INDUSTRIAL POLICY: HANDLE WITH CARE

Alibek KONKAKOV

Director for Public Administration and Policy

The need for industrial policy is often justified by the experience of developed countries. However, a recent IMF report — "Industrial Policies: Handle with Care" — presents a more cautious view.

In certain cases, industrial policy may be justified. Examples include high entry barriers, coordination problems, a lack of specialized infrastructure, or geoeconomic considerations. However, the permissibility and effectiveness of government intervention depend on numerous conditions and carry significant risks.

Key risks include:

• Weak institutions increase the likelihood of policy errors, ineffective implementation, and even "state capture"

• Fiscal costs (budgetary and tax-related) can spiral without a defined “exit strategy”

• Supporting select sectors may harm the productivity of more efficient industries

• Some support measures may be perceived as unfair competition, triggering retaliatory trade restrictions

To improve the chances of success, certain conditions must be met:

• Focus on sectors with high distortions (e.g., pharmaceuticals) with strong entry barriers and reliance on funding

• Rely on strong institutional foundations – from professional bureaucracy to access to capital

• Support sectors with strong upstream production linkages

• Combine support with trade liberalization and global integration

Key principles:

• Diagnose market failures rather than set ambitious top-down priorities

• Institutional competence and autonomy

• Gradual approach – from basic infrastructure to targeted instruments

• Prefer export incentives and reduced transaction costs over subsidies

• Support must be temporary

• Ensure transparency and adherence to international obligations

What does this mean for Kazakhstan?

The Law “On Industrial Policy” and the Entrepreneurial Code offer broad support measures – subsidies, guarantees, tax benefits, and financing. However, the current approach doesn’t fully align with the IMF’s principles:

• Priorities are set administratively (not via distortion diagnostics)

• Support measures are often open-ended in time

• Risks of capture by special interests are not institutionally mitigated

• Instruments are broadly applied rather than targeted

• Evaluation mechanisms and exit strategies are not yet embedded

Key takeaway

The IMF report reflects a shift in the global expert community — industrial policy is no longer viewed as a universal solution for economic transformation. It is only justified when based on clear diagnostics, limited intervention, and institutional readiness. If there is sustained political demand, it is crucial to at least build such policy on the right foundations to reduce the risk of systemic failures.