IMF launches fiscal monitor chapter 2

The International Monetary Fund (IMF) has raised concerns about the resurgence of industrial policies by governments, cautioning that a well-designed fiscal policy mix may be more beneficial for economic growth. The latest commentary from the IMF highlights the potential risks associated with industrial policies, such as misallocation of resources and capture by special interests. During a recent interview with CNBC Africa, Era Dabla-Norris, Assistant Director of the Fiscal Affairs Department at the IMF, emphasized the pitfalls of industrial policies that heavily rely on costly subsidies or tax breaks. She noted that while these policies may promise gains, they often result in substantial losses. The Fiscal Monitor released by the IMF also warns against discriminating against foreign firms, as such practices could lead to costly retaliation and hinder countries' abilities to leverage innovation from other nations. Dabla-Norris explained that the challenges associated with implementing targeted industrial policies stem from various factors. Governments often struggle to time these policies correctly or lack information about market failures and inter-sector linkages. Additionally, projects may not undergo thorough vetting processes due to a lack of technical or administrative capacity, leading to misallocations of resources and policy mistakes. The IMF official highlighted the importance of increasing fiscal spending on innovation and technology diffusion to drive economic growth. While advanced economies have shifted towards incentivizing private research and development by firms, public funding for fundamental research has declined. Dabla-Norris suggested that a mix of public funding for basic research, R&D grants for startups, and tax incentives for applied innovation could significantly boost GDP. By increasing spending on these policies, countries could potentially raise GDP by 2% in the long term. She underscored the significance of creating enabling conditions for technology adoption in emerging markets and developing economies. Investments in education, strategic infrastructure, and digital connectivity are crucial for these nations to harness external innovations and build up their own capacities. Dabla-Norris stressed that a multi-pronged approach, tailored to the specific needs of each country, is essential to achieve sustainable growth. In terms of the roles different countries should play, the IMF recommends a complementary mix of fiscal instruments for advanced and emerging economies to support innovation. While advanced economies should focus on fueling innovation, emerging markets need to prioritize human capital development and infrastructure investments. The report also advocates for structural policies that uphold fair competition and free trade, emphasizing the importance of international cooperation to enhance the global technology frontier. Overall, the IMF's call for a reevaluation of industrial policies in favor of well-designed fiscal strategies underscores the potential long-term benefits of targeted investments in innovation and technology diffusion. As global economies navigate challenges posed by the ongoing pandemic and high debt levels, strategic fiscal policies could pave the way for sustainable growth and prosperity on a global scale.