Promoting downstream processing: resource nationalism or industrial policy?

Olle Östensson

doi:10.1007/s13563-019-00170-x

Abstract

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.

Highlights

The article aims to provide a critical overview of the arguments used in the debate about policies to promote downstream processing of minerals, coercive policies such as export taxes or bans
It should first be noted that there are few if any examples of successful use of taxes or restrictions on unprocessed products to promote downstream processing
Existing empirical evidence such as the Indonesian experience or the experience of export taxes on iron ore in India5 shows that the initiatives that have been taken do not appear to be based on a careful assessment of costs and benefits

Summary

Why is it important to think about downstream processing now?

The economic policy debate about downstream processing has a long history, usually colored in mercantilist or central planning hues, with the most prominent examples being found in the old Soviet Union. Some countries have resorted to outright bans on the export of unprocessed commodities, including Indonesia on bauxite, copper, nickel and tin from 2014 to the end of 2016 and Tanzania on copper and gold since March 2017 (Östensson and Löf 2017) All of these developments justify a closer look at policies aiming to support or promote downstream processing of minerals, through restrictions on exports, and to try to assess the possibilities of success of these policies. The features most commonly underlying market failures are absent It is almost never a question of processed products from mining countries not being competitive on the world market but rather of how to achieve sufficient profitability of the downstream stages. Recalculated 62% Fe Cfr China & IODEX 62% Fe North China Cfr, US$/t Rebar Middle East import CFR Gulf States port US$/t Iron ore (100% Fe) price as % of rebar price

China India European Union Japan USA

Copper concentrates Unwrought copper

Findings

Conclusions