An Urgent Call to Use the Demographic Dividend

Nicaragua’s Civil Coordinator has made an urgent, almost desperate call to change the country’s course. We only have a few decades, so we have no time to lose. We must act now if we want to see a little light at the end of the tunnel.

Adolfo Acevedo

On August 8, the Civil Coordinator, a Nicaraguan civil society umbrella organization made up of some 600 nongovernmental organizations, networks and individuals, held its first assembly of 2009 to present its “Proposal to the nation to change the course of the country.” The text had already been discussed with over 5,000 people from 43 Nicaraguan municipalities.

Six indispensable steps

Referring to both the national and international crisis, the Civil Coordinator stated that “we can do little or nothing to change the world crisis, but a lot to contribute to the search for national consensus,” listing six steps it considers “indispensable.”

The six steps are: “First: establish a Social Contract that defines the ethical principles to do away with exclusion and social discrimination, especially as experienced by women, children and Afro-descended and indigenous peoples. Second: create social control mechanisms to get the economy moving again, as it has been a victim of the voracity of the political class that legalized theft, usury and fraud with the collusion of governments and public officials. Third: develop civil society processes that help achieve social empowerment, a retooling of laws and institutions and the shaping of a new political culture that ends caudillismo and pacts among the upper echelons. Fourth: design a respectful and coherent international policy that reflects the consensus of society rather than the volunteerism of a given party or caudillo. Fifth: contribute to an inclusive and democratic nation governed by the rule of law and social justice. Sixth: contribute to the development of capacities that permit inequalities to be overcome, promoting regional integration initiatives in search of the unity, sovereignty, national independence, liberty and democracy of the Central American region.

The following is a summary of the proposal’s spirit and main contents by Civil Coordinator economist Adolfo Acevedo, insulted as an “oligarch and thief” during the march that followed the assembly...

Think about the future,
consider the age structure

People start their life as children entirely dependent on adults to satisfy their needs related to nutrition, health, affection and comprehensive development. Once adults, people’s “fate” will depend a lot on what was done for them when they were little.

One fundamental aspect of Nicaraguans’ fate has to do with the evolution of the population’s age structure, i.e. with the country’s demographic trends. A population’s age structure is normally broken down into people under the age of 15, between 15 and 64 and over 64. The theory behind this classification is based on people’s life cycle and the economic role they play during their life.

Children are conventionally classified as “minors under the age of 15,” which is an economic classification as they are consumers totally dependent on their parents’ income. They don’t work or generate income; they only consume.

According to this conventional classification, only 15- to 64-year-olds represent the population of working and income-generating age, even in Latin American countries. But although we know that children under 15 shouldn’t work, even the National Institute of Development Information (INIDE) classifies working-age people—those who enter the labor market and generate income—starting at age 10.

It is these people who sustain the dependents: the smallest and the oldest. And in this phase of their life they also have a very important economic function in that they save to have something to live on when they reach retirement age, conventionally estimated at 64, when they stop working and receiving an income and start living on the savings supposedly accumulated when they worked.

This population age structure and its evolution over time are extremely important to get people thinking about the future of both Nicaragua and all of us. In 1990, 46% of the Nicaraguan population was under 15 years old and was dependent. Another 51% was of working age and only 3.1% was already at retirement age. At that time there was almost one working-age person per child, and not all people of working age had effectively entered the labor market. We had households with many children, in which probably only one person was generating income, which was most likely scant and had to be distributed among many children. The consequences were malnourished children, illiteracy and sporadic and extremely poor medical and social assistance.

Today’s demographic dividend
is a historical opportunity

Starting in 1990, Nicaragua’s child population as a percentage of the total population began to plummet so that by 2005 it was 37.8%. In turn, the working age population rose from 51% to 58%. The fecundity rate dropped by almost half, and the child population stopped growing and actually began to shrink. While the child population was declining, that half of the population that had been children was beginning to reach working age. As a result, Nicaragua now has its largest working-age and income-generating population ever.

What does this mean for the country; what opportunities does it open up? Let’s imagine what is happening in the households with more working-age people and fewer children to care for. The household income would grow if those of working age were to find a job with a decent income, which in turn would allow more to be invested in the fewer children present. Situations such as this make it possible to reduce poverty faster. This is what happened in Southeast Asian countries such as South Korea, which in the fifties and sixties was poorer even than Latin American countries, but is now a developed country. And it made that turn-around in a relatively short time. In only a few decades, it turned into a developed country and almost completely eliminated poverty.

Its secret was that it took advantage of an opportunity we have now, known as the “demographic dividend.” This is the phase of demographic transition in which a country has the highest percentage of the population gradually entering working age, with the resulting opportunity of a large growth of the labor force. If that labor force finds highly productive jobs, it can produce a boom in economic growth.

With economic growth increasing and the dependent child population dropping, there is an increase in the average income of the country’s inhabitants, which in turn increases the possibilities of investing more in children. In sum, the possibility of reducing poverty more rapidly is increased through in greater income per inhabitant and more investment in children.

Exploiting the demographic dividend, which allowed the Southeast Asian countries to reduce their poverty in a shorter period of time and become developed countries, also implies that working age people received adequate nutrition when they were young. The didn’t enter the labor market malnourished, but rather received appropriate health care and adequate qualifications, so when they began to work they were prepared for highly productive and well remunerated formal jobs. That is what is meant by taking advantage of the demographic dividend.

There can be no
development with poor schooling

Although we are living in the demographic dividend phase in Nicaragua, we’re finding that when working-age people were children, they received poor nourishment and an extremely low educational level.

According to the welfare quintiles—which classify households into five groups, each representing 20% of the households according to their income levels—the average schooling level among those over 15 is 2.7 years in the quintile of low-income households, which are the poorest households and are found mainly in rural zones. In the next quintile up, the schooling level is nearly 4 years, which is a threshold, as fewer than four years of schooling means a person is illiterate. In the third quintile, which brings us up to 60% of the households, the level is only 5 years. In other words, people entering the labor market from these three-fifths of Nicaraguan households have extremely low schooling levels. In the other two quintiles, those households with more resources, the schooling levels average 8 to 11 years.

There’s a very close correlation in all countries between people’s schooling level and the income they will receive for their work over their adult life. If at least the three fifths of Nicaragua’s children and young people being raised in households of the three lowest-income quintiles enter the labor market with such low schooling and skill levels, it means that in the remaining 50 years of their life they will only have precarious, probably informal jobs that will keep them forever under the poverty threshold. Finding formal and well-paid employment requires qualifications that the majority of Nicaragua’s children and adolescents never attain.

More education, less poverty

The latest World Bank study points out the relationship between education and better jobs. It’s the part I like most because for the first time it stresses education as a fundamental determinant of a country’s poverty levels. The study says outright that living in poverty is almost a certainty for people with less than a complete secondary education; they are virtually condemned to living under the poverty threshold.

The World Bank has found that work income increases in line with years of schooling, and only crosses the poverty threshold once a person has 11 years of schooling—a complete secondary education. In Nicaragua, those entering the labor market every year, some 118,000 young people, have abysmally low education levels.

The study also tells us that poor people’s low education levels appear to be even restricting their access to the world of the free trade zone assembly plants for re-export known as maquiladoras, because even working there requires at least a complete secondary education. And only people in the highest income quintile, 20% of the population, reach this level. I don’t like to refer to this as the rich quintile, because household surveys in Nicaragua and the rest of Latin America don’t really capture the small percentage of truly wealthy, those who finish high school and go on to university.

Seven out of ten jobs in Nicaragua
are precarious and informal

According to the demographic dividend, Nicaragua is currently experiencing the greatest growth ever in its working age population, an opportunity that could help us climb out of poverty in a short period of time.

But this opportunity is being totally missed, because the bulk of the young people moving into working age are very poorly prepared. Nearly seven of every ten jobs in Nicaragua are precarious and in the informal sector. And that’s because the Nicaraguan economy mainly generates the kinds of jobs that can absorb a labor force with the kind of really low skills Nicaraguan workers typically have.

The better paid jobs require more skills and the only ones with those skill levels—a complete high school education or even higher—are children and adolescents from the 20% of households with the highest incomes who are following the example of parents who got a secondary education or more in the past. It is demonstrated that the children of parents who completed high school or even higher educational levels have greater probabilities of doing the same.

What are the options for Nicaraguan youths entering the labor market with such low levels of schooling? These education levels explain the reasons behind emigration and the increased social decomposition and violence, even though the gangs in Nicaragua luckily haven’t reached the violence level of the gangs—or maras—in El Salvador. But from an economic perspective, a Nicaraguan kid who joins a gang acquires a sense of identity and power, and even possibly a higher income than in some low-level, dead-end, precarious job.

The seeds of a catastrophe

Unless all of this is taken into account, we’re talking about a national reproduction of poverty and worse. We’re not only failing to take advantage of the demographic dividend, we’re sowing the seed of a future demographic catastrophe.

Right now, the infant population is rapidly decreasing, while at the same time there’s a significant growth in the working age population. But within three or four decades our demographic transition will enter a new phase as that population sector enters retirement. In that phase, what will interest us will be the proportion of working people to those retiring, because the former will have to support the latter.

Only 20% of Nicaragua’s labor force is affiliated to the social security system, so a full 80% will have no savings accrued when they hit retirement age. Nicaragua’s social security system will start to show a deficit in 2020. And I say this with full knowledge of the facts because I was on the National Social Security Reform Commission in 2006. I know the Nicaraguan Social Security Institute’s actuarial studies, which reveal that the payments coming in from insured workers mean the social security system will be unable to pay pensions and will start generating a growing deficit. Given that situation, retirement-age people will increasingly depend on working-age people for their very survival.

In 2005, there were still 14.4 working-age people for every retirement-age person. By 2050 there will only be 4.6, according to the population’s aging curve. Also in 2005, there were 15.5 people over 60 for every 100 children under 15. In 2050, the figure will be 101 over 60 for every 100 under 15. Both these age groups depend on the working population. And most of those 101 adults won’t have had any capacity to save for their old age, while there will be ever fewer working age people to support them.

Moreover, most working-age people will probably still be working in informal, precarious jobs that will condemn them to repeat the cycle of a life lived in extreme poverty, while they have to support a child population with no hope of having a good diet or education. And there won’t be many children in whom to invest so that at some future point they can get us out of poverty… Why? Because we’re not investing everything required to ensure that those who enter the labor market do so with the schooling levels needed to climb out of poverty.

A country with no way back

What’s Nicaragua’s outlook in view of all these official figures from the population census and the living standard measurement survey? What awaits us? If we reach the situation described above, Nicaragua will have no way back and the country will stop being viable. A three- or four-decade window is currently opening for Nicaragua to make the investments and transformations required to exploit the demographic dividend as much as possible, because once that window closes and the population gets old, the game is over.

The core of the Civil Coordinator proposal is to explain almost desperately, imploringly, to the Nicaraguan nation that unless we make a virtually superhuman effort in these coming few decades, we will condemn most of its population and hence the country to being unviable, which would be a social and democratic catastrophe.

We must invest at least
7% of the GDP in education

We in Nicaragua don’t think of the future. Four decades seems like a huge amount of time, a long way to go. I turned 32 in 1990 and can’t believe I’m already 50. So the idea that we have a lot of time ahead of us is a huge error. In 1990, when I was 32, most of the population was between 0 and 19 years old. That same population had reached productive age by 2005 and today represents 63.4% of the population.

The working age population in the coming years will consist of the children on whose behalf the Civil Coordinator is making this demand, this proposal to invest the equivalent of 7% of the Gross Domestic Product (GDP) in education.

I’ve heard Education Minister Miguel de Castilla say “that idea about 7% of the GDP isn’t possible because Nicaragua is a very poor country.” But Honduras is also a very poor country, and it reached this level in 2001. Bolivia, which is also very poor, has also reached it. And Lesotho, a country even poorer than Nicaragua, invests the equivalent of 13% of its GDP in education. So why can’t Nicaragua?

Like other countries, we measure the priority a family puts on investing in its children’s education by looking at the percentage of a household’s income dedicated to it. Nicaragua needs to invest at least 7% of its GDP in education, which would mean doubling the Education Ministry’s current budget, which is 3.5% of the GDP. Such an increase would allow us to achieve the fundamental educational goal of all children between 3 and 6 getting a preschool education, which is absolutely fundamental for their future development. We would also be able to hit other basic targets: 100% of primary school-age children enrolled in school, 80-100% of those enrolled in primary school finishing it, and the enrollment of at least 73-75% of secondary school-age children. With that we would hit the jackpot: an average schooling level of at least 9 years for our whole population.

The Millennium Development Goals set 2015 as the target date for the entire world’s child population to have a complete primary education. We could debate that deadline, but we have to make the effort to invest what is required in education. So far Nicaragua isn’t making even the minimum effort to change course, which is precisely to dedicate 7% of the GDP for education. If we don’t do it, if we don’t change our apparently inevitable course, we will have a dark future, a future with no future.

We must invest in the rural areas

Another central point of the Civil Coordinator’s proposal is to seriously turn around the abandonment of the rural areas. The uneducated children aren’t floating in the air; they live in areas abandoned by the state. Some 60% of the 75% of children living in the poorest zones of Nicaragua are in rural areas, places with no access to drinking water, where there aren’t even formal primary schools with first to sixth grade or secondary schools with first to fifth grade. They mainly have multi-grade schools and very deficient education quality.

Some 75% of Nicaragua’s road network consists of rural roads, which get all chewed up when it rains and aren’t repaired afterward. Only about 10% of the network is paved, compared to 20% in other equally poor countries. How many kilometers do poor rural children walk on such roads to get to school? The rural areas also need solid investments in the road network so people can access basic public services and producers can get their harvests out.

Nicaragua’s extreme poverty is concentrated in the rural areas, and 73% of the extremely poor work in agriculture, the sector that provides most employment in the country, 30% of it in family units employing between one and five people. These are very small economic units with very little land and no access to credit or other kinds of resources.

We propose making a major effort to overcome the enormous backwardness and abandonment of rural areas. This demands serious investment in health to reduce infant and maternal mortality and to ensure the access of all pregnant women to maternity centers, health centers, or at least health posts.

The education policies aimed at surmounting the educational backwardness in rural and urban zones shouldn’t just be Education Ministry policies. They have to be part of the country’s development policies, which must be comprehensive. Women’s education is an essential aspect of this comprehensiveness, so they can join the labor market not as self-employed housekeepers or unpaid workers in a family business, as currently happens, but rather in decent, well paying jobs. Women’s education also assumes investing to reduce teen pregnancies and provide appropriate sexual and reproductive health education to the population in general.

A real development bank

To address the backwardness in agricultural production, the Civil Coordinator proposes taking seriously the idea of a development bank. Are we going to continue to allow Salvadorans to come to Nicaragua, buy up Nicaraguan bean growers’ harvests at absurdly cheap prices, then take them back to El Salvador to package and export them? We need to develop value chains in agriculture to improve the capacity to collect, store and commercialize our farmers’ harvests.

In the next seven years our products may continue to fetch good prices in the international markets, particularly beef and coffee. Beans are now Nicaragua’s fifth largest export crop. But if the good prices are to be reflected in better income for the growers, the commercialization problems need to be resolved, because the larger earnings are ending up in the hands of traders and not reaching the growers. We need to raise the income of rural households, which in turn would help rural families send their kids to school.

How do we finance all this?

How are we supposed to finance all this investment? The Civil Coordinator’s national proposal involves transforming the tax system. In Canada, the prime minister and his chauffer send their sons to the same school because Canada’s public schools are open to everyone and their quality is the same. The principle of education for everyone is respected in developed countries, where the challenge is no longer universal primary school or even universal secondary school, because they are now on their way to universal university education. The levels of higher education in those countries are currently around 60-70% and should reach close to 100%. How do they finance such high investment in education and quality health care for all? Through progressive tax systems in which those with higher incomes pay much larger percentages than those with lower incomes.

Eva Zetterberg, Sweden’s former ambassador to Nicaragua, once told us she pays 50% of her high salary in taxes. What do Swedes receive in return? They know that despite having such a high tax burden, no one in their country will suffer or die for lack of medical care; no one will be unprotected in their old age and everyone’s children will receive the same quality education.

The Nicaraguan tax system needs to be transformed. Most people currently talking about a tax reform are suggesting cosmetic changes, but the Civil Coordinator is proposing something many don’t want to even mention: taxing capital income. These are the resources that will allow us to make the investments we need. The government doesn’t dare do it and is hoping foreign cooperation will bail us out, providing the resources we ourselves could generate. Eva Zetterberg had the same idea when she wondered if it was fair for taxpayers in wealthy countries to finance public investment in countries such as ours, where the wealthy don’t contribute through taxes.

Turn the regressive tax system
into a progressive one

People have two kinds of income. One is income from their work: salaries and professional services. Workers have their income tax withheld from their paycheck and consultants have it withheld from the fee they are paid. There’s no way around it. But the income from capital gains, financial transactions and dividends is either exempted from taxes or has a very low rate. In developed countries a business magnate like Carlos Pellas would have his dividends, capital gains and financial earnings added up and a progressive rate applied to that total income that could net out at close to 40% in taxes. In the United States, the wealthiest 1% of households have to pay a net tax of around 30% of their total income. That’s where these countries get the resources to invest. And the lack of such as system in Latin America explains why the social gap is so huge, the poverty so great and the education so deficient. With its regressive tax systems, Latin America has the highest concentration of income and the greatest levels of income inequality in the world.

A regressive tax system means the tax burden falls more heavily on the lower-income population and more lightly on the sectors with greater incomes. And the idea of changing this makes the government go weak in the knees. But as long as it doesn’t stand firm enough to transform the tax system, the country will never have the resources needed to develop. Last year, I was invited to speak during World Education Week along with businesswoman Lorena Zamora. Like me, she spoke eloquently about the importance of education, except that I also talked about the need to transform the tax system, which made her visibly upset. Well, it might get some people upset, but that’s the Civil Coordinator’s proposal.

The enormous weight
of the domestic debt

Another point of our proposal is the domestic debt. Nicaragua’s domestic debt isn’t just the CENI bonds that have been talked about so much. The bulk of the domestic debt right now is made up of payments on the older indemnification bonds to compensate owners for properties confiscated in the eighties. We met with Public Prosecutor General Hernán Estrada in 2008—back when he would still meet with us—and he told us he had reviewed six months of indemnification bond issues and found that one property valued at $200,000 had been indemnified with $2 million. There were other cases in which the properties had already been lost through defaulting on bank loans and many cases in which there was no legal justification for indemnification. He told us about a huge number of irregularities, forcing him to annul a large part of that bond issue.

The Civil Coordinator is therefore suggesting a review of that entire debt to determine irregularities. The investigation of the CENIs, which was heading in that same direction, was regrettably later turned into a political instrument to persecute Eduardo Montealegre, who may have had responsibilities in the CENIs case but is neither the only nor the worst offender. We propose a review to determine the part of the indemnification bonds issued irregularly and the part issued in conformity with the law. And regardless of the findings on that aspect, we also propose restructuring that debt so it can be paid off over a longer period at lower interest, allowing resources currently going to pay on it to be redirected to the investments the country urgently needs.

Where is the Venezuelan
government’s cooperation?

We’re also proposing incorporating Venezuelan cooperation into the national budget. In 2008 Venezuelan cooperation was reportedly worth US$300 million, while total foreign cooperation with Nicaragua has averaged some US$570 million a year over time. If we add both amounts we can only conclude that Nicaragua has never before had so many available resources. When have we ever had such an opportunity?

We dream of having the Venezuelan money incorporated into the budget to invest in housing, drinking water and sanitation, in health and education and the construction and maintenance of the road network. The US Millennium Challenge Account provided US$175 million a year over five years for development of the northwestern part of the country and we can already see the impact of everything invested in road infrastructure and productive development in that area, even though the US government cancelled the last $65 million. We should also be seeing the development impact of the $300 million in Venezuelan cooperation, but we’re not. If those resources are being distributed among the people, they may have a little more for spending power, but what Nicaragua needs today is an important public investment effort.

Another of our proposals is to reorient all foreign cooperation. Nicaragua has traditionally had one of the highest levels of per-capita foreign cooperation in the world. In the last 15 years the world’s poorest countries have received an average $20 per inhabitant in international cooperation, while Nicaraguans have received over $100 per inhabitant. But a large part of that cooperation doesn’t go directly to the people, because 30% is taken up by administrative costs and another 30% by contracting consultants, who are called “technical assistants.”

Nicaragua has received over US$8 billion in international cooperation in the past 15 years, which is an enormous amount of money. But we can’t see its impact in the country’s physical infrastructure or the development of its human capital, because a large part has been squandered. Reorienting foreign cooperation toward other priorities is one of the planks of the Civil Coordinator’s proposal, which is designed so that each national sector can really take on those parts it feels to be most important.

We mustn’t let Nicaragua
scrape the bottom of the barrel

Does our proposal for the nation have specific suggestions for the amounts to be invested annually in all this? That isn’t exactly the question. The question is whether Nicaragua still has time to find a way out. And the answer is that it is running out of time to make investments and important transformations in education if we want to avoid losing this opportunity and reaching the point of no return, which is when our own baby boom of the eighties and early nineties starts reaching old age.

We are making an urgent, almost desperate call. The core of our proposal can be summed up like this: “We have between thirty and forty years; we don’t have time to lose and we can’t wait. We have to act now, so we can begin to see a little light within those three or four decades.”

Economist Adolfo Acevedo Vogl coordinates the Civil Coordinator’s Economic Commission.

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