Promoting downstream processing: resource nationalism or industrial policy?

The article aims to provide a critical overview of the arguments used in the debate about policies to promote downstream processing of minerals, particularly coercive policies such as export taxes or bans. It reviews some of the possible reasons why downstream processing of minerals does not always take place in the country where they are mined, including asymmetry of market power, tariff escalation, scale factors, availability of inputs, closeness to market, and business environment. The costs (in terms of lost exports of unprocessed exports) and benefits (in terms of increased processing) of coercive further processing policies are discussed, using as an example Indonesia’s ban on exports of unprocessed minerals from 2014 to 2016. It is concluded that there are few if any examples of successful use of taxes or restrictions on unprocessed products to promote downstream processing. Existing evidence appears to show that the severity and duration of the downturn in exports of unprocessed products surprised governments and that few governments even attempt to estimate either the negative or the positive impacts in any systematic manner. It would probably be more productive in most cases to instead emphasize industrial policies that focus on removing constraints and bottlenecks that stand in the way of the economy reaching its full potential, including those relating to skills, credit, energy supply, transport infrastructure, and inappropriate regulation.