The (Un)intended Consequences of Export Restrictions: Evidence from Indonesia

Abstract

An increasing number of developing countries is restricting the export of its natural resources in order to promote the domestic processing of these resources, and boost local economic development in its, often lagging, mineral regions. In this paper, we identify the local labor market consequences of such voluntary export restrictions in the context of Indonesia, a major producer of raw nickel and bauxite, which banned the export of unprocessed mineral ores in 2014. Using exogenous variation in the timing of the export restrictions, the opening of new processing facilities, as well as in the spatial distribution of Indonesia's mineral deposits, we find that the ban led to large investments into nickel processing and, despite an initial dip, positively affected aggregate employment in nickel mining districts. In turn, the opening of new nickel smelters, did not increase overall employment but spurred structural transformation: mining and manufacturing employment rose, but was entirely offset by a reduction in agricultural employment -- partly the result of the negative environmental effects of nickel processing. In contrast to nickel, the export ban had limited effects on bauxite processing, resulting in a permanent decline in bauxite production and negative effects on local employment in mining districts. Finally, we document positive spillover effects from nickel processing to mining employment in districts endowed with coal, the main source of energy for nickel processing.