East Asia and Pacific Economic Update, October 2026

A global surge in the production of AI-related goods is lifting growth in those countries in the East Asia and Pacific region that are involved in their manufacture, while high energy costs are weighing on growth elsewhere, particularly in Pacific Island economies. Growth in the region is expected to average 4.4 percent per year in 2026–28. Activity could be slowed by energy prices remaining elevated for an extended period, spillovers from a slowdown in AI investment and related financial strains, or damage caused by a severe El Niño. Scaling up energy generation capacity to meet the needs of growing economies and AI use can also limit the risks of depending on imported fossil fuels. Broadening adoption of AI tools can help increase productivity and create good jobs across sectors. Tourism and agribusiness offer potential for job creation at scale. These sectors tend to have low entry barriers, low minimum scales of operation, and labor-intensive production processes.

Artificial intelligence (AI) adoption is increasing across East Asia and Pacific among both individuals and firms, though it remains below levels in advanced economies. Firms’ growing demand for AI-related skills is often bundled with analytical skills, such as mathematics and critical thinking, and social skills, such as communication and collaboration. AI innovation in East Asia, reflecting both adaptation and advancement, is pivoting from Japan to China and the Republic of Korea. For most countries in the region, adoption and adaptation of existing AI technology–especially of small AI tools—offer the main pathway to reap AI benefits in the short term. Governments play a key role as enablers, users, and regulators of AI. Efforts to improve the fundamental enablers of a conducive business environment, in particular the availability and reliability of infrastructure and a skilled workforce, could yield double dividends in harnessing AI for development and supporting broader growth momentum in East Asia and Pacific. Policymakers can maximize AI benefits by ensuring digital foundations, by using AI to improve the provision of public services, by strengthening institutional and regulatory readiness, and by deepening intra-regional cooperation.

Over 2022–25, small state EMDEs grew faster than other EMDEs—except in East Asia and Pacific (EAP), where most small states grew more slowly than the median small state EMDE. While EAP’s small states resemble their non-EAP peers in demographics, education levels, and governance, they are among the most remote, sparsely populated, geographically dispersed, and least connected countries in the world. EAP’s small states are also more vulnerable to natural disasters and energy shocks than other small states. Outmigration accounts for about twice as large a share of the population in EAP’s small states as in the average small state EMDE. As a result, EAP’s small states generate less income from exports and tourism, and rely more on official development assistance (ODA) and remittances. Historically, sustained high-growth episodes among small states have been preceded by faster growth in foreign direct investment, fixed investment, and air passenger arrivals—precisely the channels that are obstructed by remoteness. Lifting growth in EAP’s small states therefore depends on reducing the effective distance to markets, easing key firm-level constraints—finance, electricity, transport, and labor regulations—where these economies lag, building disaster resilience, and reducing their reliance on imported fossil fuels.

The adoption, adaptation, or advancement of artificial intelligence (AI) requires access to “compute”, the ability to process large amounts of data. Local data centers offer one form of access to compute. High-capacity and reliable energy grids in some EMDEs in East Asia and Pacific make them attractive data center locations. Data center investment is also attracted by other good fundamentals, such as sound governance and regulatory quality, and a skilled workforce. Efforts to improve these fundamentals are therefore likely to constitute “no-regrets” policies that benefit data center investment as well as broader investment.