At the official launch in Bucharest of the European Bank for Reconstruction and Development’s (EBRD) Transition Report 2024-2025, Chief Economist Beata Javorcik delivered an insightful speech on the complexity of industrial policy in the modern economy as it surges back to the attention of decision-makers. Her address underscored the importance of navigating industrial policy carefully, highlighting both its potential and its pitfalls. The “Navigating Industrial Policy” report, provides a comprehensive analysis of how governments are using industrial policy to reshape economic structures worldwide. Below, we selected five key themes from Beata Javorcik’s speech.

 

Industrial policy returns

After a period of decline in the 1990s when policymakers doubted the government’s ability to “pick winners,” industrial policy is making a strong comeback. Countries such as the United States, China, Germany, India, and Brazil are now heavily investing in industrial policies, with many EBRD economies following suit. “Romania in this sense is no exception”, Beata Javorcik said.

Industrial policy is nothing new… but now industrial policy is back, and it’s back with a vengeance.

According to the report, there has been a marked increase in the prevalence of industrial policies over the last decade, particularly in high-income countries. This revival is largely driven by political and economic considerations, including the growing public demand for greater state intervention in the economy.

However, “industrial policy is not only about picking winners; it is about letting losers go. Actually, Draghi report talks about this, and says ‘there is no point trying to bring solar panel value chain to Europe, because we have high material cost, high energy cost and high labor cost — we cannot be competitive, so recognizing that some sectors are not going to become champions.”

 

Tools of industrial policy

The report categorizes industrial policy instruments into several broad categories, including grants, export finance, tariffs, and public procurement rules favoring domestic suppliers. “For this report, we analyzed industrial policies in 140 countries”, Javorcik said, and then she emphasized that industrial policies today extend beyond manufacturing to include services, regional development, and firm-level interventions. However, she also noted a concerning trend: a significant portion of industrial policies discriminate against foreign interests. This inward-looking approach, seen in policies like the Inflation Reduction Act in the U.S., risks global economic fragmentation.

 

Public expectations and political economy

Public perception has shifted significantly over the past two decades, leading to increased political support for industrial policies.

Why is industrial policy back? One of the reasons is that people, the electorate, want to see greater intervention of the state in the economy.

In post-communist economies, where skepticism of state intervention was once prevalent, the majority of people now favor greater public ownership and government involvement. “If you look at Romania, Romania is no different when it comes to public perceptions and the changes over the last 20 years”, Javorcik commented. „Many people now say industrial policy is a silver bullet, it will solve all the problems.” This shift is not unique to transition economies; it has been observed in advanced economies as well. Governments are responding to these demands by implementing industrial policies that promise job creation, economic security, and technological advancement.

 

The risk of fragmentation

Javorcik cautioned against the potential downsides of industrial policy, including economic inefficiencies and global trade tensions. One major risk is that countries will adopt increasingly protectionist measures, leading to economic fragmentation (another word for de-globalisation) and reduced international cooperation.

There are some very disturbing features of industrial policy… If every country starts introducing more and more of industrial policies favoring their own players, we are going to push the world closer to fragmentation and the world economy breaking into blocks.

Another issue is the misalignment of objectives — many policies aim to achieve multiple, sometimes contradictory, goals, such as promoting electric vehicles while simultaneously protecting traditional automotive jobs. Additionally, many industrial policies lack expiration dates, making them politically difficult to phase out even when they become ineffective or counterproductive. [See tax breaks for the IT sector or the construction sector. e.n.]

 

Structural change and the future of growth

A key insight from the report is the growing role of services in economic development. While traditional models of growth relied on moving from agriculture to manufacturing, today’s economies must integrate services into their industrial strategies. “Look at the red line here, this is Romania. Romania has followed the trend with manufacturing becoming a smaller share of GDP and services becoming more important.”

 

 

Countries in Eastern Europe, including Romania, have seen a rise in service exports, particularly in IT and business services. “If you look at the share of services exports for GDP, particularly computer services, Romania is among the countries that have managed to increase in a very impressive way.” However, the transition to a service-driven economy requires substantial investments in education, infrastructure, and policy openness.

It has become increasingly difficult to grow only through export of manufacturing.

The report highlights that countries with better focus on human capital tend to be more successful in exporting services, underlining the importance of strategic investments in workforce development.

 

Industrial policy is a powerful tool, but as Javorcik emphasized, “it is not easy to get it right.” The EBRD’s Transition Report 2024-2025 provides a critical analysis of the successes and failures of industrial policies around the world. While they can drive economic transformation, they must be carefully designed, with clear objectives, competitive pressures, and exit strategies. “In Romania, according to our high-level data set, there are about 50 policies. In Spain and France, it’s 500.” So Romania could do more, especially by improving to whom the financing and industrial policies are targeted. As countries navigate this complex landscape, balancing intervention with market forces will be key to ensuring sustainable growth.