Credit DINphotogallery
Credit DINphotogallery
Credit DINphotogallery
Credit DINphotogallery
Governments have traditionally used targeted interventions known as industrial policy to make domestic producers more competitive or promote growth in selected industries. While some developing countries continued to use it, industrial policy fell out of favor across most of the world for years, because of its complexity and uncertain benefits.
Now, industrial policy appears to be back everywhere. The pandemic, heightened geopolitical tensions, and the climate crisis raised concerns about the resilience of supply chains, economic and national security, and more generally about the ability of markets to allocate resources efficiently and address these concerns. As a result, governments came under pressure to have a more active industrial policy stance.
Economists have long debated the merits and drawbacks of industrial policy. These measures can help address market failures, such as interventions related to the climate transition. But industrial policy is costly, and can lead to various forms of government failures ranging from corruption to mis-allocation of resources. Industrial policies can also lead to damaging cross-border spillovers, raising the risk of retaliation by other countries, which can ultimately weaken the multilateral trading system and worsen geoeconomic fragmentation. More data, more analysis and more dialogue are needed to avoid costly mistakes.
In this blog, we unpack the return of industrial policy and ask three questions about what is driving this resurgence, the trade-offs that it raises, and what the IMF is doing about it.
The new wave
The IMF recently joined forces with the Global Trade Alert to monitor developments. Our new research shows that there were more than 2,500 industrial policy interventions worldwide last year. Of these, more than two thirds were trade-distorting as they likely discriminated against foreign commercial interests. This data collection effort is the first step toward understanding the new wave of industrial policies.
The recent surge in such measures has been driven by large economies, with China, the European Union, and the United States accounting for almost half of all new measures in 2023. Advanced economies appear to have been more active than emerging markets and developing economies. Data for the past decade are less precise, but the available information shows that the use of subsidies has historically been more prevalent in emerging economies, contributing to large number of legacy measures still in place.
Recent measures focus more on the green transition and economic security, and less on competitiveness. Competitiveness was the objective for one-third of all industrial policy measures last year. The remaining two-thirds were motivated by climate mitigation, supply chain resilience, and security considerations.
Interestingly, the most-active sectors were military-civilian dual use products and advanced technologies, including semiconductors and low-carbon technologies, as well as their components, such as critical minerals.
Industrial policy steers a reallocation of resources toward certain domestic firms, industries or activities that market forces fail to promote in a socially efficient way. To deliver net economic benefits, however, these interventions need to be well-designed, which means they need to be directed to address well-identified market failures, and based on competition-enhancing principles and sound cost-benefit analysis.
Since industrial policy aims to alter incentives for private companies, it also entails a risk of resources being misallocated and governments being captured by industries over time. It can also affect trade, investment, and financial flows as well as global market prices which could have significant implications for trade partners and the global economy.
IMF staff’s recent analysis of the new industrial policies underscores the need for caution.
The IMF’s role
Given the novelty and macro-criticality of many recent industrial policy measures, IMF staff has stepped up work in three areas.
The IMF has increased focus on collecting data and providing analysis of industrial policies to increase awareness and inform policy discussions. In addition to the new data monitoring initiative, staff examines the effectiveness of industrial policies in achieving stated objectives, such as innovation (see the April 2024 IMF Fiscal Monitor) and climate goals, as well as their cross-border spillover effects.
—For more on the return of industrial policy, listen to our recent podcast.
