Industrial policy is back. At the mid-point of the implementation of the 2030 Agenda for Sustainable Development, major economies are launching initiatives to strengthen their domestic productive capacities in strategic areas such as energy, information technology and pharmaceuticals. The United States' Inflation Reduction Act and CHIPS Act are but two examples of a broader trend: industrial policy measures have doubled over the last decade. This revival is led by advanced economies, while some large developing countries have been operating successful industrial policy regimes for decades.

The climate emergency, in particular, demands an all-hands-on-deck approach. The scale and speed of transformation in our energy systems and production and consumption patterns cannot be achieved without a robust and comprehensive policy approach. However, there is much to cheer about. So far, about 170 countries have set their own targets for the deployment of renewable energies, and most of them have used industrial policy tools such as tax incentives, public investments or tendering procedures to achieve these, along with regulatory interventions.

At the same time, most developing countries have neither the fiscal nor the policy space to match the ambitious subsidy programs in advanced economies. This could result in a further widening of disparities between rich countries and poor countries. We run the risk of new green technologies becoming the preserve of the rich.

Climate is not the only driver of the industrial policy revival. It is also a response to a confluence of crises and can be dated back all the way to the 2008 global financial crisis. More recently, the COVID-19 pandemic revealed vulnerabilities in medical supply chains. Rising geopolitical tensions are providing an additional geostrategic impetus to reducing external dependencies, particularly in sectors that are deemed strategically important.

This mix of motivations carries with it both opportunities and risks. A new generation of sustainable industrial policies has the potential not only to speed up the energy transition but also to create decent jobs and more inclusive and resilient development pathways. Geostrategic competition and aggressive protectionism on the other hand could lead to a fragmented global economy that leaves everyone worse off. Such downside risks are highest for poor and vulnerable developing countries.  

In the United Nations 2023 Financing for Sustainable Development Report 2023: Financing Sustainable Transformation, we are calling for actions in three areas to ensure that developing countries can also take advantage of the current moment and pursue sustainable industrial transformations – which have historically been an engine of growth and development.

First, we must urgently overcome the financial divide that restricts many developing countries from pursuing ambitious industrial transformations in line with SDG 9 on industry, innovation and infrastructure and for the benefit of other goals. Fiscal incentives, public investments, or capitalization of national development banks are all costly. Tax incentives both to enterprises and households have been estimated at more than 5 per cent of GDP in foregone tax revenues in some developing countries. In a context of rising global interest rates in the post-pandemic period, many developing countries simply do not have the fiscal space, let alone access to financial markets at reasonable costs to make these investments without additional support.

High sovereign borrowing costs also translate into high cost of capital for private investment, for instance in renewable energy. Economy-wide costs of capital have been estimated to be up to seven times higher in developing countries than in the United States and Europe. That is why the United Nations Secretary-General's SDG Stimulus Plan, which calls for a sizeable scaling up of concessional financing and action on debt relief, and reforms to the international architecture are so urgently needed.

Second, effective public policy support for sustainable industrial transformations requires both targeted support to firms and stepping up relevant capabilities in the public sector. Developing these skills in public agencies is critical to creating a supportive enabling environment for industrial transformation. Building broad coalitions of change can help achieve just and sustainable transformations.

Third, we must ensure that the "rules of the game" around fair international trade, investment and technology are supportive and up to date with our sustainable development and climate ambitions. Industrial policies can have cross-border impacts, and these rules aim to balance the pursuit of legitimate national interest and avoiding negative spill-overs.

We do not always have that balance right at the moment. As challenging as it might be in the current geopolitical environment, we must continue to work at creating open and fair trading and investment regimes that create a level playing field for all countries while preserving their policy space to pursue sustainable industrial transformations.

We have the solutions to turbocharge the implementation of the SDGs. We, therefore, call upon all stakeholders to reinforce their commitment to a sustainable industrial transformation and provide the financial means necessary to that end.

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Li Junhua, of China, is United Nations Under-Secretary-General for Economic and Social Affairs, Department of Economic and Social Affairs (DESA)