Global economic upheavals are fundamentally rewriting the standard Washington Consensus blueprint for development. For decades, the orthodox division of labor was clear: the state provided public inputs, macroeconomic stability, regulatory predictability, and basic infrastructure, while the private sector served as the engine of accumulation. Today, that boundary is blurring. Buffeted by geopolitical fragmentation, supply chain reconfigurations, and rapid automation, hyperactive industrial policy has returned to the global economic stage with an intensity not seen in half a century.
From New Delhi’s tech subsidies to Hanoi’s export corridors, state-directed structural transformation is firmly back in vogue. Yet World Bank introduces a necessary note of skepticism – while targeted sector-picking can reallocate global market shares, it frequently compromises allocative efficiency and strains already-thin fiscal buffers. It leaves the deep-rooted structural drags on aggregate total factor productivity (TFP) entirely untouched.
The South Asian Reality Check
South Asia provides a warning of this policy misalignment. Between 2022 and 2025, the region deployed protective industrial interventions at twice the rate of the average emerging market economy, with roughly half of these measures explicitly targeting manufacturing. State support has leaned heavily toward high-wage subsectors, capital-intensive large firms, and high-visibility manufacturing plays, exemplified by India's Production-Linked Incentive (PLI) schemes in electronics, where mobile phone production has increased nearly 28-fold over the past decade.
The macroeconomic returns from these interventions remain highly asymmetric: while trade defense mechanisms predictably suppressed imports, export incentives failed to stimulate expansions. Fiscally, this aggressive targeting is bounded by narrow tax bases and elevated sovereign debt; general government debt as a percentage of GDP exceeds the 63 percent emerging-market average in all South Asian nations except Bangladesh – reaching 132 percent in Maldives, 106 percent in Bhutan, 101 percent in Sri Lanka, and 81 percent in India – while 2019–2023 tax revenue fell systematically below the 15 percent benchmark.
Mixed signals: On data and the key industrial sectors
More critically, this manufacturing obsession ignores actual structural change, given that services – not manufacturing – have driven the bulk of non-agricultural employment growth across South Asia over the past decade. It similarly overlooks a crippling supply-side shortage: the remittance-migration trap. In a remittance-dependent economy like Nepal, over half of all households rely on external inflows, which pushes up domestic reservation wages and fuel real estate and import consumption rather than productive investment. By ignoring this phenomenon, active industrial policies are structurally bound to fail if a country's primary export continues to be its young labor force, starving domestic industries of baseline human capital.
A poignant microcosm of this South Asian tension is unfolding in Nepal, where aggressive vertical ambitions directly collide with severe underlying policy realism and financial constraints. As detailed in the official "Budget 2026/27", the government has launched a bold fiscal pivot to establish a production-oriented economy, eliminating excise duties on 360 items, compressing its customs architecture into seven tiers, slashing rates on 273 raw materials, and drawing up plans for specialized Employment-Linked Production Zones alongside a Sovereign AI Compute Center in Syuchatar. Yet executing this requires navigating deep-state capacity vulnerabilities; while structural simplifications, such as shifting to mere notifications for entity expansion, sound promising, they risk being hollowed out by institutional capture and persistent capital budget under-execution.
As highlighted in the International Monetary Fund (IMF) report, revenue over-optimism, political transitions, and cumbersome procurement dragged FY2025/26 real GDP growth down to a subdued 3 percent. More pressingly, with non-performing loans climbing to 5.4 percent in early 2026 and savings and credit cooperatives facing severe balance sheet distress, Nepal's push proves that ambitious industrial Master Plans cannot outrun a fragile financial foundation, meaning that horizontal stabilization measures, like the newly completed Loan Portfolio Review of major commercial banks, must take precedence to prevent severe fiscal drag.
East Asia's Enclave Problem
A structural problem of symmetry confronts East Asia and the Pacific, where decades of growth have relied almost entirely on capital deepening while TFP contributions have trended toward zero. National frontier firms, particularly in digital-intensive sectors, are falling further behind the global productivity frontier. Planners have attempted to bridge this gap by aggressively chasing the artificial intelligence boom, deploying tax holidays and subsidized energy to secure hyperscale data centers and hardware assembly.
While Malaysia and Viet Nam have carved out lucrative niches as premier exporters of AI-enabling hardware, this localized success masks a profound domestic tech deficit. True AI diffusion across these economies remains negligible. Due to persistent bottlenecks in domestic broadband connectivity, basic digital literacy, and venture capitalization, the productivity gains of automation remain cordoned off within multinational enclaves. Real structural transformation requires economy-wide technology absorption, a public good that a targeted factory subsidy is structurally unsuited to deliver.
Welfare Gains vs. Absolute Costs
Economic history demonstrates the vital difference between an effective industrial policy – one that simply achieves a production target – and an efficient one, where the net welfare gains exceed the deadweight and fiscal costs. South Korea’s heavy and chemical industry push in the 1970s managed to clear both bars, successfully shifting its comparative advantage while raising aggregate welfare. By contrast, empirical evidence from China’s shipbuilding sector shows that, while the policy was highly effective at capturing global market share, the net cost to the state was significantly higher than the economic benefits.
Furthermore, these critiques often miss the deeply asymmetric gender dimension of structural transformation. Industrial policy conversations frequently treat "firms" and "labor markets" as gender-neutral blocks, systematically excluding female-led enterprises. Strategies become deeply skewed if they do not deliberately target the financing bottlenecks of micro, small, and "Missing Middle" enterprises, which women disproportionately run. To achieve true technology absorption and economic integration, vertical pushes must be explicitly paired with robust frameworks—like targeted concessions or credit guarantees—that bring women entrepreneurs into the formal fold.
Way Forward
The lesson for developing Asia is that proactive, sector-specific targeting is an elite policy game requiring sound economic fundamentals and the prior dismantling of major domestic distortions. For most of the region, the most efficient industrial policy available is horizontal structural reform. This means systematically removing the pervasive trade and investment restrictions that choke the domestic services sector, eliminating non-tariff barriers blocking access to intermediate inputs, and modernizing tertiary education to equip students with the Science, Technology, Engineering, and Mathematics (STEM) skills required by an evolving global marketplace.
Where targeted support is deployed, interventions must be restricted to "first-choice" public inputs that resolve well-defined market failures directly without inducing rent-seeking or fiscal drag. Rather than picking winners, states should focus on well-managed, plug-and-play industrial zones to bypass complex land constraints, publicly synchronized retraining programs to mitigate the labor-market churn of rapid automation, and robust quality-assurance or credit-scoring frameworks to naturally validate local inputs and smooth global supply-chain transactions. Ultimately, preserving Asia's growth momentum requires a cold return to first principles, recognizing that taking the wheel is only a viable strategy if policymakers have already built a road capable of carrying the engine.
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