Avoiding a Lost Generation

By Nemat Shafik (Version in  عربي)

Young people were innocent bystanders in the global financial crisis, but they may well end up paying the heaviest price for the policy mistakes that have led us to where we are today.

Young people will have to pay the taxes to service the debts accumulated in recent years.

Moreover, the global economy is threatened by continued strains in the euro area, and unemployment is still climbing in several countries, in particular in Europe. Young people (those aged 15 to 24) are the most affected, and youth unemployment has reached record levels in a number of countries.

If the right policies are not put into place, there is a risk not only of a lost decade in terms of growth but also of a lost generation.

Consider this. In Spain and Greece, nearly half of all young people cannot find jobs. In the Middle East, young people account for 40 percent or more of all unemployed people in Jordan, Lebanon, Morocco, and Tunisia and nearly 60 percent in Syria and Egypt. And in the United States, which traditionally has had a strong job creation record, more than 18 percent of all young job seekers cannot find employment.

Legacy of loss

Youth unemployment has long-term consequences for economic growth because of the loss or degradation of human capital. But it also has many other consequences, both for the individuals affected and for society as a whole.

Among those consequences are

  • Increased costs to the economy: Youth unemployment results in higher unemployment insurance and other benefit payments, lost income tax revenues, and wasted productive capacity.
  • Brain drain: Youth unemployment often leads to increased emigration, which is clearly happening in Ireland and Iceland and has been a long-standing feature of many Middle Eastern countries. Many crisis-hit economies have a tradition of emigration when the economy undergoes a serious downturn.
  • Higher crime rates: Increased unemployment has been linked to higher crime rates.
  • Lower lifetime earnings: Youth unemployment leaves a “wage scar” in the form of lower earnings that can last into middle age. The longer the period of unemployment, the bigger the effect.
  • Lower life expectancy: Unemployment more generally has been linked to lower life expectancy, a higher incidence of heart attacks later in life, and even higher rates of suicide.

Road map to jobs

The biggest contribution the IMF can make to reducing youth unemployment is helping its member countries foster macroeconomic stability and restore economic growth. It is only when the economy recovers that people will start to find jobs again.

To get the world economy back to where it creates rather than destroys jobs, a number of steps should be taken.

In advanced economies like the United States and Europe, there is a problem of inadequate demand. More needs to be done to energize growth and employment.

Many countries in Europe also face obstacles to hiring young people that are of a more long-standing structural nature.

As part of its policy dialogue with member countries, the IMF is recommending measures to reduce labor market segmentation, lower barriers to competition (especially in the service sector), implement growth-friendly tax reforms, and increase efforts in education and research and development.

Emerging economies are another story. They have been growing strongly, and some—at least until recently—were even at risk of overheating. Some of these countries—mainly those running large external surpluses—could contribute to solving the global and youth unemployment problem by boosting domestic demand and purchasing more goods produced elsewhere, including in advanced economies.

Low-income countries weathered the crisis pretty well after 2008, but in the process used a lot of their government resources. They now need to rebuild their fiscal buffers, so they can sustain employment and redirect spending toward high-priority areas such as health, education, and infrastructure, even if the global environment deteriorates.

Access to credit is another important factor in job creation. That is why it is important to recapitalize banks and more broadly restore confidence, so that financial institutions can get back to the business of lending and contributing to growth.

In developing economies, many banks are lending, but the loans do not reach large segments of the population, particularly young people and would-be entrepreneurs.

Call to action

For millions of young people around the world, a lot is at stake in 2012. If we do not succeed in putting the world economy back on the path to recovery, futures will be blighted, and more dreams will be stolen. To solve the problems of youth unemployment, restoring global growth is crucial, as are policies to support job creation and credit. None of this can be achieved without global cooperation.­

Read more at F&D magazine.

13 Responses

  1. [...] Nemat Shafik The following video gives a brief overview of the youth unemployment crisis: [...]

  2. [...] more than 18 percent of all young job seekers cannot find employment. -Nemat Shafik, on the IMF Direct BlogJust when did we stop giving a shit? The following IMF graph is a bit outdated, but still: crisis or [...]

  3. “Young people will have to pay the taxes to service the debts accumulated in recent years.”

    As Keynes said… “Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the ‘financial’ burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment.”

  4. Of course the young generation will pay through the nose for all the government extravagance and the leakage/wastage/pilferage of precious resources of those highly debt ridden countries. But for my country, the United States, I have some perturbing questions popping up in the mind. And my those questions relate to the aims, objectives and the role played by the IMF ever since it came into being. Regretfully, I am of the considered opinion that this organization has utterly failed in helping countries of the world in maintaining global monetary/financial stability. This organization, in my opinion, is now more or less operating as ‘The European Monetary Fund’. Especially, with reference to holding the top management position by no one else from the free world but only from Europe; virtually as a birthright.

    The IMF is dolling out billions of hard-earned dollars on some absurdities like the bailouts by their ‘troika’ towards funding some of the PIIGS in the euro zone. This is being done not because of any fault of our young generation.

    And the disturbing questions are (i) What about the poor European countries being bled white by the EU big-wigs? (ii) What will happen to our share of the dollars collected by the IMF for financing those bailouts, if there is a default and the money gets stuck up or lost?, (iii) How many times has the IMF financed such bailouts for the mountains of debts in the African or Third World countries during the last two decades? and (iv) what is happening to the people of Greece after the haircuts, bailouts, and most severe austerity measures imposed upon them by the IMF in collaboration with the EU Commission and the European Central Bank?
    I think these are the future debts which the young generation will pay for the faults of such organizations.

    As a layman, I thought it in fitness of things to raise such issues here, as I have done repeatedly during the last couple of years.

  5. Generation Y has to be convinced that this is the period of globalization and as such of acute competition. Their predecessors have worked hard and are handing over this Mother Earth to them for further nurturing and development. Substantial infrastructure has been developed. Miraculous inventions in the fields of science and information technology have been made. They should not, however, expect low-hanging fruit that’s easy to swallow. They should put in their contribution and make this planet much more prosperous and worth living for the coming generations.

    • Mr. Mir, of course I agree with you that the next generation should not expect low hanging fruit, but, may I ask you, do you believe our generation is handing over the world to the next generation, in such a degree of better shape that what our fathers handed it over to us? There is a sort of self congratulatory tone in your message that somehow sounds quite wrong to me.

      • Kind attention for Mr. Per Kurowski
        ———————————————

        Thank you for your comments. Mr Kurowski I do believe that we are handing over the world to the next generation in a better shape considering the progress made in the fields of physical sciences, medicine, computer engineering, information technology, faster means of transportation, communication etc. Nowadays, the people living in different parts of the world can easily understand and share each others’ problems. Solutions can be offered at a very fast speed. It is because of the internet miracle that I can communicate with you and can share your knowledge.

        The young generation (15 to 24 years) is lucky to start with because much more has been accomplished. Even the visible sky does not seem to be the last limit. Now we can think beyond it. Space and its resources are likely to be within the reach of the human beings. As President Obama on 15.4.2010 stated about the National Space Policy “that our goal is the capacity for people to work and learn and operate and live safely beyond the earth for extended periods of time, ultimately in ways that are more sustainable and even indefinite.”

        I agree with Nemat Shafik that global cooperation is needed for job creation, poverty reduction and economic growth. We should do our best to avoid conflicts among the nations and divert resources physical, financial and natural, for the welfare of the humanity.

        What I am trying to say is that despite huge growth in the human population, Mother Nature is kind towards us. Human intellect has not yet been fully exhausted in the sense that we cannot solve the new challenges. What is needed is hard work for further innovations in order to have access to the hidden treasures of this planet and beyond.

        As regards debts and deficits, these challenges have popped up in the past and were resolved. Similarly these problems are resolvable now.

        Kind regards

  6. Young people work for low wages and are exploited by business owners. So many youths are getting smarter and being more cautious! What about the 25 to 35 to 40 generation? People, who have worked, studied and have skills now have nothing! It is not just a youth problem it is an under-the-age of retirement problem. This has been coming since the 1990’s due to extreme capitalism of the 1% who hold the world’s wealth as our politicians allowed this to happen.

    • Hold it there! “1% who hold the world’s wealth as our politicians allowed this to happen” has absolutely nothing to do with “extreme capitalism” and all to do with extreme cronyism.

  7. Again, as I see it, the best way for the young to have a chance to get jobs might be for the current bank regulators to lose theirs.

    I have also recently been proposing that for each percentage point the unemployment rate for the youth exceeds the overall unemployment rate, the retirement age should be cut with x months as there is no justice in the old generation, who already had its chance, standing in the way of the new generation.

    By the way, these comments are not based on hindsight. My criticism and warnings about current bank regulations were spelled out loud and clearly before and while being an Executive Director of the World Bank and a member of its Audit Committee 2002-2004, precisely when the so close to odious Basel II was being discussed, as Nemat Shafik could attest.

    http://subprimeregulations.blogspot.com/2004/11/some-of-my-early-public-opinions-on.html

  8. The lost generation is already there. You can find it not only in Greece or Spain, but also in Italy, in the Balkans, in Portugal and Ireland. It is due to the wrong policies of the IMF and the EU in the sovereign dept crisis. I appreciate that you try to change this policy, but I am afraid most of what you are saying is just PR, and does not mean a real change. This is what happens in Brussels, where I live… http://lostineurope.posterous.com/verlorene-jugend (in German)

  9. blessed be the days to come…………….we hope for a better future…….we have no words anymore than this.

  10. Yes, and the current lack of jobs for the youth is much the result of really dumb bank regulators who thought that the only purpose of banks was to be mattresses and not to default; and which is why the banks now have obese exposures to what was officially perceived as absolutely not risky, like triple-A rated securities and infallible sovereigns, and anorexic exposures to what was officially perceived as risky- such as those important new generation of job creators, the small businesses and entrepreneurs.

    When are the IMF and the World Bank going to understand that this issue of regulatory discrimination against risk-taking is much too dangerous for them to remain silent in solidarity with the regulators?

    Occupy Basel! http://bit.ly/dFRiMs

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