Subsidies, tax breaks detrimental to production – IMF

The International Monetary Fund says 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.

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.

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