Youth, Skills and Entrepreneurship in Latin America

Latin America’s economic progress is slowing down. While investing in youth is an effective way to overcome the challenging conditions the region faces, many youth lack the necessary skills to be productive in today’s society. On April 20^th  the Inter-American Dialogue hosted the launch of the report “Latin American Economic Outlook 2017: Youth, Skills and Entrepreneurship,” produced by the Organization for Economic Cooperation and Development (OECD), the Economic Commission for Latin America and the Caribbean (ECLAC), and CAF – Development Bank of Latin America.  The speakers invited to explore this topic included: Adriana Arreaza, Director of Macroeconomic Studies at CAF, Angel Melguizo, Head of the Latin American Unit at OECD, Mariana Costa, Co-Founder and CEO of Laboratoria, Clemencia Cosentino, Director of STEM Research and Evaluation at Mathematica Policy Research, and Carlos Ganoza, Chief of Staff of Peru’s Ministry of Economics and Finance.

 The following are a few of the key messages that came out of the event:

1. Latin America’s economic growth and social progress is undergoing a major slowdown. As Arreaza explained, the region’s GDP growth has diminished between 2010 and 2016, and countries’ potential output growth is slowing down due to diminished investments and lower productivity. This has taken a toll on social variables. For instance, real wages are stagnant while poverty and unemployment have risen, all of which threaten the expansion of the middle class that grew during the past decade. This presents vast policy challenges, especially given that countries are working with limited fiscal space to increase taxation for revenue. What the region needs, she explained, are structural reforms to increase productivity for inclusive growth. She favored investing in education, training, and skills development to increase economic performance, strengthening regional integration policies, and improving state capacities to enhance the provision of public goods to produce regional structural growth. However, policies need to be tailored for each country, as one size does not fit all.

2. Half of firms in Latin America report difficulty in hiring employees with adequate skills to do work. This is emblematic of the gap between skills taught in schools and those desired by employers. Therefore, while LAC youth are more educated today, they still lack good employment prospects. This has left 20% of LAC youth in the informal labor market and another 20% neither working nor studying. Ganoza finds these conditions particularly troublesome because youth engaging in such work, or lack of work, are not learning valuable skills or technology that would prepare them professionally for work in larger, formal, companies. This lack of adequate preparation also presents a big opportunity cost economically. For example, in Honduras, the combined opportunity cost of those who neither study nor work, combined with those working in the informal labor market, equates to almost 10% of unattained GDP.  As Costa and Malguizo commented, to address these challenges, adequate funding must be channeled to education and entrepreneurship programs that are responsive to market demands.

3. The mismatch in skills also increases the difficulty LAC youth face in transitioning from informal to formal labor markets. Not surprisingly, gaps in the cognitive, socioemotional, life, and other skills, make it harder for youth to enter formal labor markets from informal labor markets. Melguizo posed the question: are informal labor market jobs a stepping stone toward the formal labor market or a trap from it? Considering how difficult it is to transition from informal to formal labor markets and the fact that people that begin in formal labor market are more likely to remain in formal labor markets, his answer is self-evident. As a potential solution he suggested encouraging entrepreneurship and expanding government and public-private partnership programs to help foster skills development.

4. While entrepreneurship is certainly worth promoting, it may not be the right course of action for everyone. Given the limited investment in social, cognitive and non-cognitive skills, as well as other qualities a successful entrepreneur typically has, entrepreneurship on its own may not be enough to overcome the region’s job market challenges. Additionally, one’s motivation for becoming an entrepreneur is important to consider. One in four LAC entrepreneurs become entrepreneurs out of necessity, essentially because of the lack of opportunities in the formal job market and not because they want to seize an opportunity to bring their business idea to fruition. Ganoza found scaling entrepreneurship projects to be an additional challenge. However, entrepreneurship can work for some people. For example, Costa’s organization, Laboratoria, trains women to become software developers, which provides them with quality skills for high paying, highly demanded jobs with opportunities for professional development.

5. Public-private partnerships are increasingly popular ways to address the labor market and skills gap. Public-private partnership (PPP) programs can help ensure that entrepreneurship programs offer business, vocational and technical training, mentoring, and counseling work. To maximize their effectiveness, it is equally important that public-private partnerships strengthen connections between young entrepreneurs and business networks, and provide guidance regarding business registration.  As Arreaza explained, private sector involvement would help share the burden of government spending on such programs

6. There is a strategic value in using data and conducting systematic evaluations to assess program effectiveness. It is necessary to have a broader framework to use evaluations for strategic decision-making purposes and to help one determine which skills and outcomes to prioritize. Evaluations of entrepreneurship and youth trainings help organizations and governments identify what works and where reform is needed.  As Consentino said, policy changes are more effective when you have used data and evaluations.

In sum, given LAC’s difficult economic realities, measures to address the region’s challenges related to youth, skills, and entrepreneurship are undoubtedly necessary.  This is acutely demonstrated by the mismatch between skills taught in schools and those demanded by the labor force, as well as the difficult transition from informal labor markets (and unemployment) to formal labor markets.  As discussed in both the report and by the panelists, entrepreneurial activities, public-private partnership and government programs have many opportunities to offer.  Though each requires customization, increased funding and improved use of data and evaluations, together these options provide the foundation for a path towards sustainable economic growth.