Reconciling State Aid with Competition for Fair, Effective Industrial Policy

How do you build industrial policies that harness public financial support to boost key economic areas, while maintaining a level playing field and avoiding market distortions?

After several decades when state intervention in industry was largely out of favor across much of the world, many governments are revisiting state aid measures to strengthen supply chains, respond to global shocks, foster innovation, support sustainable investment, and speed up the transition to greener, more digital economies.

But there are also risks: public support to specific firms or sectors can crowd out private investment, protect inefficient companies, distort markets, and trigger subsidy wars.

“The goal is not to say ‘no’ to support – it’s to say ‘yes, but smartly’,” said Xiaoqing Yu, the World Bank’s Director for the Western Balkans. “A smart industrial policy should, at heart, be a competitive industrial policy: disciplined by transparent state aid control, supported by strong institutions, and coordinated across borders so support builds markets rather than fragments them.”

The issue is highly relevant for Europe and Central Asia (ECA), where state-owned firms have historically received extensive support and governments want to combine industrial transformation with fiscal stability. For example, state aid in the Western Balkans totalled over $4 billion in 2022, ranging from about 0.5% of GDP in Albania to around 6% in Serbia. At the same time, countries working towards accession to the European Union (EU) must align with its competition rules.

Against this background, on February 11-12, 2026, nearly 50 competition and state aid officials from Europe and Central Asia exchanged experience on the core question: how to design effective industrial policy using state aid as a tool to foster competitiveness and stability, while avoiding negative impacts.

Proportionate, targeted support

State aid can take many forms: subsidies, tax credits and other investment incentives, strategic public procurement, or rules on local content in supply chains.

It can play a key role in accelerating productivity growth, but if too generous or poorly targeted, it can lead to subsidy races or fiscal imbalances. Competition rules aim to reconcile this tension by permitting subsidies and incentives only when they are proportionate, targeted and contribute to defined priorities.

“We don’t constrain industrial policy – we ‘competition-channel’ it, so we ensure that public support strengthens competitiveness and resilience without undermining the competition that is needed to drive innovation and efficiency,” said Natalie Harsdorf, Director General of the Austrian Federal Competition Authority.

Speakers attending Reconciling Public Support and Competition Policy: Strengthening Economic Resilience in Europe and Central Asia event, co-hosted by the World Bank and the Austrian Federal Competition Authority under the umbrella of the Vienna Development Knowledge Center, highlighted key elements for effective industrial policy and state aid. They should address well identified market failures, and promote competition and credible restructuring of inefficient firms and sectors. They should be disciplined, time-bound and performance-based, shifting risk to the private sector.

Rules on investment incentives and state aid must be applied consistently and correctly to provide a predictable base for investment, with high standards of accountability. Transparency is crucial, including clear information on policy.

Certain sectors, notably transport and energy, tend to be particularly sensitive because of a strong state-owned presence and public service obligations. Speakers agreed it was vital not to prop up failing businesses, and to avoid protectionism that stifles efficiency and innovation.

Vuk Aleksić from Serbia’s Commission for State Aid Control said the country’s state-owned companies receive no special treatment to cover losses, whereas state aid targeted at renewable energy had contributed to greater stability and competition.

Implement, coordinate, evaluate

Often strong national rules exist but the difficulties lie in implementation: a lack of institutional or regulatory capacity can limit a country’s ability to oversee public support effectively.

“It’s not enough just to show we have all the laws – we also need to demonstrate that these rules are effectively applied in the country,” said Alexei Gherţescu, former Chairman of Moldova’s Competition Council.

With national responsibilities split between competition and state aid authorities, finance ministries, and other agencies, the importance of coordination was a recurring theme. Speakers also stressed building international links, especially with other EU accession countries and the European Commission.

Participants cited personal experience of navigating political pressures, and convincing governments keen to pursue state aid policies that could be popular with voters but bad for competition.

Participants also discussed how to evaluate state support measures so that lessons learned can feed into future action, agreeing on the importance of clear monitoring objectives and quality data.

Even when an intervention is seen to be positive, it can be hard to know if an alternative path, such as investing in education, could have yielded better results. Above all, governments must consider whether state aid is the right tool for their own circumstances.

“Operating state aid is an aspirin,” said María Muñoz, head of the European Commission’s state aid unit. “It may solve your headache but it won’t solve your illness.”