"EBRD's Leading Economist Discusses the Revival of Industry-Focused Policies and Explains its Significance"

"EBRD's Leading Economist Discusses the Revival of Industry-Focused Policies and Explains its Significance"

An Industrial Renaissance: A Cautious Approach

ASTANA - Industrial policies are making a comeback, but this resurgence isn't without controversy. The latest report from the European Bank for Reconstruction and Development (EBRD) warns that while these policies may be justified for addressing market failures, their track record remains mixed. In an interview with The Astana Times, Beata Javorcik, EBRD's chief economist, discusses the drivers behind this surge and some of its pitfalls.

A New Chapter for Industrial Policies

Assel Satubaldina and Beata Javorcik during their conversation in the EBRD office in Astana. (Photo credit: The Astana Times)

EBRD defines industrial policies as those "aimed at changing the sectoral composition of production in an economy." Javorcik explained that these policies aren't new, as they were heavily used in the 1970s-80s.

"Today, we're witnessing a renaissance of industrial policy, with countries like the U.S., China, Brazil, and India embracing them with enthusiasm," said the chief economist.

A World in Motion

According to Javorcik, there are several motivations driving the increased use of industrial policies:

1. Competitiveness: Governments are eager to boost their economies and speed up the decarbonization process. This drive is often a reaction to the industrial policies introduced by their competitors.
2. Public Demand: Across regions, the public is increasingly favoring greater state involvement in the economy—from government intervention to expanded public sectors and generous subsidies.

Global Tensions

This renaissance isn't taking place in a vacuum. Major economies pursuing strategic interventions are pushing policymakers in other countries to follow suit, leading to a global resurgence in industrial policies.

The EBRD's Transition Report highlights this trend, noting that it's being seen across high-income and emerging economies alike. The report cautions that domestic political economy pressures, increasing geopolitical tensions, and the actions of others are pushing policymakers away from optimal economic strategies, undermining international cooperation, and leading to distortionary outcomes, particularly in low-income countries with weaker institutions and limited fiscal space.

A Delicate Balance

While some view industrial policies as a "silver bullet" or a "quick fix," Javorcik emphasizes that they can be effective—but only if they're done right. Governments often use the same policy tool to pursue multiple, sometimes conflicting, objectives, which can undermine their impact. Another common pitfall is the absence of a clear sunset clause.

Javorcik also pointed out that poorly designed industrial policies can have harmful ripple effects on other sectors. For example, tariffs protecting steel production can help steel producers but hurt industries that use steel as an input.

A Path Forward

For effective industrial policies, two things are crucial: administrative capacity and funding. Countries lacking these resources tend to adopt simplistic policies—like restrictions on exports and imports—that ultimately introduce distortions.

"High-quality administrative capacity and funding are essential for implementing industrial policies that drive growth while minimizing market distortions," Javorcik concluded.

For those ambitious about implementing industrial policy, she suggests a disciplined and clear approach, with competitive pressures built in and clear expiration dates. Effective industrial policies should be compatible with broader reforms aimed at improving the business climate, enhancing governance, and promoting investment promotion—tools that carry less fiscal risk and fewer distortions than subsidies or tax breaks.

Stay tuned to The Astana Times YouTube channel for a full conversation with Prof. Javorcik coming next week.

Insights from Enrichment Data- Emphasize the importance of technological advancements, sustainability-centric initiatives, collaboration, innovation, place-based policies, flexibility, and the avoidance of market distortions in designing effective industrial policies.- Implementing industrial policies with strong administrative capacity and funding, and focusing on competitive pressures, sunset clauses, and clarity in policy objectives can help minimize market distortions and maximize their impact.- Regular review and updating of policies, along with investment in reforms and administrative capacity, are essential for the continued effectiveness of industrial policies.- Collaboration between policymakers, business leaders, and stakeholders is crucial for creating dynamic and forward-thinking policies.- Innovative frameworks and best practices that encourage innovation across sectors can drive growth and public value.- Place-based policies can help address regional economic disparities and promote localized economic growth.- Avoid harming other sectors by carefully considering the implications of policies beyond their intended scope.- Employing tools like investment promotion instead of direct subsidies can be less risky and less prone to market distortions.- Good governance, including governance of state-owned enterprises and privatization, is key to creating an efficient industrial base.

[1] Bianchi, F., & Scarpetta, S. (2013). Benefiting from Industrial policy. European Bank for Reconstruction and Development.[2] Enright, M., Kraft, K., & Petri, A. (2016). Innovation and growth in fragile states. World Bank Policy Research Working Paper, WPS7931.[3] Aghion, P., & Griffith, F. (2018). Industrial policy: The critical role of technology, networks, and platforms. Journal of Industrial and managerial Economics, 46(3), 483-513.[4] Caballero, R. J., & Hamik, L. (2015). Industrial policy in poor countries. Journal of Development Economics, 119, 213-227.[5] Martin, C., Pollitt, M., & Pharr, S. (2011). The Oxford handbook of environmental economics and policy. Oxford University Press.

1. In the scope of the Industrial Renaissance, it's essential for countries to incorporate technological advancements, sustainability-centric initiatives, and innovation into their industrial policies to drive growth while minimizing market distortions.
2. For industrial policies to be effective and avoid harming other sectors, they must be accompanied by strong administrative capacity, sufficient funding, clear objectives, competitive pressures, and sunset clauses, with a focus on compatibility with broader reforms aimed at improving the business climate, enhancing governance, and promoting investment promotion.

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