The International Monetary Fund has said that most industrial policies rely heavily on costly subsidies or tax breaks, which could be detrimental to productivity and welfare if not effectively targeted.
The multilateral lender stated this in a new report titled
‘Industrial Policy Is Not a Magic Cure for Slow Growth’.
According to the global lender, Industrial policy, in which
governments support individual sectors, can drive innovation if done right.
It said striking the right balance was a crucial
consideration, as history is full of cautionary tales of policy mistakes, high
fiscal costs, and negative spillovers in other countries.
The report also noted that many countries were ramping up
industrial policy to boost innovation in specific sectors in the hope of
reigniting productivity and long-term growth amid security concerns.
The report read in part, “Most industrial policy relies
heavily on costly subsidies or tax breaks, which can be detrimental for
productivity and welfare if not effectively targeted.
“This is frequently the case, for example, when subsidies
are misdirected toward politically connected sectors. In addition,
discriminating against foreign firms can prove self-defeating, as such policies
can trigger costly retaliation and most countries—even major advanced
economies—rely on innovation done elsewhere.”
According to the report, the recent turn to industrial
policy to support innovation in specific sectors and technologies is not a
magic bullet.
“However, well-designed fiscal policies that support
innovation and technology diffusion more broadly, with an emphasis on
fundamental research that forms the basis of applied innovation, can lead to
higher growth across countries and accelerate the transition to a greener and
more digital economy,” it noted.
It advised governments deploying industrial policies to
invest in technical capacity, recalibrate support as conditions change, and act
in line with open and competitive markets.
It added, “In some cases, industrial policy can be
justified, such as when it supports sectors that generate strong knowledge
spillovers to the domestic economy (for example, in the semiconductor
industry).
“Another important use case is driving green
innovation—reaching net zero emissions will require technologies that do not
yet exist. But subsidies to green innovation should be transparent, focused on
environmental objectives, and complemented by robust carbon pricing to minimise
fiscal costs.”
Since taking over the reins of power, the Bola Tinubu-led
administration has embarked on widespread reforms premised on discontinuing
subsidies that many analysts had blamed for Nigeria’s current economic woes
During his inauguration on May 29, 2023, President Bola
Tinubu announced that the regime of fuel subsidy had come to an end for good.
Two weeks later, the Central Bank of Nigeria floated the
local currency to allow it to find its true value.
The two major policy reforms, despite being met with
criticism by some quarters of society, have received applause from
international observers.
In an earlier report released in January, the IMF had
commended Nigeria and three other countries for recent subsidy reforms that
would create space for development spending.
It said, “Building resilience in the face of these trends
requires countries to act. Some countries have made progress— for instance,
Angola, The Gambia, Nigeria, and Zambia have taken steps to implement
significant energy subsidy reforms to create space for development spending.”
It, however, expressed worry that many countries were
lagging, especially in efforts to increase revenues, such as broadening the tax
base, reducing tax exemptions, and increasing the efficiency of tax
administration.
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