A new economy for the 21st century

Ahead of this year’s spring meetings of the International Monetary Fund (IMF) and the World Bank (WB), the only story that broke through the noise was the news that the World Bank was endorsing industrial policy, even though it had not recommended it for decades. And while much of the ensuing debate focused on whether this “turn” was good or bad, whether it was overdue or dangerous, few thought about the essential question: what had actually changed?

The Bank has just confirmed what many of us have long been saying: the economic framework it has promoted since 1993 (when it declared against industrial policy instruments in its “East Asian Miracle” report) has not served developing countries well. Such recommendations, as the World Bank’s chief economist, Indermit Gil, recently observed, “have the practical value of a computer diskette today.” But in defending the report, he also made it clear how limited this turnaround remains. Industrial policy, in his view, should be “targeted and temporary,” an exception in a market-oriented model, not an instrument to foster general economic transformation.

The latest publications of the World Bank confirm that industrial policy can be applied more successfully in countries with different income levels and institutional conditions than the previous consensus allowed, and that its instrument is not limited to tariffs and subsidies. State support for private actors, the World Bank now argues, should be provided with “carrots and sticks”, including withholding funding from companies with poor performance. This new position is consistent with our arguments in the book “The Entrepreneurial State”, as well as our later work on the role of missions and the conditions for granting funding.

Yet these new conclusions do not automatically create a new economy. The Bank still sees the state only as a technical assistant who corrects market failures, not as a creator who shapes markets. The question, however, is not whether governments should intervene in the event of market failures, but rather what kind of economy we want to build. What social goals should guide investment, and how can institutions regulate the relationship between the private and public sectors so that value is created collectively and distributed fairly?

From this perspective, the Bank continues to lag behind, seeing fiscal policy space as a fixed constraint within which to optimize, rather than as an institutional potential that can be developed. As a result, the Bank will continue to organize industrial policy around specific sectors and considerations of comparative advantage. But energy transition, water and food security, health, economic resilience – these are not sectoral issues. They require economy-wide missions.

This is especially important now that the bank itself has begun to adopt the language of “mission.” Both “Mission 300” (access to electricity in Africa) and the Water Forward initiative, launched at the spring meetings to strengthen water security, are designed to address large, systemic, cross-sectoral problems. But our analysis of 30 National Energy Plans (NECs) in Africa revealed a gap: the ambitions are systemic, while the architecture remains sectoral.

The World Bank is not an isolated case. Economists at the IMF also confirm that the policy of strict fiscal austerity and liberalization has not brought the expected results. But these conclusions have not yet led to a corresponding change in working methods.

The situation needs to change. The IMF and the World Bank are at the heart of an international order whose core recommendations continue to rely on economic theory that is not grounded in real-world empirical data. And it is precisely what these institutions model, measure, and recommend that determines how development and macroeconomic policies are implemented around the world. They help determine who gets access to liquidity and under what conditions; whose debt is considered sustainable; whose public investments seem justified; whose political autonomy should be limited.

The rich countries that finance and control these institutions are not themselves immune to the consequences of this economic theory. For decades, its flawed ideas have shaped policies in Europe and the United States: they have suppressed public investment; weakened the civil service; treated wages as a cost rather than a driver of aggregate demand; and left households exposed to shocks that markets have failed to cope with.

The ensuing affordability crisis has now turned into a political crisis. The economic theory that has limited development support abroad (eroding state capacity and narrowing governments' room for maneuver) has contributed to the rise of far-right forces at home.

Europe’s response to the 2022 energy shock has shown what is at stake. From 2022 to 2025, EU member states and the UK faced additional costs of $1,8 trillion, mostly borne by households and public budgets, while shareholders of companies that raised prices made a profit. Spain points to an alternative path. It has treated investment in energy security as a mission, not as another form of subsidy, and today the country generates more than half of its electricity from renewable sources. This has helped it better protect itself from another energy shock than its neighbours.

For such resilience to become the rule rather than the exception, an economic concept that governments can consistently apply is needed. The “Global Progressive Mobilization” initiative, organized by Spanish Prime Minister Pedro Sanchez, recently brought together representatives of progressive governments from around the world with the aim of launching the process of forging a new economic consensus.

Its foundations are clear. We need state institutions capable of investing, coordinating, and regulating markets in the interest of society. We need financing focused on mission rather than debt ratios, and rules that view fiscal space not as a constraint imposed by a market-determined “ceiling” but as the result of productive investment. We also need measures of value geared toward the common good.

All these elements will be brought together by the Global Council for a New Economic Science for the 21st Century. One of the authors of this text (M. Mazzucato) has become its co-chair, together with the First Deputy Prime Minister of Spain, Carlos Cuerpa. Our goal is to translate the principles of the new economy into operational principles focused on justice, equality, sustainability and global solidarity. The arguments in favor of a new economic thinking are already beginning to prevail. Now we need to show what comes next.

M. Mazzucato is Professor of Economics of Innovation at University College London (UCL)

L. Merling is a Research Fellow in Industrial Strategy at the Institute for Innovation and the Public Interest, University College London (UCL).

Copyright: Project Syndicate, 2026. (translation: NR)