We need new ideas to address the three biggest economic problems of our time: climate change, the erosion of the middle class, and poverty. The first is an existential threat to our physical environment; the second is polarizing and undermining democracy; and the third is a moral disgrace to us all. So it seems that, as we see the rise of authoritarianism and economic nationalism, there is little reason for optimism on any of these fronts.
In my new book, “Shared Prosperity in a Fractured World,” I argue that solutions to these problems already exist. They are actively being used around the world, but they often remain under the radar or ignored because they deviate from conventional approaches.
At first glance, our three big problems are distinct, and the options for solving them often seem to be in conflict with each other. Many believe that the green transition is incompatible with economic growth, and that strengthening the middle class in developed economies is contrary to the interests of developing countries. But they all imply a common, global task: stimulating the structural transformation of our economies in order to encourage activities that are “green” and conducive to the creation of better, more productive jobs.
Industrial policies have traditionally played a key role in the process of economic transformation, first in developed economies and then in the successful countries of East Asia. Today, we need an updated version of the same strategy, taking into account the demands of the green transition and the fact that manufacturing is no longer a generator of jobs (even in developing countries).
We have already made significant progress in renewable energy. While economists have long advocated carbon taxes or equivalent cap-and-trade schemes as the most effective way to reduce emissions, the real, spectacular gains in this area have come from China’s green industry policies. Driven by national goals but largely implemented at the local level by municipal governments, these policies have driven down the costs of solar, wind, and battery power to levels that now make renewable energy cheaper than fossil fuels. The result has been an acceleration of the green transition, leading even some of the most pessimistic observers to believe that climate catastrophe can be averted.
The Chinese approach is emblematic of a new style of industrial policy that differs significantly from the conventional picture. It involves significant cooperation between the national government, local authorities, and businesses. While subsidies have played an important role, they have been only one of many instruments, including public procurement policies and venture capital. The Chinese approach is better characterized as experimental and iterative rather than a top-down approach with strict conditions.
Can a similar approach help create good jobs and the productive transformation necessary to preserve the middle class and reduce poverty? Unfortunately, in both developed and developing countries, industrial policy has continued to be oriented towards manufacturing sectors, even when the goal was to create or maintain employment. Certainly, manufacturing remains relevant and important for the green transition, for ensuring supply chain resilience, and for national security. But automation and global competition have made it a labor-displacing sector—even in China, which remains the world’s industrial superpower. We have little choice but to rely on services for the kinds of productive jobs that serve as a pathway to the middle class.
Fortunately, in both developed and developing countries, there are many experiments at the local level in which partnerships between government agencies and the private sector or civic groups are bringing about significant economic transformations. These local initiatives may not look like traditional industrial policies, but they are similar to China’s strategy. They involve iterative collaboration and the provision of public inputs (vocational training, business assistance, regulatory assistance, site preparation) along with subsidies to find new business opportunities and alleviate constraints.
At the national level, economic authorities can draw on these models. The administration of former US President Joe Biden conducted “competitions” in which local economic development agencies were invited to submit proposals for federal funding. Such an approach not only provides new resources, but also encourages local actors to overcome the problems of collective action and develop a shared vision for future development. Unfortunately, the scope of these programs paled in comparison to the administration’s key industrial policies, the Chips and Science Act and the Inflation Reduction Act, which were largely focused on industry.
National governments, especially in developed economies, can also play a huge role by steering innovation in a way that is more conducive to the workforce. Many service industries – retail, warehousing, logistics – have already benefited from the introduction of new digital technologies, but private corporations do not always have the interests of workers in mind. They prefer to use new technology to monitor and extract the most from workers, rather than to give them autonomy and enable them to perform a wider range of tasks. Generating technologies that empower workers in traditionally low-wage jobs, such as caregiving, retail, and food services, requires a dedicated government effort, similar to what we need for renewable energy.
My book offers both a warning and a basis for hope. In it, I show that our current policy menu is inadequate to the tasks ahead and is bound to create serious conflicts between goals. To simultaneously confront climate change, rebuild the middle class, and reduce global poverty, we must step back from established ways of thinking and consider new approaches. The good news is that it is neither impossible nor too late to embark on a better path, nor is it unrealistic to call it unrealistic. The seeds of these innovative approaches have already been sown in practical measures around the world. We do not need a revolution, but only a reconfiguration of our priorities and policies.
Domestic politics and the absence of global cooperation often rule out the options that economists and other technocrats consider the preferred options. But they do not rule out other approaches that are often more effective in the real world.
The author is a professor of international political economy at Harvard University
Copyright: Project Syndicate, 2025. (translation: NR)
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