IMF flags risks of industrial policy on economic growth

• Says it may not boost economic growth as hoped

Onome Amuge

The International Monetary Fund (IMF) has cautioned that the industrial policy initiatives recently implemented by the United States, Europe, and other countries to drive innovation in certain sectors would not be a “silver bullet” for stimulating economic growth.

In a chapter of its Fiscal Monitor report, the IMF notes that in light of sluggish productivity growth and a looming sense of insecurity, a growing number of countries have adopted industrial policies aimed at driving innovation in key industries. 

Industrial policy is a strategy used by governments to encourage the development of specific sectors in an economy, often with the goal of improving national competitiveness or addressing social and economic challenges. 

The IMF noted that while industrial policy can play a role in supporting technological progress, it is important to note that it is not a “one-size-fits-all” solution. In fact, it pointed out that a more effective approach to driving innovation and technological change would be to focus on creating the right conditions for research and development, and fostering a more open and collaborative approach to technological innovation. 

An assessment by IMF officials  stated that for targeted fiscal support for innovation to be effective, several key conditions must be met. The IMF officials recommended that targeted sectors must generate measurable social benefits, such as reducing carbon emissions or increasing knowledge spillovers to other sectors. It added that the policies must be open to both domestic and foreign firms, to avoid discrimination and promote a level playing field. It noted further that the government must have the capacity to administer and implement the policy effectively, without undue bureaucratic hurdles or political interference. 

The IMF warned that many industrial policies are poorly targeted and can actually harm productivity and welfare. This, it explained, is often the case when subsidies are given to industries with strong political connections, rather than those with the most potential to contribute to social goals such as lower carbon emissions. In addition, the IMF pointed out that industrial policies that discriminate against foreign firms can be self-defeating, as they can trigger costly retaliation from other countries and lead to a loss of foreign investment and knowledge sharing.

The major financial agency of the United Nations, acknowledged that there may be some cases where industrial policy is appropriate, such as when it is used to support sectors that generate substantial knowledge spillovers to the domestic economy. 

To this end, the IMF recommended that governments deploying industrial policies should ensure that they have the technical capacity to administer and implement the policies effectively. It added that they should also be prepared to recalibrate the support they provide as market conditions change, and take care not to distort markets or encourage protectionism.