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Context

• Recent industrial policy initiatives by the US, Europe, and other nations aim to drive innovation but are not guaranteed solutions for economic growth, according to the International Monetary Fund (IMF).

Concerns Raised:

• While industrial policy can foster innovation if implemented effectively, historical examples highlight risks such as policy errors, high fiscal costs, and negative consequences for other countries.
• Overreliance on subsidies and tax breaks may pose fiscal risks, favor special interests, and lead to resource misallocation.
• Discriminatory policies against foreign firms could provoke retaliation and exacerbate economic divisions.

IMF Recommendations:

• Advocates for a broader policy mix to support innovation, including increased public funding for fundamental research, R&D grants for startups, and inclusive tax incentives for applied innovation.
• Suggests that boosting public spending on fundamental research could significantly enhance GDP and reduce debt-to-GDP ratios for advanced economies.

Examples Cited:

• Highlights recent industrial initiatives like US funding for domestic research and semiconductor manufacturing, EU's support for climate neutrality transition, and measures in Japan, South Korea, and China.

Conclusion:

• Encourages less technologically advanced countries to prioritize policies promoting technology diffusion through investments in education, infrastructure, and digital skills to narrow the gap with advanced economies and foster growth.

READ ABOUT IMF: https://www.iasgyan.in/daily-current-affairs/imf

https://www.iasgyan.in/daily-current-affairs/international-monetary-and-financial-committee-imfc

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