East Asia's growth is slowing in 2026, and the region is betting on industrial policy to keep up with AI

The World Bank's latest regional outlook shows GDP growth in East Asia and the Pacific declining in 2026 before recovering in 2027, driven by external shocks like Middle East conflict, energy price spikes, and supply chain disruptions. The region is now explicitly framing industrial policy as a response to the AI boom and domestic structural challenges, signaling a shift toward government-directed investment in digital capacity rather than waiting for markets to adapt.

East Asia has spent three decades as the world's manufacturing engine by staying flexible and responsive to global demand. A slowdown coupled with AI disruption breaks that model. The World Bank's explicit pivot to 'industrial policy in the digital age' means governments across the region are about to start picking winners in AI, semiconductors, and digital infrastructure, reversing decades of relatively hands-off development. This matters because it changes who gets capital, which countries can compete in high-value AI applications, and which manufacturing jobs actually disappear versus which ones relocate.