite capable of generating, but also the commercialization of innovation, including foreign technology. In this regard, domestic enterprises are vitally important as vessels of commercialization. The problem is that companies prefer to stay in their comfort zone rather than diversify into new high-tech industries. The economics literature on diversification into new sectors is replete with various market failures, including information and coordination externalities. Thus, government intervention on this front is justified.

For diversification to thrive, financial support is key. Access to finance is the biggest barrier to business in Indonesia, according to a 2023 World Bank survey. Capital markets tend to have a short-term focus as risk-averse investors seek quick profits. Thus, the government could seek to provide companies with “patient” capital for diversification, the kind of capital that the market often fails to offer. This patient capital could include concessional long-term loans or capital injections for domestic companies that demonstrate their potential to be competitive in new downstream sectors such as nickel recycling or electric vehicle battery manufacturing. The policy should be accompanied by strict evaluation and conditions, and companies that fail to achieve certain goals, such as investment or production, should be cut off from government support.

East Asian tigers often resorted to such patient capital policies. For example, between 1962 and 1985, 58 percent of South Korean bank loans were concessional loans that the government directed toward strategic production sectors. Thanks to this patient capital and other government support, many Korean conglomerates eventually diversified, including Hyundai (from construction to automobiles), Samsung (from sugar processing to electronics), and LG (from cosmetics to electronics).

The policy could draw criticism from those who believe the government should get out of the way. But this criticism rings hollow at a time when many countries, both developed and developing, are now pursuing proactive industrial policies. Moreover, this criticism contradicts the fact that for many decades, Indonesian companies have failed to adequately diversify from the country’s traditional sectors. Without a political breakthrough, can Indonesia continue to do the same and expect different results?

Downstreaming 1.0 has laid a strong foundation, but it is time for Indonesia to accelerate its transition to Downstreaming 2.0, in which a country’s comparative advantage no longer depends only on natural resources, but also on the ingenuity of its people to make the most of them.