World Bank Resurrects Industrial Policy: Ball is in Southeast Asia’s Court

The World Bank has reversed course on industrial policy. In a new report, Industrial Policy for Development (2026), the World Bank argues that industrial policy is replicable and should be part of the national policy toolkit of all countries. This contrasts with the advice from a 1993 paper about the “East Asia Miracle”, which discouraged industrial policy, deeming it a costly failure. The new approach has implications for Southeast Asian countries, with the caveat that policymakers should refrain from adopting a one-size-fits-all approach.

The renewed debate is healthy and necessary, but it must be grounded in context. In the 1990s, Latin America was adjusting after the debt crisis, Africa was struggling to grow, and Eastern Europe was dismantling its command economies. Only East Asia was achieving sustained growth, which is precisely why the Bank called it a miracle and treated it as the exception rather than the template.

The world looks very different today. First, there is a fundamental shift in the global production system. The global economy has moved from global production networks, or Toyota-like modular and distributed networks of factories and processes, to global value chains. The latter consists of decentralised activities across regions and countries. They are also known as vertical production systems (or Techno-Electric Stacks). Global value chains represent a new emerging production order; China, the US, and other high-income countries, whether on their own or in alignment, orchestrate and dominate these vertical production systems. Developing countries have realised that joining global value chains is harder than integrating into global production systems.

The emergence of green industrial policies is the second major development. Industrial policy is needed because energy transition, critical minerals, and supply-chain fragmentation have made conversion — the ability to restructure productive capacity — necessary to reorient development toward digital transformation, AI, energy efficiency and sustainability.

The third top trend is AI, which cuts across vertical production systems and green industrial policies. AI is a disruptive force, pushing companies to choose among competing standards and to strengthen national and regional value chains. The acceleration of conversion capacity depends on the adoption of chips and AI to advance in areas such as agriculture, health, and education, which will define nations’ competitive edge and the supremacy of specific vertical production systems.

Put together, vertical production systems, green industrial policies and AI in manufacturing explain, in part, the World Bank’s advocacy, which is not a new theory but a strategic repositioning. The primary business of a development bank is to finance physical infrastructure. In both high-income and developing countries, the building of new infrastructure to upgrade production processes is a priority; a simple integration into global markets is no longer sufficient. In the current era of supply-chain fragmentation and competition for critical minerals, a country’s ability to coordinate processing and manufacturing with strategic allies is essential. This dynamic applies to both the public and private sectors.

… a global wave of renewed legitimacy for industrial policy expands the political space for governments to act without being penalised by donors or markets. That is an advantage Southeast Asian countries should not squander.

The report offers important methodological clarifications. Industrial policy is not just for manufacturing but applies to all productive activities, agro-processing, critical minerals, services and tourism. The report recognises that modern production systems and AI have made it increasingly difficult to draw clear-cut lines between manufacturing and other productive sectors. The report identifies four priority tools: industrial parks, skills development, market access assistance and quality infrastructure. Crucially, none of these can deliver results quickly. As East Asia’s experience demonstrates, industrial policy requires sustained commitment. It might require at least a decade at a minimum before positive outcomes materialise.

When it comes to contextualising industrial policies, however, it remains unclear whether the main emphasis is on regions and countries. The World Bank’s Regional Economic Updates in April 2026 focuses on industrial policies. For Latin America, it recommends strengthening governance to capitalise on critical minerals and asks the private sector to take on such risks. For Africa, it urges the region to advance structural diversification and expand soft and hard infrastructure to leverage industrial parks and market access. For East Asia, it adopts a cautious view, recommending the advancement of reforms and the adoption of AI and digital transformation to offset the negative effects of geopolitical frictions. In all three regions, industrial policies are described as a central fulcrum of development.

For Southeast Asia, industrial policy cannot be a one-size-fits-all prescription, as the region’s diversity is a defining feature. Singapore is deepening its position in advanced technologies and R&D; Vietnam is scaling up electronics diversification and Indonesia is betting on nickel downstreaming to capture more value from its resource wealth. The Philippines is navigating the transition from Business Process Outsourcing to AI and Malaysia is aiming to consolidate productive clusters. These are not merely different priorities; they reflect fundamentally different positions in the global production hierarchy. Middle-income countries focus on technological upgrading to overcome the middle-income trap, while the Least Developed Countries such as Timor-Leste face the imperative of generating income and employment toward structural changes. Industrial policy must be calibrated accordingly.

Whether development banks will fully embed industrial policy into their lending programmes remains to be seen. But the direction of travel is clear. History is instructive: every successful instance of industrial development originated in a domestic decision and a deliberate political choice to build state capacity, align incentives, and stay the course despite inevitable setbacks. The playbook has not changed; what has changed is the external environment — a global wave of renewed legitimacy for industrial policy expands the political space for governments to act without being penalised by donors or markets. That is an advantage Southeast Asian countries should not squander.

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