Did the World Bank’s latest report on South Asia overlook the political economy?

A report of particular significance to India is the World Bank’s South Asia Development Update, whose theme this year is ‘Jobs, AI and Trade.’ It highlights the region’s growth performance, exudes cautious optimism around AI and productivity and prescribes policy reforms, particularly for trade.

While the report follows the pattern of competently written World Bank documents, it is based on a world that no longer exists. We need a more clear-eyed perspective, one that’s embedded in the political economy.

The world has shifted beneath our feet. Artificial intelligence (AI) is driving today’s geo-economic discourse in a way unseen since the rise of the internet, capturing billions of investment dollars along the way.

An AI arms race between the US and China is underway, with others, including India, trailing far behind. AI agents are beginning to produce scientific advancements and ‘agentic AI’ may soon autonomously execute complex workplace tasks.

That means fewer workers—even white-collar ones—just as South Asia is banking on moving up the value chain. Fears of rising inequality, both between and within countries, are growing.

The other seismic shift is trade—or rather, its unravelling. Donald Trump’s return to the White House has brought tariffs approaching Great Depression levels. Indian goods now face levies exceeding 50%. The contribution of exports to growth and job creation has taken a hit.

Beyond tariffs, the deepening US-China rivalry is fragmenting supply chains. The two powers are waging economic warfare over semiconductors, advanced batteries, robotics and AI. South Asia isn’t a player in this contest, but it could be collateral damage.

The third shift is on climate—or more precisely, the collapse of political will to address it. In a troubling sign, only 19 of the World Bank’s 25 executive directors reaffirmed support for the Bank’s climate agenda; several key countries, including the US (already out of the Paris Agreement), Russia and Saudi Arabia, withheld their signatures. Japan and India, both negotiating trade deals with Washington, reportedly abstained.

This rupture in the global consensus on a defining challenge of the 21st century bodes ill, not least for countries like India and Bangladesh that will suffer immensely from climate change.

This tough global context confronts South Asian economies and provides the setting for the World Bank’s report. Much of what the World Bank says about South Asia is correct: it is the fastest growing emerging region, inflation is largely contained and credit ratings are improving, although high debt is a concern. Under ordinary circumstances, this macroeconomic framing would be benign. It is when the discussion turns to AI, trade and jobs that things get trickier.

South Asian economies could be affected by a global economic slowdown, export market dislocations, labour market disruptions from AI, social unrest or conflicts. The Bank warns that AI is already hitting the labour market hardest where South Asia hoped to compete: moderately educated, young, white-collar workers in business services and IT.

Job postings for AI-exposed roles have dropped 20% since Generative AI arrived, with entry-level and upper-middle-skilled positions taking the biggest hit. However, with most workers in low-skill, agricultural or manual jobs, the region’s labour markets are better shielded than those in advanced economies.

Demand for AI talent is surging and those with the right skills now earn roughly 30% more than other white-collar professionals. The opportunity gap is widening. An estimated 15% of workers—mostly well-educated and experienced—stand to gain from AI-driven productivity.

On trade, the Bank notes that while much of South Asia’s labour force remains protected by high tariffs, liberalization could reallocate workers to more dynamic sectors—if accompanied by labour-market flexibility. The Bank argues that “major tariff reductions could catalyze a reallocation of workers across firms, sectors, and locations,” but only if governments remove impediments to labour market “churn” and carefully sequence reforms within broader trade agreements.

The Bank argues that AI and trade reforms can raise productivity, boost growth and create better jobs — if countries prepare well enough and sequence reforms. It is relatively muted in pointing out longstanding problems. The Bank recommends skills, infrastructure and innovation, but does not ask hard questions about why these have failed to take root. It notes that productivity has declined, private sector investment is stagnant and workers remain mostly informal, but doesn’t dig deeper into why that is so.

The answer perhaps lies in the political economy, both local and global. Entrenched interests, weak state capacity and distorted incentives often stifle competition and innovation. The Bank’s faith in “strengthened and streamlined safety nets” ignores deeper questions about who gains and who loses in a climate-burdened world that is increasingly unequal and less rules-based.

The World Bank must do better. With its deep reservoir of talent, global knowledge and convening power, the Bank should help emerging economies navigate this turbulent future with greater analytical rigour, political economy realism and less ideological baggage. South Asia’s youth deserve more than abstract promises of work productivity. They need a development model grounded in the world as it actually is.

The author is an economist and the co-author of ‘Unshackling India: Hard Truths and Clear Choices for Economic Revival’