How to ensure Demographic Dividend does not become a Demographic Bomb?

WB’s chief economist Justin Lin writes a post on the topic.

He says the population bomb is ticking in some countries esp Africa. It is upto them what they want to do with it. Do they want to cash on the dividend or let it become a bomb?

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

What is the way? He says the traditional route is to expand the supply side:

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.

He says we need to look at demand side as well and increase growth etc in the economy.

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. 

To this he goes to his growth framework – New Structural economics which focuses on comparative advantage:

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. 
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”).
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.
Loads of  Government  intervention and policies. The puritans will not be impressed…
INdia’s case is actually the reverse…The focus is hardly om increasing supplies but just harping onto one word called growth. It seems to be the panacea for all the ills facing Indian economy….

2 Responses to “How to ensure Demographic Dividend does not become a Demographic Bomb?”

  1. PB Says:

    Off-topic but I thought you might like this article:

  2. What will India look like in 2025? « Mostly Economics Says:

    […] well said. Here is Justin Lin on a general post giving a framework for how to ensure demo dividend does not become a bomb. Going by his frameowrk, […]

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