If someone changes their stance on something, what would you call that person? A hypocrite? Well, probably most of us would say the same. But when that change of stance is based on scientific and empirical study, that's not hypocrisy. Its evolution. Or confession. As the old-world order crumbles, the World Bank - part of that order - has admitted it made a mistake. Let's see what's the matter.
The World Bank's Confession
The World Bank changed its stance on 'industrial policy' in March 2026. Back in 1993, the bank downplayed the role of industrial policies in Japan's or South Korea's growth, even though evidence suggested that they mattered. Instead, it promoted the idea that less government intervention leads to higher economic growth.
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"That advice has not aged well - it has the practical value of a floppy disk today," writes Indermit Gill, World Bank Chief Economist, in the latest report. The report states that the South Korean government's support of heavy industry and chemicals in the 1970s added about 3% to its GDP each year. In other words, the policy wasn't a failure, as projected a couple of decades ago.
What Industrial Policy Really Means
Let's understand what the industrial policy means.
The idea is straightforward: markets don't always make the best long-term decisions on their own, and thus, governments must step in to fix things. It's not about replacing markets like communism. It's more about the government setting direction, while markets do the driving.
This can take many forms, such as subsidies, tax incentives for a few sectors, creating special economic zones, investing in skills, or protecting domestic firms from foreign competition.
A Brief History of the Flawed Narrative
The idea that industrial policy was "bad" brewed for many years in academia before it became mainstream. Its roots go back to Friedrich Hayek, who warned that governments lack the information to direct economic activity effectively. That paved the way to free market liberalism, also called neoliberalism.
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Economists like Milton Friedman and Gary Becker strengthened the case for markets, while Jagdish Bhagwati highlighted how state-led protection could lead to inefficiencies. By the 80s, leaders like Margaret Thatcher and Ronald Reagan embraced the new idea. By the 90s, many developing countries, from Latin America to India, adopted free market policies, often under crisis conditions and external pressure.
This shift was called the Washington Consensus, a template built around liberalisation, privatisation, globalisation and reduced state control. The International Monetary Fund (IMF) and World Bank often compelled countries to implement these policies to get loans during crises.
What Free-Market Reforms Did to Developing Economies
Free-market ideas are not flawed. They benefited many countries, including India, through higher growth, poverty reduction, improved efficiency and deeper integration with global trade. But the problem with the Washington Consensus was its uniform imposition, with little regard for domestic context or alternative approaches.
Industrial development in many emerging economies faced problems due to these policies. Economists showed that many developing countries moved into services too early, before building a strong manufacturing base. Young and less efficient domestic industries failed when exposed to intense global competition, resulting in premature deindustrialisation.
Countries also struggled to move up the value chain and remained dependent on farming, commodities or low-value segments of global supply chains. So, while free-market reforms improved efficiency, they fell short on multiple issues.
At the same time, it is important not to oversimplify this story. Multiple factors shape industrial growth and economic development, such as institutions, governance, and global conditions. The evidence indicates that relying solely on markets, without government backing for industry, was not enough.
The Turning Point and the World Bank's Reversal
Despite all the narrative buildup, countries never gave up industrial policies, including the developed ones. The 2008 financial crisis triggered governments to step in, while Covid-19 and the Russia-Ukraine war accelerated their adoption. Governments around the world brought national security concerns into policies, leading to the protection of chips, energy, pharmaceuticals, and other industries.
In 2026, the World Bank formally acknowledged this shift. The emphasis now is not on whether governments should intervene, but how. What is emerging now is a more balanced approach.
It argues that markets can bring efficiency and innovation, but they need support to build new industries and manage transitions. It has become more supportive of investing in infrastructure, education, and research and embedding new challenges such as the changing climate and demography in industrial policies.
The broader message is that global institutions are now more open to endorsing industrial policy as a tool to achieve specific goals. For instance, the recent UNCTAD Critical Minerals, Critical Decisions report recommends that countries use industrial policies to shift from being raw materials exporter to developing domestic value chains around their resources.
The Risks Are Real
But we cannot ignore the risks.
Powerful firms can capture governments. Subsidies can keep inefficient businesses alive. Policies meant to be temporary can become permanent. Governments may support the wrong industries. In extreme scenarios, the governments can risk becoming authoritarian if they get too powerful.
These concerns are valid, and that's why industrial policy has a mixed track record.
Look Before You Leap
For that reason, the IMF recommends evaluating policies before implementing them. The basic advice is that the government should intervene only if there is a clear market failure. It writes that the government must check whether simpler, less distortive alternatives exist.
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If the government decides to intervene, then the policy must fit the country's capacity, and complementary reforms must accompany it. Such a policy must have clear rules and exit plans. Moreover, the expected benefits must outweigh the fiscal and economic costs, and ensure that the governments have the ability and capacity to implement it effectively. Without these precautions and understanding of the risks, governments may make an expensive mistake.
Finally, using industrial policy does not relieve governments of basic duties such as developing a healthy and educated workforce, robust infrastructure, and stable macroeconomic conditions.
Final Take
For the Global South, this is a real opportunity. In a world where rich countries back their own industries, not doing the same is no longer a neutral choice - it is a disadvantage. But opportunity alone is not enough. Industrial policy is only as effective as the state that designs and implements it. That said, neither industrial nor free market policies are a silver bullet.
The bigger lesson is how economic thinking evolves. The 1993 World Bank view was not wrong, but it became more biased. Today, it is revisiting those assumptions and acknowledging what it missed. That's the strength of the scientific approach - evidence forces revision, and knowledge improves over time. So, let's welcome this change.
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