{
  "title": "Picking Winners Is Difficult and Costly",
  "sourceUrl": "https://www.imf.org/en/publications/fandd/issues/2024/09/picking-winners-is-difficult-and-costly-arezki-landau",
  "canonical": "https://www.imf.org/en/publications/fandd/issues/2024/09/picking-winners-is-difficult-and-costly-arezki-landau",
  "overlayPath": "/en/publications/fandd/issues/2024/09/picking-winners-is-difficult-and-costly-arezki-landau/index.md",
  "summary": "Industrial policy could waste resources as capital becomes scarcer",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Industrial policy—government actions to assist industries deemed strategically important—is again central to policymakers’ toolkits amid green and digital transitions and growing economic insecurity.\n- Key recent policy examples and drivers:\n  - The US Inflation Reduction Act of 2021, offering unprecedented tax credits and subsidies to foster investment.\n  - China’s proactive policies supporting “strategic” sectors such as clean energy technologies and chip manufacturing.\n  - The European Green Deal as the EU response to US and China policy moves.\n- Historical context: industrial policy fell out of favor decades ago in advanced economies because of risks of subsidy races and trade wars; these concerns have reemerged with the revival of industrial policy."
    },
    {
      "heading": "Capital scarcity, r-star, and macroeconomic consequences",
      "content": "- Two causes of growing capital scarcity:\n  - Depressed global savings because of population aging—especially in advanced economies, but also in China, and to a lesser extent in other emerging markets.\n  - Increased capital demands to address decarbonization and digitalization challenges.\n- Transition-related capital issues:\n  - Stranded assets (mostly fossil fuel reserves that lost their value) and capital obsolescence from the move to greener energy.\n  - Developing economies’ pressing needs to enhance infrastructure and invest in human capital (for example, increasing electricity access).\n- Implication for real interest rates and fiscal constraints:\n  - The real interest rate, known as r-star—the neutral interest rate that equilibrates the economy in the long run—will likely rise after several decades of staying at very low levels.\n  - Combined with high levels of public debt, a higher real rate will impose strong financial constraints on advanced economies.\n- Capital coefficient and productivity:\n  - As industrial policy becomes mainstream in advanced economies, the capital coefficient—the ratio of the stock of capital to output—will rise, and productivity may decline.\n  - A waste of scarce capital will erode advanced economies’ net international investment position and impose burdens on future generations."
    },
    {
      "heading": "Risks, evidence, and emerging casualties",
      "content": "- Main risk: wasting scarce capital through misallocation when capital is limited (investment mistakes harder to absorb than when capital is abundant).\n- Historical note: China’s three decades of abundant capital allowed many investment mistakes to be absorbed; that may not be replicable going forward.\n- Emerging examples of problematic outcomes:\n  - China: manufacturers, including of electric vehicles, facing bankruptcies amid overcapacity.\n  - United States: a large proportion of projects associated with the Inflation Reduction Act have been delayed.\n  - European Union: industrial policy on batteries for electric vehicles is faltering because of the (unexpected) drop in demand for such vehicles.\n- Developing economies’ vulnerabilities:\n  - As capital becomes scarcer and more expensive globally, higher debt in advanced economies may constrain government spending and occasion reductions in development aid capital transfers to poorer countries.\n  - Several major traditional donors, including the United Kingdom, have reduced aid commitments.\n  - Financing the energy transition for developing economies will be harder; countries face trade-offs between retiring hydrocarbon resources to meet net zero targets or using hydrocarbon resources to provide energy to their populations."
    },
    {
      "heading": "Policy trade-offs and governance recommendations",
      "content": "- Recommendation: state clearly and precisely the objectives being pursued to avoid cluttering industrial policy programs with multiple, sometimes geopolitical, objectives that are less directly linked to economic logic or market-failure justification.\n- Recognize trade-offs:\n  - Trade-off between speed and effectiveness of public action associated with industrial policy, which could have harmful consequences for present and future generations.\n  - Need to balance geopolitical motivations and externalities linked to climate and the environment when justifying public intervention.\n- Governance prescription:\n  - The era of scarcity in global capital calls for stricter and more transparent governance of industrial policy.\n  - Favor reasoned actions by keeping trade-offs in mind and prioritizing clear, narrowly defined objectives that align with correcting identified market failures.\n\nSource: Picking Winners Is Difficult and Costly. RABAH AREZKI and JEAN-PIERRE LANDAU. F&D Magazine, September 2024.\n\n---\n\n\nSource: https://www.imf.org/en/publications/fandd/issues/2024/09/picking-winners-is-difficult-and-costly-arezki-landau"
    }
  ],
  "bullets": [
    "[Markdown version](/en/publications/fandd/issues/2024/09/picking-winners-is-difficult-and-costly-arezki-landau/index.md)",
    "[Structured JSON version](/en/publications/fandd/issues/2024/09/picking-winners-is-difficult-and-costly-arezki-landau/index.json)",
    "[Bundle manifest](/en/publications/fandd/issues/2024/09/picking-winners-is-difficult-and-costly-arezki-landau/bundle-manifest.json)",
    "Authors: RABAH AREZKI, JEAN-PIERRE LANDAU",
    "Published: September 3, 2024",
    "Industrial policy—government actions to assist industries deemed strategically important—is again central to policymakers’ toolkits amid green and digital transitions and growing economic insecurity.",
    "Key recent policy examples and drivers:",
    "Historical context: industrial policy fell out of favor decades ago in advanced economies because of risks of subsidy races and trade wars; these concerns have reemerged with the revival of industrial policy.",
    "Two causes of growing capital scarcity:",
    "Transition-related capital issues:",
    "Implication for real interest rates and fiscal constraints:",
    "Capital coefficient and productivity:",
    "Main risk: wasting scarce capital through misallocation when capital is limited (investment mistakes harder to absorb than when capital is abundant).",
    "Historical note: China’s three decades of abundant capital allowed many investment mistakes to be absorbed; that may not be replicable going forward.",
    "Emerging examples of problematic outcomes:",
    "Developing economies’ vulnerabilities:",
    "Recommendation: state clearly and precisely the objectives being pursued to avoid cluttering industrial policy programs with multiple, sometimes geopolitical, objectives that are less directly linked to economic logic or market-failure justification.",
    "Recognize trade-offs:",
    "Governance prescription:"
  ],
  "alternates": {
    "markdown": "/en/publications/fandd/issues/2024/09/picking-winners-is-difficult-and-costly-arezki-landau/index.md",
    "json": "/en/publications/fandd/issues/2024/09/picking-winners-is-difficult-and-costly-arezki-landau/index.json",
    "bundleManifest": "/en/publications/fandd/issues/2024/09/picking-winners-is-difficult-and-costly-arezki-landau/bundle-manifest.json"
  },
  "generatedAtUtc": "2026-09-15T19:27:47.417Z"
}