The World Bank industrial policy shift that emerged around the 2026 Spring Meetings of the IMF and World Bank was widely reported as a historic U-turn. For decades the institution counselled developing countries to steer clear of state-led strategies to build industries. Now it acknowledges that such policies can work. Lara Merling, a research fellow at UCL, argues that the change is real but far narrower than the headlines suggest, and that the deeper question of what kind of economy states should be building remains unanswered.
How far has World Bank industrial policy really moved?
The Bank’s old position traces back to its influential 1993 report, The East Asian Miracle, which examined the rapid growth of economies such as South Korea and Taiwan but warned other countries against copying their industrial-policy tools. That advice, Merling argues, did not serve the developing world well.
The report became a reference point for a generation of policy advice that emphasised macroeconomic stability, open trade and limited state intervention, often summarised as the Washington Consensus. Developing countries borrowing from the Bank and the IMF frequently found those principles embedded in the conditions attached to their programmes.
The new framing concedes several points critics have made for years. It says industrial policy is more replicable across income levels than the old consensus allowed, and that it extends well beyond tariffs and subsidies. It also endorses attaching conditions to public support, with carrots and sticks that include withdrawing finance from firms that underperform. These ideas closely echo the literature on the entrepreneurial state, mission-oriented policy and conditionality that Merling and like-minded economists have long promoted.
Yet the Bank’s leadership has hedged. Chief economist Indermit Gill described the old advice as nearly obsolete while still defending the 1993 report, and characterised industrial policy as targeted and temporary. In other words, it remains an exception within a fundamentally market-led model rather than an engine of broad economic transformation.
Market fixer or market shaper?
Merling’s central objection concerns the role of the state. In the Bank’s framework, government steps in mainly to correct market failures, filling gaps where private actors underinvest. She argues instead that the state should actively create and shape markets, guided by clear public purposes. That requires institutions capable of governing the bargain between the public and private sectors, so that value is created collectively and its rewards are shared fairly rather than risks being socialised while gains are privatised.
The distinction is not merely academic. A fixer state waits for markets to fail before acting and tends to offer support with few strings attached. A shaping state sets direction first, for example by deciding that an economy should decarbonise or build domestic capability in critical technologies, and then uses procurement, public finance and regulation to steer private investment toward that goal.
Fiscal space as something to build
A second critique concerns money. The Bank tends to treat fiscal space as a fixed constraint within which policymakers must optimise. Merling argues it should instead be seen as an institutional capacity that grows with productive public investment. Because the Bank starts from a tight budget envelope, it naturally organises industrial policy around particular sectors and existing comparative advantage. Merling contends that the defining challenges of this era, including the energy transition, water and food security, public health and economic resilience, cut across sectors and call for economy-wide missions.
The IMF faces a similar critique. Its own economists have documented the ways austerity and rapid liberalisation can fail, yet those findings have not consistently changed operational practice. Because the two Washington institutions shape access to liquidity, judgements about debt sustainability, the credibility of public investment plans and governments’ room for manoeuvre, the gap between research and practice has real consequences for borrowing countries.
Lessons for rich economies and the energy shock
Merling stresses that the problem is not confined to the developing world. Similar assumptions guided policy in Europe and the United States, holding back public investment, weakening public services and treating wages as a cost rather than a source of demand. Households were left exposed to shocks, and the resulting affordability squeeze has fed political backlash, including rising support for the far right.
The energy crisis is her clearest illustration. Between 2022 and 2025, EU member states and the UK incurred around $1.8 trillion in additional costs, much of it absorbed by households and public budgets while shareholders of companies raising prices gained. Spain took a different approach, treating energy security as a mission rather than a subsidy line, and now generates more than half of its electricity from renewables, leaving it better insulated than many of its neighbours. Her broader argument appears in Merling’s essay on a new economic model.
Toward a new economic consensus
Merling points to the Global Progressive Mobilisation, convened by Spanish Prime Minister Pedro Sánchez, as an early attempt by like-minded governments to shape an alternative framework. She calls for public institutions able to invest, coordinate and govern markets in the public interest; finance structured around missions rather than leverage ratios; fiscal space treated as something built through productive investment instead of a ceiling set by markets; and measures of value oriented toward the common good.
Advanced economies have already moved in this direction in practice. Large subsidy and investment programmes for semiconductors and clean energy in the United States and Europe in recent years show that industrial policy is no longer treated as a developing-country exception.
For investors, a sustained revival of World Bank industrial policy, alongside similar moves in advanced economies, would have tangible implications: larger public investment programmes, more conditional state support for strategic industries and a bigger role for development banks in sectors such as clean energy and infrastructure.
Conclusion
The new World Bank industrial policy stance is significant, but Merling argues it amounts to a partial correction rather than a new paradigm. As long as industrial policy is treated as a temporary exception and fiscal space as a fixed limit, the state’s capacity to drive transformation will remain constrained. The case for a new economics, she contends, is being won. The harder task now is designing what comes next.
