Industrial Policy: Managing Trade-Offs to Promote Growth and Resilience | Mehdi Benatiya Andaloussi

Mehdi Benatiya Andaloussi is an economist at the IMF. He has co-authored multiple chapters of the World Economic Outlook and has conducted research on energy and commodity markets, real estate markets, and the implications of industrial policies. 

Mehdi Benatiya Andaloussi will present the paper Industrial Policy: Managing Trade-Offs to Promote Growth and Resilience.

Abstract

‘Countries increasingly seek to reshape their economies by targeting public support to specific firms and sectors. Their motives vary widely but often include an emphasis on developing strategic industries, with a view to raising future productivity and growth and reducing reliance on imports in key sectors such as energy. This chapter leverages theoretical models, empirical data, and case studies to investigate under what conditions such industrial policies are most likely to succeed. Using a stylized model drawn from the infant industry literature, it shows that industrial policies can help onshore production and catch up with the global technology frontier in a sector where firms become more efficient the more they produce. But this comes at the cost of higher consumer prices during the catch-up phase and is sensitive to initial conditions such as the size of the technology gap, how quickly firms learn by doing, and market size. Such policies can also incur substantial public expenditure, an important consideration at a time of elevated debt and limited fiscal space in many countries.’

‘Empirically, recent industrial policies—mainly a combination of direct support and subsidized financing—are associated with improved outcomes in the targeted sector, but the magnitudes are small. Moreover, such interventions are likely to spill over to other sectors, which is difficult to identify empirically. Use of a multisector quantitative trade model to examine the aggregate policy impact finds that imperfect targeting of interventions could reduce aggregate productivity as factors of production move from one sector to another. For example, 

broad-based energy sector subsidies could lessen reliance on fossil fuel imports while reducing productivity in non-energy sectors. Overall, the chapter findings suggest that policymakers should be keenly aware of opportunity costs and trade-offs: while industrial policy can raise production in the targeted sector, this needs to be balanced against other considerations such as fiscal cost, higher consumer prices, and possible resource misallocation. Appropriate targeting and safeguards, market discipline, and complementary structural reforms are crucial elements of a well-designed industrial policy package.’

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