Navigating industrial policy

Zsóka Kóczán interviewed by Tim Phillips recorded at the PSE-CEPR Policy Forum, Paris.

Tim Phillips: 
Welcome to another of our podcasts recorded at the Paris School of Economics CEPR Policy Forum 2026. I’m Tim Phillips. Industrial policy is back in rich and poor economies alike. Governments are intervening to change what their economies produce. Now, this was the subject of the European Bank for Reconstruction and Development Transition Report 2024-2025. But are the right economies using the right policies in the right way? Well, that’s not obvious. It’s not easy to measure either. One of the leads on the report was Zsóka Kóczán, and she presented her findings at the conference. She’s with me now as well. Zsóka, welcome to VoxTalks Economics.

Zsóka Kóczán: 
Thank you very much. It’s a pleasure to be here.

Tim Phillips: 
Zsóka, I claimed it’s back, but is it? What’s the pace of adoption of industrial policies? Also, has it continued since you produced the report, which is a couple of years ago now? 

Zsóka Kóczán: 
So, in our report, we tried to build a novel database of industrial policies. We built on the work and dataset put together by Réka Juhász, Nathan Lane, and their co-authors that they kindly shared with us, which draws on the Global Trade Alert. We try to build on this, in particular to expand coverage of emerging markets, but also to rely on large language model processing to try to codify the objectives of industrial policies. So, what at least we think policymakers might have intended to do with them. We focus on a count measure of industrial policies, so we look at the number of industrial policies announced in any given year or those in place in any given year. But what we see is indeed a resurgence in industrial policies in line with what has been documented in various other studies relying on other datasets. The US and China have most industrial policies in place. In general, we see that larger economies have adopted more industrial policies, but we see a very broad-based upward trend. This has become more pronounced since 2019, and this roughly coincides with the rise in export restrictions on critical raw materials. It is not just a COVID effect. So, when we look at industrial policies adopted over 2020 to 2022, about 30% of them appear to be COVID related, but the broad pickup holds even excluding these policies. Now you asked about what happened to them since. Of course, measuring industrial policies is a very data-intensive exercise. However, what we can see from other studies that have been published since, as well as a number of high-profile announcements recently, such as the European Commission’s draft proposal for the Industrial Accelerator Act, it appears that the trend is very much continuing.

Tim Phillips: 
I suppose we better define what we mean by industrial policy, now we’ve been talking about it for a couple of minutes. What are you including in this, and I suppose importantly, what are you excluding? 

Zsóka Kóczán: 
Industrial policies here refer to any policies that aim to change the sectoral composition of economies. So, you can think of these as those that aim to support sector X but not sector Y. The second part of the statement is often left implicit. This puts them in contrast with what are often referred to as horizontal policies. So, for instance, general improvements in the business environment, general improvements in institutions, investments in primary education that would not have a sectoral focus. Of course, there are relatively broad-based policies, for instance, easing immigration requirements for high-skilled labour, that would have a sectoral component. But broadly speaking, in our report, you can think of them as those that target specific sectors.

Tim Phillips: 
It wasn’t talked about for years, was it? If you’d have come here 10 years ago, you’d have been cancelled for talking about it, and now you’re giving a presentation. Is it true that although we didn’t name it industrial policy, this sort of activity just never went away?

Zsóka Kóczán: 
In fact, there was an IMF working paper a few years ago titled ‘The Policy That Cannot Be Named’, looking at industrial policies before they were in again. As you say, the idea of states intervening in the structure of economies to aim to change their sectoral composition is not new at all. It has been around for at least a century. Its focus has shifted over time, initial focus on infrastructure. Then there was, of course, the commanding heights of the economy, famously import-substituting industrialisation. It became especially popular in the decades following the Second World War, where there seemed to be broad consensus that state intervention in the economy to support innovation, to support multilateral trade and finance arrangements was the best way to speed up reconstruction and raise living standards. It then fell out of favour in the 1970s and 1980s. President Reagan famously remarked in 1986 that the nine most terrifying words in the English language were, “I’m from the government, and I’m here to help.” They have made a comeback. They have become more popular in the ’90s and 2000s. What we see these days is that they may also be a response to geopolitical fragmentation. Industrial policies often are expensive. It may not necessarily be optimal for a country to invest so heavily in supporting a sector via industrial policies. Unless, of course, it sees that its rivals are doing the same, in which case they may end up in a prisoner’s dilemma style equilibrium where given others are doing it, it may become an optimal response for them to do so, too.

Tim Phillips: 
At the European Bank for Reconstruction and Development, many of your countries are literally on the front line of that geopolitical fragmentation. Have they used industrial policy more than others? Because so far, we’ve been talking about the US and China and Europe, import substitution, which is famously Latin American. Is it an EBRD specialty? 

Zsóka Kóczán: 
In general, when we look at a count measure of industrial policies, we see that richer economies, those with better administrative capacity, more fiscal space to do so, tend to use industrial policies more. However, we see quite a range. So, in the EBRD regions, in terms of number of industrial policies adopted, most were done by Türkiye, by Poland, but they are widespread across emerging Europe, the Western Balkan, Central Asia, the Southern and Eastern Mediterranean as well. Industrial policies adopted in emerging Europe tend to be quite similar to those in advanced economies. They often have environmental goals, regional development goals. They tend to rely more on subsidies, given relatively larger fiscal space in these economies. Whereas further east, they often focus more on secure supply, strategic sectors. Generally more distortive instruments are used more in poorer economies.

Intermission: 
At the forum, we also spoke to Pol Antras and Zsóka’s boss, Beata Javorcik, about how Europe might use industrial policy to respond to China and the US. Follow us and you can listen to our recent episode, Europe in the Middle, wherever you get your podcasts.

Tim Phillips: 
Why do governments adopt industrial policies? Are they being aggressive or defensive or because voters want it or because other people are using it? Can we make a generalisation? 

Zsóka Kóczán: 
It’s likely to be a combination of a number of factors. Um, traditionally, market failures have been used to justify industrial policies because of negative externalities. We see an increasing emphasis on environmental externalities. We see increasing talk of coordination failures being used to justify them. Market failures were of course also used to justify the early industrial policies that tended to focus, as the name suggests, on industry… 

Tim Phillips: 
Mm-hmm

Zsóka Kóczán: 
… and in particular on sectors that were seen to have significant upstream and downstream linkages, significant spillovers to the rest of the economy. But we also think that political economy considerations play a role here. I mentioned geopolitical fragmentation earlier, but there may also be a domestic element to this. We know that voters in general prefer subsidies to taxes even largely because the costs of subsidies don’t tend to be as salient, at least in the medium term. More generally, as we documented in a transition report a few years ago, demand seems to be increasing for a larger role of the state in the economy. This is especially the case for people who were personally impacted by the repeated economic crisis that we’ve seen in recent years, where they seem to be looking to the state to step in and try to socialize risks. So, in this context, even if there is a market failure and the industrial policy may not necessarily be the first best response to this, given political economy considerations, industrial policy style solutions may become more popular. We also see an interplay between a larger state and a small number of large firms. Not only are industrial policies more likely to be adopted in the run-up to elections or in years with weaker economic growth, they’re also more likely to be adopted in countries and years where the 15 top listed firms account for larger shares of GDP. As both the government may think that supporting a handful of large firms may be an easy way to promote development, but these firms may also be large enough to lobby for government support.

Tim Phillips: 
As we’ve established, everybody’s doing it, but are there particular governments that are well-suited to being able to use industrial policy if they want to grow their economies?

Zsóka Kóczán: 
In recent years, we have seen that industrial policies are becoming more popular, also among middle- and lower-income countries, including in those where administrative and fiscal capacity may be lower. Now, we all worry about government failures replacing market failures, even if some of us perhaps less so than President Reagan did in his famous remarks. In general, industrial policies require particularly high levels of administrative capacity to be implemented well. They require in-depth knowledge of particular sectors, technologies. They require ability to collect data, evaluate it, ideally iteratively as a learning process, and refine industrial policy over time. Industrial policies have tended to be more successful in economies where they were accompanied by parallel investments in improvements in bureaucratic quality. For instance, in Korea, one of the Asian miracles adopting industrial policies, as you mentioned earlier.

Tim Phillips: 
Is there a risk of a mismatch here then that some of the countries who are most tempted to reach for the industrial policy lever are the ones least well suited to use it?

Zsóka Kóczán: 
Perhaps, and not just at the country level. So, when we look at whether particular countries are more likely to use some instruments than others, we see that the instruments that are relatively less distortive, if distortive at all, for instance, trade finance, support for activities abroad, localisation requirements, tend to require relatively high levels of administrative capacity to be implemented. Whereas those that are very simple to implement tend to be more distortive. This would include, for instance, export-import bans, quotas, various licensing requirements that affect a very broad spectrum of firms and are very hard for firms to adapt to, to work around.

Tim Phillips: 
It must be difficult measuring the impact of industrial policy. You’ve got no counterfactual. How do you go about it?

Zsóka Kóczán: 
Indeed, it is very difficult, largely because the objectives of industrial policies are not always clear. 

Tim Phillips: 
Oh, yeah. That, that too. Yes. 

Zsóka Kóczán: 
Most industrial policies, as we find in our analysis, three-quarters of them have more than one objective. Over 10% of them have three or more objectives, and these don’t necessarily pull in the same direction.

Tim Phillips: Right. 

Zsóka Kóczán: 
So, for instance, the goal may be to support environmental goals with decarbonisation, but part of this may want to build up a domestic industry, create employment, create secure supply of energy. The fastest way to get to decarbonisation may actually be via imports of various renewable products. So, with multiple objectives pulling policymakers in different directions, it also makes it very difficult for them to acknowledge failures or to take credit for the successes of industrial policies. So here, ideally, we would want there to be a single objective or at least a clear prioritisation of objectives, ideally publicly or at least in private, in order to make evaluations easier. This is made more difficult by the fact that industrial policies have spillovers to other sectors, across borders, and often show effects over very long-time horizons.

Tim Phillips: 
I’m glad you’re doing this analysis and not me. How do you go about it? How do you measure that success? 

Zsóka Kóczán: 
In the report, we started by trying to get a better sense of what these industrial policies actually aim to do. So, we use large language model processing to code the objectives of industrial policies. We group these into five broad buckets, those targeting growth and productivity — which account for the bulk of them — but then also employment, secure supply or targeting strategic sectors, environmental objectives, and regional development. We don’t conduct in-depth evaluations, largely because these are very data-intensive exercises best done as case studies rather than in a cross-country setting. However, we do try to draw some lessons from some of these case studies in the broader literature. 

Tim Phillips: 
So, I’m going to ask you the negative question, from what you found out, what really doesn’t work? What’s the least effective industrial policy? 

Zsóka Kóczán: 
I think what is really important here is the broader context, not just the clarity about the objectives. But something that perhaps receives less attention is that evaluations, rather than just being binary — I think we economists have a tendency to think in very binary terms, this worked or this didn’t — should really be seen as an iterative process where industrial policies get evaluated and accordingly refined over time. Investments in bureaucratic quality tend to help the success of industrial policies and then, of course, the standard recommendations of building in competitive elements, market tests. We also try to look a little bit at what sort of policy recommendations to give to economies that may have lower levels of administrative capacity but do choose to do industrial policies. These include, for instance, focusing on relatively narrow sectors where industrial policies may be easier to oversee and coordinate. If coordination within the public sector itself is difficult, then focusing on policies that can be set up within a single line ministry. Setting up specialized units that may be easier to hire and fire than the public sector in general are some of the approaches that can support the success of industrial policies.

Tim Phillips: 
So, if you have these policies that don’t work, you maybe don’t have to be an economist to discover that they don’t work. You can walk down the street, you can have a look at your country’s GDP. When policymakers are doing industrial policy badly, why do they carry on doing it? Why are they still doing it?

Zsóka Kóczán: 
We looked at a number of characteristics of industrial policies that make them particularly problematic, that is, prone to distortions and difficult to phase out. One of these is that they tend to discriminate against foreign interests. Often driven by political economy considerations because they are motivated to support the development of a particular domestic sector.

Tim Phillips: 
Uh-huh. 

Zsóka Kóczán: 
Many of them are firm specific. I mentioned the interplay earlier between the large state and the small group of large firms which may be lobbying for these, but again, which may make them particularly difficult to phase out. Traditionally, many of them have lacked sunset clauses, so even when they were introduced, they didn’t have a stated end date. Policymakers appear to be learning from historical experience because sunset clauses are actually becoming more common over time.

Tim Phillips: 
Okay, so I’m going to play policymaker now, and you’re advising me on industrial policy, and it sounds like you’re the person to do it. So, based on your research, which of my many economic problems would you advise me that I could apply it to, and which ones should I steer clear of? 

Zsóka Kóczán: 
Picking sectors is very difficult, but perhaps more than picking winners, it’s even more difficult to let go of the losers. Part of this reflects human psychology, but the phasing out aspect tends to be where many industrial policies run into problems because they remain in place longer than they should. One general trend that we see is that industrial policies tend to work better in a context where the pie is growing, rather than when they are used to support, for instance, sunset industries, because there is, as you might imagine, the incentives are even stronger on the part of firms to lobby to make sure that these support mechanisms are not discontinued. So, the risks of addiction are higher.

Tim Phillips: 
Okay, so focus on success, avoid failure, make sure I don’t have zombie policies. How would you advise me to evaluate the policies? As you said, this is difficult, but it is essential. 

Zsóka Kóczán: 
Evaluation should be seen as an iterative process, at least that is what successful examples of industrial policies in the past teach us. They should be refined as they go. There should be clear benchmarks. Setting up separate agencies responsible for evaluation of policies that are seen as independent, that are seen as slightly separate from both the public sector and the affected private firms tends to be helpful in this regard. 

Tim Phillips: 
And as you have mentioned, industrial policies can be very popular with the electorate, so of course I’m always gonna be tempted, and that partly explains the fashion for industrial policies we have at the moment. Should it be a worry that this might crowd out the duller work that we do on infrastructure, improving business conditions, or making sure that we have a skilled workforce?

Zsóka Kóczán: 
They should exist in parallel. 

Tim Phillips: 
Mm-hmm. They should. 

Zsóka Kóczán: 
And we do worry that they may crowd out the duller fundamentals. But actually, as a number of examples in our report highlight, the success of industrial policies is often conditional on these fundamentals being in place. We see that special economic zones, which have been increasing in popularity recently as well, are more likely to be successful where there is a strong human capital base, where there is the right physical infrastructure in place, the success of industrial policies being greater where administrative capacity is stronger. So, these dull fundamentals need to be in place to ensure that industrial policies can work.

Tim Phillips: 
Zsóka, thank you very much. 

Zsóka Kóczán: 
Thank you very much for having me.

Tim Phillips: 
If you want to read the transition report from the European Bank for Reconstruction and Development, it is called Navigating Industrial Policy, and you can find it at tr-ebrd.com.

Outro:
VoxTalks Economics is a Talk Normal production. The assistant producer is Megan Bieber and our editor is Andre Zagarion. Next time on VoxTalks Economics, the importance of a hegemon for globalisation.