## ppea2024008

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### EXECUTIVE SUMMARY — Overview and definition
- Industrial policy (IP) defined as targeted government interventions to support specific domestic firms, industries, or narrowly defined economic activities to achieve national (economic or non-economic) objectives.
- Distinct from “horizontal policies” that improve the general business environment for all firms and industries.
- Drivers of the recent IP resurgence since the mid-2010s include the COVID-19 pandemic, escalating geopolitical tensions, and pressures to accelerate the green transition.
- Prepared by named IMF staff and country teams; _February 29, 2024_.

### Recent trends and scope
- The latest IP wave (2023) has been mainly led by advanced economies (AEs).
- Stated motives in recent IP activity: competitiveness, climate mitigation, supply chain resilience, and national security.
- Sectoral focus in 2023: military-civilian dual use products, advanced technology products (including semiconductors and low-carbon technologies), and upstream inputs such as critical minerals; medical goods dominated earlier in the COVID-19 pandemic.
- Between November 2008 and December 2021:
  - more than 32,500 protectionist policy interventions were implemented globally,
  - outnumbering the 6,900 trade-liberalizing ones (WEF 2022).

### Policy instruments and cross-country patterns
- Most recent IPs have been implemented through subsidies.
- Differences by country group:
  - AEs: direct financial grants, state loans, and other forms of state aid.
  - EMDEs: state loans, tax relief, and capital injections.
- EMDEs more frequently use trade restrictions on imports and exports.
- Common discriminatory IP tools:
  - local content requirements (LCRs),
  - preferential access to raw materials for domestic producers,
  - subsidies unavailable to foreign entities,
  - preferential access to credit for domestic firms.
- De facto discrimination can arise from instrument design (example: digital services taxes with high sales thresholds effectively targeting only foreign suppliers).
- Non-discriminatory instruments: subsidies or tax incentives available to all companies in the targeted sector irrespective of residency or firm size.

### Economic rationale, effectiveness, and risks
- Potential justification: well-identified externalities, coordination failures, or under-provision of public inputs.
- Success conditions: measures should be well-targeted, time-bound, cost-effective, transparent, and preserve macroeconomic stability, fiscal and external sustainability.
- Major risks: resource misallocation, rent seeking, corruption; robust institutions and governance are necessary to mitigate these risks.
- Empirical evidence on net benefits is mixed; historical use often aimed at protecting infant industries and fostering diversification, with varied outcomes.

### Cross-border spillovers and trade implications
- IP can affect trade, investment, financial flows, and global market prices, generating spillovers and implications for trading partners and the global economy.
- Recent discriminatory IP measures have triggered countermeasures in other countries, risking global trade and economic integration.
- Proper IP design, implementation, and governance are critical to minimize distortions, avoid government failures, contain fiscal costs, and limit negative cross-border spillovers.

### IMF surveillance principles and coverage — The “When”
- IP should be covered in IMF surveillance when macro-critical or likely to generate significant cross-border spillovers—the same standard applied to other policies.
- Macro-criticality: a policy can significantly affect present or prospective balance of payments or domestic stability.
- Empirical staff survey (August 2023):
  - 48 countries used macro-critical IPs since end-2021.
  - 2/3 of macro-critical IPs in AEs were seen as potentially triggering cross-border spillovers.
  - In about 2/3 of macro-critical IP deployments in EMDEs, country teams viewed that goals could have been achieved through horizontal policies.
- Timing and scope:
  - Discuss IP measures in Article IV when first introduced and meeting coverage criteria; reassess on significant changes; reassess legacy IP measures that continue to weigh on economic performance and stability.

### IMF surveillance principles and coverage — The “How”
- Starting point for staff analysis:
  - Evidence of market failure, objectives, targeted firms/sectors/activities, benefits and costs, complementary policies, governance issues, and cross-border spillovers.
- Scope of staff analysis depends on available information and expertise; staff should prioritize IMF core expertise (fiscal, monetary, financial aspects) when information is limited.
- Cost-benefit assessment, where feasible:
  - Quantitative estimates where data permit of domestic benefits and costs and cross-border spillovers.
  - Models/methods referenced include general equilibrium models, empirical models and surveys, and partial equilibrium approaches (delta quantity / elasticity using world share of exports and trade elasticity at HS6 product level).
  - Sensitivity analysis recommended given wide uncertainty in estimates.
- Policy alternatives:
  - Staff can recommend less distortionary alternatives when appropriate and feasible and should flag fiscal/financial IP measures that might pose risks to balance of payments or domestic stability.

### IMF limits on coverage of national security–driven IP
- Fund staff should not discuss the appropriateness of IP driven solely by national security objectives or propose alternative policies to achieve such objectives; analysis limited to economic impacts and spillovers.
- Three cases outlined for permissible staff actions depending on whether national security is the sole objective, overarching but with intermediate economic goals, or one of multiple objectives.
- Members should notify the Fund before imposing restrictions on international payments and transfers for current international transactions that, in the member’s judgment, are solely related to preservation of national or international security (Decision No. 144-(52/51)).

### Trade measures, WTO consistency, and decision framework
- Trade-distorting IP (tariff and non-tariff barriers, LCRs, export subsidies, export bans, quotas, licensing, export taxes, domestic subsidies) should be discouraged.
- Staff responsibilities when trade-distortive measures meet coverage criteria:
  - Factually present these policies in Article IV staff reports and discuss effects including rent-seeking, spillovers, retaliation, and reduced access to critical inputs and technologies.
- WTO consistency guidance:
  - Staff should encourage authorities to clarify WTO consistency early; IMF role is not to enforce or interpret WTO rules but to advise on economic grounds.
  - If a WTO panel/Appellate Body has ruled against a measure → IMF cannot support the measure and should advise removal or time-bound phaseout.
  - If not subject to a WTO ruling and not a clear breach of WTO commitments → staff assessment based on economic rationale.

### Conceptual framework and assessment dimensions (four interlinked considerations)
- A. Justification:
  - Are objectives clearly specified and is there a well-identified market failure (under-provision of public inputs, negative externalities, coordination failures)?
  - First-best option is to directly address the source of market failure; prefer cooperative international resolution for harmful foreign policies.
- B. Design:
  - Choice of instruments aligned with institutional and implementation capacity.
  - Complementary economy-wide policies to mitigate distortions and ensure competitive neutrality.
  - Governance: transparency, monitoring, credible expertise, fact-based decision-making, and sunset clauses to reduce rent-seeking and corruption.
  - Private sector role: engage private sector over time; facilitate private takeover from SOEs where relevant.
- C. Cost-Benefit Assessment:
  - Comprehensive assessment of net benefits, including fiscal, administrative, resource misallocation, and spillovers.
  - Stylized model (from Juhász, Lane, Rodrik, 2023): g(s, θ, φ) = (1−θ(1−s)) A − φ ψ(s) with implications that intervention may be socially desirable in limited scope (s <<1) or not (s=0); desirability depends on market failure size relative to intervention cost.
- D. Implementation:
  - Compatibility with fiscal sustainability, balance of payments, and domestic stability; legal obligations including WTO commitments; country capacity to implement; use pilot projects; ex ante duration and monitoring.

### IP effectiveness: empirical evidence, case studies, and risks
- Empirical evaluation challenges: defining counterfactual, simultaneous policy tools, attribution difficulty, mixed evidence on cross-border spillovers.
- Recent empirical work: mixed results across methods (difference-in-difference, regression discontinuity design, propensity score matching, natural experiments) and multi-sector general equilibrium models.
- Case-study success factors include:
  - Targeting sophisticated, export-oriented sectors while enforcing competition and accountability.
  - Targeting resource-intensive activities or sectors with high network linkages.
  - Involvement of large domestic export-oriented private firms in high-technology sectors tends to yield better outcomes than relying solely on SOEs or MNCs.
  - Hard IP tools (tariff barriers, subsidies) are rarely efficient; specialized financing schemes, export promotion agencies, and public research institutes often yield better results.
  - IP more likely to succeed when part of an overall economic strategy including human capital, innovation, infrastructure, and business climate improvements.

### Green IP, SEZs, and SOEs — guidance and assessments
- Green IP:
  - Definition: strategies to promote innovation, adoption, and production of low-carbon technologies (LCT).
  - Carbon pricing is the most efficient policy for emissions reduction; green IP may be justified where political constraints or LCT market failures exist.
  - Green IP that relies on subsidies and tax incentives could pose macroeconomic and governance risks.
  - Five guiding principles for green IP:
    1. Complement core decarbonization policies, notably carbon pricing.
    2. Minimize adverse spillovers and avoid creating technology transfer barriers; avoid discrimination between domestic and foreign producers.
    3. Ensure support is time-bound, cost-effective, transparent, and limits fiscal burdens; subsidies executed through the budget with clearly defined sunset clauses.
    4. Conduct policies within an appropriate institutional framework to minimize implementation risks.
    5. Coordinate globally on green IP measures to avoid inefficient subsidy races and promote data sharing, sectoral agreements, and patent pools.
- SEZs:
  - Main levers: direct and indirect tax breaks, infrastructure support and public services, less stringent regulations, and administrative facilitation.
  - Types: Free Trade Zones (FTZs), Export Processing Zones (EPZs), comprehensive SEZs, science parks, regional development zones.
  - Effects can be temporary and enclave-like; risks include displacement of investments, profit-shifting, and failure to stimulate additional domestic investment.
  - Tax measures: indirect tax reliefs in fenced-in SEZs are generally less problematic; profit-based incentives carry profit-shifting concerns; expenditure-based incentives (accelerated depreciation, investment tax credits) found more efficient.
  - Global minimum tax (15 percent) will negate some income tax incentives for large MNCs and may shift incentives toward other instruments requiring evaluation.
- SOEs:
  - SOEs often operate in natural monopoly or strategic sectors, pursue noncommercial objectives, and may receive state subsidies and preferential credit.
  - Staff should assess economic implications if macro-critical or generating significant cross-border spillovers but refrain from advising on national security–only objectives.
  - Recommended safeguards when IP implemented through SOEs:
    - Strong institutional frameworks: corporate governance, transparent reporting, performance management, fiscal risk management.
    - Quantified fiscal costs and risks: identify IP via SOEs as quasi-fiscal activity, quantify and reflect in the budget.
    - Continuous monitoring: financial oversight, scrutiny of reported and estimated figures, reporting obligations, and regular evaluations.
    - Assess impacts on competition and markets to minimize distortions.

### Examples of recent IMF Article IV coverage (selected country findings)
- China (2023):
  - Context: state role, homegrown innovation push, supply chain disruptions.
  - Tools: preferential credit, research funding, innovation tax breaks, incentives for strategic manufacturing and science and technology firms.
  - Staff recommendations: pro-market reforms, reduce barriers to interprovincial trade, scale back implicit SOE guarantees, improve transparency, phase out protectionist and discriminatory measures including export controls on critical minerals.
- Euro Area (2023):
  - Tools: REPowerEU, extension of CBAM, Green Deal Industrial Plan (GDIP), Foreign Subsidy Regulation, FDI Screening, Chips Act.
  - Staff assessment: CBAM to be WTO-consistent and based on embodied carbon where feasible; relaxation of state-aid rules could lead to high fiscal costs and distortions—subsidies should be limited in scope, duration, and size.
- Indonesia (2023):
  - Tools: export restrictions on raw materials, domestic processing requirements, tax holidays, subsidies (e.g., on energy/coal); focus on downstreaming nickel ore to e-vehicle batteries.
  - Staff assessment: recommended regular cost-benefit analysis, phase out existing export restrictions and avoid extending them, and implement broad structural reforms.
- Saudi Arabia (2023):
  - Tools: National Industrial Strategy, Saudi Green Initiative, PIF, government procurement, SEZs, local content procurement authority.
  - Staff assessment: preferential procurement is discriminatory and risky; welcome commitment to WTO compliance; recommended rigorous evaluation, cost-benefit analysis, exit criteria, claw-back mechanisms, sunset clauses, and emphasis on export orientation and workforce upskilling.
- United States (2023):
  - Schemes and amounts:
    - Inflation Reduction Act: US$386bn over 10 years.
    - CHIPS Act: US$278bn over 10 years.
    - Build America, Buy America: about US$2,700bn over 10 years.
  - Staff assessment: flagged inefficiencies and trade-distorting effects of discriminatory provisions such as “Buy American”; advised unwinding domestic-content preferences that distort trade, investment, and raise fragmentation and retaliation risks; conducted impact assessments on emissions and fiscal outlook.

### Collaboration and next steps
- IMF staff expected to analyze macro-critical issues and seek external inputs where expertise or granular data are lacking.
- Existing collaborations and efforts cited:
  - OECD industrial policy framework (Criscuolo et al., 2022).
  - Joint Subsidy Platform (IMF, OECD, World Bank, WTO).
  - IMF collaboration with Global Trade Alert to monitor new IP measures in 75 jurisdictions.
  - OECD QuIS and other international organization work on SEZs, local content policies, and subsidy monitoring.
- Planned future work:
  - Build databases of IP measures (border and behind-the-border).
  - Develop analytical tools to identify externalities, perform cost-benefit analysis, and assess cross-border spillovers.
  - Support peer learning and workshops to provide granular guidance (e.g., on green IP).
  - Tailor IP analysis and policy advice for different country groups (AEs and EMDEs).

*Source: ppea2024008 (excerpts).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Overview and definition
- Industrial policy (IP) is defined as targeted government interventions aimed at supporting specific domestic firms, industries, or narrowly defined economic activities to achieve certain national (economic or non-economic) objectives.
- IP is distinct from “horizontal policies” that aim to improve the general business environment for all firms and industries (examples: strengthening the rule of law and governance, promoting ease of doing business, developing infrastructure).
- The term “industrial policy” regained attention around the 2010s and IP is “making a strong comeback.” Major drivers since the mid-2010s include the COVID-19 pandemic, escalating geopolitical tensions, and pressures to accelerate the green transition.

### Recent trends and scope
- The latest IP wave (2023) has been mainly led by advanced economies (AEs).
- Stated motives in recent IP activity include: competitiveness, climate mitigation, supply chain resilience, and national security.
- Sectoral focus in 2023 shifted toward military-civilian dual use products, advanced technology products (including semiconductors and low-carbon technologies), and upstream inputs such as critical minerals; medical goods dominated earlier during the COVID-19 pandemic.
- Between November 2008 and December 2021, more than 32,500 protectionist policy interventions were implemented globally, outnumbering the 6,900 trade-liberalizing ones (WEF 2022).

### Policy instruments and cross-country patterns
- Most recent IPs have been implemented through subsidies, with AEs and EMDEs differing in subsidy instruments:
  - AEs: direct financial grants, state loans, and other forms of state aid.
  - EMDEs: state loans, tax relief, and capital injections.
- EMDEs more frequently use trade restrictions on imports and exports, reflecting possibly more limited fiscal or administrative capacity and lower-administration-cost instruments.
- Common discriminatory IP tools include: local content requirements (LCRs), preferential access to raw materials for domestic producers, subsidies unavailable to foreign entities, and preferential access to credit for domestic firms.
- De facto discriminatory policies can arise from instrument design (example: digital services taxes with high sales thresholds effectively targeting only foreign suppliers).
- Non-discriminatory instruments do not distinguish companies based on residency or firm size and can include subsidies or tax incentives available to all companies in the targeted sector.

### Economic rationale, effectiveness, and risks
- IP may be justified when well-identified externalities, coordination failures, or public input under-provision exist.
- The bar to get IP right is high: to be effective, IP measures should be well-targeted, time-bound, cost-effective, transparent, and deliver on their objectives while preserving macroeconomic stability, fiscal and external sustainability.
- Risks of IP include resource misallocation, rent seeking, and corruption; robust institutions and governance are necessary to mitigate these risks.
- The empirical evidence on the net economic benefits of IP has been mixed; historical use was often to protect infant industries and foster diversification but outcomes vary.

### Cross-border spillovers and trade implications
- IP can significantly affect domestic economies and generate cross-border spillovers: trade, investment, financial flows, and global market prices can be impacted with implications for trading partners and the global economy.
- Recent discriminatory IP measures implemented in some countries have triggered countermeasures in others, putting global trade and economic integration at risk.
- IP design, implementation, and governance are critical to minimize distortions, avoid government failures, contain fiscal costs, and minimize negative cross-border spillovers.

### IMF surveillance principles and coverage
- IP should be covered in IMF surveillance when it is deemed macro-critical or has the potential to generate significant cross-border spillovers—the same standard applied to other policies.
- Macro-criticality: a policy can significantly affect present or prospective balance of payments or domestic stability.
- The scope of IMF staff analysis and policy advice depends on:
  - IP type and objectives,
  - Available information and expertise,
  - Whether IP is driven by national security motives (if so, staff should assess domestic economic impact and cross-border spillovers but should not provide policy advice).
- The note outlines “when” and “how” country teams engage with authorities on IP issues and highlights areas for external collaboration and further how-to guidance.

### Conceptual framework and assessment dimensions
- The note provides a conceptual framework for assessing IP across four principal dimensions:
  - A. Justification: presence of market failures, externalities, or coordination problems.
  - B. Design: targeting, time-boundedness, instruments, and discrimination considerations.
  - C. Cost-Benefit Assessment: fiscal and macroeconomic costs, expected benefits, distributional effects.
  - D. Implementation: governance, institutions, risks of rent seeking, monitoring and sunset clauses.
- A stylized example and taxonomy of IP objectives and tools are included to operationalize these dimensions.

### Examples of recent IMF Article IV coverage
- The note provides examples of IP coverage in recent Article IV consultations, including:
  - Trade measures (Indonesia),
  - Green IP (the USA and the Euro Area),
  - Special economic zones (Saudi Arabia),
  - State-owned enterprises (China).

### Collaboration and next steps
- The note highlights the need for IMF staff collaboration with other international organizations and for additional how-to notes that will elaborate on specific IP themes and operational guidance.
- This umbrella paper frames the IP discussion, compiles existing guidance relevant to IP, and identifies areas requiring further elaboration in subsequent how-to notes.

Prepared by Stephan Danninger (EUR), Christian Ebeke, Anna Ilyina, Adam Jakubik, Oana Luca, Brad McDonald, Sergio Rodriguez, and Michele Ruta (all SPR), with contributions from Fuad Hasanov (EUR), Simon Black, Tibor Hanappi, Samir Jahan, Pedro Francisco Juarros, Yuko Kinoshita, Raphael Lam, Natalie Manuilova, and Thornton Matheson (all FAD), Reda Cherif (ICD), and Julianne Ams and David McDonnell (LEG); in addition to the China, Euro Area, Indonesia, Saudi Arabia and the US country teams. Daria Zakharova provided overall guidance. Brad McDonald is a former Deputy Division Chief, SPR, and currently a Lecturer in the University of Minnesota Humphrey School of Public Affairs.

_February 29, 2024_

### 8.      IP typically refers to targeted government interventions aimed at steering the

### 8.      IP typically refers to targeted government interventions aimed at steering the structural transformation of the domestic economy

### Definition and scope
- IP refers to targeted government interventions aimed at steering the structural transformation of the domestic economy.
- IP is designed to develop or support specific domestic industries, firms, or narrowly defined economic activities to achieve certain economic or non-economic objectives that would not occur without such interventions.
- This definition excludes:
  - Policies that apply to all sectors or forms of economic activity (“horizontal policies”) such as active labor market policies or R&D support available to all firms and sectors.
  - Policy measures adopted for the purposes of maintaining domestic or balance of payment stability (though the policy rationale may be difficult to discern in practice).
- IP is distinguished as “vertical policies” in contrast to horizontal policies.
- Market distortive policies: a market distortive policy is any government intervention that affects relative prices and resource allocation. In this Note, “distortive policy” refers to a policy that can alter the relative price or the allocation of resources in an economically inefficient manner.

### Economic and non-economic objectives of IP
- Economic objectives vary and are context specific. Typical domestic-oriented IP objectives:
  - Productivity
  - Economic diversification
  - Economic development
  - Employment
  - The green transition
  - National security
- Foreign-oriented IP objective:
  - Increase export market shares for certain products by supporting domestic producers.
- IP may be motivated by multiple objectives and sometimes by pressure from domestic interest groups seeking protection or financial support.
- During 2020-21, IP measures have been used in response to the COVID-19 pandemic.
- IP can also have non-economic objectives.

### Illustrative taxonomy and policy tools
- External policy tools within IP can include:
  - Export restrictions
  - Export subsidies
  - Import tariffs (import restrictions)
  - Local content requirements (LCR)
  - Discriminatory domestic regulations or enforcement practices
  - Policies to attract or to limit foreign direct investment (FDI) in specific sectors
  - Special Economic Zones (SEZs) providing preferential fiscal and regulatory treatment and infrastructure support, typically within specific geographic zones and/or economic sectors
  - Restrictions on movements of people, restrictions on joint ventures, sector/activity specific trade finance, policies affecting sale/transfer of technology
- Domestic policy tools under IP include:
  - Taxes (sector/activity specific taxes versus general taxes)
  - Subsidies (domestic subsidies; sector/activity specific)
  - Concessional loans (sector/activity specific concessional loans)
  - Grants (sector/activity specific grants)
  - Government guarantees (sector/activity government guarantees)
  - R&D incentives (general R&D tax credits; sector/activity specific R&D tax credits)
  - State-owned enterprises (Sector/activity specific SOEs)
  - Public procurement policies and related restrictions
  - Product market regulations, export licensing requirements, product standards, labor market regulation, credit market regulation
  - Complementary policies such as education, health, housing, social policies, immigration policies/restrictions
- SEZs have been used to attract foreign firms by offering unique regulations, infrastructure, and additional incentives (such as access to critical mineral resources) not available in the rest of the country.

### Variation by development stage and administrative capacity
- At early stages of economic development:
  - Limited administrative capacity leads countries to often rely on import tariffs and SEZs to protect nascent industries and promote import substitution.
- At higher-income status with stronger administrative and fiscal capacity:
  - Countries tend to rely on more financially costly and complex levers: targeted R&D support, tax incentives, public procurement, loan guarantees, or FDI screening.
  - Tax incentives are widely used by EMDEs, though less so by AEs.
  - AEs are more likely to offer expenditure-based incentives (such as accelerated depreciation) rather than profit-based incentives (such as tax holidays) targeted at foreign investors, often on a discretionary basis.

### IP effectiveness: empirical evidence and risks
- IP can be beneficial by addressing market failures and economic externalities (closing the gap between private and social net returns).
- Risks and documented downsides:
  - Inefficiencies due to resource misallocation or rent seeking.
  - Discriminatory IP can distort domestic resource allocation and provoke tit-for-tat retaliatory policies, distorting trade and investment flows.
  - Proliferation of trade-distorting IP measures can undermine the international trade system.
- Empirical evaluation challenges:
  - Difficulty in defining a counterfactual.
  - Multiple simultaneous policy tools complicate attribution of effects.
  - IP measures can have net cross-border spillover effects that are difficult to assess; studies find both positive spillovers (knowledge spillovers, cost reductions, faster technology adoption, increased competition) and negative spillovers (distorted trade, diverted investment, exacerbated adjustment costs).
- Recent empirical evidence is mixed:
  - Surveys: Lane (2020); Juhász, Lane, Rodrik (2023).
  - Newer micro- and sector-level quasi-experimental and historical evaluations improve assessment but yield mixed results across methods (difference-in-difference, regression discontinuity design, propensity score matching, natural experiments) and multi-sector general equilibrium models.
  - Specific findings cited:
    - Aghion et al (2015) highlights the need for pro-competitive IP.
    - Criscuolo et al (2019) notes investment may help meet job creation objectives but not necessarily a TFP objective.
- Case-study evidence on success factors:
  - Targeting sophisticated sectors with export-orientation while enforcing competition and accountability.
  - Targeting resource-intensive activities or sectors with high network linkages to other sectors.
  - Involvement of relatively large domestic export-oriented private firms in high-technology sectors tends to yield better outcomes than relying solely on SOEs or multinational corporations.
  - Hard IP tools (tariff barriers, subsidies) are rarely efficient; specialized financing schemes, export promotion agencies, and public research institutes often yield better results.
  - IP is more likely to succeed when part of an overall economic strategy that includes economy-wide measures supporting human capital, innovation, infrastructure, and business climate.

### Assessing IP: a conceptual framework (four interlinked considerations)
- The main considerations/questions around the use of IP are grouped under four headings: justification, design, cost-benefit assessment, and implementation.

A. Justification
- What are the IP objectives and is there a case for targeted government intervention?
  - IP can be considered if there is a well-identified market failure (e.g., under-provision of public inputs, negative externalities, coordination failures).
  - The first-best option is to directly address the source of market failure.
  - Unilateral IP measures in response to perceived harmful foreign policy are not first-best; cooperative resolution or international processes (such as the WTO dispute settlement mechanism) are preferred.
- Are there alternative policies that could achieve the same objectives?
  - Authorities should explore a broader range of policies, including potentially less distortionary horizontal policies.

B. Design
- What is the best choice of IP instruments?
  - Select a consistent set of policy instruments aligned with institutional and implementation capacity.
- Which complementary economy-wide policies could mitigate distortionary effects and ensure effectiveness?
  - Aim for competitive neutrality: equal opportunity for all firms in a sector regardless of age, size, ownership, or organizational structure.
  - Complementary policies may include education, labor market, and immigration policies for high-tech sector targeting.
- Is there a robust governance framework for IP?
  - Transparency in project selection, regular monitoring and reviews, credible expertise, fact-based decision-making, and clearly defined sunset clauses are necessary to reduce risks of rent-seeking, corruption, and distorted comparative advantage.
- Is there a clear role for the private sector?
  - Private sector engagement over time is critical so beneficiary sectors can function independently; even if initially implemented through SOEs, policies should facilitate private-sector takeover.
- What has prior experience shown?
  - Lessons from past IP successes and failures should inform new measures.

C. Cost-Benefit Assessment
- What are the expected net benefits of IP for the domestic economy?
  - IP should be used when benefits of addressing market failure outweigh costs and risks of intervention.
  - Especially for IP with potential macro-critical effects, a comprehensive, rigorous cost-benefit assessment capturing direct and indirect costs and benefits (including fiscal, administrative, and resource misallocation costs) is required.
- Box 1: Stylized example (from Juhász, Lane, Rodrik, 2023)
  - Model elements:
    - g(s, θ, φ) = (1−θ(1−s)) A − φ ψ(s)
    - g is a measure of economic performance
    - A is a state variable affecting economic performance
    - θ is a market failure parameter (θ∈[0,1])
    - s is a subsidy (s∈[0,1]) alleviating distortion
    - ψ(s) is fiscal or agency cost associated with a subsidy, an increasing and convex function of s, and φ captures government intervention capacity
  - Framework implications:
    - Intervention may be socially desirable in limited scope (s <<1)
    - Non-intervention may be socially optimal in some cases (s=0)
    - Desirable degree of intervention depends on size of market failure relative to cost of intervention
- What are current and future fiscal costs?
  - Assess current and future fiscal costs on revenue and expenditure sides, contingent liabilities, and structure of fiscal incentives.
- What are cross-border spillovers and spillbacks?
  - Assess potential trading partner responses and adverse spillbacks from discriminatory IP measures.

D. Implementation
- Is IP compatible with fiscal sustainability, balance of payments, and domestic stability?
  - Determine sufficient fiscal space and consider external stability risks when IP involves restrictive measures on trade, investment, or financial flows.
- Is IP consistent with legal obligations, including WTO commitments?
  - Discriminatory IPs risk triggering retaliatory actions and adverse spillbacks.
- Does the country have adequate capacity to implement IP?
  - Choose support levels and types to minimize government failures, establish monitoring and evaluation mechanisms, define intervention duration ex ante, start with pilot projects before scaling up.

*International Monetary Fund*

### 17.      IP tends to involve a range of policy tools that are generally covered in IMF

### 17.      IP tends to involve a range of policy tools that are generally covered in IMF

### A. The “When” — When IP should be covered in IMF bilateral surveillance
- IP coverage in IMF surveillance is grounded in the 2012 Integrated Surveillance Decision (ISD), which integrates bilateral and multilateral surveillance and makes the Article IV Consultation a vehicle for both.
- The ISD establishes the macro-criticality standard in bilateral surveillance (see Box 2).
- Whether a given IP is macro-critical depends on its type and scope, and the country’s macroeconomic, structural, and institutional characteristics.
- Fiscal, monetary, and financial policies would always be considered macro-critical.
- The macro-criticality assessment of IP:
  - Requires judgement and may change over time.
  - Should prompt Article IV consultations to cover, where appropriate, inward spillovers and spillbacks from IPs adopted by other countries.
- Even if not macro-critical domestically, IPs may generate significant cross-border spillovers and warrant coverage:
  - The ISD requires Article IV consultations to discuss spillovers arising from policies that may significantly influence the effective operation of the International Monetary System (IMS).
  - Example: significant outward spillovers can arise when a country imposes restrictions on exports of goods in markets where it controls a large share of global supply.
- Surveillance priorities from the 2021 Comprehensive Surveillance Review (CSR) — notably ensuring economic sustainability and preempting and mitigating spillovers — support coverage of IP in IMF surveillance.
- Empirical staff survey evidence:
  - According to the IMF staff survey conducted in August 2023, 48 countries used macro-critical IPs since end-2021.
  - 2/3 of macro-critical IPs in AEs were seen as potentially triggering cross-border spillovers (Figure 4).
  - In about 2/3 of cases of deployment of macro-critical IPs in EMDEs, country teams viewed that these goals could have been achieved through horizontal policies.
  - In AEs, IPs have been mainly motivated by climate and security considerations; in EMDEs, key motives include growth, diversification, and export performance (Figure 5).
- Timing and scope of Article IV coverage:
  - Ideally, discuss IP measures in Article IV when first introduced and meeting coverage criteria (Box 2).
  - Re-assess when there are significant changes, similar to approach used under the 2022 Review of The Institutional View on The Liberalization and Management of Capital Flows.
  - Country teams may reassess “legacy” IP measures if they continue to weigh on economic performance and stability.

### B. The “How” — General considerations for covering IP in Article IV consultations
- Starting point for analysis:
  - Examine IP measures relative to broad considerations (Section IV): evidence of market failure, objectives, targeted firms/sectors/activities, benefits and costs, complementary policies, governance issues, and cross-border spillovers.
  - These considerations generally imply IP support should be time-bound, cost-effective, transparent, and consistent with preserving domestic macroeconomic stability, fiscal and external sustainability, and avoiding negative cross-border spillovers.
- Scope of staff’s analysis and policy advice depends on available information and expertise:
  - Staff can draw on established IMF views on fiscal, financial, structural, trade, and exchange-rate policies.
  - Comprehensive assessment may be challenging due to difficulty disentangling IP effects from other factors and lack of information or expertise.
  - Existing guidance (2015 Board Paper, Staff Note for the G20, 2022 Surveillance Guidance Note) recognizes staff may not always be able to provide specific policy advice if information or expertise is insufficient.
  - Where quantitative analysis is not possible, staff can rely on qualitative assessments.
  - Where information or expertise is limited, staff should prioritize IMF core expertise areas where reliable information and analytical tools are available, i.e., fiscal, monetary, and financial aspects of IP (Indonesia 2023 Article IV cited as example).
- Cost-benefit assessment, where feasible:
  - A comprehensive cost-benefit assessment can provide valuable input into policy discussions.
  - Where data and analytical tools are available, staff can provide quantitative estimates of:
    - Domestic benefits and costs: benefits may include positive effects on economic performance, environmental or social outcomes; costs may include fiscal costs, agency costs, implementation costs, losses from resource misallocation, or retaliation by trading partners.
    - Cross-border spillovers: effects on global market prices, cross-border trade, investment, and financial flows, and trading partners’ economies.
  - Models and methods referenced (examples in source):
    - General equilibrium models (e.g., Paret and Voigts (2024) for emissions reduction, fiscal costs, and macro effects of the US Inflation Reduction Act).
    - Empirical models and surveys (e.g., Lane (2020); Juhász, Lane, Rodrik (2023)).
    - Partial equilibrium approaches for direct price effects (delta quantity / elasticity using world share of exports and trade elasticity at HS6 product level).
  - Assessment sensitivity: Estimates may have wide uncertainty; sensitivity analysis could be useful.
  - Staff encouraged to draw on expertise and analysis of other international organizations where specialized expertise or granular data are required.
- Policy alternatives:
  - Where appropriate and feasible, staff can recommend alternative economic policies — more efficient, less distortionary, or less discriminatory — to achieve stated IP economic objectives, consistent with balance of payments and domestic stability, and IMS stability.
  - Staff should flag fiscal or financial IP measures that might pose risks to balance of payments or domestic economic stability.
  - On cross-border spillovers, staff should encourage authorities to avoid policies inconsistent with international obligations, including WTO commitments, and with international tax and financial rules (IMF, 2024).

### C. The “How” — Coverage of IP driven by national security objectives
- The Fund’s role and limits:
  - Fund staff should neither discuss the appropriateness of IP driven solely by national security objectives, nor propose alternative policies to achieve such objectives.
  - The Fund is not an appropriate forum to discuss national security considerations; analysis must be limited to economic impacts and spillovers (if any), in line with coverage standards (see Box 2).
- Cases and permissible staff actions:
  - Case 1 — National security is the only objective:
    - Staff should assess economic implications in line with the IMF mandate.
    - Staff does not advise on the appropriateness of proposed policies or on alternative policies to achieve national security objectives.
  - Case 2 — National security overarching, but there are intermediate economic goals:
    - Staff should assess economic implications in line with the IMF mandate.
    - Staff can advise on how policies help achieve intermediate economic objectives but not on the security objectives.
  - Case 3 — Multiple objectives (economic and national security):
    - Staff should assess economic implications in line with the IMF mandate.
    - Staff can advise only on policies implemented in pursuit of economic goals.
  - In determining the objective of a given policy, staff must defer to the authorities’ representation.
- Notifications on restrictions:
  - Members should notify the Fund before imposing restrictions on international payments and transfers for current international transactions that, in the member’s judgment, are solely related to preservation of national or international security (Decision No. 144-(52/51)).
  - Where possible, member authorities should notify the Fund before imposing such restrictions; an established framework exists for such notifications.

### D. The “How” — Coverage of IP with trade provisions
- Distortionary trade-related IP should be discouraged:
  - Trade measures in IP (tariff and non-tariff barriers, LCRs, export subsidies, export bans, quotas, licensing, export taxes, domestic subsidies) can distort resource allocation, trigger similar policies elsewhere, and put the international trade system at risk.
  - Some measures tend to be more distortionary than others; a schematic ranking of import and export restrictions is provided for illustrative purposes.
- Staff responsibilities when trade-distortive measures meet coverage criteria (Box 2):
  - Factually present these policies in Article IV staff reports.
  - Discuss their effects, including rent-seeking problems, spillovers, potential retaliation, and reduced access to critical inputs and technologies.
- WTO consistency:
  - Staff should encourage authorities to ensure consistency of IP measures with their WTO obligations.
  - Fund policy advice and program conditionality must not contradict a member’s WTO legal obligations, which cover trade measures including tariffs and domestic measures such as subsidies.
  - Staff should seek to clarify WTO consistency as early as possible with relevant experts.
  - Where ambiguity or doubt exists about WTO consistency, authorities should be encouraged to clarify potential conflicts before implementation.
  - The IMF’s role is neither to enforce nor to interpret WTO rules nor to pass judgment on WTO consistency; that is the jurisdiction of the WTO dispute settlement system.
  - Where a measure does not breach WTO obligations, staff should provide advice based on economic arguments and may, where warranted by the surveillance mandate, advise liberalization beyond WTO commitments.
  - When a WTO panel or the Appellate Body has not ruled on a disputed measure, staff assessment should be based on economic rationale.
  - When a WTO panel or the Appellate Body has ruled against a measure, the IMF cannot support the measure.
- Decision framework for assessing trade measures (as described):
  - If a measure has been the subject of a WTO dispute settlement ruling:
    - If panel/Appellate Body ruled against the measure → The IMF cannot support the measure; should advise removal or time-bound phaseout.
    - If not ruled against → Staff’s assessment based on economic rationale.
  - If not the subject of a WTO ruling:
    - If the proposed measure constitutes a clear breach of WTO commitments (e.g., tariff increase above binding) → The IMF cannot support the measure; should advise removal or time-bound phaseout.
    - Otherwise → Staff’s assessment based on economic rationale.

*Source: ppea2024008 - 17.      IP tends to involve a range of policy tools that are generally covered in IMF*

### 29.      Green IP has been increasingly used to address environmental externalities and market

### 29.      Green IP has been increasingly used to address environmental externalities and market failures

### Overview
- Green IP refers to government strategies to promote the development of domestic innovation, adoption, and production of low-carbon technologies (LCT).
- Although carbon pricing is viewed as the most efficient policy to reduce carbon emissions, political constraints on raising energy prices and market failures in LCT could justify green IP.
- Green IP that relies on subsidies and tax incentives could pose macroeconomic and governance risks.
- Staff assessments should weigh benefits and costs, including:
  - Benefits: direct economic benefits and indirect benefits—in the form of lower emissions and associated health outcomes.
  - Costs: direct fiscal cost, contingent liabilities, and potential costs from retaliatory measures from other countries.

### Guiding Principles for Green IP
- Green IP is subject to many of the same considerations as traditional IP interventions, including market failure, government failure, political risks, and high fiscal costs. The global externality nature of climate change raises additional issues.
- When assessing green IP, staff can consider the following five principles:
  1. Complement core decarbonization policies, notably carbon pricing.
     - Policies that accelerate adoption, innovation, and production of LCTs can address technology-related market failures, particularly for nascent technologies.
     - Such policies should be assessed on a case-by-case basis.
  2. Minimize adverse spillovers, avoid creating technology transfer barriers, especially to developing countries, and avoid inconsistencies with the WTO obligations.
     - Policies aimed at reducing carbon emissions should not discriminate between domestic and foreign producers or products to reduce adverse spillovers and the risk of retaliation.
     - Policies should be consistent with relevant international legal obligations.
  3. Ensure support is time-bound, cost-effective, and transparent, while limiting fiscal burdens, other domestic costs, and negative effects on international markets.
     - Measures should be regularly monitored and evaluated to reduce fiscal costs.
     - If support is provided through subsidies, they should be executed transparently through the budget, with clearly defined sunset clauses.
     - If subsidies are targeted, it is preferable they be aimed at specific green activities (for example, green investment or adoption of renewable energy sources) rather than specific groups.
  4. Conduct policies within an appropriate institutional framework to minimize implementation risks.
     - Strong governance framework required to avoid waste, rent seeking, and capture.
     - Green policy goals need clear identification (development of new green technologies, rapid deployment, or stimulation of consumer demand).
     - Transparency on qualifications for receiving support and assessment of their benefits is required for proper policy evaluation.
  5. Coordinate globally on green IP measures.
     - International coordination can improve effectiveness and efficiency; uncoordinated green IP is typically less effective for the global climate problem and can lead to an inefficient and costly subsidy race.
     - Coordination areas include data sharing, sectoral agreements, and patent pools to reduce information asymmetry, promote market transparency, and accelerate innovation and deployment needed for global decarbonization.

### Coverage of IP Supported by Special Economic Zones (SEZs)
- SEZs can support IP objectives by targeting specific industries or value chain components and are used as investment promotional tools.
- Main policy levers for SEZs: direct and indirect tax breaks, infrastructure support and public services, less stringent regulations, and administrative streaming and facilitation conducive to foreign investment.
- The number of middle-income and low-income countries adopting SEZs has increased significantly over the last two decades (UNCTAD, 2019).
- Challenges in assessing SEZs:
  - Effects are hard to disentangle from other policy measures.
  - SEZs can increase economic growth initially but effects tend to be temporary when SEZs operate as enclaves with limited links to the domestic economy.
  - Risks include displacement of investments, profit-shifting, and failure to stimulate additional investment.
- Staff assessment angles: fiscal costs, regulatory incentives, upfront fiscal resource costs and opportunity costs, compliance with international tax standards, and avoiding using SEZs with infrastructure or temporary regulatory incentives as a substitute for addressing wider infrastructure gaps.
- Annex I highlights SEZ types and tax measures.

### Annex I — Special Economic Zones (selected points)
- Types of SEZs:
  - Free Trade Zones (FTZs) and Export Processing Zones (EPZs): generally export-oriented and facilitate exports.
  - Comprehensive SEZs, science parks, and regional development zones: may involve domestic and foreign companies and are more likely to have IP goals and generate domestic spillovers.
  - SEZs are ideally fenced-in with customs controls to avoid leakage but may not be restricted to a specific area.
- Tax measures in SEZs:
  - Indirect tax reliefs in fenced-in SEZs are generally less problematic than income tax incentives.
    - Reduced tariffs for capital goods and intermediate inputs eliminate production distortions and can benefit the general economy.
    - Remitting indirect taxes on exports facilitates international trade and does not infringe WTO rules.
    - VAT deferral or exemption through SEZs is not necessary if exports are zero-rated and VAT administration and refunds run smoothly; where not the case, VAT deferral and exemption can provide a material benefit.
    - Any indirect taxes waived for SEZ exports should be fully reimposed on sales into the domestic economy in principle, though administrative challenges exist.
  - Business income tax incentives:
    - Profit-based incentives (reduced income tax rates and tax holidays): greatest value to high-profit projects that might proceed without incentives; concerns about profit shifting and tax competition.
    - Expenditure-based investment incentives (accelerated depreciation and investment tax credits): found more efficient and effective at encouraging marginal investment.
    - Non-neutral income tax treatment inside vs. outside SEZs can distort competition and create tax avoidance opportunities through transfer pricing.
  - Global minimum tax:
    - The global minimum tax agreement of the Inclusive Framework will negate some income tax incentives, since large MNCs will be required to pay at least the 15 percent minimum tax—either in the host country or elsewhere.
    - Implementation could induce trends towards other tax incentives (custom duties or indirect taxes) and non-tax instruments (subsidies) which will need evaluation for effectiveness and WTO compliance.
  - Property tax breaks:
    - Recurrent taxes on real property are relatively efficient and often finance local public services and therefore should not be waived.
    - Transaction taxes, such as stamp duties, deter efficient reallocation of assets, so alleviating these charges is less problematic.

### The “How”: Coverage of IP Supported by State-Owned Enterprises (SOEs)
- SOEs often operate in sectors with natural monopoly features, fixed infrastructure, or strategic importance and may be among the largest companies in EMDEs and AEs.
- SOEs often pursue noncommercial objectives and enjoy government support, including state subsidies and preferential access to credit.
- Effectiveness of SOEs in pursuing mandates is mixed; mandates often not clearly specified or adequately costed.
- Where SOEs are used to pursue IP objectives, staff should:
  - Assess economic implications if macro-critical or generating significant cross-border spillovers.
  - Refrain from discussing appropriateness of measures motivated solely by national or international security concerns; Fund should not suggest policy alternatives in such cases.
  - Remain neutral during legal disputes and avoid recommendations inconsistent with authorities’ legal obligations.
- Recommended safeguards when IP is implemented through SOEs:
  - Strong Institutional Frameworks: ensure strong corporate governance, transparent reporting, performance management, fiscal risks management, and costs oversight mechanisms given SOEs often operate outside traditional budget cycles and reporting.
  - Quantified Fiscal Costs and Risks: calculate costs before assigning policy decisions to SOEs to assess fiscal affordability and inform risk mitigation; identify IP via SOEs as quasi-fiscal activity, quantify it, and reflect it in the budget.
  - Continuous Monitoring: strong financial oversight to monitor fiscal costs and associated risks; scrutinize reported actual and estimated figures; reporting obligations with clear accountability lines and allow regular evaluations by governments.
  - Impact on Competition and Markets: assess potential SOE interventions’ impacts on other market participants to minimize distortions to competition and value chains; evaluate economy-wide costs and benefits.

### Collaboration with External Partners
- IMF staff may lack sufficient expertise to carry out comprehensive IP assessments; staff expected to analyze macro-critical issues and seek inputs from external partners when needed.
- Main challenges: comprehensive cost-benefit assessments, quantifying outward spillovers and spillbacks, and providing granular policy advice.
- Collaboration examples and ongoing work:
  - OECD framework for analyzing IP in AEs (Criscuolo et al., 2022).
  - Netherlands carbon neutrality strategy combining carbon taxes, subsidies, and infrastructure spending for hydrogen development.
  - UNCTAD (2019) and the World Bank (2017) work on SEZs; UNIDO (2016) on local content policies.
  - Joint Subsidy Platform developed by the IMF, OECD, World Bank, and WTO to improve subsidy data.
  - IMF collaboration with Global Trade Alert to monitor new IP measures in 75 jurisdictions (Evenett et al., 2024).
  - OECD’s Quantifying industrial strategies—QuIS effort limited so far to nine AEs.
  - Platform for Collaboration on Tax (IMF-OECD-World Bank) to improve resource mobilization.

### Next Steps
- Further guidance and new analytical tools will be developed to enable more granular and comprehensive IP assessments.
- Future work will focus on:
  - Building databases of IP measures (border and behind-the-border).
  - Developing analytical tools to identify externalities, perform cost-benefit analysis, and assess cross-border spillovers.
  - Supporting peer learning through workshops with internal and external experts to provide granular guidance in areas such as green IP.
  - Tailoring IP analysis and policy advice for different country groups (AEs and EMDEs).

*Source: ppea2024008 (excerpts).*

### 3.      Expenditure measures. Governments typically provide better and more reliable

### 3.      Expenditure measures. Governments typically provide better and more reliable

### Expenditure measures — key points
- Governments typically provide better and more reliable infrastructure such as roads, power, telecommunication, and water in SEZs than the rest of the economy.  
- Establishing SEZs with good infrastructure entails a cost associated with the SEZs.  
- Establishing SEZs with good infrastructure should not substitute for remedying infrastructural failures across the wider economy.  
- To ensure the spillover benefits targeted by industrial policies, the SEZs must be well interconnected wi   th the rest of the country.

### Other measures — key points
- SEZs are provided with non-tax incentives.  
- SEZs operate under more liberal economic and legal frameworks on issues such as labor, land use, and foreign investment.  
- SEZs offer better public services with efficient customs, fast-track registration and licensing often through “one-stop-shop” services.

### Annex II. Industrial Policy Coverage in Selected 2023 Article IV Consultations — overview
- Annex II reports country-level summaries of industrial policy (IP) coverage in selected 2023 Article IV consultations.
- Coverage emphasizes Context, Goals, Tools, Staff’s assessment, and Coverage in past staff reports where provided.

### A. China 2023 Article IV Consultation
- Context:
  - The role of the state in the economy and use of industrial policy have raised concerns about domestic distortions and tensions with trading partners.  
  - China’s industrial policy has been characterized by a push towards homegrown innovation and reliance, intensified by supply chain disruptions, geoeconomic fragmentation, and a deteriorating external environment.
- Goals:
  - Develop homegrown technologies in specific sectors and enhance self-reliance.
- Tools:
  - Preferential access to credit, research funding, collaboration with state entities, innovation tax breaks, and incentives for strategic manufacturing and science and technology firms and sectors.
- Staff’s assessment:
  - Focused on (i) significant domestic challenges: resource misallocation, excess capacity in targeted industries, and uneven-level playing field vis-à-vis private enterprises; and (ii) role of such policies in trade distortion and spillovers to the trading system and fragmentation pressures.
  - Staff recommended pro-market reforms, including:
    - Reducing barriers to interprovincial trade and better market integration at the national level to boost competition and productivity.
    - Balancing public sector dominance in “strategic key industries” with further market liberalization, particularly in services, and ensuring that competition policy is applied equally to state- and privately-owned firms.
    - Allowing greater firm entry and exit to boost business dynamism and foster innovation in manufacturing and services.
  - Staff recommended rolling back recent and longstanding industrial policies and accelerating SOE reform:
    - Scale back implicit guarantees to SOEs, eliminate cost advantages and preferential access to credit provided to SOEs, improve transparency and SOE governance, and foster orderly exit of unprofitable SOEs.
  - Staff assessed that widespread state-intervention undermines the level playing field internationally and risks triggering retaliatory responses by trading partners; advised removal of protectionist provisions that discriminate between domestic and foreign producers and called for phase-out or removal of export controls, including those on critical minerals, noting they should not be used to provide competitive advantage to domestic industries.
- Coverage in past staff reports (2016-22):
  - Discussion largely centered on (i) need for SOE reform, particularly removal of preferential access to credit and implicit guarantees, and (ii) limiting intervention via non-market-based measures.
  - Several staff reports acknowledged trading partners’ concerns about the large role of the state and competitiveness concerns associated with development of homegrown technologies, while calling on authorities to improve transparency and reduction of industrial subsidies.

### B. The Euro Area 2023 Article IV Consultation
- Context:
  - Use of IP measures in the EU accelerated following COVID 19 supply disruptions and Russia’s invasion of Ukraine and the subsequent energy crisis.
  - The EU’s ambitious green plan is central to the bloc’s economic strategy to promote sustainable growth and significantly reduce emissions.
- Goals:
  - Centered on investment in renewables and improvements in energy efficiency to accelerate the green transition, achieve energy security, mitigate emissions, and enhance competitiveness of Europe’s green industrial sector.
- Tools:
  - REPowerEU to reduce energy dependance.
  - Extension of the Carbon Border Adjustment Mechanism (CBAM) and Emission Trading System to more goods and sectors.
  - Introduction of the Green Deal Industrial Plan (GDIP) to achieve EU green energy security goals and ensure competitiveness of EU clean tech industries; GDIP relaxes EU state-aid rules and designs country-specific schemes to support investment in production of critical minerals and green products.
  - Other tools: the Foreign Subsidy Regulation, the EU FDI Screening Regulation, upgraded Export Control Regulation, the Chips Act, and the Anti-Coercion Instrument.
- Staff’s assessment:
  - Energy crisis likely to accelerate green policy initiatives.
  - CBAM should be implemented in line with WTO and, to the extent possible given administrative difficulties, be based on actual embodied carbon content of traded products rather than benchmarks.
  - Relaxation of state-aid rules could lead to high fiscal costs, economic inefficiencies, and distortions; value in developing a common perspective on appropriate use and design of subsidies, preferably limited in scope, duration, and size, while safeguarding integrity of the Single Market.
  - Foreign subsidies, investment screening, and export controls should be narrowly targeted to specific objectives and should not be deployed to provide a competitive advantage to domestic industries.

### C. Indonesia 2023 Article IV Consultation
- Context:
  - Indonesia is a large commodity exporter, world leader in production and exports of nickel ore, important producer and exporter of tin, and participant in production of bauxite and copper; also a key global supplier of palm oil and fish.
  - Indonesia has pursued prudent policies and has strong macro fundamentals but faces productivity and diversification challenges and regional disparities; manufacturing sector lags ASEAN peers in complexity and value-added.
- Goals:
  - IP Revival launched by the National Development Plan 2020-24 aims to transform Indonesia from a natural resource-dependent country into a modern and competitive economy and move down the value chain to lift value added (downstreaming), support subnational development, economic diversification, and high-quality job creation to reach high-income status by 2045.
- Tools:
  - Focus on priority sectors chosen down the value chain from key commodities.
  - Main tools: export restrictions on raw materials, domestic processing requirements, tax holidays, and subsidies (for instance, on energy/coal).
  - Sequenced implementation starting with nickel ore (Jan 2020) with medium-to-longer term goal of domestically producing e-vehicle batteries; extended to other metals including bauxite; eventual integration of palm oil and fisheries flagged.
- Staff’s assessment:
  - Recommended regular cost-benefit analysis to inform whether downstreaming policies are working or should be extended to other minerals; design policies to not hinder competition and innovation while minimizing negative cross border spillovers.
  - Discussed costs and benefits quantitatively or qualitatively as feasible:
    - Benefits: increase in realized investment (including foreign) in nickel ore smelters, higher export values supported by volumes and higher price for refined nickel, and increase in formal jobs in distant regions with lower income levels.
    - Quantifiable costs: foregone revenues and subsidies (i.e., fiscal costs).
    - Qualitative costs: spillovers across borders (price effects in global commodity markets) and domestic impact of export restrictions (resource misallocation, rent seeking).
  - Consistent with Fund’s mandate and policies, staff advised phasing out existing export restrictions and not extending export restrictions to other commodities.
  - Stressed need for broad-based structural reforms across sectors for durable economic transformation: recommended reforms to strengthen labor market efficiency, investment climate, human capital development, infrastructure investment, and financial deepening.

### D. Saudi Arabia Article IV Consultation
- Context:
  - Promoting economic diversification to reduce reliance on hydrocarbons is a key focus of Vision 2030.
  - Authorities use IP—including the National Industrial Strategy (NIS), Saudi Green Initiative, and the PIF (Saudi Arabia’s SWF)—to complement horizontal policies.
- Goals:
  - NIS focuses on three main objectives: building industrial national resilience, becoming an integrated regional manufacturing hub, and expanding global leadership in selected economic sectors.
  - Saudi Green Initiative focuses on climate friendly investment to boost the renewable sector; PIF aims to unlock new sectors using its asset base and partnerships.
- Tools:
  - Main tools: government procurement and Special Economic Zones (SEZs).
  - Local Content Procurement Government Authority aims to boost local potential through regulations.
  - SEZs aim to catalyze business clusters, concentrate similar industries, and address shortcomings in the broader economy by jumpstarting activity in SEZs while broad-based reforms take effect.
- Staff’s assessment:
  - Procurement rules: Authorities’ commitment to remain WTO compliant is welcome, but preferential policies such as local procurement for government contracts are discriminatory and should be avoided as they could trigger retaliatory actions by trading partners.
  - Rigorous evaluation of policy: Authorities’ plans to include cost-benefit analysis, impact evaluation, strict exit criteria, claw-back mechanisms, sunset clauses and time-bound incentives are welcome to minimize risks and phase out policies as needed.
  - SEZs: Domestic spillovers from SEZs remain uncertain; picking winning industries is difficult as IP includes many sectors; fiscal incentives can be burdensome and distortionary; coordinated policies needed to foster backward linkages and ensure value creation for the domestic economy.
  - Institutional set-up: Authorities have a clear governance framework and a national incentives committee—which should govern all incentives (including through a working group with SEZs).
  - Emphasis: Should be on export orientation with focus on technology and innovation rather than import substitution, and on policies to upskill and reskill the workforce.
- Coverage in past staff reports (2017-22):
  - Discussion focused on ensuring government support crowds in private sector, is timebound and linked to performance.
  - SEZs are to be viewed as temporary solutions to frictions in the business environment until a well-structured regulatory framework and environment can be extended throughout the country.
  - Improvements in human capital targeting specific skills needed in priority sectors are essential.

### E. The United States 2023 Article IV Consultation
- Motivation:
  - Recent IP interventions occurred amid hollowing out of the industrial base, internationalization of supply chains, rise of certain countries perceived as not adhering to global trade rules, and elevated domestic inequality.
- Goals:
  - Invest in sources of economic and technological strength, diversify and strengthen supply chain resilience, incentivize minimum global labor, governance, and environmental standards, preserve national security, and deliver global public goods (e.g., climate, health).
- Schemes:
  - The Inflation Reduction Act (US$386bn over 10 years) to support green energy, electric transportation, and energy efficiency, including through local content rules.
  - The CHIPS Act (US$278bn over 10 years) focusing on workforce development, R&D, and incentives for semiconductor manufacturing; includes provisions preventing companies receiving federal incentives from materially expanding semiconductor manufacturing capacity in any “foreign country of concern” for a 10-year period.
  - Build America, Buy America (about US$2,700bn over 10 years) introduces domestic content procurement preference for infrastructure.
  - Bilateral and regional trade agreements (e.g., US–Japan Critical Minerals Agreement and the Indo-Pacific Economic Framework for Prosperity).
- Staff’s assessment:
  - Centered on (i) alerting authorities to inefficiencies of policies that include discriminatory provisions and (ii) evaluating economic impact of provisions that favor specific industries via traditional tools, including carbon pricing.
  - Staff noted that “Buy American” policies that favor domestic content and/or North American produced goods and services would distort trade and investment, increase fragmentation and retaliation risks, weigh on growth, productivity, and employment, and should be unwound.
  - Staff assessed the impact of policies that favored specific industries, reduced corporate tax burden, and subsidized consumption; conducted impact assessments to examine implications for emission reduction and the fiscal outlook and examined ways to potentially offset negative impact on the US fiscal deficit.
- Coverage in past staff reports (2017-22):
  - Discussion focused on (i) need to be judicious in use of import restrictions on national security grounds; (ii) rollback of tariffs and other trade distortions introduced beginning in 2017; (iii) encouraging use of multilateral trading system to find common ground on tariffs, farm and industrial subsidies, and services trade; (iv) calls for elimination of the lower tax rate for exporters (the Foreign Derived Intangible Income) to provide a more level playing field for global investment decisions; and (v) criticism of broad-ranging preferences to domestic over foreign production through the Base Erosion Anti-Abuse Tax provisions in the Tax Cuts and Jobs Act.

### References (selected as cited)
- Aghion and Combe (2023). Industrial Policy is, first of all,  a good governance Les Echos.  
- Aghion, Philippe, Jing Cai, Mathias Dewatripont, Luosha Du, Ann Harrison and Patrick Legros. 2015. "Industrial Policy and Competition." American Economic Journal: Macroeconomics, 7 (4): 1-32.  
- Amsden, Alice. 1989. Asia’s Next Giant: South Korea and Late Industrialization. Oxford: Oxford University Press.  
- Amsden, Alice. 2003. The Rise of “The Rest”: Challenges to the West from Late-Industrializing Economies. Oxford: Oxford University Press.  
- Bartelme, Dominick, A. Costinot, D. Donaldson, and A. Rodríguez-Clare. 2019. The Textbook Case for Industrial Policy: Theory Meets Data. NBER WP 26193.  
- Cherif, Reda et al. 2022. Industrial Policy for Growth and Diversification: A Conceptual Framework. IMF Departmental Paper 22/17.  
- Cherif, Reda, Marc Engher, and Fuad Hasanov. 2020. Crouching Beliefs, Hidden Biases: The Rise and Fall of Growth Narratives. IMF Working Paper 20/228.  
- Cherif, Reda, Marc Engher, and Fuad Hasanov. 2023. Crouching Beliefs, Hidden Biases: The Rise and Fall of Growth Narratives. World Development (forthcoming)  
- Cherif, Reda and Fuad Hasanov. 2016. Soaring of the Gulf Falcons: Diversification in GCC Oil Exporters in Seven Propositions. In Cherif, Reda, Fuad Hasanov, and Min Zhu (editors), Breaking the Oil Spell: The Gulf Falcons’ Path to Diversification. Washington, DC: International Monetary Fund Press.  
- Cherif, Reda and Fuad Hasanov. 2019a. Principles of True Industrial Policy. Journal of Globalization and Development 10(1).  
- Cherif, Reda and Fuad Hasanov. 2019b. The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy. IMF Working Paper 19/74.  
- Cherif, Reda and Fuad Hasanov. 2019c. A ‘True’ Industrial Policy for All. Project Syndicate, October 30.  
- Choi, Jaedo and Levchenko, Andrei A. 2022. The Long-Term Effects of Industrial Policy. NBER Working paper 29263.  
- Criscuolo, Chiara, Ralf Martin, Henry G. Overman, and John Van Reenen. 2019. "Some Causal Effects of an Industrial Policy." American Economic Review, 109 (1): 48-85.  
- Criscuolo, C., N. Gonnei, K. Kitazawai and G. Lalanne. 2022. An industrial policy framework for OECD countries: Old debates, new perspectives, OECD Science, Technology and Industry Policy Papers, No. 127, OECD Publishing, Paris.  
- Evenett, Simon, Adam Jakubik, Fernando Martín, Michele Ruta. 2024. The Return of Industrial Policy in Data. IMF Working Paper 2024/1.  
- Felipe, Jesus and Changyong Rhee. 2013. Report to the Government of Kazakhstan Policies for Industrial and Service Diversification in Asia in the 21st Century. Asian Development Bank.  
- Fajgelbaum, Pablo, Pinelopi K. Goldberg, Patrick J. Kennedy, Amit Khandelwal, and Daria Taglioni.

*Source: ppea2024008 - 3.      Expenditure measures. Governments typically provide better and more reliable*

### 2023. The US-China Trade War and Global Reallocations. NBER Working Paper 29562.

### ppea2024008 - 2023. The US-China Trade War and Global Reallocations. NBER Working Paper 29562.

### Cited IMF publications and staff notes
- IMF 2010. Reference Note on Trade Policy, Preferential Trade Agreements, and WTO Consistency.
- IMF 2015. Structural Reforms and Macroeconomic Performance – Initial Considerations for the Fund.
- IMF 2016. Staff Note for the G-20—A Guiding Framework for Structural Reforms.
- IMF 2022. Guidance Note for Surveillance Under Article IV Consultations,
- IMF 2023. International Organizations Launch Platform to Promote Access to Subsidy Information. https://www.imf.org/en/News/Articles/2023/05/25/PR23179-Trade-Joint-Subsidy-Platform
- IMF 2024. Industrial Policy: Trade Policy and WTO Considerations in IMF Staff Work. [forthcoming.]

### Academic working papers and books (selected)
- 2023. The US-China Trade War and Global Reallocations. NBER Working Paper 29562.
- Juhász Réka, Nathan Lane, Dani Rodrik. 2023. The New Economics of Industrial Policy. NBER Working Paper 31538. http://www.nber.org/papers/w31538
- Irwin, Douglas. 2023. The Return of Industrial Policy. Finance and Development. June 2023.
- Krueger, Anne O. and Baran Tuncer. 1982. An empirical test of the infant industry argument. American Economic Review 72(5):1142–1152.
- Lane, Nathan. 2020. The New Empirics of Industrial Policy. J Ind Compet Trade 20, 209–234 (2020). https://doi.org/10.1007/s10842-019-00323-2
- Lane, Nathan. 2021. Manufacturing Revolutions: Industrial Policy and Industrialization in South Korea. Working paper.
- Kim, Minho, Munseob Lee and Yongseok Shin. 2022. The Plant-Level View of an Industrial Policy: The Korean Heavy Industry Drive of 1973. NBER Working paper 29252.
- Rodrik, Dani. 2008. Industrial policy: don’t ask why, ask how. Middle East Development Journal, Demo Issue (2008) 1–29. https://drodrik.scholar.harvard.edu/files/dani-rodrik/files/industrial-policy-dont-ask-why-ask-how.pdf
- Rodrik, Dani. 2012. Why we learn nothing from regressing economic growth on policies. Seoul J Econ 25(2):137–151
- Spence, Michael. 2023. In Defense of Industrial Policy. Project Syndicate, May 5. Available: https://www.project-syndicate.org/commentary/industrial-policy-us-chips-and-science-act-debate-by-michael-spence-2023-05.
- Juhász Réka, Nathan Lane, E. Oehlsen, and V. C. Pérez., 2023. The Who, What, When, and How of Industrial Policy: A Text -Based Approach, STEG Working Paper https://steg.cepr.org/publications/who-what-when-and-how-industrial-policy-text-based-approach

### Empirical and methodological references
- Jenkins, Glenn P., CY Kuo, A. C. Harberger. 2019. Cost Benefit Analysis for Investment Decisions. First Edition. Kindle Direct Publishing.
- Ledyard, J.O. 2018. Market Failure. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi-org.libproxy-imf.imf.org/10.1057/978-1-349-95189-5_1052
- Liu, E. 2019, “Industrial Policies in Production Networks”, The Quarterly Journal of Economics.

### International organizations, reports, and working papers
- IMF, OECD, World Bank Group, and WTO. 2022. Subsidies, Trade, and International Cooperation. https://www.imf.org/en/Publications/analytical-notes/Issues/2022/04/22/Subsidies-Trade-and-International-Cooperation-516660
- UNCTAD. 2019. World Investment Report 2019: Special Economic Zones. Available at: https://unctad.org/publication/world-investment-report-2019
- UNIDO. 2016. The Role of Local Content Policies in Manufacturing and Mining in low-  an  d Middle- Income countries.
- World Trade Organization. 2020. World Trade Report 2020. Government Policies to Promote Innovation in the Digital Age. https://www.wto.org/english/res_e/publications_e/wtr20_e.htm
- World Economic Forum. 2022. Industrial Policy and International Competition: Trade and Investment Perspectives. White Paper. https://www.weforum.org/whitepapers/industrial-policy-and-international-competition-trade-and-investment-perspectives/

### Historical and theoretical references on industrial policy
- Wade, Robert. 1990. Governing the Market. Princeton, NJ: Princeton University Press.
- Woo, Meredith. 1991. Race to the Swift: State and Finance in Korean Industrialization. New York: Columbia University Press.
- Lebdioui, Amir; Keun Lee, Carlo Pietrobelli. Local‑foreign technology interface, resource‑based development, and industrial policy: how Chile and Malaysia are escaping the middle‑income trap. The Journal of Technology Transfer. Springer.
- Voigts Simon, Anne-Charlotte Paret, 2024 “Emissions Reduction, Fiscal Costs, and Macro Effects: A Model-based Assessment of IRA Climate Measures and Complementary Policies”, IMF Working Paper No. 2024/024

*Source: ppea2024008 - 2023. The US-China Trade War and Global Reallocations. NBER Working Paper 29562. (content as provided in the source PDF).*

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_Source: https://www.imf.org/-/media/files/publications/pp/2024/english/ppea2024008.pdf_