IMF warns against overreliance on industrial policy for economic growth

IMF against overreliance: The International Monetary Fund (IMF) cautioned against viewing recent industrial policy initiatives in the United States, Europe, and other regions as a cure-all for economic growth, stating that while such policies can drive innovation, they also carry risks and costs.

In a chapter from its upcoming Fiscal Monitor, the IMF stressed that historical examples demonstrate the potential for policy mistakes, high fiscal costs, and negative spillovers to other countries. Era Dabla-Norris, a deputy director at the IMF, highlighted the risks of focusing solely on subsidies and tax breaks, noting the potential for fiscal strain, capture by special interests, and misallocation of resources. Policies that discriminate against foreign firms could also lead to retaliatory measures and deepen economic divisions.

The IMF recommended a broader policy mix to support innovation, including increased public funding for fundamental research, R&D grants for start-ups, and tax incentives for applied innovation. It suggested that boosting public spending on fundamental research could significantly raise GDP and reduce debt-to-GDP ratios for advanced economies over the next eight years.

The chapter cited various recent initiatives, such as US funding for domestic research and semiconductor manufacturing, the EU's climate neutrality plan, and efforts in Japan and South Korea, as well as longstanding policies in China.

Dabla-Norris emphasised the need for tax incentives to be accessible to a wide range of firms to foster innovation and prevent market monopolisation by large corporations.

The IMF is set to release an updated global economic forecast, and in May, it will publish a report on fiscal strategies for artificial intelligence. Dabla-Norris stressed that less technologically advanced countries should focus on policies that promote technology diffusion from more advanced economies, such as investing in education, transportation, and digital skills, which could lead to faster growth.

(with Reuters inputs)