## Industrial Policy Is Not a Magic Cure for Slow Growth

_IMF Blog, April 10, 2024_

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**Canonical URL:** [Industrial Policy Is Not a Magic Cure for Slow Growth](https://www.imf.org/en/blogs/articles/2024/04/10/industrial-policy-is-not-a-magic-cure-for-slow-growth)

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## Bibliographic details
- Authors: Era Dabla-Norris, Daniel Garcia-Macia, Vitor Gaspar, Li Liu
- Published: April 10, 2024

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### Main argument and context
- Many countries are ramping up industrial policy to boost innovation in specific sectors amid security concerns; examples cited include the United States’ CHIPS and Science Act, the European Union’s Green Deal Industrial Plan, the New Direction on Economy and Industrial Policy in Japan, and the K-Chips Act in Korea, alongside longstanding policies in emerging market economies like China.
- Industrial policy can drive innovation if done right, but it is not a magic bullet; well-designed fiscal policies that support innovation and technology diffusion more broadly, with emphasis on fundamental research, can lead to higher growth and accelerate the transition to a greener and more digital economy.
- The blog is based on Chapter 2 of the April 2024 Fiscal Monitor.

### Conditions under which targeted industrial policy yields gains
- Targeted sectors must generate measurable social benefits, such as lower carbon emissions or higher spillovers of knowledge to other sectors.
- Policies must not discriminate against foreign firms.
- The government must have strong capacity to administer and implement such a policy.

### Risks, common pitfalls, and limits of industrial policy
- Most industrial policy relies heavily on costly subsidies or tax breaks, which can be detrimental for productivity and welfare if not effectively targeted.
- Subsidies are frequently misdirected toward politically connected sectors.
- Discriminating against foreign firms can trigger costly retaliation and is likely self-defeating because most countries rely on innovation done elsewhere.
- Without transparency and focus on environmental objectives, subsidies to green innovation can impose large fiscal costs.
- Protectionist measures and inward-looking policies can fragment global trade and slow the diffusion of technology.

### Justified use cases for industrial policy
- Supporting sectors that generate strong knowledge spillovers to the domestic economy (example cited: semiconductor industry).
- Driving green innovation where necessary technologies to reach net zero emissions do not yet exist — provided subsidies are transparent, focused on environmental objectives, and complemented by robust carbon pricing to minimize fiscal costs.

### Pro-innovation policy mix and its estimated impact
- Recommended complementary mix:
  - Public funding for fundamental research.
  - Research and development grants for innovative start-ups.
  - Tax incentives to encourage applied innovation across firms.
- Quantified estimate: increasing spending on these policies by 0.5 percentage points of gross domestic product—or about 50 percent of the current level in OECD economies—could raise GDP by up to 2 percent for the average advanced economy.
- Long-run fiscal implication: that level of spending on innovation could even reduce the debt-to-GDP ratio over the long term.
- Design considerations:
  - Grants are most useful if targeted to earlier stages of the innovation lifecycle.
  - Tax incentives must be easy to access if they are to benefit more than just large established firms.
- Fiscal constraint note: countries with limited fiscal space may need to reprioritize other spending and raise more revenue in the short term.

### Priorities for less technologically advanced countries
- Larger productivity dividends can be obtained by promoting diffusion of technologies developed elsewhere.
- Necessary complementary investments include human capital and strategic infrastructure to fully reap benefits of technology inflows.

### Implementation guidance and international dimension
- Governments deploying industrial policies should:
  - Invest in technical capacity.
  - Recalibrate support as conditions change.
  - Act in line with open and competitive markets to avoid wasteful spending and protectionism.
- Closer international cooperation and greater exchange of knowledge are critical to accelerate green and digital transformations.
- Inward-looking policies diminish global innovative potential and slow technology diffusion, especially to countries that need it most.

*Source: Era Dabla-Norris, Daniel Garcia-Macia, Vitor Gaspar, Li Liu; April 10, 2024 (IMF blog based on Chapter 2 of the April 2024 Fiscal Monitor).*

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## Content in this bundle

- **Chapter 2**
  - [Chapter 2 (Markdown version)](/-/media/files/publications/fiscal-monitor/2024/april/english/ch2.pdf.md){rel="alternate" type="text/markdown"}
  - [Chapter 2 (PDF)](/-/media/files/publications/fiscal-monitor/2024/april/english/ch2.pdf){rel="external" type="application/pdf"}

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## References

- [chapter of the April 2024 Fiscal Monitor](https://www.imf.org/en/Publications/FM/Issues/2024/04/17/fiscal-monitor-april-2024?cid=bl-com-SM2024-FMOEA2024001)
- [protectionist measures that could further fragment global trade](https://www.imf.org/en/Publications/Policy-Papers/Issues/2024/03/11/Industrial-Policy-Coverage-in-IMF-Surveillance-Broad-Considerations-546162)

_Source: https://www.imf.org/en/blogs/articles/2024/04/10/industrial-policy-is-not-a-magic-cure-for-slow-growth_