Unlocking jobs through trade and AI in South Asia

There are two distinct economies in South Asia.

Most people work in the traditional economy, for instance as farmers or in small informal businesses. This is a less productive economy, as competition is limited by fragmented markets and high tariffs and there’s low adoption of modern technology. Workers are often underemployed and poorly paid.

A small but growing number of South Asians work in a more dynamic, modern economy, which is cutting-edge and globally competitive. It includes high-tech service hubs and export-oriented factories that produce textiles and pharmaceuticals. Jobs here are highly productive and better paid. This economy is well positioned to take advantage of new patterns of global trade and new technologies like artificial intelligence (AI). 

These two economies exist side by side in South Asia, but in some ways, they are worlds apart. The resources needed to fuel the growth of the modern economy are locked within the traditional economy. People are often unable to move to the sectors, firms, and locations where they are best suited. Mobilizing this flow and shifting more people from the traditional to modern economy is essential for the region to reach its ambitions.

Our latest South Asia Development Update, Jobs, AI, and Trade, recommends that the region start by tackling two key areas: Increasing trade openness and facilitating the adoption of AI technology.

Boosting trade openness

Tariffs are a key obstacle to the region’s growth. South Asia’s high tariffs have protected the least dynamic parts of the labor market, such as agriculture, where employment has fallen. They’ve also handicapped manufacturing: The sector faces average tariffs on intermediate inputs—components and raw materials needed for production—that are more than twice as high as those in other emerging market and developing economies. 

By contrast, the one-third of jobs in sectors with the lowest tariffs, such as services exports, accounted for three-quarters of job growth between 2013 and 2023. Workers in these jobs are also significantly better paid, more skilled, and younger.

Carefully sequenced tariff cuts, starting with imported inputs, could help both South Asia’s manufacturing sector and its labor markets. The highest tariffs, which protect a large share of the workforce, could be reduced gradually through legislation that outlines a multi-year glide toward a lower final rate. This approach would give affected workers, firms, and regions time to adjust as new opportunities arise elsewhere.

Maximizing the benefits of AI

Another obstacle to labor mobility in South Asia is the lack of skills and infrastructure needed to leverage AI. The traditional economy, dominated by low-skill, agricultural or manual jobs, is unlikely to benefit much from AI. However, productivity gains could be substantial for the 15 percent of South Asian workers in the modern economy. These workers tend to be highly educated and experienced, and their jobs are more complementary to AI. 

South Asia can lay the groundwork for maximizing the benefits of AI by increasing the share of skilled workers and ensuring reliable electricity as well as consistent and fast internet access. Improving infrastructure and facilitating labor mobility can help amplify AI's benefits while minimizing labor market disruptions.

Pursued in tandem, policy reforms to expand trade and increase labor market flexibility could be transformative, channeling resources toward more productive sectors. Greater public and private investment can strengthen the transportation, energy, and telecommunications infrastructure needed to support greater trade and the use of AI. As firms and workers become more productive through AI and inexpensive foreign inputs, they can pay more in taxes to sustain continued public investment and strong social welfare systems. 

Unlocking South Asia’s potential is urgent. Each year, about 16 million people enter the job market, but only about 10 million find work. Reforms that enable firms to expand into new markets through the use of new technologies are critical for boosting job creation, investment, and sustained growth.