World Bank Shifts Toward Industrial Policy
The World Bank’s recent shift toward adopting industrial policy has dominated discussions ahead of the International Monetary Fund and World Bank Spring Meetings. This move marks a notable change for an institution that had long advised against such tools. Yet the debate has largely focused on whether this ‘U-turn’ is good or bad, with less attention paid to what has fundamentally changed.
The framework it promoted since 1993, particularly through its East Asian Miracle report, did not serve developing countries well. World Bank Chief Economist Indermit Gill recently described that past advice as having “the practical value of a floppy disk today.”
In defending the report, Gill also highlighted the limitations of the current shift. He stated that industrial policy should be “targeted and temporary,” an exception to a market-led model, rather than a tool for broad economic transformations. The bank’s new position aligns with arguments made in works like the ‘Entrepreneurial State,’ which emphasize the role of missions and conditionalities.
The World Bank’s latest work acknowledges that industrial policy is more replicable across income levels than the old consensus allowed. Its toolkit now extends beyond tariffs and subsidies to include carrots and sticks, such as withdrawing finance from underperforming firms.
The fundamental issue remains the bank’s limited view of the state. It still treats the state as a mere fixer of market failures, not a market creator and shaper. The core question should be about what kind of economy we want to build. Which public purposes should guide investment, and how can institutions govern the public–private bargain so value is created collectively and shared fairly?
State’s Limited View
The World Bank falls short because it treats fiscal-policy space as a fixed constraint to optimize within, rather than as a set of institutional capacities that can be developed. This approach would limit industrial policy to specific sectors and comparative advantage. However, challenges like the energy transition, water and food security, public health, and economic resilience are not sectoral issues. They demand economy-wide missions.
The IMF faces a similar challenge. Its own economists have documented how austerity and liberalization fail to deliver consistent results. Yet these findings have not consistently translated into new operational practices. The IMF and World Bank sit at the center of an international order whose default advice reflects an economics not supported by real-world evidence.
What these institutions model, measure, and recommend shapes global development and macroeconomic policy. They help determine who has access to liquidity, on what terms, whose debt is considered sustainable, and whose policy autonomy is constrained.
Wealthy Countries Pay
Wealthy countries that fund and control these institutions are not exempt from the consequences of this economic thinking. For decades, the same flawed assumptions shaped policy in Europe and the US. These policies suppressed public investment, weakened public services, and left households exposed to market failures. The resulting affordability crisis has now become a political one.
The economics that constrained development policy abroad—hollowing out public capacity—helped fuel the far right at home. Europe’s response to the 2022 energy shock shows the stakes involved. From 2022 to 2025, EU member states and the UK incurred $1.8 trillion in additional costs, much absorbed by households and public budgets, while shareholders of firms charging higher prices benefited.
Spain points to an alternative. By investing in energy security as a mission rather than a subsidy category, it now generates more than half of its electricity from renewables. This has left it more insulated from the latest energy shock than its neighbors.
