Paul van Gerven
11 April

Industrial policies are no “magic cure” to increase productivity and combat slow long-term growth, the IMF warns. The institution sees a role for such policies targeting specific societal benefits such as reduction of carbon emissions, but it generally favors more generic policies. Governments should direct funds toward fundamental research, provide grants to innovative startups and bolster applied innovation through tax incentives. This is the most efficient way to higher growth across countries and accelerate the transition to a greener and more digital economy, the IMF argues.

“Industrial policy, in which governments support individual sectors, can drive innovation if done right. But striking the right balance is a crucial consideration, as history is full of cautionary tales of policy mistakes, high fiscal costs and negative spillovers in other countries,” the IMF writes in a blog coinciding with the release of a chapter in its half-yearly published Fiscal Monitor.

IMF industrial policies
The number of countries pursuing industrial policies has increased significantly in recent years.

The warning comes at a time when many countries have embraced aggressive industrial policies once again. China, the US, the EU, Japan and South Korea are pouring billions into the semiconductor industry and the US and the EU have also adopted policies to boost the transition to a green economy. Such measures come at a risk of misallocating resources, may favor politically connected firms or industries and, in case of protectionist elements, may exacerbate geopolitical tensions, says the IMF.