In a new report titled ‘Industrial Policy Is Not a Magic Cure for Slow Growth’, the International Monetary Fund stated the detrimental effect of subsidies or tax breaks on production if industrial policies are poorly implemented.
According to the multilateral lender, an industrial policy where individual sectors have the government’s backing is a good initiative to boost and drive innovation if done well.
IMF suggests a study of historical cautionary tales of policy mistakes, high fiscal costs, and negative spillovers in other countries to make precise decisions and adopt necessary strategies to avoid history repeating itself.
The ‘Industrial Policy Is Not a Magic Cure for Slow Growth’ report noted various countries’ efforts to level up their industrial policy to boost growth in specific sectors to reignite productivity and long-term growth amid security concerns.
The report read, “Most industrial policy relies heavily on costly subsidies or tax breaks, which can be detrimental for productivity and welfare if not effectively targeted. This is most likely the result if subsidies are channeled towards political connected sectors.”
The report also added the negative effect of discriminating against foreign firms to avoid self-destruction and costly retaliation from most countries and major advanced economies.
However, the IMF reiterates that the recent update of industrial policy to support development and growth in specific sectors and technologies is not a magic bullet.
The IMF suggested that if fiscal policies to support innovation and technology are well-designed and in-depth research is carried out, there is a high chance of rapid growth to accelerate the transition to a greener and more digital economy across countries.
Also, it stated, “Another important use case is driving green innovation—reaching net zero emissions will require technologies that do not yet exist. But subsidies to green innovation should be transparent, focused on environmental objectives, and complemented by robust carbon pricing to minimize fiscal costs.”
