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.