GENEVA – Since the 2008 global financial crisis, industrial policy has returned to the fold of respectable economic discourse, after decades of being derided as misguided interventionism, especially for developing countries. But that recovery is being led by developed countries that once rejected it, and the push toward AI and renewable energy is accelerating that change.
For developing countries, this recovery presents new opportunities, provided they can address three key constraints: a weak enabling environment (lack of infrastructure and other necessary inputs), limited autonomy in policy-making, and fiscal constraints. Industrial policy is often understood in terms of subsidies and tax breaks, but many developing countries need to put in place much more than these measures. Without reliable digital connectivity, reliable power supply, reliable data protection regimes, and a skilled workforce, ambitions of AI-driven growth are mere rhetoric.
Policy options for developing countries are also constrained. This is especially true in East Asia, where World Trade Organization (WTO) rules limit the use of the tools that once underpinned industrialization success stories: export-conditional subsidies, local content rules, and technology transfer requirements. At the same time, as the United States, the European Union, and China roll out large-scale industrial policies, major economies continue to march on their own drumsticks, often bending or breaking the very rules that other countries are expected to abide by. The asymmetry is clear: of the more than 2,500 industrial policies introduced worldwide in 2023, these three countries accounted for almost half.
Finally, financial constraints are becoming more stringent. In many developing countries, up to 80% of public spending goes toward wages and debt servicing, leaving little for the long-term investments needed for industrialization. Unlike the United States or the European Union, poor countries cannot attract huge subsidies or finance multibillion-dollar technology programs. Technology parks and incubators are proliferating across Africa and Asia, but few are producing meaningful results. As the United Nations Trade and Development (UNCTAD) has observed, such zones will only be successful if they are anchored to established supply chains. Without that basis, they risk becoming an expensive white elephant. Impressive on paper, but powerless in reality.
For developing countries, a smart approach to AI is to deploy the sophisticated frontier models that are already available. Just as many countries jumped over landlines and went straight to mobile phones, developing countries can be freed from the burden of legacy infrastructure and jump directly into emerging technologies. Deploying AI costs a fraction of the cost of building it. Anyone can use tools like ChatGPT without building a data center or assembling an elite engineering team.
Such targeted applications can be transformative. In healthcare, AI-assisted diagnostics can streamline the use of scarce clinical capacity. In education, digital platforms can fill the chronic teacher shortage. In agriculture, predictive analytics can help farmers survive climate change. These applications may not wow those on the cutting edge of technology, but they can provide real-world benefits where it matters most.
They also represent the most effective industrial policy, meaning one that is pragmatic, experimental and focused on domestic realities. As Dani Rodrik argues, “Success does not lie in following a set blueprint, but in identifying areas where public action can unlock hidden potential.”
To be sure, even modest innovation projects require funding, and domestic venture capital remains scarce in many developing countries where private wealth tends to flow overseas. But governments can build institutions to attract more private capital, such as through blended finance, sovereign innovation funds, targeted guarantees, and regional technology hubs. Donors can (and should) step up their support, too. According to the OECD, the information and communication technology sector receives just 2% of total trade aid, far short of the amount needed to build digital capacity.
Governments in developing countries should also use digital technologies to create much-needed fiscal space, especially to increase efficiency in revenue collection. UNCTAD’s customs digitalization efforts, particularly through ASYCUDA, provide a useful example. In Angola, one of Africa’s largest oil-dependent economies, the move to digital customs procedures brought impressive financial benefits, with sales increasing by 44% in one year and 13% the following year as analog bottlenecks were eliminated.
In Iraq, the gains were even greater. Once major border points were digitized, customs receipts surged by more than 120% in one year. And in Bangladesh, one of Asia’s fastest-growing manufacturing economies, gradual digital transformation has improved compliance and thwarted data breaches, increasing average annual revenue by around 11% over several years.
While international cooperation remains essential, global trade rules must also evolve to better align with digital and green industrialization strategies. The WTO’s Trade-Related Aspects of Intellectual Property Rights (TRIPS) provisions may have made sense when they were designed, but they now hinder access to critical technologies. Just as compulsory licenses existed for life-saving medicines in the past, the patent system should enable wider dissemination.
Cooperation among developing countries is also important, as no single country can finance the scale of investment needed in AI and clean technology. Shard platforms such as CERN (for physics research) demonstrate how pooling expertise can spread costs, share risks, and derive mutual benefit. A more promising approach lies in collective innovation. For many regions of the Global South, which share similar disease burdens and climate change, benefit from rich data, and tap into relatively low-cost technical talent, innovating together is not only cost-effective but also strategically prudent in an increasingly multipolar world.
The revival of industrial policy will bring about a major change in the way the world economy thinks, but it will only bring joy to developing countries. The road to industrialization is now steeper and narrower and constrained by stricter technical and regulatory standards. However, this challenge is by no means insurmountable. By investing in foundational capabilities, targeting high-impact AI applications, mobilizing innovative finance, and leveraging existing policy spaces, countries can accelerate development. Success will depend not on copying the models of rich countries, but on pragmatically adapting to local realities.
Shamika Thirimanne is a senior advisor to the Secretary-General of the United Nations on Trade and Development (UNCTAD). Tafere Tesfachu is a senior advisor at the Tony Blair Institute for Global Change. This article was distributed by Project Syndicate.
