McKinsey: Increase productivity to save global growth

The world has enjoyed unprecedented economic growth since the 1950s, with the world economy growing six fold in the decades since 1964, boosted by a booming population and the development of highly productive technologies and practices. Demographic changes, with peak employment approaching in many economies, is set to place a drag on future growth. According to McKinsey Global Institute this can be offset by increasing the annual productivity growth by 80% over for the next five decades. 

Growth spurt
In a recently released research report from McKinsey Global Institute (MGI), titled “Global growth: Can productivity save the day in an aging world?”, the consulting firm looks at the historic growth and productivity trends for the world economy and projects their development over the next five decades. The MGI report focuses on the G19 and Nigeria, which generate 80% of global GDP.

The MGI identifies two major factors that contributed to the rapid growth over the past five decades in the 20 countries researched: an expanding labour market, which grew at an annual rate of 1.7% – doubling the total labour force and contributing about 48% of GDP growth, and the steady increase of productivity of 1.8% per year, which generated 52% of GDP growth.

Winding down
The golden days of growth may well be behind us, MGI’s analysis finds. A central factor in the falling off of global growth is tied to changes in population growth, with employee headcounts already declining in Germany, Italy, Japan, and Russia. With the number of employees expected to start decline in almost all major economies by 2050. The expectation is that average employment growth in the 20 countries studied is expected to wane to 0.3% a year over the next 50 years, less than one-fifth of the 1.7% growth observed between 1964 and 2014.

It’s not just a decrease in the available employees that inhibits future world economic growth. The analysis shows that if the productivity rate were to stay at the average experienced between 1964 and 2014, the rate of global GDP growth would decline from by 40% in the G19 and Nigeria, from 3.8% to 2.1%. This would be a significant drop in compounding growth, the next 50 years providing a tripling of world GDP over that of six fold increase of the past half century.

Productivity more productive
According to the researchers, improvement in productivity may be best suited to positively influence growth rates without creating massive environmental or social burdens. MGI calculates that by increasing productivity growth by 80% from 1.8% to 3.3% over the next 50 years, the world would keep pace with the past 50 years’ growth rate. To meet this demanding productivity increase, McKinsey analyses a number of models – broadly finding that to meet the growth potential both “closing the gap” and technological development needs to take place. The former makes up 75% of the productivity gains while the latter adds 25%.

Catching up involves both developed and developing economies implementing best practice techniques and technologies across the board, such that their rate of productivity “catches up” to already developed economies or lean business practices. For developing countries this could mean, increasing the share of modern retail formats, increasing the scale and capacity utilisation of auto assemblers, improving operational efficiency in health care, reducing waste in food processing, and shifting to a greater share of higher-value products or services. For developed economies this could involve opportunities to continue to incorporate leaner supply-chain operations throughout retail, and to improve the allocation of the time spent by nurses and doctors in hospitals and health-care centres. The rest, 25% of the productivity gains required, would come from yet to be developed technologies and business practices set to be created in the coming decades.

The report concludes that: “Only sweeping change—and being smarter about growth—will meet the challenge. Productivity and innovation need to be at the core of all conversations about long-term growth. Without giving them our full attention, global prosperity is in jeopardy.”