Olle Östensson, Anton Löf
UNU-WIDER working paper 113/2017
The paper discusses the practical possibilities of achieving increased downstream processing and the policies that are commonly used for this purpose. It reviews the reasons why forward vertical integration is not always an optimal choice for extractive industry companies. It finds little support for the argument that differences in market power dictate the geography of downstream processing.
Tariffs on processed products may also play only a limited role. The degree of vertical integration varies and appears to be mainly driven by production economics. Market determined processing margins fluctuate, which raises the risks of investing in downstream processing capacity.
Policies for downstream processing are discussed based on experiences in four countries: India, Indonesia, Zambia, and Tanzania. In most of these cases, a very limited amount of analysis appears to have been undertaken to design the policies. Results so far seem to indicate that a number of unintended consequences dominate the outcomes.