Green industrial policy

Reducing poverty whilst transitioning to a green economy

In regard to structural change, developing countries face a double challenge: they must foster more economic activity to generate jobs and overcome poverty, and, at the same time, they must switch to eco-friendly production. How a green industrial policy could achieve both goals is the topic of a new report. It was produced and published by the German Development Institute (Deutsches Institut für Entwicklungspolitik – DIE) in cooperation with UN agencies.
Recycling – as here in Cape Town, South Africa – needs to play a greater role in a green economy. Ulrich Doering/Lineair Recycling – as here in Cape Town, South Africa – needs to play a greater role in a green economy.

Developing countries need to modernise their economies so their economically active population will be productive enough to enjoy a decent standard of living and generate enough taxes to finance public services. At the same time, the global economy needs to be radically reorganised in the coming years in order to address global warming and other environmental challenges. The implication is that economic growth and wealth creation must be unlinked from resource consumption. Carbon emissions, in particular, have to be reduced to a minimum.

Developed countries have a historical responsibility and must act accordingly. Nonetheless, developing countries too must transform their economies and put an end to their dependency on fossil fuels. They must adopt the resource-efficiency principle, develop closed-loop production systems and consider alternatives to GDP growth as the crucial economic indicator. “Catch-up development” in the sense of fast replicating the model of today’s high-income economies is no longer an option.

So far, no country in the world has managed to achieve an acceptable level of human development without over-exploiting resources. Studies of the Global Footprint Network show that all countries with a moderate or high Human Development Index live beyond their environmental means. On the other hand, all countries whose resource consumption is within environmentally sustainable limits are at an unacceptably low level of human development.

Our new international report “Green industrial policy – Concept, policies, country experiences” spells out an alternative approach. The title requires an explanation: the term “industrial policy” refers to policy measures that accelerate structural change in an economy – in this case towards green, sustainable sectors. We are not re­ferring to industrialisation in the narrow sense of expanding manufacturing. The report is a collaborative effort, produced by five international organisations – UNEP, UNIDO, UNDP, ILO and UNITAR – in partnership with the DIE.

Double discourse

The great merit of the report lies in the fact that it links two knowledge-intensive discourses that have so far been largely unconnected:

  • the debate on developing countries’ economic strategies and
  • the debate on sustainable economic activity.

Attempts to green the economy will fail unless they impact positively, not negatively on the scope for socio-economic development. This is particularly so in developing countries, so the big question is: how can we reconcile the instruments of industrial policy, which have created broad-based wealth in East Asia, for example, with up-to-date environmental approaches and goals?

The report opens with a summary of the experience made with industrial policies in various developing countries. In most countries, governments intervened forcefully in domestic markets in pursuit of structural change in the 1960s and 1970s, but then adopted more or less radical policies of deregulation from the 1980s onwards. Neither approach resulted in sustained and productive structural change.

A number of East Asian countries, however, largely ignored ideology. They took a pragmatic approach to industrial policy, and it proved quite effective, first in South Korea, Taiwan, Singapore and Malaysia, and later – and most spectacularly – in China. It is no coincidence, of course, that all economically successful member countries of the OECD, the umbrella organisation of high-income nations, pursue pragmatic industrial policies, providing incentives to manage market dynamics.

Good industrial policy instruments

There is a broad consensus today about what constitutes good industrial policy. An essential point is that politicians and technocrats must not set targets arbitrarily; they should do so in dialogue with stakeholders. Particularly when the desired change is complex (such as establishing an aerospace industry, transitioning to clean energy systems or switching to electric mobility), the public sector must coordinate the implementation of the numerous components of development. On such a base, market participants can then deliver technological and commercial innovations. The state can have a positive impact by:

  • supporting research, staging competitions and calling for tenders to guide market players’ creativity in desired directions,
  • shielding market players from risks,
  • paying subsidies, which should be time-limited and conditional upon significant investments, and
  • monitoring the impact of measures in order to fine-tune policy even better.

Such performance criteria obviously apply to green industrial policy too. In view of the global environmental crisis, green industrial policy must rise to additional challenges however. First and foremost, the costs of environmental pollution must be factored into every investor’s calculations. There are various instruments for making that happen. Examples include taxes on environmental impacts or systems for capping emissions and trading emissions allowances.

The problem is that environmental taxes or emissions trading can undermine competitiveness in certain sectors, especially if the costs cannot be passed on to other enterprises. The challenge is thus to draft smart policies. The burden on enterprises that are exposed to international competition must not be excessive, for instance. On the other hand, eco-tax revenues can be used to cut other taxes.

When Germany initiated its “eco tax” on fossil fuels in 1999, some of the additional revenue was used to cut payroll taxes, which serve to fund state-run social-protection schemes. The reform therefore reduced non-wage labour costs. Polluting industries were made less competitive in financial terms, while labour-intensive industries became more competitive.

It deserves to be pointed out that environmental taxes always drive innovation. Enterprises reduce resource consumption and develop clean alternatives. If they do so ahead of their competitors, they have a competitive edge when other countries eventually tighten regulations.

Typically, green industrial policy is supposed to bring about systemic change. The aim is not just to modernise specific technologies, but to back off from a waste-generating “throw-away society” that consumes vast resources and dumps residues. The goal is to transition to a circular econo­my geared to reducing, reusing and recycling. Moreover, energy systems must no longer be based on fossil fuels. Transport systems too must switch from oil-based private transport to new concepts based on public transport and electric mobility for the last mile (see Gihr and Bauer in D+C/E+Z e-Paper 2018/07, p. 32). This kind of systemic change calls for a particularly high degree of societal dialogue and coordination.

Green industrial policy is also special in the sense of distinguishing good and bad practices ex ante. By and large, industrial policy is normally technology-neutral. Market forces determine which technology prevails in a competitive environment. Matters are obviously different when clean technologies compete with dirty ones. In view of the clear societal preference, governments have reason to offer targeted support to specific technologies.

Guiding hand of the state

A core task of green industrial policy, moreover, is to remove dangerous technologies from the market. This includes phasing out the internal combustion engine, for example, and gradually replacing it with clean alternatives. It is certainly necessary to discontinue fossil-fuel subsidies (see Jha in D+C/E+Z e-Paper 2018/01, p. 38).

Another difference to conventional industrial policies lies in the urgency of action. If global warming is to be kept below two degrees, the global economy must become carbon-neutral by the end of this century. The agenda for making that happen needs to be set in the next few years. It will not be done by simply relying on market competition. Powerful political incentives are needed to accelerate the transition. Pricing carbon and other environmental resources is important, but not sufficient as they do not repair well-known market failures for example in research and development or in coordinating complex system transitions. Relevant measures include massive support programmes to promote the development and roll-out of energy-storage systems, for example, or biofuel products that do not crowd out food production. Seen holistically, the green transition depends on governments assuming a proactive role in terms of guiding, coordinating and supporting market forces.

One of the primary – and most challenging – governance tasks is to organise this transformation in a way that ensures that social costs of adaptation do not rise excessively high. Wherever possible, the new alternatives should contribute to employment and prosperity at least as much as the phased-out approaches did. The opportunities of the paradigm shift in economic policymaking must be grasped. Change in the private sector must be monitored. Inevitable hardships from structural change must be cushioned in ways that lead to the public’s acceptance. In market economies, it is impossible to achieve everything by decree, and innovations essentially result from market competition. The implication is that governments should thus provide incentives that convince business and households to save resources, recycle waste, rely on clean technologies and stick to certified standards.

All summed up, the challenges that green industrial policy must rise to are huge. For this reason, none of the world’s national economies has yet made the transition to real environmental sustainability. The interest groups of those whose profits or wages depend on polluting activities are quite powerful. Even many consumers are not prepared to switch to sustainable consumption (yet). Developing countries, in particular, are highly sceptical about the short-term financial viability of the green economy. Those worries are exaggerated. Our new report provides evidence that socio-economic development can go hand in hand with a shift towards greener economies, and it shows how remaining trade-offs can be mitigated (see box).

Altenburg, T., and Assmann, C. (eds.), 2018: Green industrial policy – Concept, policies, country experiences.

Tilman Altenburg heads the “Transformation of Economic and Social Systems” research programme at the German Development Institute (Deutsches Institut für Entwicklungspolitik – DIE).

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