Friday, January 6, 2012

Demographics And Development

World Bank Chief Economist Justin Lifu Yin writes a concise article on the demographic transition and development policy (excerpt; emphasis added):

Youth Bulge: A Demographic Dividend or a Demographic Bomb in Developing Countries?

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...

...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 instability. Therefore, one basic measure of a country’s success in turning the youth bulge into a demographic dividend is the youth (un)employment rate…

…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…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…In recent decades, countries in North Africa have also experienced dramatic declines in the dependency ratio; however, as we saw above, youth unemployment has been a severe problem.

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…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…young adults may need access to services that can help them re-start their economic and personal lives…

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 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 time. 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…

…A successful development strategy that will facilitate the structural change and create job opportunities for youth…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 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.

If you’ve ever wondered about Tun Mahathir’s insistence for “Looking East” and a manufacturing based growth strategy 30 years ago, this article explains in a nutshell why. It also explains the reasoning behind the New Economic Model, and the demand side approach of the Economic Transformation Plan – we need jobs to absorb the coming wave of new entrants into the job market.

You’ll also find in the article above many of the points that Malaysia has experienced in the recent past, and will experience in the coming decade – rural-to-urban migration; a shift from low productivity agriculture to higher productivity manufacturing, and then on to services; the emphasis on education.

Of course, there’s sometimes a big gap between theory and practice. The “trickle-down” approach to industrialisation (aka “crony capitalism”) hasn’t really produced a dynamic SME sector beyond the core of MNCs and GLCs. Expected job creation by the ETP will just about absorb youth labour entering the workforce in the next decade – but there’s a skill mismatch between what fresh workers will have and that demanded by the private sector. It’s also no more than the jobs created in Malaysia in the past decade, which begs the question, is the ETP really necessary.

Nevertheless, if you’re curious about the theoretical underpinnings of Malaysia’s development strategy, you could do worse than to hit the link and have a read through the full article.


  1. hi,

    Thanks for an interesting article. Im not an economist but im deeply concern about the gov strategy in pumping out thousands of graduates every yr. To add salt to the wound i can see many of our lecturers are actually have ZERO industrial training and have problems keeping up with current industrial needs. Do u think there will be mismatch ( in term of skill, job demand etc ) of what the private sector needs and what the universities are doin right now? to what extend this will affect us all?

  2. Actually from my perspective, we're not producing enough graduates - tertiary enrollment in Malaysia is sub-30%, compared to an average 60%-70% in the OECD. Tertiary education empirically is one of the biggest factors in raising lifetime incomes.

    But the problem of skills mismatch is real. Local business surveys are consistent in pointing this out, and I've much anecdotal evidence that supports this as well.

    While I won't exempt universities from being part of the problem, it goes deeper than that - as they say, garbage in garbage out (full disclosure: my wife is a senior lecturer at a local U).

    We have to relook the approach to education right from the bottom. There's too much emphasis on rote learning and regurgitation, which leaves final graduates without the cognitive and non-cognitive skills to deal with dynamic workplace environments. We also have to ensure that parents are fully involved in the education process, something that has also been empirically proven to improve learning outcomes.

    As my old CEO used to say about local graduates - can't read, can't write, can't speak, and won't listen. That might sound harsh, but unfortunately too close to the truth.

  3. Hi Hisham,

    Great article. But I think times are changing. For example in 1969 only 2% of high school students went to universities in UK. Currently it is about 40-50%. With rising number of graduates, salaries are not what it used to be. Currently plumbers are earning about 30-35K annualy and are sometimes paid more than lecturers.

    I would like to point to you an article from economist published last month

    This article points about the rising number of tertiary graduates in South Korea and mismatch between graduates and employer requirements. many jobs nowadays donot require a graduate but would just be fine with a diploma holder or an apprenticeship.

    On the question of Malaysian skills mismatch, I have two comments. The earlier commenter posted a valid question about industry/practical experience of our lecturers. Most lecturers complete an undergraduate degree after which they are selected for master degree and then for a PhD preferably in UK. How is it possible for such a lecturer to impart practical knowledge to his students.

    Secondly, the promotion and success of lecturers is based on research publications. Employment and employability of graduating classes are important to the lecturer or to the department/faculty. You well know when they publish MBA school rankings, the main success criteria is starting salary of graduates and the percentage of students employed after 3 months of completing the course.

    Malaysia needs not more university graduates but more skilled employees regardless of place of training whether it is polytechnic, institute latihan or university. Let us aim to have quality centres of education rather than worry about quantity of graduates.

  4. @anon 11.14

    Sorry, your post got tagged as spam.

    In response, I've researched the question of the skills mismatch quite extensively (my CEO talks on the subject a lot). There's quite a few approaches to take in trying to overcome the issue - extensive collaboration on syllabuses between industry and universities; co-organised workshops and seminars; industrial attachment for academics (not just the students); mobility between business management and university lecturer careers.

    The problem is, despite these efforts, there is still no effective solution to the problem. One issue is that business complexity and volatility has increased substantially, which means that what might be relevant when a undergraduate starts his/her degree program might be completely obsolete by the time they graduate.

    Another is the stark cultural differences between academia (of all types) and the requirements of the workplace - they just don't mix well.

    This isn't something that only employers are concerned about - I know the universities are trying to resolve it too. But everyone's really shooting blanks trying to make any headway so far.

    Ref: your last comment. While going the technical/vocational route might help short term (I've advocated this myself), we might be shortchanging people over the long term.

    Research indicates that while technical education provides workers a solid start to their careers - salaries can be even better relative to degree holders - at the mid-career point, they lose ground. In other words, a degree still provides greater lifetime earnings potential, even taking into consideration a greater ratio of degree holders within a given population. The specialised training and knowledge involved with technical education makes people vulnerable and less employable if the structure of the economy changes.

    Having said that, I'd settle as much for greater technical education as for greater university education - but we're not getting either. I believe we could probably double tertiary enrollment overnight (both degree and technical), if only the infrastructure was available - but it's not. There's just not enough places available.

    I'd love to have greater quality as well - I just don't see it happening anytime soon.