A Pillar of the Economics Establishment Admits That It Was Wrong
· The Atlantic
How does a country get rich? For decades, the economics establishment generally agreed on a simple answer: Embrace free markets and avoid “industrial policy”—state-led efforts to shape what an economy produces—at all costs. No institution embodied this viewpoint, widely known as the “Washington Consensus,” quite like the World Bank. Established in 1944 to provide low-interest loans to developing countries, the bank soon became the intellectual center of development economics. In the 1990s, it took a hard stance against industrial policy, turning the concept almost into a taboo.
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But now industrial policy is back, and it has a surprising new champion: the World Bank. A report issued last month argues that the bank’s previous stance had things backward: Government intervention, when done right, can actually be an essential ingredient of economic success. Industrial policy “should be considered in the national policy toolkit of all countries,” the report concludes.
“It’s hard to overstate what a big deal this is,” Jake Sullivan, who served as national security adviser under Joe Biden, told me. “The most important institutional voice in development economics just admitted that much of what we thought we knew about what made countries prosper was wrong.” The reversal is a bit like when the the U.S. government announced that dietary cholesterol and fat are actually fine, conceding that decades’ worth of nutritional advice had been in error.
The World Bank’s turnabout centers on a famous story in development economics. During the 1960s, ’70s, and ’80s, a group of Asian economies known as the “Four Asian Tigers”—Hong Kong, South Korea, Singapore, and Taiwan—experienced some of the fastest growth ever recorded, transforming them from poor farming backwaters into rich industrial powerhouses even as the rest of the developing world lagged far behind.
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One school of thought held that these countries had succeeded because of industrial policy. The Asian Tigers, in this telling, recognized that if they embraced laissez-faire capitalism immediately, then any attempt to build advanced industries would be impeded by foreign competition. The countries therefore poured huge amounts of public money into building up companies in certain “infant industries,” such as automotives, semiconductors, and consumer electronics, and occasionally used trade restrictions to temporarily insulate those industries from foreign competitors. With enough support, these companies eventually grew from small, uncompetitive firms to giant, multinational corporations such as Samsung and Hyundai in Korea and TSMC in Taiwan.
This perspective was gaining traction in the 1980s—until the world’s top institutional authority on development economics stepped in and squashed it. In 1993, the World Bank published a widely read report, titled “The East Asian Miracle,” in which it argued that the Asian Tigers had gotten rich not because of industrial policy but despite it. Most of their economic interventions, the report argued, had made “little apparent impact” or “clearly backfired.” “Our assessment of three major uses of intervention is that promotion of specific industries generally did not work and therefore holds little promise for other developing economies,” the report concluded. The real reason behind East Asia’s economic success was “market-friendly economic policies” such as reducing trade barriers, maintaining low budget deficits, and removing regulations on private companies.
The first-order effect of the report was to turn the concept of industrial policy into the economic equivalent of flat-Earth theory, solidifying the Washington Consensus around free trade, deregulation, and privatization. It also shaped the conditions under which developing countries could access much-needed financing, because the World Bank began conditioning its loans on recipients’ eschewal of industrial policy and adoption of market-friendly reforms.
By the mid-2010s, the Washington Consensus was beginning to show signs of weakness. The first turning point came in 2016, when Donald Trump won the U.S. presidency by railing against globalization and free trade. The second came during the coronavirus pandemic of 2020, when countries around the world, including the United States, found themselves facing shortages of supplies as basic as face masks and as crucial as semiconductors.
In the meantime, China had become more powerful than ever, even as it totally flouted the World Bank’s recommendations. Using huge government subsidies, cheap loans, and major trade restrictions, it turned a set of strategic industries from virtually nonexistent into global champions. By 2025, China was producing more than half of the world’s naval ships, two-thirds of the world’s electric vehicles, three-quarters of the world’s batteries, and 90 percent of the world’s solar panels.
For developing nations, China’s path was seen as a marvel worthy of emulation. “Lots of these middle-income countries have started to see their growth slow down a lot,” Mary Lovely, an economist at the Peterson Institute for International Economics, told me. “And so what do you do? Well, if you look at China, what they did was industrial policy—and that seemed to work pretty well for them.”
But for the U.S. and other advanced economies, China’s rise presented a serious economic and geopolitical threat that had to be countered. In 2023, Sullivan gave a speech outlining the tenets of a “new Washington consensus”: one in which the government would play a more active role in creating good middle-class jobs, building resilient supply chains, reducing dependence on geopolitical adversaries, and seeding new industries crucial to national security. To that end, the U.S. under Biden invested hundreds of billions of dollars in semiconductors and clean energy and imposed new tariffs on a handful of Chinese goods in strategic industries, including electric vehicles and batteries. When Trump returned to office last year, he went even further, issuing massive tariffs on nearly all goods from around the world and purchasing government stakes in companies such as Intel.
Now that the world’s two economic superpowers were both engaged in industrial policy, the rest of the world needed to find a way to keep up. When, that same year, the World Bank surveyed its country economists, 80 percent of them reported that client governments had sought their advice on how to use industrial policy more effectively. In a comprehensive review of the development plans of 183 countries, it found that all of them were engaging in at least one form of industrial policy.
So just over 30 years after the original East Asia report, the World Bank decided to publish a sequel. This time, it came to the opposite conclusion. The “East Asian Miracle” report’s anti-industrial-policy stance “has the practical value of a floppy disk today,” writes Indermit Gill, the World Bank’s chief economist, in the report’s foreword. What changed? First, the body of evidence grew. Since the 1990s, poor countries have used industrial policy to become global leaders in key industries, such as Romania for software development, Brazil for agriculture, and China for shipbuilding. Moreover, when World Bank researchers reevaluated the East Asian experience with many more decades of data, they found that industrial-policy efforts had been far more crucial to the region’s success than was initially understood. For example, from 1973 to 1979, the South Korean government spent about 0.4 percent of its GDP each year to develop industries such as steel, electronics, and petrochemicals. At the time of the 1993 report, the cost did not appear to have been worth the benefits. But a more recent study found that the spending eventually increased the country’s annual GDP by 3 percent—an enormous amount of growth.
The second change is that developing countries have become more capable. Their policy makers are better educated, their bureaucracies more professionalized, and their budgets much larger than they were 30 years ago, giving the countries a greater chance of successfully intervening. Taking these changes together, the report concludes that industrial policy “is far more replicable than previously thought.”
[Listen: What really fueled the ‘East Asian Miracle?’]
The details of how countries use industrial policy matter a great deal. On surveying a litany of international case studies, the report finds that tariffs rarely achieve their stated goals, or they do so at the unacceptable costs of hurting industries that rely on imported goods and of inviting retaliation from other countries. Instead, the report argues for policies that offer specific industries direct support, such as subsidies, tax credits, or workforce-training programs.
Perhaps the biggest problem with industrial policy is that it can easily become susceptible to corruption and self-dealing as various special-interest groups lobby the government for favors or carve-outs. The report dedicates a chapter to “How to Get the Institutions Right,” which includes a recommendation to hand over policy implementation to a technocratic agency that is relatively insulated from politics, and that thus won’t be susceptible to pressure by politically connected interest groups. It also emphasizes the importance of making clear, credible commitments, ideally across political parties, that reduce uncertainty and allow current and would-be businesses to make long-term decisions in response to new policies. And it warns against “picking winners”—investing in particular companies or national champions as opposed to offering broad incentives for an entire sector.
This list of best practices is almost a photo negative of the approach that Trump has taken during his second term. He has imposed big tariffs on basically every good from every country on the planet. Those tariffs have been announced and then un-announced; paused and then un-paused; and revised through deals, overturned by courts, and then reinstated under different legal authorities, which also may be overturned by the courts. They have been issued based on the president’s individual authority and have resulted in an endless chain of lobbyists, foreign leaders, and CEOs making pilgrimage to Mar-a-Lago to secure carve-outs. When Trump has made targeted investments, they’ve been in the form of handpicked equity stakes in specific companies, such as Intel, rather than industry-wide commitments.
In this context, the World Bank’s implicit message to the rest of the world appears to be: Yes, industrial policy can work if done correctly. But please, for the love of God, don’t do what America is doing.