Leaning Heavily on Tariffs Blunts Developing Nations' Industrial Push, World Bank Says

World Bank Urges Targeted Industrial Policy over Tariffs in Developing Nations

By Colleen Goko

World Bank Report Highlights Industrial Policy Approaches in Developing Countries

JOHANNESBURG, March 17 (Reuters) - Developing countries are pursuing industrial policy more aggressively than rich nations but many rely too heavily on blunt tools like tariffs and subsidies that are unlikely to work, the World Bank warned in a report on Tuesday.

Background and Context

Governments have long backed industrial policy, using state tools to shape production instead of relying solely on markets, said World Bank Chief Economist Indermit Gill in a foreword.

Increased Demand for Industrial Policy Guidance

"Last year, 80% of World Bank country economists reported that client governments sought their advice on how to use industrial policy more effectively," Gill wrote in the report on strategies across 183 nations.

Intensity of Industrial Policies in Developing Economies

The report found that developing economies apply industrial policies more intensively than high-income countries, with low-income nations on average targeting 13 industries for growth, more than twice as many as wealthier states, according to authors Ana Margarida Fernandes and Tristan Reed. 

Escalating Global Trade Tensions

WORLD TRADE TENSIONS ESCALATING

The report comes as global trade tensions escalate, with governments from the U.S. to China increasingly using protectionist measures to shield strategic industries, stoking debates over how best to foster jobs, exports and economic development.

Shift in World Bank’s Stance on Industrial Policy

It also marks a turnabout for the World Bank's position formulated some 30 years ago, that told governments that industrial policy was usually a "costly failure," Gill said.

"That advice has not aged well — it has the practical value of a floppy disk today," Gill said.  

Challenges and Recommendations for Policy Implementation

However, he underscored that while industrial policy can be a viable tool, implementation often falters.

Overreliance on Tariffs and Subsidies

"Governments usually resort to blunt instruments, opting for the bludgeon of sweeping tariffs and subsidies over the scalpel of industrial parks and skills development programs," he said.

Tariff Rates and Economic Impact

Low-income economies impose the highest average tariff rates on imports at 12%, compared to 5% in high-income countries, the report found. While tariffs may protect fledgling industries in markets with strong state capacity and fiscal flexibility, many poorer states lack resources to absorb the associated costs.

"All countries would be better off with a more pragmatic and precise approach," Gill said.

Examples of Targeted Industrial Policy Successes

Examples of targeted, successful industrial policies included Romania, which boosted its software industry through payroll tax exemptions, Brazil's investment in research tailored to local agriculture supported its emergence as an agricultural powerhouse, and South Korea's 1970s focus on heavy and chemical industries contributed to long-term GDP growth.

Drawbacks of Broad-Based Subsidies

By contrast, broad-based subsidies averaged 4.2% of GDP in upper-middle-income countries, the highest on record, reflecting a growing reliance on fiscal incentives among certain economies.

(Reporting by Colleen Goko, editing by Karin Strohecker and Bernadette Baum)