Staff Discussion Notes

Industrial policies (IPs) are increasingly implemented, necessitating a reassessment of their benefits and costs. This study examines their economic and geopolitical drivers and their impact on targeted sectors. While IPs yield moderate and uneven economic gains, they are more effective when addressing highly-distorted upstream sectors with suitable tools. Structural reforms generally offer greater benefits and strengthen the link between IPs and economic performance. However, IPs may lead to significant fiscal costs and unintended spillovers, potentially accelerating economic fragmentation. Therefore, careful management of IPs is crucial.