Journal Issue

Investing in the Youth Bulge

International Monetary Fund. External Relations Dept.
Published Date:
August 2006
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With the right investments, developing countries can turn their large youth populations into a boon

RAPIDLY FALLING fertility rates in most developing countries have led to a “youth bulge”—the largest in history—that will be the next generation of workers, parents, citizens, and leaders. The number of young people aged 12–24 stands at 1.3 billion and is expected to rise to about 1.5 billion in 2035 and decline gradually thereafter (see Chart 1). This trend results from the interplay between declining fertility and what demographers call population momentum—that is, the inertia in population growth from having large child-bearing populations. Currently, the fertility decline is balanced by the still-growing numbers of people of child-bearing age. But over the next two to three decades, as the fertility decline becomes stronger and population momentum slows, the number of young people will peak and begin to drop.

Chart 1Leveling off

The number of young people is approaching a historic plateau, representing a fresh opportunity for economic growth. (youth aged 12–24, billions)

Notes: Least developed countries refers to the 50 poorest countries in the world. Less developed countries refers to all developing countries.

Source: United Nations, World Population Prospects: The 2004 Revision (medium variant).

Of course, there is a huge variation across developing countries. In many middle-income countries and transition economies, the fertility transition is fairly advanced and the number of young people is actually declining (as in China and Thailand). In others, which are not as far along (for example, Brazil and Vietnam), numbers are currently swelling to a peak or a long plateau. In still others, which are even less advanced in this transition (as in India and the Philippines), the peak will be experienced in the next one to two decades. In yet others (as in Niger and Sierra Leone), the numbers are expected to grow continuously into the foreseeable future.

What does the youth bulge imply for growth and poverty reduction? How can countries minimize the risks and seize the opportunities for this cohort? This article highlights some lessons from the World Bank’s upcoming World Development Report 2007 (World Bank, 2006) especially relating to investments that facilitate the transition from school to work.

Risks and opportunities

Some see the large numbers as a risk. For low-income countries, the cost of expanding access to post—primary schooling can be prohibitive. Achieving universal primary and secondary education in low-income countries would require an incremental cost of $34–69 billion a year, or about 3 percent of GDP (Cohen and Bloom, 2005). Add to that the cost of addressing HIV/AIDS—a disease to which young people are particularly prone, given youthful sexual experimentation—and noncommunicable diseases, and financing the fiscal burden, difficult at the best of times, can be daunting. In the case of HIV/AIDS, inaction could lead to levels of income by 2050 that are two-thirds 1960 levels in real terms—a “spectacular descent into backwardness,” according to one estimate (Bell, Devarajan, and Gerbach, 2006).

Another concern is the risk of unemployment. Young people make up one-fourth of the working-age population but nearly half of the unemployed. Survey data from 60 developing countries show that young people spend nearly a year and a half in joblessness or intermittent work before entering stable employment—costly to individuals in terms of forgone learning. For example, in Guatemala, experience in skilled jobs increases reading comprehension and cognitive skills, which are lost to those unable to get these jobs. Unemployment also risks social unrest, which can hurt a country’s climate for investment.

Yet large numbers of young people present countries with an unprecedented opportunity to deepen their human capital. Declining fertility means that countries have a larger proportion of people of working age relative to the proportion of children and elderly people, making more income available per dependent. In a country whose ratio of children and elderly people to workers declines by 25 percent, every real or rupee collected in taxes can finance a 33 percent increase in spending per dependent that could be used to develop and maintain their human capital (assuming per worker tax rates are constant). Within families, a decline in the number of siblings means more resources available per child. Thus, the economic conditions for investing in children and dependent youth have never been better.

With the right policies and institutions, a rising share of working-age people in the population can boost economic growth. One study attributes more than 40 percent of the higher growth in the East Asian “tigers” versus that in Latin America during 1965–90 to the faster growth of the tigers’ working-age population, combined with their better policies on trade and human capital development (Bloom and Canning, 2004). Indeed, the skills of the labor force, built largely during childhood and youth, are an important determinant of a country’s overall investment climate. Skill shortages, a feature of all developing countries, tend to be smaller where enrollments in post–primary education are high.

How can countries address the challenges posed by the youth bulge? Countries can help by broadening opportunities for the young to develop human capital; by helping them choose among those opportunities; and by providing second chances when the choices are missed or don’t work.

Broadening opportunities for young people

Many countries still don’t provide enough avenues for young people to build their human capital, whether through access to learning of sufficient quality or through smooth entry into jobs in which they can develop skills. To make the most of their demographic window of opportunity, many countries need to do more.

Improve the quality of basic education. Even though there has been dramatic progress in the numbers of young people who are completing primary school, poor quality is a constraint. In several African countries, fewer than half the young women aged 15–24 can read a simple sentence after three years of primary school—and fewer than 60 percent even after six years in countries such as Ghana and Zambia (see Chart 2, left panel). Many young women do not know certain basic facts that could save their lives (Chart 2, right panel).

Chart 2Mind the gap

Many young women in Ghana and Zambia lack book and life knowledge.

To improve basic education, a key requirement is to measure quality well—for example, by applying standardized tests, comparable across schools and countries. Countries need to take this monitoring seriously and act on the findings. They also need to emphasize the nutrition, health, and psychosocial development of preschool-age children. In countries as diverse as Jamaica, the Philippines, Turkey, and the United States, enriched child care and preschool programs have led to higher achievement test scores, a higher graduation rate fom high school, and lower crime rates for participants, well into their 20s.

Meet demands for higher skill levels. For many middle-income countries that educate their young people adequately, the challenge is to meet the demand for skills in the global economy. Current trends belie the expectation that expanding trade will raise the demand for unskilled workers. Instead, developing countries face a growing demand for workers with higher skills. As a result, workers with secondary and more advanced education have seen their earnings rise sharply in a wide range of countries, even as their numbers have increased (National Research Council and Institute of Medicine, 2005).

To produce more post—basic school graduates with the right skills requires solving both demand and supply problems. On the demand side, for many young people, especially those from poor families, further schooling is too costly, in terms of both money and the opportunity cost of time. Policy can stimulate demand through incentives such as conditional cash transfers, which provide monetary compensation to households conditional on school attendance. Mexico’s conditional cash transfer program, Oportunidades, has significantly increased secondary school enrollments among young people from poor families by reducing grade repetition and lowering dropout rates, particularly in the critical transition from primary to secondary school (World Bank, 2006).

Constraints on the supply side can be met by expanding the number of upper secondary and tertiary places while maintaining the quality of education. Countries where private contributions are still relatively small have scope for charging fees and developing public-private partnerships.

Ease labor market entry. Many skills are acquired on the job. But young people everywhere have a hard time getting started (see Chart 3). Some wait a long time for a job; others take low-paying jobs that teach them few new skills. While ensuring that economic growth increases demand for workers of all ages, it is important that young people be able to compete on a more equal basis. In many middle-income countries, labor market regulations penalize new entrants. Policies that limit flexibility and mobility across sectors, such as overly rigid employment protection laws or excessively high minimum wages, tend to constrain young people more than others and lengthen the transition to work. Partial reforms, as in Europe, that introduce flexibility only for the young and unskilled, are unlikely to succeed because they do not offer improved prospects for graduating to more stable and secure jobs (World Bank, 2006).

Chart 3Short on experience

It’s harder for young people than for those over 24 to find jobs.

Source: Authors’ calculations based on World Bank (2006).

Note: Data and regional averages are from a sample of countries for each region.

Many young people find their first jobs in the informal sector. Providing literacy and basic education, practical occupational training, and general behavioral skills for apprentices and certifying their skills on completion can improve their prospects of moving up the skill ladder in informal sector jobs. In Kenya’s Jua Kali program, vouchers provide master craftsmen with access to new technologies and allow them to upgrade their skills, improving the quality and relevance of the training they can offer their employees.

Choosing among opportunities

Many young people enter adulthood without the information, resources, or experience to choose well among life’s opportunities. Governments can help them become more capable decision makers.

Information. Simple and relatively cheap interventions that inform young people of the payoffs of further schooling can improve decision making. In the Dominican Republic, a survey of boys in the final year of primary school showed that they underestimated the returns to completing secondary school by up to a factor of 10. Boys at randomly selected schools who were told about the “true” earnings premium to secondary education then went on to complete more years of secondary school than those who had not been told. School-based career guidance services have shown promise in Chile, the Philippines, Poland, Romania, Russia, South Africa, and Turkey. Because the success of such interventions depends on the information available to counselors, emphasis needs to be placed on training trainers.

Resources. Higher education can be expensive for students. For the half of all university students in private universities in Argentina, Brazil, Chile, and Colombia, out-of-pocket costs range from 30 percent to 100 percent of GDP per capita. Even for students in free public universities, the opportunity costs are substantial. Credit schemes for poor students could not function without government support, and many such schemes have foundered because of low repayment rates. Australia’s system makes repayment contingent on graduates’ incomes, as tracked in tax systems. Middle-income countries such as Thailand are starting to try such schemes, which are worth monitoring and evaluating. In countries with poorly developed income tax systems, mechanisms such as targeted school vouchers and individual learning accounts that encourage savings for education may be a better choice.

Decision-making ability. Despite the big gains in enrollment rates, very few education systems emphasize the thinking and behavioral skills—motivation, persistence, cooperation, team building, ability to manage risk and conflict—that individuals need to process information and make wise decisions. Methods of teaching these skills have been well tested in developed country settings and are now beginning to be tried in developing countries. They are well worth pursuing.

Young people may also need incentives to make the right choices about schooling and working. The Bangladesh Female Secondary Stipend Assistance program targets girls aged 11–14, transferring a monthly payment to bank accounts in the girls’ names, contingent on their performing well enough to advance in school and staying unmarried.

Providing second chances

Invariably, some young people will not be able to avail of opportunities open to them. They may drop out of school, enter work too early, end up with jobs that lead nowhere, or be unable to find any job at all. This can result in an enormous missed opportunity for society as a whole.

Policies that help young people recover from bad choices or poor circumstances can provide a safety net that benefits society well into the future. They include youth rehabilitation programs, treatment programs for people with communicable diseases, and retraining programs for school dropouts. Bangladesh’s Underprivileged Children Education Program helps 10–16-year-olds who have dropped out of primary school, providing three years of schooling and channeling the youth into vocational programs that it runs. The program, which served 36,000 students in 2002, costs roughly the same per student as regular schooling.

Footing the bill

Some of the policy directions recommended here require a reallocation of resources. The biggest bill may be for the cost of expanding access and improving the quality of basic education—and expanding the definition of basic to include at least some secondary education. While making both primary and secondary education universal in low-income countries can cost as much as 3 percent of national income, this figure falls to about 0.5 percent of national income when both low- and middle-income countries are considered (Cohen and Bloom, 2005). Although indeed large, these sums are within the capability of many countries. For the poorest countries, these burdens would be manageable if richer countries shared the costs.

Other measures that have been mentioned here may not require financial, as much as political, capital. The returns on investing in young people would be substantially enhanced by trade and labor market reforms that deploy human capital more efficiently, but these may threaten the entitlements of older workers. For example, employment protection laws in Latin American and some industrial countries increase the unemployment rate of relatively unskilled young people by inhibiting the incentives to create jobs. Balancing the need to broaden opportunities for young people while providing adequate protection is difficult but necessary. Spain’s partial labor market reforms, which lowered firing costs only for entry-level jobs, failed because the policy reinforced labor market segmentation. It was only when Spain moved to broader reforms that increased the flexibility of the entire labor market that unemployment fell (World Bank, 2006).

“The biggest bill may be for the cost of expanding access and improving the quality of basic education.”

Similarly, improving the investment climate for human capital requires targeting the benefits, costs, and risks perceived by young people. This, too, may be controversial, because some societies see responsibility in the hands of the young as a threat. But there are now more examples that successfully targeting the capability of young people by giving them the right incentives has strengthened their own future and that of society as a whole. One is a merit scholarship program for girls in Kenya that boosted the test scores not only of girls, but of boys as well, perhaps through the result of peer influence (Kremer, Miguel, and Thornton, 2004).

Emmanuel Y. Jimenez is Sector Director, East Asia and Pacific Human Development, at the World Bank. Mamta Murthi is a Lead Economist, Europe and Central Asia, at the World Bank.


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