SL faces pressures from AI, trade protections: World Bank economist

World Bank Economist Dr. Jonah Rexer

• Says protected sectors have had negative impact on jobs, sectors in low-tariff regimes have generated most new jobs

South Asia’s strong growth outlook masks a deep labour-market imbalance that is now intersecting with rapid technological change, creating new vulnerabilities for Sri Lanka, World Bank Economist Dr. Jonah Rexer said delivering the Centre for Poverty Analysis (CEPA) guest lecture on the South Asia Development Update.

He said the region remains the fastest-growing emerging market bloc, with growth projected at around 6% in 2026. But the underlying jobs problem – a working age population expanding faster than employment opportunities – continues to shape economic and social outcomes.

“Growth has not been enough,” he said, noting that South Asia has one of the widest gaps globally between labour force growth and job creation. For Sri Lanka, this has translated into persistent pressure on young workers and a weakening link between rising incomes and life satisfaction.

Sri Lanka, he said, reflects this broader trend. The post-crisis rebound has begun to stabilise, but the structural employment challenge remains intact.

Against this backdrop, Dr. Rexer said Artificial Intelligence (AI) is adding a new layer of disruption. 

Although about 20% of jobs in South Asia are exposed to AI, the distribution of that exposure is concentrated in higher-skilled, younger workers in ICT, finance, and business process outsourcing. 

Drawing on a dataset of 30 million online job postings, he said the region is already seeing a contraction in labour demand for substitutable roles such as software developers, call centre agents, and other entry-level professional services positions.

Sri Lanka’s early adoption rate of generative AI, around 10%, above the emerging market average, means these labour-market effects could arrive sooner. 

The country’s exposed roles overlap closely with its export-oriented IT and BPM sectors, creating what he described as “a twin pressure point” for Sri Lanka: technological displacement in precisely the industries expected to absorb young, educated workers.

Dr. Rexer said these AI dynamics intersect with Sri Lanka’s protected trade regime. South Asia is one of the world’s most tariff-protected regions, with about 40% of workers employed in sectors facing tariffs above 30%. 

These highly protected sectors, including agriculture and low-productivity industry, have made a negative contribution to employment growth over the past decade, while low-tariff sectors have generated almost all net job creation, including in Sri Lanka.

He identified high tariffs on intermediate inputs as a major constraint on competitiveness. 

Sri Lanka, like its regional peers, imposes input tariffs significantly above those of competitor economies, raising production costs in manufacturing and services that could otherwise expand into export markets. 

Sectors such as textiles, apparel, electronics, pharmaceuticals and business services were highlighted as areas that would benefit directly from reducing intermediate input costs. Only about 13% of South Asia’s workforce is employed in export-linked jobs. Sri Lanka, he said, should be closer to double that share.

Labour-market rigidities further dilute the impact of tariff reform. 

World Bank modelling indicates that when tariff reductions are paired with reforms that allow workers to move more easily between firms and regions, the GDP gains from trade liberalisation almost double. Without such mobility reforms, he said, tariff cuts alone deliver limited benefits.

Dr. Rexer said Sri Lanka’s ability to manage AI disruption and benefit from trade reform hinges on workers being able to shift into more productive sectors. 

Strengthening digital access, reducing input costs, improving skills and easing labour-market frictions, he said, are prerequisites for translating technological and trade reforms into broad-based employment gains.