In economic debates across boardrooms and ministries, few terms are as casually interchanged as industrial policy and industrial strategy. Both suggest state intervention in the economy. Both evoke images of governments picking winners, supporting key sectors, and guiding national industrial priorities.
However, while they are related, they are not the same. For Gulf economies navigating energy transition, AI-driven productivity shifts, and post-oil diversification, understanding the difference is crucial.
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Difference between policy and strategy
At its simplest, industrial policy refers to the set of tools governments use to support specific industries or economic activities. These tools might include subsidies, tax incentives, tariffs, export credits, or infrastructure investments. Historically, industrial policy has involved the government stepping in to protect nascent industries, attract foreign investment, or enhance technological capabilities.
Industrial strategy, on the other hand, is broader and longer-term. It’s not just about the tools but about the destination: A coherent vision for how an economy should evolve over the next decade or more, and how government action, private investment, and workforce development will align to achieve it. Industrial strategy answers the ‘why’ and ‘where’, while industrial policy delivers the ‘how’. This distinction is not just semantic.
Industrial policy without strategy risks becoming reactive, fragmented, or captured by vested interests. Governments may respond to short-term pressures or lobbyists without a clear understanding of how individual interventions fit within the broader economic transformation. Conversely, a well-articulated industrial strategy helps discipline policy choices, clarifying which industries are crucial for long-term national goals — whether that’s decarbonization, digitalization, food security, or advanced manufacturing.
The Gulf experience
For Gulf economies, this debate is particularly pertinent. Over the past two decades, the region has made industrial policy a core part of its diversification efforts. Free zones, local content requirements, state-backed industrial funds, and sector-specific incentives have proliferated. The results, however, have been mixed. While some sectors — notably petrochemicals, aluminum, and logistics — have matured into globally competitive industries, others remain heavily state-dependent or underdeveloped.
According to a 2023 IMF report, while flagship industries like chemicals and logistics have achieved global scale and market access, emerging sectors such as pharmaceuticals, advanced manufacturing, and technology assembly continue to rely on subsidies, local procurement mandates, and preferential financing to remain viable.
The good news is that some progress is being made. Saudi Arabia’s National Industrial Strategy, launched in 2022, and the UAE’s Operation 300bn both aim to outline not just priority sectors but also the capabilities, regulatory reforms, and investment pathways required to build globally competitive industries. The challenge now is to translate those strategies into disciplined, data-driven policies — and, equally important, to prune or retire policies that no longer serve strategic objectives.
Enabling competition, innovation and experimentation
Yet even the best-designed industrial strategies carry risks. State intervention in industry selection, resource allocation, and market shaping is notoriously challenging to execute effectively. History is replete with examples — from post-war Britain’s “white elephants” to Japan’s missteps in the 1990s — where industrial policies became vehicles for inefficiency, rent-seeking, and political patronage.
Critics, particularly from classical liberal schools of thought, argue that the complexity of modern economies makes it impossible for governments to predict which industries or technologies will succeed. In their view, attempts to pick winners often end up protecting losers, distorting markets, and crowding out private initiative.
What ultimately matters for long-term growth and resilience is creating a dynamic, rules-based environment where markets, entrepreneurs, and businesses — both local and transnational — can compete, innovate, and experiment. This includes accepting that failure is part of the process. Innovation does not emerge fully formed from five-year plans or incentive schemes; it arises from trial, error, competition, and adaptation.
Governments should focus less on trying to control outcomes and more on enabling the conditions for competitive markets, robust institutions, high-quality education, and open trade. Industrial strategy has a role to play, but it must be disciplined, transparent, and limited in scope, leaving room for the market to do what it does best: Allocate resources, reward talent, and drive discovery.
Professor Adam D. Dixon is the Adam Smith Chair in Sustainable Capitalism at Adam Smith’s Panmure House, owned by Edinburgh Business School at Heriot-Watt University.
