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Industrial policy, the use of government intervention to support specific industries or firms, has expanded sharply in recent years, but new research suggests its economic impact remains modest, uneven and heavily dependent on policy design.
According to economists Adam Jakubik, Florence Jaumotte, Samuel Pienknagura and Michele Ruta, who wrote in an IMF blog, governments across the world are increasingly turning to industrial policy in response to repeated global shocks, including the COVID-19 pandemic, supply chain disruptions and the ongoing geopolitical tensions linked to the war in the Middle East.
The researchers note that the Middle East conflict alone triggered at least 305 industrial policy measures within its first two months, ranging from energy and fertiliser export restrictions to subsidies for green energy products and direct support for exporters. These measures came alongside broader policy responses such as fuel price caps and tax reductions.
This wave of intervention is part of a broader global surge. Data from the New Industrial Policy Observatory (NIPO), developed with Global Trade Alert, shows that industrial policy actions have accelerated dramatically since 2020. The database tracks more than 52,000 interventions across 75 countries since 2009, with last year’s total 2.5 times higher than pre-pandemic levels.
The researchers describe this as a structural shift in economic policymaking, noting that unlike earlier crises, many of the measures introduced since the pandemic have remained in place even after immediate pressures eased, signalling a move toward more permanent state involvement in industrial development.
They also highlight a significant change in policy motivation. While industrial policy after the 2008 global financial crisis was largely focused on competitiveness and climate objectives, recent interventions are increasingly driven by concerns around national security, supply chain resilience and geopolitical competition.
Using advanced language models to analyse policy documents, the study finds that governments are now more likely to justify industrial policy in terms of strategic autonomy and reduced dependence on geopolitical rivals, particularly in critical sectors such as energy, technology and manufacturing.
This shift marks a departure from traditional market-correction goals toward a more strategic, security-oriented approach to economic management.
However, the economic outcomes of these policies remain mixed.
At the product level, industrial policy tends to improve competitiveness in targeted sectors, but the effects are generally temporary. Gains are also concentrated in sectors that were already relatively competitive, limiting the ability of such policies to create entirely new industries.
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Firm-level evidence shows that subsidies often lead to sustained increases in investment, but productivity and output gains tend to fade over time and can even reverse. Export incentives have limited direct impact on firm performance, although they may help shift resources toward more productive firms after adjustment periods.
Despite these limitations, the study identifies areas where industrial policy performs better. Interventions targeting sectors with significant market distortions—such as those with high mark-ups or strong reliance on external finance—produce effects that are up to four times larger than average.
Policies linked to climate transition efforts also show stronger and more durable gains in competitiveness, suggesting that green industrial strategies may be among the most effective forms of state intervention.
In addition, support aimed at upstream parts of supply chains, particularly inputs and intermediate goods, tends to be more effective than policies focused on final products.
The researchers caution, however, that these successes do not negate the broader limitations of industrial policy. They argue that while there are valid economic justifications for intervention, especially in the presence of market failures, delivering sustained structural transformation is far more difficult than current policy enthusiasm suggests.
They find little evidence of self-reinforcing cycles in which government support consistently generates long-term industrial upgrading. Instead, most interventions produce modest and often short-lived improvements, primarily in sectors that were already relatively strong before receiving support.
This raises important questions about whether industrial policy should be the primary instrument for economic transformation.
The study argues that broader economy-wide reforms may offer greater and more durable benefits. Improvements in institutions and regulatory frameworks can raise output in inefficient sectors by as much as 10 per cent in the medium term—significantly higher than the gains typically associated with industrial policy.
Financial reforms are particularly effective in easing constraints in capital-starved industries, while structural reforms tend to boost productivity across the economy without the risks associated with governments selecting preferred sectors or firms.
Ultimately, the authors conclude that while industrial policy is now a central feature of global economic strategy, its effectiveness depends heavily on careful targeting, strong institutional capacity and complementary reforms. Without these conditions, governments risk achieving only limited, temporary gains despite increasingly ambitious interventionist agendas.
