Making industrial policy work for jobs in South Asia

Jobs will define South Asia’s development trajectory over the next decade: about 280 million young people are set to enter working age, making the creation of more and better jobs an urgent policy imperative. Against this backdrop, industrial policy is making a global comeback, and South Asia is riding the crest of the wave. Between 2016–19 and 2022–25, the average South Asian country doubled its number of newly implemented industrial policies, implementing more than twice as many measures as the average emerging market and developing economy (EMDE). India alone drove much of this surge, ranking among the world’s top 10 countries—and third among EMDEs—for the number of new policies.

This renewed push for industrial policy is often justified by its potential to generate jobs and accelerate structural transformation. But as governments increasingly use policy to protect domestic industries, a critical question arises: are these policies actually delivering the desired economic and employment outcomes? The latest South Asia Economic Update: Working with Industrial Policy recommends combining broad-based development policies with targeted measures to address market failures.
 

Figure 1: The rise of industrial policies in South Asia

A Tale of Asymmetric Outcomes

Compared to other EMDEs, South Asia relies less on costly domestic subsidies—unsurprising given the region's limited fiscal space—and more on trade-related measures such as import bans and tariffs and export subsidies.

However, the impacts of these trade-related measures have been highly asymmetric:

• Imports declined: When South Asian countries implemented import-restricting policies (like import tariffs and bans), these measures were followed by a statistically significant decline in imports in the targeted sectors.
• Exports stagnated: Conversely, the introduction of export-promoting policies, such as export incentives and domestic subsidies, was not followed by a statistically significant increase in exports.

This suggests that while South Asian governments have been successful at shielding domestic markets from foreign competition, their interventions have struggled to make domestic industries more globally competitive.
 

The Sectoral Divide: Where Policies Land in South Asia

South Asia’s industrial policies are heavily skewed toward manufacturing. About half of all new measures implemented in the region since 2022 have targeted the manufacturing sector—ranging from 43 percent in Nepal to over 60 percent in Bangladesh. This is a striking concentration, considering that manufacturing accounts for only 14 percent of South Asia’s employment.

The sectors receiving the most protection are not the ones creating the most jobs. Across the region, the non-agricultural sectors least protected by industrial policies—primarily services—have been the main engine of employment growth over the past decade. For instance, the quarter of non-agricultural sectors with the fewest industrial policies generated over 80 percent of employment growth in Bangladesh and Sri Lanka, and 40 percent in India. Within the manufacturing sector itself, however, the sub-sectors most targeted by policies did contribute more significantly to job growth.
 

Figure 2: The disconnect between policy focus and job creation

The Spatial Divide: Where Jobs Pay in South Asia

The sectoral impacts of industrial policy also shape where the good jobs are. At the subnational level, South Asia is home to some of the largest regional wage differentials in the developing world (such as in Bhutan, India, and Maldives).

What drives these massive wage gaps within the same country? Worker characteristics, such as education and sector of employment, explain about one-fifth to four-fifths of these differences. However, even after controlling for these individual traits, significant regional “wage premiums” remain.

The most dynamic, high-paying subnational labor markets have these features:

• Transport connectivity: Regions with larger and better-quality road and rail networks offer 10–20 percent higher wage premiums.
• Workforce skills: Areas with a higher concentration of educated workers generate 20–40 percent higher wages across the board.
• Firm composition: Regions with larger formal firms (over 20 employees) and a higher share of service jobs pay 20 percent more.

Crucially, these wage dynamics appear to be self-reinforcing. Regions that already offer higher wage premiums are seeing those premiums grow faster, leading to a divergence where thriving areas pull further ahead while struggling regions lag behind.
 

Figure 3: Drivers of regional wage premiums in South Asia

Maximizing Gains: A Path Forward for Policy

If heavy-handed trade protections aren’t boosting exports, and lagging regions are falling further behind, how can South Asia reform its approach? Because most countries in the region are constrained by limited fiscal space and regulatory capacity, a shift toward “first-choice” policies and foundational reforms is required.

• Implement “first-choice” policies: Instead of relying on broad import tariffs, governments should target specific market failures. Skills development programs can help workers transition into higher-paying, emerging sectors (Fernandes and Reed 2026). Market access assistance can connect small- and medium-sized enterprises with foreign buyers, overcoming information gaps that hinder export growth. Industrial parks can alleviate coordination challenges and high fixed costs for new industries, provided they are placed near skilled labor and transport hubs. Locating industrial parks in lagging regions has, in some cases, stimulated economic activities and increased employment in the surrounding areas (Gallé et al. 2024)—provided the region has the resources and a responsive local government.
• Invest in broad-based cross-cutting reforms: Industrial policies work best when the foundation is solid. Upgrading physical infrastructure (reliable electricity, transport logistics) and digital connectivity is not just good development policy; it is essential for making industrial parks effective. Furthermore, streamlining business regulations and reducing onerous customs delays will increase the take-up and success of industrial programs.

South Asia has the potential to harness industrial policy for true structural transformation. By pivoting away from pure protectionism and focusing on the underlying enablers of productivity—connectivity, skills, and market access—the region can ensure that economic growth translates into better-paying jobs for all South Asians.