Promoting SDGs and Economic Growth Through Downstreaming Policy: An Entry Point for Colombia and Indonesia to Cooperate in Breaking the Middle-Income Trap

By: Fauzi Maulana Hakim^*

Summary

Since 2020, Indonesia enacted downstreaming policy for nickel ores as an effort to increase its export value and to utilize its abundance of natural resources to ensure its place as the fourth largest economy by 2045. The policy was a major success, contributing to significant job creation, investment, and economic growth, while promoting energy transition. Comparatively speaking, Colombia has all the ingredients to enact the same policy, which may serve as an entry point for further collaboration between the two countries.

In 2007, economists Indermit Gill and Homi Kharas introduced the concept of the “middle-income trap”,^[1] a phenomenon where countries that have achieved a certain level of income due to low-cost labor and raw resources-based growth find themselves “trapped” and unable to transition into high-income economies. The culprit of the middle-income trap is highly studied by economists. Through these studies, three main causes may be identified: lack of innovation, rapid de-industrialization, and exports of low-valued commodities; the last of which is a problem Indonesia once faced. 

Indonesia was once a country with high dependence on agricultural commodities. In the 1980s, Indonesia was characterized by its high agricultural output and cheap labor.^[2] However, it was clear by the 2010s that Indonesia can no longer rely on these qualities, lest it will be a textbook-case of a country stuck in the middle-income trap. With a sharp observation of the current development in the global stage as well as recognizing its own potential as a country rich with natural resources, the Government of Indonesia stipulated the Indonesia Emas 2045 (Golden Indonesia 2045), a roadmap whose purpose is to guide Indonesia to be the fourth largest economies by its centenary in 2045.^[3] One of most notable policies enacted to achieve this aspiration was the downstreaming policy, which started in the nickel sector in 2020. 

The enactment of this policy is in line with the increasing importance of minerals, especially in the era of energy transition. The International Energy Agency, for example, envisioned that the global demand for critical minerals will increase six times by 2040.^[4] The World Bank opines that by 2050, the production of critical minerals will have increased 500%.^[5]

It is worth noting that Indonesia has the largest nickel reserves in the world, amounting to 42.3% of total reserves in the world.^[6] Its strategic value is also widely recognized in energy transition, playing a key role in, among others, the production of electric vehicle (EV) battery production. With the increasing production of EV and its place as one of the methods adopted to promote clean energy, Indonesia was aware of its crucial role in the international stage with its abundance of nickel reserves. In June 2023, President Joko Widodo stated that: “if the downstream is successful, we will leap forward to build, for example, mineral downstream or an EV battery ecosystem. In the past, what we exported was only raw, nickel was only exported raw”. 

The downstreaming policy entails two main aspects. First, it prohibits the export of raw nickel. Second, it establishes an obligation to process extracted nickel domestically to increase their value before being imported. The main idea for this policy is two-fold; it not only aims to increase the value of exported products, but also it attracts investment to build smelters and to create jobs domestically. 

The policy was a major success. It contributes to the fulfillment of at least three SDGs: SDG 8, SDG 9, and SDG 7.^[7]

SDG 8 refers to “Decent Work and Economic Growth”. The downstreaming policy of Indonesia can create new layers of production in the supply chain of critical minerals, and as such will create more jobs within local economies. In 2014, the value of Indonesia’s nickel export was around USD1.4 billion. After the policy, in 2022, the value increased significantly to USD22 billion.^[8] This also impacted on the regional economy where the processing takes place. In 2023, the GDP of Northern Maluku increased by 20.49%, and Central Sulawesi by 11.91%.^[9] This reflects not only economic growth, but also job creation. 

The next related SDG, SDG 9, refers to “Industry, Innovation and Infrastructure”. Four targets of SDG 9 will be directly impacted. First, in terms of target 9.2 (promote inclusive and sustainable industrialization), downstreaming plays a role in increasing job opportunities and economic growth supported by industries. Second, the increased activities along the supply chain will enable more access of small-scale industries to financial sectors, especially to obtain credits and loans. This correlates to Target 9.3 (increase access to financial services and markets). Third, with the orientation of energy transition, downstreaming will impact positively to the production of clean energy, because it creates a conducive ecosystem to produce necessary materials for clean and renewable energy. This relates to Target 9.4 (update all industries and infrastructure for sustainability). Lastly, Target 9.5 (enhance research and upgrade industrial technologies) is promoted through the application of technology-intensive production because downstreaming promotes innovation and research. 

The impact on SDG 8 and 9 creates a multiplier effect to SDG 7 “Affordable and Clean Energy”. The creation of industry ecosystem of clean energy through the utilization of minerals will impact positively to the advancement of affordable clean energy resources. 

It is therefore safe to conclude that the benefits of downstreaming are apparent; not only theoretically, but also practically. Indonesia is a successful test case for the implementation of this policy. Comparatively speaking, Colombia has all the necessary ingredients to also benefit from this policy. At this moment, it can be argued that Colombia stands at a similar crossroad that Indonesia once faced. Like Indonesia, Colombia is blessed with an abundance of natural resources, including critical minerals paramount for global and domestic energy transition. The data from Servicio Geológico Colombiano shows Colombia’s significant possession of nickel, copper, and rare earth elements, particularly concentrated in the departments of Córdoba, Antioquia, and Chocó. Furthermore, Colombia has identified 37 strategic mining areas for exploration, including those rich in copper and cobalt, key components for EV batteries and renewable energy infrastructure.^[10] In 2022, Colombia launched its National Development Plan 2022–2026, which highlights a more sustainable and equitable approach to mining, echoing Indonesia’s push for inclusive and innovation-driven industrialization.^[11] The cherry on top would be the reindustrialization policy of Colombia, aiming to, among others, diversify export products and also to add more value to them.

With all the necessary ingredients present, sufficient political will and an implementation of a tailor-made policy with similar intent would lead Colombia to a similar result as what Indonesia has been enjoying through its downstreaming policy. This is a possible entry point for cooperation between the two countries on the issue: starting from a policy dialogue, exchange of best practices and technical assistance between government stakeholders, leading to possible business engagements in the form of trade, joint ventures, transfer of technology, and investment.

Through the framework of South-South Cooperation, an aspect which Colombia has been intensifying, both countries can ensure that they are on a correct pathway to get out of middle-income trap for the benefits of both countries and their people.  

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^*  Consul at the Embassy of the Republic of Indonesia in Bogotá

^[1] GILL, Indermit; KHARAS, Homi. An East Asian Renaissance: Ideas for Economic Growth. Washington, D.C.: World Bank, 2007.

^[2] HILL, Hal. The Indonesian Economy since 1966: Southeast Asia’s Emerging Giant. Cambridge: Cambridge University Press, 1996.

^[3] REPUBLIC OF INDONESIA. Visi Indonesia 2045: Indonesia Emas. Jakarta: Ministry of National Development Planning/BAPPENAS, 2019.

^[4] INTERNATIONAL ENERGY AGENCY. The Role of Critical Minerals in Clean Energy Transitions. Paris: IEA, 2021.

^[5] WORLD BANK. The Mineral Intensity of the Clean Energy Transition. Washington, D.C.: World Bank, 2020.

^[6] UNITED STATES GEOLOGICAL SURVEY. Mineral Commodity Summaries 2023. Reston, VA: USGS, 2023.

^[7] SDGs CENTER UNPAD. The Benefits and SDGs Compatibility of Indonesia’s Mineral Downstreaming Policies. Jakarta: Ministry of Foreign Affairs of the Republic of Indonesia, 2024. 

^[8] Financial Times. (2024, February 11). In charts: how the Joko Widodo era remade modern Indonesia’s economy. Retrieved from https://www.ft.com/content/66a490e3-9268-4d8d-b7df-d2f901cd0fde

^[9] Badan Pusat Statistik. (2024). Produk Domestik Regional Bruto Provinsi di Indonesia 2023. Jakarta: BPS. Retrieved from https://www.bps.go.id

^[10] MINISTERIO DE MINAS Y ENERGÍA. Áreas Estratégicas Mineras 2023. Bogotá: Gobierno de Colombia, 2023.

^[11] REPÚBLICA DE COLOMBIA. Plan Nacional de Desarrollo 2022–2026: Colombia, Potencia Mundial de la Vida. Bogotá: Departamento Nacional de Planeación, 2022.