10/04/2025
“Industrial Policy at a Crossroads: Balancing Growth, Resilience, and Risk”
Abridged: Industrial policy can boost targeted sectors, especially in strategic or infant industries, but the overall economy-wide gains are modest, costly, and highly contingent. Success depends on precise targeting, good governance, fiscal discipline, and complementary reforms; otherwise, policies risk misallocation, higher prices, and unsustainable fiscal burdens.
Prologue
Industrial policy (IP) has re-emerged globally as governments pursue growth, resilience, and technological leadership by targeting strategic sectors, especially clean energy and advanced manufacturing.
Drawing on infant-industry models, energy-focused macro-simulations, empirical sectoral estimates, and historical case studies, finds that while IP can accelerate learning-by-doing and foster domestic capacity, its gains are typically modest, contingent, and costly.
Sector-level benefits are evident: direct subsidies raise targeted sectoral value added (~0.5%) and productivity (~0.3%), with stronger effects in advanced economies’ infant industries. Yet broader spillovers often dilute aggregate outcomes, as resources reallocate from more productive sectors, sometimes reducing economy-wide (Total Factor Productivity) TFP.
Energy-sector policies illustrate the trade-offs starkly: reshoring clean-tech production bolsters self-reliance and jobs but entails steep fiscal outlays (~0.4% of EU GDP annually, ~€30,000 per job), whereas open-import strategies enhance adoption at lower cost but erode domestic capacity.
Historical experience underscores that successful IP (e.g., Korea) hinges on export orientation, competitive discipline, governance, and complementary reforms, while poorly designed approaches (e.g., Brazil) exacerbate inefficiency and fiscal strain.
Overall, IP can be a catalyst for structural transformation, but its effectiveness depends critically on precise targeting, institutional safeguards, fiscal discipline, and integration with broader reform frameworks; otherwise, it risks high opportunity costs, elevated consumer prices, and misallocation.
Source: IMF
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