From Megatrends to Action: Rethinking Industrial Policy in Southeast Asia

How can developing economies in Asia raise productivity, create jobs, and align growth with decarbonisation and energy efficiency? According to the United Nations Industrial Development Organisation’s Industrial Development Report 2026 (UNIDO IDR 2026), the answer lies in a push towards more innovative and targeted industrial policies. The report holds key lessons for Southeast Asia.

The IDR 2026 report presents a comprehensive framework that highlights foresight and megatrends analyses, with a call for an industrial push that could reshape the development trajectories of nations through 2050, including Southeast Asia. The case studies, which will soon be published, were led by Keun Lee, from the Centre for Economic Catch Up with Khazanah Research Institute (for semiconductors), Shanghai University of International Business and Economics (for the mobility sector in China), and the representative of UNIDO’s Indonesia Office (for nickel and EV Batteries).

As industrial policies make their return to the centre of economic strategy in many countries, several longstanding approaches to industrial development are being revived. Among these is “foresight,” commonly used by business consultants to anticipate trends in firms and industries, but also employed by the OECD and UN to support strategic planning. By reintroducing concepts such as “megatrends” — popularised by thinkers such as Alvin Toffler and John Naisbitt — the report captures the sense of disorientation prevalent today. It offers a more grounded perspective than the exaggerated optimism of some contemporary futurists.

The IDR 2026 report also identifies three interrelated gaps that future industrialisation must address. First, an intensity gap requires increasing the share of global manufacturing output held by developing economies. Second, a productivity gap demands accelerated technology adoption and industrial upgrading. Third, an environmental efficiency gap necessitates the greening of industrial ecosystems through decarbonisation, resource efficiency, and circularity.

These gaps will be addressed against the backdrop of transformative megatrends reshaping the global industrial landscape. Such megatrends include the energy and green transition, the rise of artificial intelligence and digitalisation in production, the reconfiguration of global supply chains, and demographic shifts. Each megatrend presents both challenges and opportunities that vary widely across regions. As a result, they necessitate differentiated responses.

The report emphasises that current development trajectories are inadequate. Under business-as-usual scenarios, more than 30 per cent of the global population would remain below the poverty line by 2050, with 300 million people suffering from hunger daily. These projections make clear that minor policy adjustments will not suffice to achieve the Sustainable Development Goals or the Paris Agreement targets.

As the global industrial landscape requires a fundamental shift, Southeast Asian economies play a significant role, collectively expanding manufacturing while advancing the green transition.

To explore pathways beyond the current development trajectory, IDR 2026 models alternative scenarios. The industrialisation (only) push scenario evaluates the impact of ambitious, coordinated policies aimed at accelerating industrial growth through interventions in seven priority areas. These include advancing physical and digital infrastructure, strengthening institutions and government capacity, and developing skills for green and digital transitions.

The clean energy and industrialisation scenario builds on the industrialisation (only) push scenario, but adds sustainability and equity objectives. Expanding renewable energy and phasing out coal would help decouple industrial growth from carbon dioxide emissions, enabling developing countries to reduce emissions more rapidly than advanced economies.

The report’s modelling, conducted with the Pardee Center for International Futures at the University of Denver, provides guidelines for how future-ready industries can reduce global extreme poverty and increase manufacturing value added by approximately 60 per cent. Industrial transformation pathways modelled in the report indicate approximately 25 per cent higher average GDP per capita and a 6 per cent reduction in global emissions under coordinated policy action.

Southeast Asia stands at a critical juncture in its industrial development. The region is a key destination for manufacturing diversification, with ASEAN’s share of global exports hovering around 8.5 per cent in 2025. Southeast Asia’s share of manufacturing value added in the Asia-Pacific is projected to increase from 8 per cent in 2025 to 14 per cent in 2050. Yet this growth trajectory faces multiple challenges: productivity gaps compared to advanced economies, infrastructure bottlenecks, fragmented regional policy coordination, and the urgent need to align industrial expansion with climate commitments.

Drawing on the IDR 2026 framework, Southeast Asian nations should prioritise five strategic industrial policy directions which are worth to list it: establishing integrated critical minerals value chains that adhere to rigorous environmental standards, accelerating coordinated green hydrogen and clean energy manufacturing ecosystems, strengthening regional industrial policy coordination through issue-based cooperation, improve industrial upgrading through targeted technology absorption and innovation policies, and embedding just transition principles and inclusive industrial ecosystems. 

The case studies by the Centre for Economic Catch Up describe the extent to which the strategic directions are followed. Nickel processing and EV production in Indonesia have successfully attracted FDI. Although the sector has so far provided low value-added to the mineral sector, it is set to grow if downstreaming policies are strengthened. By contrast, the semiconductor sector in Malaysia has grown rapidly, with the electrical and electronics sector accounting for 40 per cent of total exports and propelling the country to achieve high-income status. The mobility sector in China, comprising electric vehicles (EVs), autonomous driving (AD), and urban air mobility (UAM), is dominating the global industry and advancing rapidly under green industrial policies.

As the global industrial landscape requires a fundamental shift, Southeast Asian economies play a significant role, collectively expanding manufacturing while advancing the green transition. The IDR 2026 emphasises that manufacturing-led industrialisation remains the most established pathway to sustained productivity growth and high-income status. However, this call to action requires contextualisation at the regional and national levels through strategic planning. Megatrends and foresight analysis can benefit Southeast Asian economies when coupled with strategic industrial policy design. This is an urgent next task for adjusting trajectories.

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