Industrial Policy is Back But the Bar to Get it Right Is High

IMF Blog, April 12, 2024

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Authors: Anna Ilyina, Ceyla Pazarbasioglu, Michele Ruta
Published: April 12, 2024

Overview

Industrial policy—targeted interventions to make domestic producers more competitive or promote growth in selected industries—had fallen out of favor in much of the world but has returned amid the pandemic, heightened geopolitical tensions, and the climate crisis.
Drivers of resurgence: concerns about supply chain resilience, economic and national security, and doubts about markets' ability to allocate resources efficiently.
Central message: More data, more analysis, and more dialogue are needed to avoid costly mistakes.

The new wave — scope, objectives, and sectors

Data monitoring:
- IMF and the Global Trade Alert collected new data showing 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.
Geographic concentration:
- China, the European Union, and the United States accounted for almost half of all new measures in 2023.
- Advanced economies appear to have been more active than emerging markets and developing economies.
- Historical pattern: 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.
Policy objectives:
- 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.
Sectoral focus:
- Most-active sectors: military-civilian dual use products and advanced technologies, including semiconductors and low-carbon technologies, and their components such as critical minerals.

Trade-offs, risks, and empirical findings

Intended rationale:
- 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, interventions need to be well-designed: directed to address well-identified market failures, based on competition-enhancing principles, and supported by sound cost-benefit analysis.
Risks and adverse effects:
- Costs: industrial policy is costly and can lead to government failures (corruption, mis-allocation of resources).
- Cross-border spillovers: interventions can affect trade, investment, financial flows, and global market prices, with significant implications for trade partners and the global economy; risk of retaliation and geoeconomic fragmentation.
- Political economy capture: evidence shows a high correlation between the number of measures and political economy variables such as the presence of an upcoming election and the importance of certain products in the export basket, indicating potential favoritism toward established companies.
Empirical concerns from IMF staff analysis:
- Measures announced or implemented last year were not always clearly related to market failures; in some cases, general business-environment improvements would have been more appropriate than targeted interventions.
- Tit-for-tat dynamic: the odds of interventions focusing on a certain product are higher if it was the target of interventions by other trading partners.
- Subsidies and other measures often create cross-border spillovers that may induce reactive policies by other governments.

What the IMF is doing

IMF staff has stepped up work in three areas:

1. Data and analysis:

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.

2. Bilateral surveillance and policy advice:

In bilateral surveillance, IMF staff assesses industrial policy measures that can significantly affect the country’s domestic or external stability or have the potential to generate significant cross-border spillovers.
Scope of analysis and advice depends on the type of industrial policy, its objectives, and available information and expertise.
Two recent IMF papers provide a conceptual framework and guiding principles for the coverage of industrial policy in IMF surveillance, including trade-related issues and consistency with World Trade Organization rules.

3. Multilateral dialogue and cooperation:

Collaboration with the WTO to promote multilateral dialogue on trade and industrial policy.
A technical meeting on policies for resilience took place in February with contributions from several countries and other international organizations.
Goal: deepen and broaden information-sharing on enacted measures, their effectiveness and spillovers, and help develop a common understanding of issues and possible cooperative solutions.

Policy implications and recommendations (from the analysis)

Design principles for industrial policy:
- Target interventions to well-identified market failures.
- Base policies on competition-enhancing principles and sound cost-benefit analysis.
Broader approach where appropriate:
- In cases where measures are not clearly linked to market failures, general improvements to the business environment may be preferable to targeted interventions.
Multilateral engagement:
- Increased data sharing, analysis, and dialogue—through forums such as IMF–WTO collaboration—can reduce risks of damaging cross-border spillovers and retaliatory dynamics.

Anna Ilyina, Ceyla Pazarbasioglu, Michele Ruta — April 12, 2024. Industrial Policy is Back But the Bar to Get it Right Is High (IMF blog).

References

new research](https://www.imf.org/en/Publications/WP/Issues/2023/12/23/The-Return-of-Industrial-Policy-in-Data-542828)

to our recent podcast](https://www.imf.org/en/News/Podcasts/All-Podcasts/2024/02/22/michele-ruta-on-ip)