IMF Working Papers

Using a small open economy overlapping generations model, this paper examines how AI can drive economic divergence across and within Asian economies. While AI adoption may promise sizable productivity gains, it could create temporary but potentially longlasting divergence across countries. Structurally-prepared advanced economies tend to adopt AI earlier and see immediate growth gains while emerging markets and developing economies (EMDEs) face delayed adoption and initial growth headwinds from rising costs of capital. Structural reforms that boost productivity and strengthen human capital not only accelerate adoption in EMDEs but also amplify the growth gains. Within countries, AI adoption could widen inequality along multiple dimensions: across skill groups, as high-skilled workers benefit disproportionately from complementarity with the more capital-intensive technology, and across generation, as the shift of national income toward capital favors asset-rich older households relative to younger workers who rely primarily on labor income. Redistributive policies can help mitigate these distributional pressures, though they entail equity efficiency trade-offs that vary with country-specific fiscal and demographic conditions.