The Industrial Policy Trap: Why Modern States Are Repeating Past Mistakes

The current global return to industrial policy is a reaction to geopolitical tension and domestic political pressure. While governments increasingly attempt to pick winners, the result is often a cycle of dependency and administrative bloat. Because these policies frequently lack exit strategies and are captured by the firms they support, they risk diverting resources away from the essential investments in infrastructure and education that drive long-term growth. This analysis helps policymakers and institutional leaders distinguish between strategic state intervention and the political theater of firm-specific subsidies. Understanding these dynamics allows leaders to identify which interventions are genuine developmental catalysts and which are zombie policies destined to become permanent fiscal burdens.

The Illusion of the First-Best Solution

Modern industrial policy is rarely a precise response to a market failure. Instead, it is often a chaotic reaction to competing objectives. Research by Zsoka Koczan at the EBRD shows that over 75% of industrial policies pursue multiple, often conflicting goals, such as simultaneous decarbonization, domestic job creation, and supply chain security.

This creates a systemic blind spot. When a policy has three or more objectives, it becomes impossible to evaluate its success. Policymakers can pivot between these goals whenever a project underperforms, shielding the policy from accountability. The downstream effect is policy addiction. Because these interventions lack sunset clauses, they persist long after their original purpose has faded.

Picking winners is hard. Letting go of losers is even harder.

-- Zsoka Koczan

The Administrative Capacity Gap

There is a mismatch between the ambition of modern industrial policy and the administrative reality of the states deploying it. Koczan notes that while richer economies with robust institutions can manage complex, less-distorted interventions, lower-capacity states often default to crude, high-distortion instruments like import bans and quotas.

This creates a feedback loop. The states least equipped to handle the complexity of industrial policy are often the most tempted to use the blunt, destructive tools that are easiest to implement. When these policies are firm-specific, where a handful of large firms account for a significant share of GDP, they create a captured system. These firms lobby not for market efficiency, but for the continuation of their own subsidies. Over time, this crowds out the dull fundamentals, such as primary education, institutional reform, and basic infrastructure, that are the actual prerequisites for success.

The success of industrial policies is often conditional on these fundamentals being in place.

-- Zsoka Koczan

The Prisoner’s Dilemma of Geopolitical Fragmentation

The current surge in industrial policy is not just domestic. It is a defensive reflex against a fragmenting global trade system. If a rival nation subsidizes a strategic sector, a country may find itself in a prisoner’s dilemma where it is forced to respond in kind, even if the intervention is economically suboptimal.

However, the system responds to this by favoring shiny sectoral interventions over boring institutional improvements. The immediate political payoff of a subsidy, which voters generally prefer over tax-based solutions because the costs are less visible in the medium term, creates a structural bias. The result is a system where resources are diverted toward supporting sunset industries rather than fostering new growth. Without an iterative, learning-based approach to evaluation, one that treats policy as an experiment rather than a permanent entitlement, these interventions inevitably become the zombie policies that haunt national budgets for decades.

Key Action Items

• Implement Mandatory Sunset Clauses: Every new industrial policy must have a pre-defined expiration date. This forces an evaluation before renewal, preventing the addiction to subsidies. (Immediate)
• Prioritize Single-Objective Metrics: If a policy has more than one clear goal, it is likely designed to be un-evaluable. Demand a single primary KPI for every intervention. (Immediate)
• Decouple Evaluation from Implementation: Establish independent units to oversee policy performance. These units must be insulated from both the political cycle and the influence of the specific firms receiving support. (12 to 18 months)
• Focus on Dull Fundamentals First: Before launching sectoral subsidies, audit the state’s capacity for infrastructure and human capital investment. If these are lagging, industrial policy will likely fail to gain traction. (Ongoing)
• Adopt an Iterative Learning Framework: Treat industrial policy as an experimental process. If a policy is not meeting benchmarks, the default action must be refinement or termination, not continued funding. (Next 6 months)
• Avoid Firm-Specific Subsidies: Shift focus toward horizontal policies that improve the business environment for all participants, rather than picking individual winners that are prone to lobbying capture. (Long-term)