The price of Indonesian nickel output has risen tenfold in five years after buyers were forced to build refineries in the country. Now Southeast Asia's largest economy plans to use the model to join the ranks of high-income countries in everything from copper processing to fishing.
The goal is to double the gross domestic product (GDP) per capita to US$10,000 by 2045, bringing Indonesia closer to the World Bank's highest income level. At the same time, this move created new centers of development outside the richest and most densely populated island of Java.
"We use nickel as an example," Investments Minister Bahlil Lahadiya said. "It doesn't matter. We have raw materials, but we sell them to foreign refineries and then import them internally. Where do we leave our ideas?
President Joko Widodo has pointed to the economic models of Taiwan and South Korea as one of the few countries that can escape the middle class trap by building manufacturing and increasing productivity.
For decades, Indonesia has relied on commodity exports, a phenomenon known as the resource curse, where mineral-rich countries suffer when commodity prices fall as they invest in minerals.
A new roadmap for more offshore processing starts this year with oil and gas, followed by fisheries. In the future, Indonesia will only export refined palm oil, coconut products, wood, seaweed and even salt. The campaign could generate $545 billion in investment, roughly half of the country's current gross domestic product, according to government estimates.
“We sell Indonesia stories in numbers: 280 million people, thousands of islands, etc. This is not an investment, but a historical campaign," said Lahadiya. "Now we're saying to them, 'What industry do you want?' This is where you work and work," he said.
The Ministry of Investment has released a list of projects that investors can choose from, with expected rate of return, break-even schedule, and state-sponsored projects. For example, a $49.8 billion ($3.3 million) cocoa factory in Central Sulawesi is expected to produce 22 percent, and a $1.13 billion copper refinery in East Java is expected to produce 16 percent.
There are signs that the policy is working. Last year, Indonesia posted its biggest trade surplus to date, with investment rising 44 percent to a record $80 billion.
Investment in a nickel refinery in North Maluku boosted the country's economic growth by 29 percent last year.
"The company has been mining nickel for a long time, but we have only seen this big boom now," Lahadiya said. "Jobs come with growth. People no longer need to go to Java to find a good job.
In West Papua, one of the country's poorest provinces, a plant is being built to convert natural gas into methanol, urea and ammonia. Ready-to-eat tuna and shrimp processing and packaging materials are produced all over the island, rather than shipped to facilities in Thailand or Vietnam.
However, Indonesia's unexpected drop in nickel, partly due to a global surge in electric car battery production and a sharp shortage on the London Metal Exchange, has given Indonesia a strong bargaining position to force miners to build smelters.
There are also questions about how the government will translate billions of dollars of investment into broader investments in technology and jobs that boost overall productivity.
There are also legal risks. The World Trade Organization recently adopted a resolution against the EU banning nickel ore exports. Jokowi has vowed to appeal the verdict and has refused to change his policy.
While Indonesian companies have so far relied on export bans to force them to build local facilities, the government now says it wants to take a more lenient approach by ending incentives for low-quality products. For nickel, this means that there is no tax relief for taxpayers who produce products with less than 40% nickel, as the government requires a minimum of 70-80%.
"But we won't wait," said Lahadiya. If we say that the industry should be ready without stopping exports, we get the usual excuse that it will take too long.
Concentrate exports at For copper giant Freeport-McMoRan Inc., which has mined one of the region's largest copper and gold deposits since the 1970s, will stop this year as a new smelter is expected to come on stream.
Lahadalia believes that regional elections next February, when Jokowi is expected to step down at the end of his second term, will not hinder the downstream strategy. He said changes in the economy were locked in as smelters and factories were built.
"Besides, whoever cancels it will be laughed at. "We're halfway there, why did we come back?"
“We sell Indonesia stories in numbers: 280 million people, thousands of islands, etc. Investment Minister Bahlil Lahadiya said that this is not an investment, but promoting history. (Photo: Bloomberg)
