Update from Davos: Can industrial policy really work? With Beata Javorcik

Episode Summary

Executive Summary: Sam Fleming and EBRD chief economist Beata Javorcik examine the resurgence of industrial policy amid nationalism, climate goals, and geopolitical competition. They trace its shift from post-1990 discredit to renewed acceptance after the financial crisis and pandemic, arguing that while some interventions can work, poorly designed policies risk fragmentation, distortion, and permanent subsidies.

Main Topics: Definition and history of industrial policy (Priority: 5/5): Javorcik defines industrial policy as government intervention to alter an economy’s productive structure, noting its origins in communist systems, Asian tiger growth strategies, and Latin American import substitution before its post-1990 decline. Why industrial policy is rising again (Priority: 5/5): The discussion links the revival to lessons from the global financial crisis, market failures, the green transition, geopolitical imitation, and stronger public support for state intervention. Risks and distortions of industrial policy (Priority: 5/5): The interview highlights foreign discrimination, conflicting policy goals, lack of sunset clauses, capture by vested interests, and the difficulty of withdrawing support once subsidies begin. Trade policy and Trump-era tariffs (Priority: 4/5): Tariffs and trade restrictions are presented as common but especially distortionary industrial policy tools because they protect targeted sectors while hurting downstream users and encouraging fragmentation. When industrial policy can work (Priority: 5/5): Javorcik argues industrial policy is most defensible when it addresses clear market failures, such as R&D, startups, and investment promotion that lowers information and transaction costs. Europe, Draghi, and competitiveness (Priority: 4/5): The conversation turns to Europe’s need for innovation-led growth, deeper single-market integration, better startup finance, and a more coordinated response to competitiveness challenges.

Key Arguments: Industrial policy is government action intended to change an economy’s productive structure, not merely support industry in a narrow sense. After being discredited around 1990, industrial policy returned because economists and policymakers accepted that markets can fail, especially where externalities exist. Use of industrial policy has risen steadily since about 2010 across advanced economies and emerging markets, with especially frequent use in the US, China, Germany, India, Brazil, and parts of Africa. Popular support has grown because people have experienced disruptive structural change, job loss, automation, AI, recessions, and pandemic shocks. Industrial policy often distorts trade: in advanced economies it frequently discriminates against foreign interests and can trigger retaliatory measures. The hardest part of industrial policy is not identifying winners but letting losers go; once support exists, lobbying makes it politically sticky. Good policy requires clear goals, a hierarchy of objectives, exposure to market forces, and sunset clauses. Investment promotion is presented as a relatively low-cost and often effective example because it lowers information barriers rather than relying on heavy subsidies. The East Asian growth model succeeded partly because protected sectors were still exposed to competition, especially through export markets. Europe’s competitiveness challenge may require innovation, deeper integration, and better access to funding rather than simply bigger subsidies.

Data Points: Countries covered in EBRD operations: Close to 40 - The EBRD now operates across Europe, North Africa, Asia, and is expanding to sub-Saharan Africa. EBRD transition report sample size: 140 countries - Javorcik cites the bank’s latest transition report analyzing industrial policy across 140 countries. Advanced-economy industrial policy discriminating against foreign interests: 90% of cases - The report found that in most advanced-economy cases, industrial policy favors domestic interests over foreign ones. Young people supportive of greater state intervention in the mid-1990s: About one-third - Javorcik describes earlier survey data showing lower support among young people for state intervention. People past 60 supportive of greater state intervention in the mid-1990s: About two-thirds - Older people were notably more favorable to a larger state role at that time. Timeframe for rising industrial policy: Since roughly 2010 - The interview identifies about 2010 as the point when the number of industrial policies began increasing steadily. Policy objective conflict example: Electric vehicles vs. automotive employment - European policy aims to electrify transport while preserving jobs in the auto sector and limiting consumer subsidies.

Pivotal Quotes: "Industrial policy is a government intervention aimed at changing a productive structure of an economy." — Beata Javorcik: Core definition of industrial policy early in the discussion. "The most difficult part of doing industrial policy is not picking winners, it's rather letting losers go." — Beata Javorcik: Summarizes the political and economic challenge of withdrawing support once it has been granted. "We should be embracing industrial policy in cases where there is a clearly articulated reason for industrial policy and where the appropriate instrument can be chosen." — Sam Fleming: The host’s defense of targeted intervention, prompting discussion of when state action is justified.

Implications: Industrial policy is likely to expand, but the winners will be countries that keep it targeted, temporary, and competitive. Poorly designed intervention risks subsidy races, fragmentation, and higher fiscal strain.