We need fresh ideas to address the three biggest economic challenges 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 fuels polarization and weakens democracy; and the third is a shared moral catastrophe. In moments of rising authoritarianism and economic nationalism, there seem to be few reasons for optimism on any of these fronts.
In my new book, Shared Prosperity in a Fractured World, I point out that solutions to these problems already exist, in practices that are common worldwide. But they often go unnoticed or are dismissed because they depart from the conventional.
Indeed, at first glance the three great challenges look very different, and the attempts to respond to them often seem at odds. Many people believe that the green transition is incompatible with growth and that supporting the middle class in advanced economies clashes with the interests of developing countries. Yet all three challenges involve a shared global task: to promote a structural transformation of the economy that encourages environmentally friendly activities and conducive to the creation of higher-quality and more productive jobs.
“Industrial policy has traditionally played a central role in processes of economic transformation; first in advanced economies and then in the successful East Asian economies”
Industrial policy has traditionally played a central role in processes of economic transformation; first in advanced economies and then in the successful East Asian economies. Today we need an updated version of the same strategy, one that takes into account the requirements of the green transition and the reality that manufacturing industry is no longer a source of job creation (not even in developing countries).
We have already achieved substantial success with renewable energy sources. Although economists have long argued that the best way to reduce emissions is through carbon taxes or cap-and-trade systems, the major advances in this area emerged from China’s green industrial policies. Targeted at national objectives but largely implemented at the local level by municipal authorities, these policies reduced the cost of solar and wind power and of electric batteries so much that renewable energy sources are now cheaper than fossil fuels. That has produced a significant acceleration of the green transition, which has led some of the most pessimistic observers to believe that a climate disaster can be avoided.
The Chinese strategy is representative of a new style of industrial policy that is very different from the conventional image. It presumes a high degree of collaboration among the national government, subnational governments, and business interests. Although subsidies played an important role, they were only one tool among many others (for example, public procurement policies and the state’s provision of venture capital). The best description of the Chinese method is that it is experimental and iterative, rather than top-down and imposing strict conditions.
Could a similar strategy also contribute to the creation of quality jobs and the productive transformation necessary to preserve the middle class and reduce poverty? Unfortunately, industrial policies (in both developed and developing countries alike) have continued to target the manufacturing sector, even when the objective was to generate or preserve jobs. There is no doubt that manufacturing remains important for the green transition, to guarantee the resilience of supply chains and for national security. Yet automation and international competition have turned it into a labor-light sector (even in China, which remains the world’s manufacturing superpower). To generate the kind of productive jobs that provide a pathway to the middle class, the only viable alternative is the services sector.
Innovating from the Local Level
Fortunately, there are numerous subnational experiments in both advanced and developing economies where partnerships between government agencies and the private sector or civil-society groups are driving meaningful economic transformations. Although these local-level initiatives do not resemble traditional industrial policy, they are similar in spirit to the Chinese approach. They involve iterative collaboration and the public provision of inputs (training, business extension, regulatory assistance, and green zones) together with subsidies to identify new business opportunities and mitigate constraints.
National economic authorities can build on these models. The U.S. government, during Joe Biden’s presidency, implemented a “challenge” system in which local economic development agencies could submit proposals that would then receive federal funding. This mode not only expands the resource base but also encourages local actors to overcome collective-action problems and to generate a shared vision of future development. Unfortunately, the scale of these programs was tiny compared with the Biden administration’s flagship industrial policies: the CHIPS and Science Act and the Inflation Reduction Act, both focused on manufacturing.
National governments (especially in advanced economies) can also play a very important role in guiding innovations toward outcomes more favorable to workers. Many service industries (retail, warehousing, logistics) have already learned to harness the introduction of new digital technologies, but private firms do not always take workers’ interests into account. They prefer to use these new technologies to monitor workers and increase their productivity, rather than grant them autonomy and empower them to perform a broader range of tasks. Creating technologies that empower workers in traditionally low-paid jobs (for example, caregiving, retail, and food service) requires deliberate public action, just as we need for renewable energy.
“To address climate change, rebuild the middle class, and reduce global poverty all at once, we must abandon established mindsets and embrace new ideas”
My book offers both a warning and reasons for hope. I show that the current policy mix is not up to the task and will inevitably generate serious conflicts among objectives. To address climate change, rebuild the middle class, and reduce global poverty all at once, we must abandon established mindsets and embrace new ideas. The good news is that it is not impossible, nor is it too late to embark on a better path. The seeds of these innovative strategies already exist in practices around the world. We do not need a revolution, only a reconfiguration of policies and priorities.
It is common for national political contexts and the lack of international cooperation to block the use of options that economists and other technocrats deem preferable. But they enable other ideas that are often more effective in the real world.
© Project Syndicate, 2025. Translation by Esteban Flamini.
In collaboration with the “la Caixa” Foundation
