Industrial Policy for Development

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Overview

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Amidst slower global growth, a shifting labor market, and rising protectionism, governments around the world are increasingly turning to a once controversial policy. Industrial policy—the range of policy tools governments use to shape what an economy produces, rather than leaving it to markets alone—is back with a vengeance.

Contrary to recent headlines, advanced economies are not the heaviest users of industrial policy. As this report documents, developing economies use it more intensively. New data show that total business subsidies among upper-middle-income economies now average 4.2 percent of GDP—the highest on record. Middle-income economies have higher average import tariffs and more dispersion of tariffs across individual products compared to high-income economies—evidence of stronger targeted protection of certain industries. A review of the latest national development plans across 183 economies finds that low-income economies target growth in 13 industries on average, more than twice the number in high-income economies.

This report offers the first comprehensive guide to industrial policy for development in the 21st century, distinctive in four respects: it covers 15 policy tools—well beyond the existing literature's focus on tariffs and subsidies; it provides practical guidance on design and implementation, including how to target industries and design effective institutions; it draws on new evidence from more than 60 economies; and it identifies targeted approaches for governments using industrial policy to pursue specific goals, from earning foreign exchange and creating jobs to reducing pollution and strengthening security and resilience.

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Main Messages

  • Industrial Policy in the 21st Century: Beyond Manufacturing

    Industrial policy is defined more broadly in this report as government action designed to promote strategic business activities. “Strategic” means that governments prioritize certain activities because of their development relevance, and “business activities” can include performing tasks or producing products across many sectors. Importantly, industrial policy may promote activities in manufacturing but also agribusiness, tourism, or skilled professional services.

  • Developing Economies Are the Most Intensive Users of Industrial Policy

    A review of national development plans from 183 economies shows that all governments target at least one industry, with low‑income economies targeting an average of 13 while high-income economies target on average only 5. Among upper-middle-income economies total business subsidies now average 4.2 percent of gross domestic product (GDP), the highest on record. In developing economies, the primary motivation for industrial policy remains job creation and investment, rather than national security, supply chain resilience or climate objectives that increasingly shape policy in advanced economies.

  • What Countries Can Do Depends on Government Bandwidth, Market Size, and Fiscal Space

    Three country characteristics are decisive in determining which industrial policy tools can be used effectively: government bandwidth for sustained interaction with multiple businesses and industries, local market size to achieve economies of scale, and fiscal space to bear costs without sacrificing spending on social services. Economies with large markets, strong government capacity, and fiscal space have wider opportunities to experiment with industrial policy; others must choose carefully from a more limited mix of options.

  • Phasing Out Industrial Policies Too Early Can Dampen Their Long‑Term Benefits

    Industrial policy benefits, including learning‑by‑doing and productivity gains, take time to materialize. Automatic termination rules can end policies too early, before these benefits fully emerge. While discipline and accountability are essential, effective industrial policy requires patience and evidence‑based judgment. Extensions should depend on demonstrated improvements and on whether supported activities can eventually become competitive. The key challenge for governments is not to pick winners, but to sustain promising policies long enough—and to let go of those that fail.

The Four I's: How to Prioritize Industrial Policy Interventions

This four-part framework can guide policy makers in prioritizing interventions in the pursuit of industrial policy for development:

institutions icon
Despite the potential of well-designed industrial policies for development, nothing in this report suggests that they can be effective or efficient without enabling institutions. These institutions include accountable and capable implementing agencies that are insulated from politics and interest-group pressures, and strong economywide fundamentals: an educated and healthy workforce, energy and transportation infrastructure, and a sound macroeconomic framework. If governments pursue industrial policy as a temporary fix for fundamentals, they should set milestones for improvements in those fundamentals over the planned length of the industrial policy, 3–10 years.

inputs icon
Even with limited fiscal space and small local markets, countries with sufficient government bandwidth can still pursue an industrial strategy. The first choice should be public inputs that can be delivered at cost and are underprovided due to specific market failures, such as coordination failures (industrial parks), skills underinvestment (skills development), and information asymmetries (market access assistance and quality infrastructure). Some tailoring to the needs of industries may be required but should not be exclusive.

incentives icon
Countries should turn to market incentives as a last resort, as these are typically the most costly—either fiscally (production and innovation subsidies, consumer demand subsidies, and public procurement), for the broader economy (import tariffs, local content requirements, commodity export bans, export subsidies), or due to retaliation from trading partners. Moreover, these tools require careful monitoring. A notable exception is a technology transfer quid pro quo arrangement, when technology cannot be licensed, which incurs no fiscal cost.

interventions
Be wary of macroeconomic interventions. Competitive exchange rate devaluation is difficult to sustain over the long period of time needed to realize benefits and can trigger retaliation by other countries. More research is needed to understand whether and when general tax credits for research and development in private businesses translate into valuable inventions.

Data Highlights

Figure 0.1: The value of industrial policies today and differences across income groups



Table 0.1: Typology of feasible industrial policy tools for selected combinations of country characteristics


Additional Data Resources



Endorsements

"This is a fantastically useful book. The unique focus on industrial policy realities on the ground, given countries’ own fiscal conditions and state capacities, shines throughout."
Dave Donaldson
Class of 1949 Professor of Economics at MIT and John Bates Clark Medalist
"I have long advocated for an activist industrial policy and a developmental state to accelerate structural transformation and economic catch-up. This book makes a comprehensive contribution to the debate and addresses key questions—such as which strategic activities to promote, how to do it, and how to institutionalize delivery and accountability. Policymakers and practitioners would benefit from reading the book."
Professor Arkebe Oqubay
SOAS University of London, Former Mayor of Addis Ababa
"This book restores structural transformation and diversification to the center of the development agenda, without nostalgia for a single canonical model. It makes the conversation about how countries do new things, not merely how they do more of existing things."
Professor Ricardo Haussman
Founder and Director of the Harvard Growth Lab, former Chief Economist of the Inter-American Development Bank, and former Minister of Planning of the República Bolivariana de Venezuela
"The debate has moved beyond whether industrial policies—or productive development policies, as we refer to them at ECLAC—should be implemented to foster economic growth. The key challenge now lies in deepening our understanding of what to do and how to do it. This book by the World Bank makes an important contribution in that regard."
José Manuel Salazar-Xirinachs
Executive Secretary, the Economic Commission for Latin America and the Caribbean (ECLAC)

In the Authors’ Words

  • Ana Margarida Fernandes
    Ana Margarida Fernandes
    Lead Economist, Development Research Group

    "I have spent my research career seeing how countries benefit from trade. But we never had a good set of recommendations for how to realize these benefits, beyond general improvements in the business environment and infrastructure. In this report, we explore a new, comprehensive menu of policy tools. We are still skeptical of some of them, like tariffs, but many others are worth trying.” 

  • The World Bank
    Tristan Reed
    Economist, Development Research Group

    "Most country clients I've ever talked with want some sort of industrialization strategy. Our goal is this report was to provide them with an evidence-based toolkit: which activities are strategic? how to promote them? how to stay accountable while doing it?"