Developing economies are more actively pursuing industrial policy than high-income countries, but many do so with broad, blunt instruments that often fail to deliver intended results, the World Bank warned in a report released on Tuesday.
The analysis, which spans 183 countries and was authored by Ana Margarida Fernandes and Tristan Reed, notes that lower-income nations target a greater number of industries for growth than wealthier peers. On average, low-income economies aim at 13 sectors - more than double the number targeted by high-income countries.
World Bank Chief Economist Indermit Gill, writing in the report's foreword, said that governments continue to seek guidance on industrial strategy. "Last year, 80% of World Bank country economists reported that client governments sought their advice on how to use industrial policy more effectively," he wrote.
The report arrives as global trade tensions are intensifying and governments from the United States to China increasingly adopt protectionist measures to shield strategic industries. That environment has reignited debate over the most effective ways to support jobs, exports and economic development.
Reflecting a shift in institutional perspective, the World Bank acknowledged a departure from its earlier position that industrial policy was typically a "costly failure." "That advice has not aged well - it has the practical value of a floppy disk today," Gill wrote, while stressing that a willingness to use industrial policy does not guarantee success.
Implementation, the report argues, is often the weak link. Rather than deploying precise instruments - such as industrial parks or programs to build workforce skills - many governments fall back on sweeping tariffs and broad subsidies. The data show low-income economies impose the highest average tariff rates on imports at 12%, compared with 5% in high-income countries.
While tariffs can shelter nascent industries in contexts with strong state capacity and fiscal room, the report cautions that many poorer states lack the resources to bear the associated economic costs. To be effective, industrial policy needs pragmatism and precision that align with a country's administrative and fiscal realities.
The report offers examples of more targeted and apparently successful approaches. Romania stimulated its software sector through payroll tax exemptions; Brazil invested in research adapted to local agriculture, aiding its rise as an agricultural leader; and South Korea's 1970s emphasis on heavy and chemical industries contributed to its long-run economic expansion.
In contrast to those targeted measures, the analysis highlights rising reliance on broad fiscal incentives in some economies. Broad-based subsidies averaged 4.2% of GDP in upper-middle-income countries - the highest level on record, according to the report - underscoring an increased dependence on general fiscal incentives.
Bottom line: The World Bank's cross-country review underscores a paradox: developing countries are more active industrial-policy users but often favor blunt tools that may be costly and poorly matched to their capacity, suggesting a need for more calibrated, pragmatic measures.