Slowing productivity growth across Europe and Central Asia (ECA) has prompted governments to look beyond broad structural reforms. Industrial policy, targeting specific sectors, activities, or enterprises, has surged as a result, and a recent ECA Economic Update examines whether it is helping reverse the productivity slowdown in many countries in the region.
The use of industrial policies in ECA accelerated after the 2008 Global Financial Crisis and then surged after 2020. The boost after 2020 was driven by COVID pandemic relief, but the focus has since shifted to energy efficiency, supply-chain resilience, and national security. The number of annual policy announcements now exceeds pre-pandemic levels in a third of ECA countries, led by Russia, Türkiye, and Central Europe (Figure 1).
Most of these policies target agriculture, food production, and intermediate goods (Figure 2). Only 10% of policies are aimed at high-tech or capital goods. There are very few attempts at moonshots. The EU and high-income countries, by contrast, increasingly focus their industrial policy on advanced manufacturing, semiconductors, clean energy, and digital infrastructure.
Industrial policies can be categorizes in three broad groups according to a recent World Bank report. The first is tailored public inputs, things like special economic zones, export promotion agencies, skills development programs, and sectoral roundtables. These address coordination failures and information gaps with relatively low risk of market distortion or retaliation from trading partners. The second is market interventions: subsidies, import and export tariffs, export bans, local content requirements, and public procurement rules that alter relative prices to steer investment toward preferred activities. The third is macroeconomic interventions such as currency devaluations, R&D tax credits, and broad-based tax incentives.
In ECA, subsidies have become the dominant tool, and their use has grown dramatically. After being among the lowest in the world, subsidy levels in the region are now the highest among developing regions, led by Kazakhstan, North Macedonia, Bulgaria, and Serbia. Import tariffs are rarely used, but non-tariff measures and export bans are common. In ECA excluding Russia, 60% of all export measures introduced since 2020 are outright bans. In Russia, 80% of export measures are taxes, mostly on grains.
The evidence on whether industrial policy works in delivering structural transformation or productivity growth is mixed at best. Against the few successes, economic history is full of large fiscal burdens, costly failures, and negative spillovers to other sectors. In ECA, the legacy of central planning - state-owned enterprises, lingering market distortions, incomplete transitions to market economies - adds further complications. In some cases, subsidies and price rigidities undermine the very signals that markets depend on.
A case study from North Macedonia shows the limits of well-intentioned programs. An impact evaluation of innovation programs run by the Fund for Innovation and Technology Development found that supported firms did expand employment, wages, investment, and sales. But productivity did not improve. Fewer than 5% of low-productivity firms moved upward, and more than 30% of firms reported declining productivity after receiving aid. The programs generated activity, but not structural transformation.
Three factors explain most industrial policy failures. The first is political capture: when implementing agencies lack independence, well-connected interest groups may secure subsidies rather than fostering genuine innovation. The second is information gaps and misaligned incentives: government officials rarely possess the knowledge of private actors, and they do not bear the cost of failure. The third is flawed benchmarking. Many governments have tried to replicate the growth of postwar Japan or 1970s Singapore by focusing on state direction, while overlooking the high savings and investment rates, strong education systems, a vibrant business environment, and strong labor productivity that were the main drivers behind those successes.
For ECA countries, structural reforms – not industrial policies - are still the foundation for economic vibrancy. Modernizing the business environment, reducing the footprint of state-owned enterprises, encouraging entrepreneurship, and improving education are the prerequisites for sustained productivity growth. Where clear market failures exist, tailored public inputs (special economic zones, skills development programs) can help address these without distorting competition or hurting markets. Tools such as production subsidies and trade measures require a higher bar: strong justification, sufficient government capacity to design and monitor programs, clear sunset provisions, and transparent reporting of costs and outcomes.
The right approach also depends on where a country is in its development. For ECA’s middle-income countries aiming for high-income status, policies that support better education, skills development, and the infusion of foreign ideas and technology are more appropriate than those targeting frontier innovation. It is often the under-provision of basic government services, whether a poor business environment or a weak education system that leads to calls for industrial policy in the first place. Governments should consider, however, responding to lagging productivity and limited business dynamism with broader reform efforts rather than narrowly targeted industrial policies.
The bottom line is that industrial policies can address specific market failures, but they are no substitute for structural reform. Contestable markets, open to trade and investment, are the essential foundation. Without strong institutions, competitive markets, and real government capacity, the risk of capture, waste, and market distortion is simply too high.
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