The World Bank Tuesday confessed to an error of more than three decades duration, moving to embrace industrial policy as tariffs, subsidies and a variety of other interventions become increasingly popular with governments in search of growth.
Back in 1993, the bank published an assessment of the rapid economic growth achieved by some economies in east Asia, and which appeared to owe something to government interventions in support of selected industries.
The bank controversially concluded that their economic success had nothing to do with those interventions, which it instead described as a “costly failure.”
As World Bank Chief Economist Indermit Gill wrote in a new report, that conclusion helped “stigmatize” industrial policy just as a leap forward in transport and communications technologies spurred a period of intense globalization.
Instead, governments were encouraged to let markets operate without direction or barriers to trade, while keeping inflation low and budget deficits narrow and backing investment in education and vital infrastructure.
“That advice has not aged well—it has the practical value of a floppy disk today,” wrote Gill.
Taking a fresh look at the evidence, the new report concludes that the South Korean government’s “big push” during the 1970s in support of heavy industry and chemicals has resulted in the economy being 3% larger each year. In other words, it was very much not a failure, nor was it particularly costly.
Despite the stigma, many economies never entirely lost faith in industrial policy. Indeed, China resorted to a wide variety of interventions during its period of record growth. In emulation, many rich economies—including the U.S.—have begun to implement industrial policies.
“Industrial policy—the range of policy tools that governments use to shape what an economy produces rather than leave it to the discretion of markets alone—is back with a vengeance,” the bank said.
Among recent successful uses of industrial policy, the bank noted Romania’s offer of tax breaks to qualified computer engineers, which increased the availability of workers with the skills needed to turn the country into “a leading global hub for software development.”
Despite its historic animus, the World Bank said 80% of its country economists reported that client governments last year sought their advice on how to use industrial policy more effectively. The report published Tuesday offers advice on how to make the right use of 15 policy tools, going well beyond subsidies and tariffs. But it warned that industrial policy isn’t a “silver bullet” that guarantees growth without any other action.
“Governments in developing economies are botching the job far too often, but not because industrial policy itself is the wrong choice,” wrote Gill. “It’s because governments usually resort to blunt instruments, opting for the bludgeon of sweeping tariffs and subsidies over the scalpel of industrial parks and skills development programs.”
In the World Bank’s view, advanced economies should be better able to do industrial policy right, since they have greater administrative capacity, larger markets and more money to spend than their poorer counterparts.
But in practice, it is developing economies that are most active. The World Bank said that in economies with per capita incomes ranging from $5,000 to $14,000, total business subsidies now average 4.2% of gross domestic product, the highest on record.
The World Bank estimates that 183 countries target the growth of at least one industry, and that, on average, poor countries target 13, more than twice the number in rich countries.
While President Trump has attracted much attention for his attempt to use tariffs to revive U.S. manufacturing among other goals, taxes on imports are even more widely used by poor countries, for which they are least appropriate as industrial policy.
“Low-income economies, usually characterized by small market size, tend to be the heaviest users of import tariffs, which require a large market size to be effective,” the World Bank said.
Despite the World Bank’s change of heart, industrial policy still has its critics. The European Bank for Reconstruction and Development, which was established to help Europe recover from communism just two years before the 1993 report, argues that industrial policies drive economies apart, open up new opportunities for corruption, and have a tendency to last longer than necessary.
Write to Paul Hannon at paul.hannon@wsj.com