Industrial policies, once maligned, have been making a global comeback in recent years. But while these state-led strategies can be effective, they carry significant risks, particularly for emerging economies with weaker institutional frameworks, the European Bank for Reconstruction and Development (EBRD) warned in its latest Transition Report, Navigating Industrial Policy.

“Industrial policy is back with a vengeance,” EBRD chief economist Beata Javorcik told bne IntelliNews ahead of the report’s publication on November 26. “It’s back in advanced economies and it is becoming more prominent in poorer countries as well, including our countries of operations.”

Governments around the world are increasingly making strategic interventions to address challenges such as climate change, regional inequality and supply chain security. These policies often aim to correct market failures, stimulate industrial growth and respond to external pressures such as the policy shifts of advanced economies. However, Javorcik warned that despite the growing enthusiasm, there are clear drawbacks. 

“Public discourse about industrial policy has changed from industrial policy being vilified two to three decades ago, to now in many quarters considered to be a silver bullet. But industrial policy has some disturbing features, as we have analysed,” she said. 

The EBRD report highlights a growing public appetite for state intervention, driven by rapid structural changes in the global economy. 

Even since the pre-covid time, people have become more positively predisposed to greater state intervention in the economy, especially older people,” said Javorcik. She attributes this shift to trends like globalisation, automation reshaping manufacturing, the advent of artificial intelligence (AI) in services, and the energy crisis in Europe caused by the war in Ukraine. 

Within the EBRD region of operations, which includes Emerging Europe, Central Asia and countries in the Southern and Eastern Mediterranean (Semed) region, the largest numbers of industrial policies have been implemented in Poland and Turkey, the development bank’s research found. Other countries with large numbers of industrial policies include Croatia, Czechia, Egypt, Greece, Hungary, Kazakhstan, Romania and Slovakia. 

More uncertainty

The report shows that in 90% of cases, industrial policies discriminate against foreign interests, thus, industrial policy has become another force that is pushing the global economy towards fragmentation, a trend that has become increasingly apparent in recent years. 

The re-election of Donald Trump to the US presidency adds a further layer of uncertainty for economies reliant on global trade. 

“Tariffs are probably the channel through which our countries of operation are going to be affected,” Javorcik said. The European Union, the largest export market for many emerging economies, could face increased US tariffs, which would dampen growth in Western Europe and reduce demand for exports from EBRD regions. 

“The second question is will the Trump presidency lead to faster fragmentation of the global economy. Will it speed up the process of the world splitting into blocs, which will come with economic costs?” she added. 

“The third channel is what will happen to global trade rules. The US has already stepped away from the [World Trade Organization] WTO, and this move is going to be more prominent under Trump.” Emerging markets, which rely on WTO rules to ensure predictable trade environments, could face heightened uncertainty if these norms are undermined.

Risks for emerging markets

While industrial policies can be helpful, emerging economies often lack the fiscal and administrative capacity to implement sophisticated industrial policies, the EBRD pointed out. Instead, they resort to measures like export bans, quotas and licensing requirements — approaches that can create distortions and increase costs for local producers.

“Industrial policy need fiscal space and administrative capacity. Countries that have neither tend to go for cheap and easy,” said Javorcik. “These tend to be the most distortive types of industrial policy and if they are done by a country with highly imperfect institutions, with corruption, there is a very big risk of these policies being captured by vested interests and causing even greater distortion.”

The report stresses the need for careful design and execution of industrial policies, highlighting the importance of clear objectives and well-coordinated frameworks. Balancing multiple goals — such as promoting green transitions while protecting jobs — is particularly challenging and often leads to conflicting outcomes. Struggling industrial in particular are likely to lobby for support, but this can impede structural changes, such as the transition to a greener economy. Moreover, many industrial policies lack an expiration date. 

Structural changes and opportunities

Across the EBRD’s regions of operation, industrial policies are being shaped by ongoing economic transformations. The growth of the services sector and the digital revolution have redefined economies in many post-communist countries, with some emerging as leaders in IT exports. However, others struggle with inadequate infrastructure and skills gaps.

Liberalising service trade and introducing targeted industrial policies could help bridge these gaps, but success depends on strong economic foundations. Special economic zones (SEZs), a popular industrial policy tool, illustrate this variability. By 2020, more than 1,100 SEZs had been established in EBRD economies, with mixed results. Factors such as proximity to infrastructure and effective governance often determine their outcomes.

Direct state support for private firms is another common strategy, taking the form of subsidies, grants, tax relief, and equity injections. However, the report criticises the lack of customisation in these interventions, noting that they rarely account for firms’ innovation potential or growth prospects.

The EBRD report stresses the need for clarity, coordination and pragmatism in industrial policy design. Policymakers must set realistic goals, prioritise objectives, and establish expiration dates for interventions to avoid long-term distortions, the report said. 

“Our bottom line is while industrial policy can deliver, it’s very hard to get it right,” Javorcik concluded.