The
youth bulge is a common phenomenon in many developing countries, and in
particular, in the least developed countries. It is often due to a
stage of development where a country achieves success in reducing infant
mortality but mothers still have a high fertility rate. The result is
that a large share of the population is comprised of children and young
adults, and today’s children are tomorrow’s young adults.
Figures 1 (a)-(b) provide some
illustrative examples. Dividing the world into more and less developed
groupings (by UN definitions) reveals a large difference in the age
distribution of the population. The share of the population in the 15 to
29 age bracket is about 7 percentage points higher for the less
developed world than the more developed regions. In Africa (both
Sub-Saharan and North Africa), we see that about 40 percent of the
population is under 15, and nearly 70 percent is under 30 (Figure 1(a)).
In a decade, Africa’s share of the population between 15 and 29 years
of age may reach 28 percent of its population. In some countries in
“fragile situations” (by World Bank definitions), almost three-quarters
of the population is under 30 (examples in Figure 1(b)), and a large
share of 15-29 year olds will persist for decades to come (Figures 1(c)
and (d)).
Source: Author’s calculations based on data from United Nations, Department of Economic and Social Affairs, Population Division (2011). World Population Prospects: The 2010 Revision. Medium fertility scenario is used for the 2050 projections.
In a country with a youth bulge, as
the young adults enter the working age, the country’s dependency ratio--
that is, the ratio of the non-working age population to the working age
population—will decline. If the increase in the number of working age
individuals can be fully employed in productive activities, other things
being equal, the level of average income per capita should increase as a
result. The youth bulge will become a demographic dividend. However, if
a large cohort of young people cannot find employment and earn
satisfactory income, the youth bulge will become a demographic bomb,
because a large mass of frustrated youth is likely to become a potential
source of social and political instability1.Therefore, one
basic measure of a country’s success in turning the youth bulge into a
demographic dividend is the youth (un)employment rate. Unfortunately,
the recent record has not been favorable. While unemployment rates are
naturally higher for young people, given their limited work experience,
the double digit unemployment rates presented in Figure 2 are
worrisome. Typically, the prevailing youth unemployment rates are about
twice the rate of the general workforce. The situation in the Middle
East and North Africa (MENA) and in the countries of Europe and Central
Asia is particularly troubling: youth unemployment is on the order of 20
percent or even higher. In addition, informality is more prevalent
among youth in MENA, so even for those who are employed, there may be
problems with job quality2.
Source: World Development Indicators and ILO Global Employment Trends for Youth. Two lines for MENA in recent years are for the separate sub-regions of the Middle East and North Africa by ILO definitions.
East Asian economies have been able to
turn to the youth bulge into a demographic dividend. Take the Republic
of Korea as an example. Over the past forty years, the dependency ratio
declined substantially in Korea (Figure 4(a)). In addition to dramatic
GDP growth and rapid increases in average wages, youth unemployment has
been below 12 percent and often in the single digits in recent years
(ILO data cited above). The same is true for China. Its dependency ratio
followed a similar pattern to Korea’s (Figure 1(a)). Since initiating
economic reforms since the late 1970, China has been able to generate
millions of new jobs while also relocating young workers from lower
productivity agricultural activities to higher productivity
manufacturing—all without experiencing high unemployment among the
youthful labor force. In recent decades, countries in North Africa have
also experienced dramatic declines in the dependency ratio (Figure
3(b)); however, as we saw above (Figure 2), youth unemployment has been a
severe problem.
Source: United Nations, World Population Prospects: the 2010 Revision.
The Traditional Policy Response: Prepare the Youthful Supply of Labor
The conventional approach for dealing
with youth bulge is to make young people job ready. The idea is that
young people’s skills – or more broadly, human capital—needs to be
increased to enhance their productivity in the labor market. The 2007
World Development Report, Development and the Next Generation, lays out
the policy agenda by focusing on five key life transitions: learning,
work, health, family, and citizenship. Three “lenses” are used to focus
the policy discussion: opportunities, capabilities and second chances.
Basic skills and access to secondary and tertiary education, for
example, are needed to create opportunities, while capabilities to make
the right decisions for seizing opportunities can be enhanced through
better information, access to credit and other factors. On the other
hand, when outcomes are negative—for example, poor decisions lead to low
levels of education or exposure to communicable diseases—young adults
may need access to services that can help them re-start their economic
and personal lives. The 2007 WDR emphasized both the skills upgrading
and the institutional setting for improving economic outcomes for young
people.
The above discussion provides a useful
framework for mitigating youth unemployment issue from the supply side;
however, demand for labor services is essential for absorbing new
entrants to the workforce. Such a shift in demand can be achieved only
by a dynamic change in economic structure. Countries that have been
successful in this regard move from a high share of employment in
agriculture towards an increasing share of employment in manufacturing
first and then gradually to the service sector in the post
industrialization stage. Generally, this structural change is
accompanied by rural-urban migration, and it usually starts in labor
intensive manufacturing. On an aggregate level, one can look at the
sectoral shift out of agriculture and into industry and services – both
in terms of value-added and employment. For example, Egypt in 1980 had a
GDP per capita (in constant 2005 PPP dollars) of $2,400, while China
was only at $524 and Korea was already ten times higher at $5500 (WDI
data). Egypt had only a slightly higer share of agriculture and
employment in GDP, compared to Korea; however, this structure largely
stagnated in the case of Egypt in the ensuing decades (Figures 4(a) and
(b)). Meanwhile, China now with a GDP per capita of $6800 (2005 constant
PPP) has a lower share of agriculture in total value added and the
employment share has declined continuously. On a more micro level,
countries like Korea have then moved up the industrial ladder to more
sophisticated and more capital intensive goods, as capital has
accumulated with high investment rates over time3. Throughout
this process, shifting labor demand creates opportunities for working
age population to be employed in jobs moving from lower productivity
sectors to higher productivity sectors.
Source: World Development Indicators
The youth unemployment issue has been
in the news with respect to the “Arab Spring.” Many youth protesting
in the streets have relatively high education levels. A recent World
Bank report4 finds that for oil importing countries in the
Middle East and North Africa, government sector employment is oversized
relative to other middle-income countries, while oil exporters have a
high growth sector – oil production—that is not labor intensive. The
report concludes “…the number jobs created in the last decade was
considerably less than the number needed to address key challenges, such
as high youth unemployment, low labor force participation rates,
especially among women, and fast –growing labor forces.”5 The
emerging new leaders in the Middle East and North Africa are acutely
aware of the urgent need to tackle youth unemployment. Indeed, the WDR 2013 on jobs,
which is being drafted now and is being shared in outline form with
diverse stakeholders, will grapple with this issue, among others.
How the New Structural Economics
(NSE) and the Growth Identification and Facilitation Framework (GIFF)
can help put young people to work
A successful development strategy that
will facilitate the structural change and create job opportunities for
youth can be based upon the principles outlined in the New Structural
Economics (NSE) and its policy implementation via the Growth
Identification and Facilitation Framework6. The NSE
highlights that a country’s economic structure is endogenous to its
endowment structure; however, the government needs to play a
facilitating role in the process of structural change and this role
needs to be structured according to clearly defined principles.
First, for an economy to be
competitive in both the domestic and international market, it should
follow its comparative advantage, as determined by its endowment
structure. In the early stage of development, sectors that the economy
has comparative advantage will be labor or resource intensive. Examples
include light manufacturing, smallholder agriculture, fishing and
mining. Only a few activities like mining are likely to be capital
intensive in this early stage. In the later stages of development, the
competitive sector will become increasingly capital intensive, as
capital accumulates thus changing the country’s endowment structure. In
the industrial upgrading towards more capital intensive production,
infrastructure needs to be improved simultaneously to reduce the firms’
transaction costs, and there is a clear role for government to play in
this regard.
Secondly, if a country follows the
above principle, its factor endowment upgrading will be fast (due to
large profits and a high return to investment), and its industrial
structure should be upgraded accordingly. The upgrading entails
information (for example, which new industries to invest), coordination
(improvement in “hard” (e.g., transport) and “soft” (institutional)
infrastructure), and externalities (useful information generated by
“first movers”). All of these aspects involve externalities or public
(semi-public) goods that the market will not automatically resolve on
its own. The government needs to play facilitating role in help the
private sector overcome these issues in order to achieve dynamic growth.
A practical approach for the
government to operationalize the NSE is laid out in the six steps of the
Growth Identification and Facilitation Framework. Without getting
into all the details, the six steps are: (i) identify the list of
tradable goods and services that have been produced for about 20 years
in dynamically growing countries with similar endowment structures and a
per capita income that is about 100 percent higher than their own; (ii)
among the industries in that list, the government may give priority to
those in which some domestic private firms have already entered
spontaneously, and try to identify the obstacles that are preventing
these firms from upgrading the quality of their products or the barriers
that limit entry to those industries by other private firms; (iii) some
of those industries in the list may be completely new to domestic
firms, and the government could adopt specific measures to encourage
firms in the higher-income countries identified in the first step to
invest in these industries; (iv) governments should pay close attention
to successful self discoveries by private enterprises and provide
support to scale up those industries; (v) in developing countries with
poor infrastructure and an unfriendly business environment, the
government can invest in industrial parks or export processing zones and
make the necessary improvements to attract domestic private firms
and/or foreign firms that may be willing to invest in the targeted
industries; and (vi) the government may also provide limited incentives
to domestic pioneer firms or foreign investors that work within the list
of industries identified in step 1 in order to compensate for the
non-rival, public knowledge created by their investments.
As above data reveal, the youth bulge will be an important demographic phenomenon in developing countries, and especially in Sub-Saharan African countries, in the coming decades. While it is important to increase the employability of young people themselves, it is also essential to facilitate dynamic structural change to create jobs for youth. By doing so, the youth bulge can be transformed into a demographic dividend, and the demographic bomb can be defused.
Justin Yifu Lin
http://blogs.worldbank.org/developmenttalk/
