IMF Insights: Industrial Policy Can Lift Productivity—but Comes With Risks and Trade-offs

By: Peter Ort, The Quinnipiac University Global Economics Research Team

Photo by: Andreas Dittberner on Unsplash

On November 25, 2025, a recent IMF blog post titled Industrial Policy Can Lift Productivity—but Comes With Risks and Trade-offs highlights situations of when it is appropriate to utilize industrial policy and why it may not always be good to use it at all.

Industrial policy is a form of fiscal policy that involves the likes of subsidies, quotas, tariffs, and tax breaks to uplift domestic industry. Whether it is to develop “infant” industries or to increase economic independence, industrial policy often has drawbacks similar to fiscal policy.

For the advantages of industrial policy, it oftentimes serves its purpose correctly, particularly in developed countries with strong institutions. Subsidies, for example, are associated with a 0.3 percent increase in productivity on average after three years of a subsidy’s implementation.

However, money from subsidies indirectly takes away from the people, as it is taxes that fund subsidies. A lack of subsidies would increase purchasing power for consumers as would a lack of other forms of industrial policy. Tariffs increase the price of foreign goods, potentially drawing more consumers towards domestic goods, but also at the cost of purchasing power. Quotas limit foreign imports entirely, again increasing prices for those goods at the cost of protecting domestic industry.

This is not to say that industrial policy is entirely wrong, but policy makers must take into account the consequences of industrial policy and whether it is appropriate to enact such policy. As we enter a new economic era with the second term of President Trump, it is more relevant than ever that policy makers understand industrial policy.

For more information, you can read “Industrial Policy Can Lift Productivity, but Comes With Risks and Tradeoffs.”