Industrial policy has officially made a comeback, chief economists say

In the summer of 2022, US President Joe Biden signed into law the CHIPS and Science Act, which injected over $52 billion into American semiconductor manufacturing. The legislation marked a major investment by the US government into a critical sector and highlighted the trend of governments worldwide taking a more proactive approach to industrial policy.

Industrial policy entails government efforts to bolster parts of the economy for strategic purposes. Policies can include tax credits, protective trade regulations and direct public investments, among others. Most often, these policies are aimed at supporting key industries such as heavy manufacturing, military production, energy and advanced technology.

The pursuit of industrial policy is increasing across governments and international blocs—especially among advanced economies. As the World Economic Forum’s latest Chief Economists Outlook notes, there is a “growing prevalence of industrial policies that seek to give the state a renewed prominence in national and global economic development.”

The European Union, for instance, is pursuing its own legislation on semiconductors. The policy, which seeks to invest €43 billion into the industry, aims to increase Europe’s share of global chips production capacitors from below 10% to 20%. China has also followed several industrial policies under its “Made in China 2025” framework that aims to boost domestic high-tech manufacturing.

Moreover, the Forum's report notes that the objectives of industrial policy range from “boosting growth and innovation to creating jobs and driving the green transition.”

Take the US Inflation Reduction Act, for example. The landmark legislation, which was signed into law in August 2022, includes over 20 new or modified tax incentives and tens of billions of dollars in grant and loan programs to support a clean energy transition.

“The desire to make a transition to a greener economy is also asking for a bit more state intervention,” Christian Keller, the Head of Economic Research at Barclays, explained in an interview on Radio Davos.

Of the leading economists surveyed in the Chief Economists Outlook, 58% said that active industrial policy is likely to become a widespread approach to economic policy globally in the coming years; 16% say it is extremely likely. Chief economists are “unambiguous in concluding that industrial policy will have a marked impact on the global economy in the years ahead,” the reports stated.

Respondents were divided on whether industrial policy will act as an engine of innovation and highlighted several potential concerns. Over 90% of chief economists said the deepening of geoeconomic tensions was a concern while around 70% said industrial policy could stifle competition and lead to a problematic increase in sovereign debt levels.

“You may manage to bring back production of semiconductors into your country, which before have been really concentrating on a few hubs in Asia and in the U.S. But it comes at a cost,” Keller stated.

The vast majority of economists surveyed were also neutral or said it was unlikely that industrial policy would increase global economic resilience. There was a similarly high level of uncertainty regarding the likelihood of industrial policy leading to an overall increase in global economic activity.

The chief economists were also unanimous in anticipating further changes in the structure of global supply chains, including a third who expected significant changes in the next three years.

“The twin pressures of deepening geopolitical tensions and intensifying industrial policy means that further adjustments are almost inevitable in the coming years,” the Forum’s report notes.

Perhaps unsurprisingly, there is a significant overlap between the industries where supply chain changes are expected to be most pronounced and those where chief economists expect industrial policy to have the greatest impact. Along with semiconductors, these include green energy, automotive and the broad technology category, among others.

The report also highlighted a series of business strategies that are likely to influence the changing structure of global supply chains. Over 90% of chief economists said these efforts will likely include adaptation to geopolitical fault lines and a prioritization of resilience over efficiency. Meanwhile, 84% said they expect business strategies to include a diversification of suppliers and 77% said a focus on environmental sustainability will likely be increased.