National industrial policies can be effective, but they carry risks: IMF

More countries are seeking to reshape their economies using public support for specific firms and sectors, but subsidies and other industrial policies can be costly and may not be effective unless carefully utilized, the IMF said on Friday.

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The International Monetary Fund, in a chapter of its forthcoming World Economic Outlook, said industrial policies can help countries bring production onshore and catch up with other global players in a targeted sector, but they can also drive up consumer prices and lead to a misallocation of resources.

The chapter, which examined industrial policies in the European Union, China, Brazil and South Korea, concluded that well-designed and targeted support could help sectors, but subsidies needed to be carefully crafted with clear objectives and implemented alongside structural reforms. It did not include data on recent industrial policy moves in the US.

A global slowdown in growth, rising geopolitical tensions and increasing concerns about risks to supply chains and energy security have led to a sharp increase in industrial policies, which use subsidies and other preferences to aid targeted businesses and boost growth, job creation and greater self-reliance.

A third of all industrial policies implemented between 2009 and 2022 were focused on the energy sector, it said.

To be successful, the IMF said industrial policies should be carefully evaluated, recalibrated and seek to improve the overall business environment.