Lecture

Abstract

Countries are increasingly using industrial policy to reshape their economies by supporting strategic sectors and firms. Motivations include boosting productivity, reducing reliance on imports—especially in energy—and enhancing resilience. Industrial policies can help jump-start domestic industries, but their efficacy is sensitive to sector-specific characteristics that can be hard to determine in advance. And industrial policies present trade-offs. Onshoring production in a strategic sector might lead to higher consumer prices for a prolonged period. And the fiscal cost of industrial policy can be substantial at a time of elevated debt and constrained public finances. Even when sector-level outcomes are positive, industrial policy can generate negative cross-sector spillovers and reduce overall productivity by drawing resources inefficiently away from sectors that are not targeted. Effective industrial policy requires careful targeting and implementation, strong institutions, complementary structural reforms and sound macroeconomic policy.