Why the World Bank changed its mind on industrial policy

The World Bank’s newfound support for industrial policy reveals how economic theory is inseparable from geopolitics

Photo by Isis França on Unsplash

There is a particular kind of institutional courage involved in admitting you were wrong, especially when your wrongness shaped the economic destinies of dozens of countries. The World Bank has just published a major new report on industrial policy, and in the foreword, its Chief Economist concedes that the institution’s earlier warning against using industrial policy “has not aged well — it has the practical value of a floppy disk today.” This is an unusually candid admission from one of the world’s most powerful international organisations. And it deserves a closer look, both for what it says and for what it doesn’t.

1993 and the triumph of free-market orthodoxy at the World Bank

In 1993, the World Bank published The East Asian Miracle, a report that would go on to shape development thinking and policy for a generation. Its central argument was that South Korea, Taiwan, Singapore, Hong Kong and other high-performing Asian economies had succeeded primarily because of market-friendly policies: low price distortions, macroeconomic stability, openness to trade, and letting comparative advantage guide which industries developed. The state's role, where acknowledged at all, was cast as facilitative rather than directive — getting the basics right and then stepping back.

This was a selective reading of the evidence, to put it generously. The same report actually acknowledged, in some detail, how governments in these economies had intervened: through targeted and subsidised credit to selected industries, protection of domestic producers, and the deliberate steering of investment into sectors the state had chosen to develop. But having noted this, the report essentially waved it away — concluding that industrial policy was secondary rather than fundamental, and that other developing countries should avoid replicating industrial policy from East Asia, to the degree it had been pursued there.

In other words: yes, industrial policy was present in East Asia — but that wasn’t really why these economies were so successful, and you probably couldn’t replicate it anyway. Active state intervention was to be treated with suspicion. Developing countries were instead counselled toward fiscal discipline, liberalisation, and integration into global value chains on whatever terms were available.

The evidence against the World Bank’s neoliberal position was strong, even around that time. In fact, in the 1980s and 1990s, many political economists documented in great detail how state intervention, rather than free markets, was the driver behind East Asian development. Alice Amsden, Ha-Joon Chang, Peter Evans, Chalmers Johnson, and Robert Wade, to name a few, all published books about the role of industrial policy in East Asia that became hugely influential. Although to some degree acknowledged, The World Bank chose mostly to treat this body of work as caveats to the main conclusion in their 1993 report.

East Asia wasn’t the only counter-evidence available. The historical record of Western industrialised nations tells a similar story. The United States built its industrial base behind high tariff walls throughout the nineteenth century, while also benefiting from enormous state investment in infrastructure, land grants to railroads, and federally-funded research. Britain had practised heavy mercantilism and, especially under Robert Walpole in the eighteenth century, actively pursued industrial policy through protective tariffs, selective import duties, and export bounties. The countries now prescribing free markets to the developing world had, almost without exception, industrialised under conditions of significant state intervention and protection.

The global consequences of the World Bank’s stance in its 1993 report should not be understated. This institution was one of the most powerful shapers of development policy across the Global South, through its lending conditions, technical assistance, and the broader intellectual climate it set. In the 1980s, 1990s and 2000s, industrial policy effectively became treated as a curiosity worldwide: fine, perhaps, in a few exceptional cases, but something you should remain fundamentally sceptical of. The prescription instead for developing countries was liberalisation, privatisation, and faith in market forces.

The development ladder was being kicked away, and the World Bank was partly doing the kicking.

The U-turn: industrial policy re-enters the room

Three decades later, the World Bank has reversed course. The new report, published last week, concludes that industrial policy “should be considered in the national policy toolkit of all countries” — a statement that would have been heretical by the institution’s own standards in the 1990s. The new report even makes explicit reference to its old 1993 report, admitting that they wrongly stigmatised industrial policy. The U-turn has been made so clear that even The Wall Street Journal ran a story about the new report under the headline: “World Bank Embraces Industrial Policy, Abandoning Three Decades of Stigma.”

Why now? This is the most interesting question. And the honest answer has two parts.

The first is straightforward. Industrial policy is experiencing a revival, driven by new realities in the world economy that demand more state intervention, such as great-power rivalries, supply chain fragilities, national security concerns, the geopolitics of the green transition, and the downfall of the rules-based international order.

But there is a second, less flattering explanation worth sitting with.

The World Bank is not a neutral arbiter of economic knowledge. As I have written previously in my newsletter, it is an institution where the interests of wealthy nations — and Western nations above all — are deeply entrenched. And the economic doctrine that the World Bank propagated so forcefully from the 1980s onward — free trade, privatisation, minimal state intervention — was not only ideologically loaded, it was also about maintaining a certain hierarchy in the world economy. As Quinn Slobodian documents in Globalists, the neoliberal project was never simply about “freeing” markets. It was about constructing an architecture of international rules that locked in the dominance of wealthy nations and made it difficult for developing countries to pursue the kinds of industrial policies that the rich world had itself relied upon historically.

That architecture served the West well. Open markets in the developing countries provided Western corporations with cheap labour, cheap goods, and cheap inputs. The stigmatisation of industrial policy was, in this context, a feature rather than a bug — it kept developing countries from doing what rich countries had always done.

What has changed is not the World Bank’s understanding of development economics. The evidence for industrial policy was always there. What has changed is the geopolitical context. Western nations now actively need industrial policy to compete, especially with China. Semiconductor supply chains, electric vehicle manufacturing, critical minerals processing — these are the battlegrounds of great power competition. It is simply no longer coherent for the West to condemn industrial policy as a relic of misguided statism when it is simultaneously practising it on a large scale.

In this light, the World Bank’s U-turn looks less like an intellectual awakening and more like an institutional adjustment to new political realities. The report does, to its credit, make the case for industrial policy in all countries, including developing ones. But we should be clear-eyed: the doctrine shifted because the interests of powerful states shifted, not because development economists suddenly discovered new evidence.

Lessons beneath the reversal

None of this should diminish the genuine commitment to international development among many of the World Bank’s economists. And the new report will provide valuable political cover for developing countries that have long wanted to pursue industrial policy but faced pressure — from the World Bank, from the IMF, from bilateral donors — to hold back.

But it would be naive to take the report at face value as a straightforward act of intellectual honesty. Institutions like the World Bank do not change their minds simply because the evidence changes. They change when the political winds shift. The winds have shifted because powerful countries have decided, for their own reasons, that industrial policy is back on the menu.

The lesson for developing countries is not to wait for the World Bank’s blessing before actively pursuing industrial policy. In fact, many East Asian countries have in the past pursued industrial policy in explicit defiance of World Bank advice. The only thing that has changed is that the world’s most powerful economies are now doing industrial policy so openly that it can no longer be denied to the rest of the world.