Need for a meaningful industrial policy

International Monetary Fund (IMF) recently released its flagship biannual report ‘World Economic Outlook’ (WEO) with the subtitle for the October edition as ‘Global economy in flux, prospects remain weak’; while the first edition for the current year was released earlier in April.

The writers of the report while correctly indicate ‘…rules of the global economy are in flux’ and that ‘…uncertainty about the stability and trajectory of the global economy remains acute’ there is a hidden paradox in the WEO report as well, and that is a lack of clarity to see the obvious in terms of the repeated mistake to find solutions in a neoliberal milieu, which in itself is the main source of the problem that continues to generate this ‘flux’, and ‘uncertainty’.

Clearly, the source of problem, as has been strongly established overall over the last four decades or so, is the neoliberal assault, and within that, practice of over-board austerity, procyclical policy, and lack of a meaningful rule-based system that guards developing countries in particular from volatile capital movements in a pro-cyclical way, whereby in economic downturn when capital is needed the most it leaves for safer heavens of developed countries.

Hence, overall, this neoliberal policy, among producing a number of other negative outcomes, especially in developing countries, like diminishing capacity of public sector delivery under over-board outsourcing, and limiting its role as mainly a facilitator to private sector, hurts their fiscal space through producing unjustifiably large interest payments-related spending needs, and hurdles them in terms of improving resilience as a consequence of laidback role of government, while on the external front it produces lack of multilateral spirit as private sector led economies work more on short-term, profit-maximizing interest, less focussed in turn on dealing with existential natured threats that cross-cut sectors and countries.

An industrial policy evolving under this neoliberal policy-dominated environment continues to put industrial policy at a back seat as moneyed interests under rising influence on public policy – given the increasing role of money in politics over the years, once again a consequence of lesser government presence in regulating better the supply-, and demand side variables of elections – work as pressure groups to use public policy to work on narrow and short-term interests rather than formulation of country-wide industrial policy working, in turn, in a purpose-driven, mission-oriented way.

Moreover, industrial policy also lacks connections externally with other countries while dealing with big challenges like existential threats of global nature, given weak level of multilateralism results in lack of knowledge sharing due to high intellectual property rights (IPRs)/patent walls.

There is another substantial problem that has originated as a result of the writers of the report approaching possible solutions, whereby although there has been some progress in terms of at least seeing a role of industrial policy – a policy, which otherwise for a long time was left aside by mainstream economic policy – yet given the deep failings of neoliberal policies in creating a resilient global economy overall, there is still far less trust in industrial policy as the situation merits.

Although a full chapter has been dedicated to the topic of industrial policy, overall advice in the report therefore calls for only a very cautious adoption of this policy. For instance, the foreword to the report by IMF’s economic counsellor points out in this regard the following: ‘…while industrial policy is increasingly used by countries to reshape their economies, this often comes with many fiscal and hidden costs.…While it might be tempting to implement sectoral industrial policies, the evidence suggests that their effectiveness can be very limited and the side effects considerable. The use of horizontal policies should instead be preferred…’

Given the approach to find solutions in neoliberal tradition mainly, therefore, sadly clear indications that diminishing role of an otherwise much-needed purpose-driven, mission-oriented public policy, especially in terms of industrial policy at the domestic level, has been one of the main reasons for not reaching desirable level of productive-, and allocative efficiencies resulting, in turn, in gaining weak outcomes of the resilience side.

Highlighting the deep need for industrial policy, a 2021 published book ‘Public purpose: industrial policy’s comeback and government’s role in shared prosperity’ pointed out: ‘Countries throughout Europe and elsewhere are increasingly turning to the view that governments should use industrial policy to tackle grand challenges.

Recognizing this trend, the International Monetary Fund issued a report in 2019 called “The return of the policy that shall not be named: principles of industrial policy.” Why could this policy “not be named”? The short answer is that industrial policy was one of the many casualties of an international shift in economic policy that began in the 1980s… The emergent sensibility – what we now call neoliberalism – was codified in 1989 in the Washington Consensus, which championed privatization, deregulation, and free trade.

Along with these central pillars came an emphasis on low budget deficits, independent central banks focused on low inflation, and liberalization of trade and foreign direct investment. This outlook was deeply confident in markets and deeply skeptical of government action… “On the basis of an exhaustive review of the experience of developing economies during the last thirty years”, the World Bank summed up in the early 1990s, “attempts to guide resource allocation with nonmarket mechanisms have generally failed to improve economic performance. Today it is precisely those “market mechanisms” that appear not to have delivered on their promise.’

Although IMF has given some importance to the role of industrial policy in recent years in its reports at the level of global outreach, there is even lesser emphasis on industrial policy formulation in country-level programmes in general; for instance, in the case of currently ongoing extended fund facility (EFF) programme with Pakistan.

Moreover, the effectiveness of industrial policy, as seen by IMF nonetheless remains quite limited since the philosophical underpinnings of industrial policy as envisaged by IMF remain strongly imbedded in a neoliberal environment of little role of government and regulation, and most role of private sector, which otherwise significantly works under profit-laden market signals and in that sense does not allow meaningfully charting out a very important role of industrial policy in dealing with the ‘grand challenges’ globally like existential threats, inequality, and poverty.

In addition, over-board austerity policy not only makes it costlier to borrow, it unnecessarily enhances interest payments related expenditures, unjustifiably denting fiscal space, and negatively impacting foreign exchange reserves, both of which are important vehicles, among others, for reaching an effective industrial policy.

Copyright Business Recorder, 2025