IMF warns of careful calibration needed as industrial policies face global challenges

Governments worldwide, across both advanced and emerging economies, have increasingly embraced industrial policy as a strategic tool to boost productivity, safeguard manufacturing jobs, and foster economic diversification. This approach, intensifying over the past decade and a half, aims to nurture “infant” industries, reduce dependency on imports, and enhance supply chain resilience, objectives that have acquired renewed urgency amid geopolitical shifts and economic uncertainties.

The latest analysis from the International Monetary Fund (IMF) sheds light on the nuanced outcomes of deploying industrial policies. Drawing on robust economic models, case studies, and empirical data, the IMF highlights that while such policies can stimulate productivity growth in targeted sectors, their broader economic impacts often involve significant trade-offs. This intricate balance demands governments design and implement these measures with exceptional caution.

Industrial policy’s success hinges largely on industry-specific dynamics, especially the capacity for productivity to scale with output. For example, industries where “learning by doing” enables cost reductions as production volumes rise can benefit substantially from early subsidies and trade protections. In these scenarios, domestic firms gradually gain efficiencies that empower them to compete globally, thereby driving dynamic, long-lasting productivity gains.

However, these gains come at a price. Targeted sectors may see modest improvements, the IMF’s findings indicate value-added in subsidized industries improves by about 0.5% and total factor productivity by 0.3% within three years of policy enactment, while consumers potentially face elevated prices for extended periods. Moreover, the broader economic repercussions can be mixed. Resources diverted to favoured sectors often sap vitality from untargeted industries, leading to productivity declines and resource misallocation that may ultimately dampen aggregate economic performance.

This complex picture is echoed in findings from the OECD and other global economic bodies. The OECD recently warned of slowing global growth, projected to contract to 3.2% in 2025 and further to 2.9% in 2026, citing heightened trade tensions and policy uncertainty, factors that cloud the effectiveness of industrial policies worldwide. The organization stresses that while industrial measures might protect priority sectors, their design must carefully mitigate risks like market distortions and retaliation from trading partners.

China’s experience offers a vivid case study. Its ambitious “Made in China 2025” initiative sought to establish dominance in high-tech manufacturing including robotics, aviation, and electric vehicles. The plan accelerated industrial advances and surpassed targets in sectors like electric vehicle production and exports. Yet, it simultaneously sparked international tensions, particularly with the United States and Europe, over concerns about unfair trade practices and technological competitiveness. Recently, IMF officials have advised China to pivot away from large-scale industrial subsidies toward policies bolstering domestic consumption, underscoring the challenges in balancing industrial policy with sustainable growth and global economic integration.

Against this backdrop, the IMF underscores the necessity for countries to maintain a strong institutional framework and macroeconomic stability when pursuing industrial policy. Governments should incorporate regular evaluation and recalibration mechanisms to ensure policies remain effective and fiscally sustainable. Importantly, broad-based structural reforms, such as enhancing the business environment and improving credit access, often yield greater economy-wide benefits without the potentially distortive effects of sector-specific interventions.

The overall message for policymakers engaged in industrial decarbonisation and broader economic transformation is clear: industrial policy can be a potent lever to advance critical sectors but is no panacea. Its execution demands judicious calibration to avoid fiscal waste, manage consumer costs, and prevent adverse macroeconomic effects. As the global economic outlook remains clouded by geopolitical tensions and trade uncertainties, well-crafted industrial policies integrated within comprehensive economic strategies may help nations navigate the complex trade-offs between fostering growth, resilience, and sustainability.