LAGOS, Nigeria (VOICE OF NAIJA)-The International Monetary Fund (IMF) has warned that many industrial policies heavily depend on expensive subsidies or tax breaks, potentially posing risks to productivity and welfare if not properly directed.
The multilateral lender stated this in a new report titled ‘Industrial Policy Is Not a Magic Cure for Slow Growth’.
According to the global lender, industrial policies that involve government support for specific sectors can foster innovation if implemented effectively.
It emphasised the importance of striking a balance, citing historical instances of policy errors, significant fiscal expenses, and adverse effects experienced in other nations.
The report highlighted the trend of numerous countries intensifying their industrial policies to foster innovation in particular sectors, aiming to stimulate productivity and sustained growth, especially in light of security concerns.
The report read in part, “Most industrial policy relies heavily on costly subsidies or tax breaks, which can be detrimental for productivity and welfare if not effectively targeted.
“This is frequently the case, for example, when subsidies are misdirected toward politically connected sectors. In addition, discriminating against foreign firms can prove self-defeating, as such policies can trigger costly retaliation and most countries, even major advanced economies rely on innovation done elsewhere.”
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The report emphasises that relying solely on industrial policy to promote innovation in certain sectors and technologies is not a cure-all solution.
“However, well-designed fiscal policies that support innovation and technology diffusion more broadly, with an emphasis on fundamental research that forms the basis of applied innovation, can lead to higher growth across countries and accelerate the transition to a greener and more digital economy,” it noted.
It suggested that governments implementing industrial policies should invest in technical capacity, adjust support measures as circumstances evolve, and adhere to open and competitive market principles.
It added, “In some cases, industrial policy can be justified, such as when it supports sectors that generate strong knowledge spillovers to the domestic economy (for example, in the semiconductor industry).
“Another important use case is driving green innovation reaching net zero emissions will require technologies that do not yet exist. But subsidies to green innovation should be transparent, focused on environmental objectives, and complemented by robust carbon pricing to minimise fiscal costs.”
Since assuming office, the Bola Tinubu-led administration has initiated comprehensive reforms aimed at ending subsidies, which numerous analysts had attributed to Nigeria’s economic challenges. On May 29, 2023, during his inauguration, President Tinubu announced the permanent end of the fuel subsidy regime.
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Two weeks later, the Central Bank of Nigeria floated the local currency to determine its actual value. Despite facing criticism from some sectors of society, these two significant policy reforms have garnered praise from international observers.
In a previous report from January, the IMF praised Nigeria and three other nations for recent subsidy reforms aimed at freeing up funds for development expenditures.
It said, “Building resilience in the face of these trends requires countries to act. Some countries have made progress, for instance, Angola, The Gambia, Nigeria, and Zambia have taken steps to implement significant energy subsidy reforms to create space for development spending.”
However, the IMF expressed concern about the lagging progress in many countries, particularly in efforts to boost revenues. This includes initiatives like expanding the tax base, reducing tax exemptions, and enhancing tax administration efficiency.