Europe and Central Asia’s governments are spending more than ever on steering their economies. They are mostly pointing in the wrong direction.
The World Bank rarely minces its words. Its spring economic update for Europe and Central Asia (ECA), published on April 8, delivered a bleak macroeconomic picture alongside a pointed verdict on industrial policy across the region: governments are doing too much of the wrong thing, and not enough of the right.
Start with the growth outlook. ECA’s GDP grew by an estimated 2.6 per cent in 2025, down from four per cent the year before. The culprit, as ever, is Russia: its economy is forecast to slow to just 0.8 per cent this year, squeezed by sanctions, high borrowing costs, and an oil windfall that doesn’t quite stretch as far as it used to. Strip Russia out and the picture is less grim but still unimpressive. The rest of the region is expected to grow by 2.9 per cent in 2026, its slowest pace since 2020.
The Middle East conflict, apparently placed on pause on April 7, hangs over everything. ECA is unusually exposed, given that most of its economies depend heavily on imported energy, and their proximity to disrupted shipping lanes compounds the problem. The World Bank’s baseline assumes Brent crude at 88 to 100 US dollars per barrel on average this year, with natural gas prices spiking accordingly. A more severe scenario, in which a resumption of hostilities cuts off 60 per cent of energy flows through the Strait of Hormuz, would push several economies into near-stagnation and tip inflation well above current projections.
In Central Asia, high growth
Kazakhstan and Uzbekistan remain the standout performers. Central Asia as a whole grew by seven per cent in 2025, its fastest rate in 14 years, underpinned by record oil production at Kazakhstan’s Tengiz field, surging gold prices, and remittances that continue to flow from Russia. That last point carries some irony, in that the same economy dragging down the regional average is propping up several of its neighbours through the wages of migrant workers. Tajikistan received remittances equivalent to 46 per cent of GDP last year.
Ukraine’s trajectory depends almost entirely on variables its government cannot control. Growth slipped to 1.8 per cent in 2025, weighed down by renewed attacks on energy infrastructure, labour shortages, and the fiscal strain of a war now entering its fourth year. The World Bank projects 1.2 per cent for 2026. A ceasefire, however uncertain, would change the maths dramatically: reconstruction-driven growth of four per cent is pencilled in for 2027 if hostilities end.
Disinflation has stalled. Median inflation across the region sat at 4.8 per cent year-on-year in February 2026, barely changed from a year earlier, and more than two percentage points above the pre-pandemic norm. Food prices account for over 40 per cent of headline inflation and reversed their downward trend at the start of this year. Poland’s central bank managed a 175 basis-point cut as its inflation fell faster than expected, but that is the exception. In Kazakhstan and Kyrgyzstan, rates were actually hiked last year as food and energy costs ran hot.
All this is the backdrop to the report’s more uncomfortable argument, in the shape of a long chapter on industrial policy that reads, in places, like a polite but firm intervention from an exasperated doctor.
The wrong medicine
Governments across the region have been reaching for industrial policy as a remedy for sluggish productivity growth. The World Bank counts more than 2,600 industrial policy announcements in ECA since 2009, with a surge since 2020 that outpaces most comparable regions. Enterprise subsidies, which were among the lowest in the world a decade ago, are now among the highest of any developing region. Kazakhstan alone poured the equivalent of 4.6 per cent of GDP per year into business support programmes between 2020 and 2023, according to a World Bank study.
The trouble is where the money is going. Nearly two-thirds of all industrial policy announcements in ECA target agriculture and food production. High-tech and capital goods attract just 10 per cent. Countries that have spent decades lamenting their dependence on commodities and low-value manufacturing are doubling down on precisely those sectors. Russia and Kazakhstan, the two most enthusiastic practitioners of industrial policy in the region, are also the only countries with explicit place-based targeting of firms, and neither has managed to meaningfully diversify exports away from hydrocarbons over the past two decades.
The World Bank’s prescription is not to abandon industrial policy altogether, but to use it sparingly, carefully, and above all differently. Tailored public inputs (industrial parks, export promotion agencies, skills programmes) are rated as first-choice tools because they address genuine market failures without the distortions that subsidies and tariffs bring. Direct market interventions are a second-best option, suitable only for countries with both the fiscal space and institutional capacity to design and monitor them. Few ECA countries meet both criteria.
The report reserves particular scepticism for one of the region’s oldest habits: channelling industrial policy through state-owned enterprises. In Central Asia and parts of the Western Balkans, SOEs are simultaneously the target and the vehicle of government support, a circular logic that tends to entrench existing structures rather than create new ones. Two-thirds of firms with a government stake of at least 10 per cent operate in competitive sectors where, as the World Bank puts it, there is no clear economic rationale for state ownership.
A few bright spots
There are exceptions worth noting. Armenia is building a 500 million US dollars AI supercomputing facility with NVIDIA and US-based Firebird, a genuine attempt at high-tech industrial policy in a country that has long struggled to find a growth model beyond re-exports and remittances. Poland’s Clean Air Programme is channelling 25 billion euros into household heating upgrades, already growing the country’s share of global heat pump manufacturing from well under one per cent to 2.3 per cent in two years. Türkiye backed domestic solar panel production and is now the world’s fourth-largest manufacturer of solar panels.
These successes share certain features: they targeted emerging or transitional sectors rather than established ones, they came with meaningful private-sector co-investment, and they had clear and measurable objectives. Most ECA industrial policy has none of these qualities.
The World Bank’s conclusion is unambiguous. Structural reform in the shape of better business environments, stronger competition, higher-quality education delivers far more per dollar spent than targeted sector support. Industrial policy can play a complementary role, but governments that treat it as the main engine of development, rather than a supplementary one, risk repeating mistakes that the region’s economic history has already recorded in painful detail.
That comparison might seem overwrought. But the basic dynamic, that governments deciding which industries to favour, channelling resources accordingly, and discovering later that the market had other ideas, is not quite as distant as ECA’s policymakers might like to believe. Two-thirds of a century of central planning left its mark. The temptation to pick winners, it turns out, is stubbornly hard to unlearn.
Photo: Dreamstime.