## Modern industrial policy should shape markets, not just fix their failures

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### Climate urgency and the case for mission-led industrial policy
- Temperatures set to rise at least 1.5 degrees Celsius above preindustrial levels this century.
- Climate finance shortfall: at least $5.4 trillion a year by 2030 is needed.
- The crisis is framed as the product of economic design—public and private institutions and their relationships—implying agency to redesign systems toward planet and people first.
- Key normative claim: economic growth has a rate and a direction; governments should steer growth so it is sustainable and inclusive.

### Mission-led approach: design and effects
- Modern industrial strategy should “pick the willing” by setting clear missions (for example, solving the climate crisis or strengthening pandemic preparedness) and shaping economies and markets to accomplish them.
- All sectors must transform and innovate; missions should cover cross-cutting changes (how we eat, move, build).
- Growth metrics (GDP, productivity, job creation) are outcomes of well-designed missions, not the mission itself.
- Public investment can have amplified GDP impact via spillovers and multiplier effects and can “crowd in” private investment, especially where private R&D is weak.

Key statistics and examples:
- World fossil-fuel subsidies in 2022: $7 trillion.
- The 20 biggest fossil-fuel firms are expected to invest $932 billion developing new oil and gas fields by the end of 2030.
- S&P 500 companies transferred $795.2 billion to shareholders last year through stock buybacks—about half of that figure coming from the 20 biggest firms.
- Five of the world’s largest listed energy companies transferred $104 billion through buybacks and dividends in 2023.
- The share of total income going to workers has declined by 6 percentage points since 1980.

### Contract conditions for public–private collaboration
- Governments should make access to public funds and benefits (grants, loans, equity investments, tax benefits, procurement deals, regulatory provisions, intellectual property rights) conditional on companies aligning behavior with mission goals.
- Conditionalities can direct firms toward net-zero emissions, affordable access, profit sharing, reinvestment of profits into R&D, and limits on shareholder payouts.
- Design principle: calibrate conditions to maximize public value but avoid overly specific requirements that stifle innovation.
- Examples of conditionality in practice:
  - France’s COVID-19 bailout of Air France: conditional on curbing emissions per passenger and reducing domestic flights.
  - Germany’s KfW energy-efficient refurbishment loans: low-interest loans provided only to companies that agree to decarbonize; debt relief of up to 25 percent for buildings meeting requisite energy standards—the higher the energy efficiency, the greater the relief.
  - US CHIPS and Science Act: access conditioned on climate and workforce development plans; accessible childcare; prevailing wages for certain workers; community investment in consultation with local stakeholders; sharing a portion of profits above an agreed threshold for funding of $150 million or more; exclusion of stock buybacks from CHIPS funding and discouragement of buybacks for five years.
- Note on criticisms: conditionalities may be seen as excessive or weak; CHIPS features flexibility with precise commitments often negotiated case by case.

### Strategic public finance and procurement
- Strategic public procurement and patient long-term financing are central mission tools.
- Global public procurement budgets total about $13 trillion a year, accounting for 20–40 percent of national public spending in Organisation for Economic Co-operation and Development countries.
- New procurement models emphasize outcomes, innovation, social value, or local production (example: US Buy Clean Initiative; Brazil redesigning procurement to support industrial strategy).
- Public financial institutions should act as lenders of first, not last, resort; they must be willing to take on risk, provide countercyclical financing, fund capital development, and act as venture capitalists to catalyze mission-oriented investments.

Public bank assets and leverage:
- National development banks (NDBs) have $20.2 trillion under management.
- Multilateral development banks (MDBs) have $2.2 trillion under management.
- Together this amounts to about 10–12 percent of global financing.
- Example of conditional lending: Germany’s KfW loans to national steel sector were conditional on lowering material content of production, contributing to the emergence of green steel.

### Public sector dynamism and institutional capabilities
- Success requires investment in government capabilities, countering closed-minded views of the state, cuts to public employment, and overreliance on big consulting firms.
- Industrial policy needs a competent, confident, entrepreneurial, dynamic public sector able to take risks, experiment, and collaborate across ministerial boundaries.
- Govlabs (for example, Chile’s Laboratorio de Gobierno) create safe spaces for civil servants to experiment, learn, and scale mission-oriented policy instruments.
- Governments should develop capabilities to measure multiplicative effects of industrial policy; static measures like cost-benefit analyses and GDP fail to capture broader impacts.
- Recommended measurement approach: a dashboard of economic, social, and environmental indicators that reflect mission goals and core values, include spillover and multiplier benefits, and serve as tools for learning and accountability.

### International implications and risks
- Countries must avoid sliding into green protectionism that prioritizes national carbon-neutral development at the expense of global cooperation and equity.
- The US Inflation Reduction Act has prompted Europe to prioritize decarbonizing its industries but is draining financing from emerging economies.
- National industrial strategies should be designed with attention to implications for international development, trade, and supply chains to enable coordinated global progress.

### Policy recommendations (summary)
- Adopt mission-oriented industrial strategies that set ambitious goals (for example, net-zero) and leave methods open to innovation.
- Use conditionalities in public funding and procurement to align private incentives with public missions while preserving room for diverse technical solutions.
- Reorient public procurement toward outcomes, innovation, social value, and local production.
- Mobilize patient, mission-directed financing with public financial institutions (NDBs and MDBs) acting as lenders of first resort and willing to take risk.
- Invest in government capabilities, cross-ministerial coordination, and experimental govlabs to implement and scale mission-oriented policies.
- Develop dashboards of economic, social, and environmental indicators to measure spillovers and multiplier effects, not just static outputs like GDP.
- Design national strategies mindful of global cooperation to prevent green protectionism and support equitable climate progress.

*mariana mazzucato, “Modern industrial policy should shape markets, not just fix their failures,” F&D, September 2024.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/09/mazzucato.pdf_