IMF Suggests Industrial Strategy Is Not a Silver Bullet for Economic Revival

The International Monetary Fund ushered in cautionary advice on a global stage on Wednesday, emphasizing that industrial strategies undertaken by global powerhouses such as the United States, Europe, and others are not a universal remedy for the sluggish growth seen in the global economy. A sneak peek into the IMF’s upcoming Fiscal Monitor reveals a chapter dedicated to the scrutiny and potential pitfalls of the industrial policies that aim to fuel innovation across certain key sectors.

With a wealth of historical examples at hand, the IMF detailed the risks associated with policies that narrowly focus on subsidies and tax breaks to stimulate industrial sectors. Such measures are fraught with the danger of high fiscal costs, potential for manipulation by vested interests, and an alarming possibility of resource misallocation on a grand scale, said Era Dabla-Norris, a deputy director of the IMF’s Fiscal Affairs Department. These policies also run the risk of inciting retaliatory measures from overseas, which could further cement the geo-economic divides already in place.

Dabla-Norris and fellow IMF officials, citing their findings, advocate for a more comprehensive approach to nurturing innovation. This includes more robust public funding for basic research, incentivizing start-ups with R&D grants, and implementing tax measures that stimulate a wider range of applied innovation. The officials projected that an increase in public spending on foundational research by roughly 0.5% of the gross domestic product annually could translate into a GDP boost of up to 2% in the long term. Moreover, these investments could contribute to a decline in a country’s debt-to-GDP ratio within an eight-year forecast period for an average advanced economy.

The report referenced recent industrial maneuvers that have been put into motion around the world. Among them is a U.S. legislative action designed to bolster domestic research and semiconductor manufacturing; the European Union’s strategy to transition to climate neutrality; and ongoing industrial developments in Japan and South Korea, not to mention the longstanding policies in China.

Over the past few decades, governments have pivoted away from the direct funding of public R&D, while nearly tripling the financial backing for the private sector’s research efforts. However, Dabla-Norris pointed out a disheartening trend: the surge in private-sector investment has not manifested in commensurate productivity advancements.

For R&D credit systems to bear fruit, Dabla-Norris emphasized the necessity of accessibility. “If we want there to be more applied research, we need to ensure that tax incentives are … more accessible to large swathes of firms and not just restricted to large established firms that use these types of tax incentives to cement their market power and potentially stymie innovation done by other firms,” she remarked during an IMF broadcast interview.

The IMF, in a January communiqué, had already highlighted that growth projections for both the global economy and international trade stand significantly lower than historical averages. The international financial institution plans to unveil a more detailed forecast on Tuesday.

A forthcoming report, set to be published in May, will delve into the fiscal strategies surrounding artificial intelligence, as disclosed by Dabla-Norris. She also signified that for countries still struggling to catch up technologically, prioritizing policies that facilitate technology adoption, such as investments in education, transportation infrastructure, and digital skills, is imperative. This action could pave the way for expedited technology transfers, increased utilization of existing technologies, and a sustainable growth rate uptick of approximately 2% over the medium term, potentially narrowing the technological gap with more advanced economies.