https://arab.news/chrhb
For at least a generation, industrial policy — public interventions to improve the performance of the business sector — has been largely discredited as a costly failure. However, the debate appears to be shifting, led by China, albeit amid a growing political backlash, especially in the West.
It is now more than three decades since several influential institutions, including the World Bank, argued that industrial policy was almost always a costly failure. Now, however, the World Bank has acknowledged that its previous advice has not aged well. So much so, in fact, that it published a new document in March titled “Industrial Policy for Development: Approaches in the 21st Century.”
The argument is that the global economic landscape is now more favorable for industrial policy. For instance, the quality of macroeconomic policy management is higher than before, in part because of better educational attainment and the generally greater quiescence of inflation.
So, with industrial policy increasingly back in vogue, the center of gravity in the debate is shifting away from whether governments ought to intervene to how best they might do so. The implication is that every nation should have industrial policy in its toolkit, even though it is rarely an economic game changer.
This message is increasingly being heeded around the globe, with a 2026 World Bank review of the national economic growth strategies of 183 countries finding that all of them targeted at least one industry.
The Organisation for Economic Co-operation and Development recently added to the growing evidence base with a landmark report. It found that, in 2024, industrial policy subsidies reached their highest levels since the aftermath of the international financial crisis in 2009.
The OECD data also highlighted the leadership role taken by Asia, specifically China, in leading this revolution in industrial policy. Between 2005 and 2024, Chinese firms received three to eight times more government support on average compared with businesses in OECD member states.
A key driver of China’s prominence is the major role played by state enterprises both as recipients and providers of subsidies. On average, the OECD found that enterprises in which state ownership was at least 25 percent were significantly bigger recipients of industrial subsidies than their private sector competitors, especially in terms of grants and below-market borrowings. This stems partly from the fact that these firms were often within heavy industries characterized by greater debt financing and below-market rate borrowings.
The implication is that every nation should have industrial policy in its toolkit, even though it is rarely a game changer.
Andrew Hammond
The research found, significantly, that this growing slew of industrial subsidies was shaping global markets. It showed that almost 60 percent of the global market share gains made by Chinese firms between 2005 and 2023 could be explained by the subsidies they received. The overall average figure was much lower, at 22 percent.
This data underlined the reasons for the growing concern about what is sometimes called “China Shock 2.0,” which was one of the key agenda items at the G7 leadership summit in France in June. A range of recent studies shaped the context for that gathering in Evian-les-Bains. One of them, by the US Chamber of Commerce, argued that the G7 collectively (the UK, Germany, Italy, France, Japan, the US and Canada) faced the risk of a sustained erosion of manufacturing competitiveness valued at up to $650 billion during the second half of this decade. That is equivalent to about 12 percent of manufacturing exports, which could be directly exposed to Chinese market share gains by 2030 if they continue at the current pace.
Another recent report helping to shape the debate was published by think tank the Centre for European Reform. It highlighted the fact that overall Chinese export volumes were growing at more than twice the rate of global trade. It called for a strengthened EU toolbox to defend key sectors such as chemicals, batteries, clean tech and semiconductors.
While the floodgates might now be opening to the wider use of industrial policy, the World Bank survey of 183 countries carried warnings too. Even under ideal conditions, such interventions were rarely complete game changers, resulting in an average gain of about 1 percent of gross domestic product.
The bank had a particular warning for developing countries, which it said were at risk of misallocating resources. Firstly, an industrial policy cannot replace the importance of getting policy fundamentals right, such as a healthy, educated workforce; strong infrastructure for transport and energy; and a robust macroeconomic framework.
Secondly, developing countries were proving to be overreliant on blunt industrial policy tools such as tariffs and subsidies. There was comparative neglect of more pragmatic, precise interventions such as human capital development, such as in the form of skills programs.
The world’s 25 poorest countries, where average annual per capita incomes are less than $1,200 a year, are the heaviest users of tariffs. The 54 upper-middle-income countries, including China, where incomes range from about $5,000 to $14,000 a year, are the biggest users of business subsidies.
Taking all this together, the intellectual tide is turning back toward industrial policy, with the state taking a newly legitimized role in economic development. However, the evidence indicates that the best way to maximize success is through precise, pragmatic interventions.
• Andrew Hammond is an associate at LSE IDEAS at the London School of Economics.