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17 September 2025
Muhammad Firman Eko Putra - Masters Student in International Political Economy, University of Sheffield
Indonesia’s ‘green’ industrial policy epitomises the reemergence of state capitalism, in which state institutions both stabilise and facilitate market expansion. On the ground, however, this reproduces the old developmental state paradigm of growth at all costs, perpetuating extractivism and generating new injustices.
Indonesia has undergone dramatic transformation over the past decade. The village of Bahodopi in Morowali, once a quiet fishing community nestled in the rainforest of Sulawesi now hosts an integrated industrial complex accommodating over 66,000 workers across 8,000 acres. This transformation has been driven by Indonesia’s ambitious nickel ‘downstreaming’ policy. The country holds approximately 42% of the world’s nickel reserves and accounts for around 50% of global nickel output.
The archipelago is leveraging its mineral abundance to position itself at the centre of the global green energy transition as nickel is essential for battery production in electric vehicles and clean energy technologies. Central to this push has been political experimentation to reorganise state institutions to act simultaneously as promoter, supervisor, and owner of capital. What emerges is a new form of capitalist state forged in the wake of the 2008 global financial crisis and the reorganisation of global value chains (GVCs). Less complex and labour-intensive midstream and downstream manufacturing inputs relocated to late industrialisers such as Indonesia while earlier industrialisers such as China moved into higher-value added production.
From Mining to ‘Downstreaming’
From Mining to ‘Downstreaming’
Indonesia’s reliance on extractive industries dates back to the Dutch colonial era. After independence, the Indonesian political economy of natural resources management swung from resource nationalism (1945-1966) to market liberalisation (1966–1998), mainly focusing on mining extraction and export of mineral ore. Until recently, the state reclaimed policy space over natural resources through the introduction of the ‘downstreaming’ policy (2009–present) which aims to climb up the value chain, shifting from raw material extraction to manufacturing. Central to this ambition was the policy of reshoring critical resources by mandating domestic mineral processing and banning the export of raw materials. This paradigm shift was triggered by the collapse of the 2000s commodity boom and the shrinking trade surplus following the 2008–09 global financial crisis, which exposed the fragility of Indonesia’s dependence on raw resource exports.
1 Nickel ‘Downstreaming’ as New State Capitalism in Practice
Indonesia’s shift towards greater direct state intervention in production arrangements and the competitive dynamics of nickel production may be understood as a manifestation of a new state capitalist impulse. What distinguishes this form of state capitalism from the developmental state is the organisation of state institutions to act simultaneously as promoter, supervisor, and owner of capital. These institutions operate both as a stabilising force and as architects of market expansion.
Promoter of Capital: The Indonesian government acts as promoter of capital through techno-industrial policies, direct investment, fostering industrialization, and supporting strategic sectors. Presidential Regulation No. 55/2019 sets out Indonesia’s ambition to become a leading green technology and EV manufacturer and exporter, offering fiscal incentives such as import duty exemptions and tax breaks, alongside non-fiscal incentives like export financing These policies are complemented by spatial planning strategies aimed at creating special purpose zones for nickel industries. The Indonesia Morowali Industrial Park (IMIP), a joint venture between China’s Tsingshan Group and Indonesia’s Bintangdelapan, created a 2,000-hectare integrated nickel hub directly embedded in nickel GVCs.
Supervisor of Capital: As supervisor, the state imposes 'defensive' measures such as export controls on strategic commodities to reshape industrial structures. Export bans on raw nickel ore are the most visible example, requiring companies to conduct domestic processing in order to produce higher-value products. Complementary measures include non-tariff instruments such as local content requirements, foreign investment screening mechanisms, and the nationalisation of foreign assets through a mandatory divestment scheme. These measures are designed to reshore critical value chains and secure value capture within Indonesia. The government is creating conditions in which the only way for firms to maintain access to its abundant nickel resources is by establishing smelters and refineries in Indonesia and producing intermediate products such as Class 2 nickel (e.g., ferronickel, NPI) as well as high-grade Class 1 nickel used in batteries, rather than merely exporting nickel ore.
Owner of Capital: As owner of capital, the Indonesian government deploys state owned enterprises and sovereign wealth fund to consolidate resources and direct investment to support the ‘downstreaming’ ambitions. Indonesia's two sovereign wealth funds, INA and Danantara, collectively manage billions in assets. INA, managing USD 10.5 billion, has invested in lithium iron phosphate cathode production, while Danantara consolidates seven SOEs into a USD 61 billion fund overseeing assets worth USD 900 billion. In May 2025, INA and Danantara signed a memorandum with France’s Eramet to create a strategic investment platform in the nickel sector.
2 New State Capitalism with Old Modes of Coercion in the Name of Growth
2 New State Capitalism with Old Modes of Coercion in the Name of Growth
Economically, ‘downstreaming’ has been largely successful in transforming Indonesia’s nickel industry and, to some extent, fostering vertical integration between firms in the chain, an essential step in increasing value-added production. It has attracted record levels of FDI and doubled the value of nickel exports.
On the ground, however, this new state capitalism to an extent reproduces the old developmental state paradigm of growth at all costs, perpetuating extractivism and generating new injustices. The extractive industry underpinning these facilities often relies on coercive expropriation, leading to widespread displacement, livelihood disruption, resource scarcity, and land grabbing. Mining operations have transformed local landscapes, resulting in deforestation and environmental degradation.
Environmental violations by companies have led to water contamination, posing serious health risks to local communities. Air pollution from nickel processing facilities and carbon-intensive captive power plants has contributed to rising respiratory infections. Within smelters and refineries, industrial accidents, fatalities, and exploitative labour conditions are common.
Community resistance is repressed. Under Indonesian law protests against mining companies can be deemed illegal and punishable by imprisonment. National Strategic Project nickel operations receive additional legal protections, including military backing, which legitimises the use of coercive measures for land acquisition and the suppression of protest.
In a push to climb global green transition value chains, Indonesia’s ‘downstreaming’ perpetuates old forms of extractive capitalist logics, exacerbating existing vulnerabilities, and generating new injustices. Addressing environmental and social impacts of nickel industries is critical for two reasons. First, the nickel industry is geographically embedded and metabolically depends on local communities and natural resources. Second, the global market increasingly demands responsible sourcing materials.
It is crucial to build an enabling environment that promotes environmental and socially responsible practices across the entire supply chain, from exploration and extraction to refining, manufacturing, recovery, and recycling. By embedding these principles throughout the nickel value chain, Indonesia can expand its access to and participation in the global supply chains of green technologies while ensuring that the green transition to be fair and just to local communities, labour and the environment.
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