GLobaL GrowTH

148 Pages·2015·2.45 MB·English

GLobaL GrowTH:
Can produCTIvITy
Save THe day In an
aGInG worLd?
January 2015
HIGHLIGHTS
29 41 87
Demographic shift Productivity challenge Enabling growth
Peak employment in sight Productivity needs to drive Competition, innovation,
growth labor, and global
integration
The McKinsey Global Institute (MGI), the business and economics research
arm of McKinsey & Company, was established in 1990 to develop a deeper
understanding of the evolving global economy. Our goal is to provide leaders
in the commercial, public, and social sectors with the facts and insights on
which to base management and policy decisions.
MGI research combines the disciplines of economics and management,
employing the analytical tools of economics with the insights of business
leaders. Our “micro-to-macro” methodology examines microeconomic
industry trends to better understand the broad macroeconomic forces
affecting business strategy and public policy. MGI’s in-depth reports have
covered more than 20 countries and 30 industries. Current research focuses
on six themes: productivity and growth, natural resources, labor markets, the
evolution of global financial markets, the economic impact of technology and
innovation, and urbanization. Recent reports have assessed global flows;
the economies of Brazil, Mexico, and Nigeria; China’s digital transformation;
India’s path from poverty to empowerment; affordable housing; and the
economics of tackling obesity.
MGI is led by three McKinsey & Company directors: Richard Dobbs, James
Manyika, and Jonathan Woetzel. Michael Chui, Susan Lund, and Jaana
Remes serve as MGI partners. Project teams are led by the MGI partners
and a group of senior fellows, and include consultants from McKinsey &
Company’s offices around the world. These teams draw on McKinsey &
Company’s global network of partners and industry and management
experts. In addition, leading economists, including Nobel laureates, act as
research advisers.
The partners of McKinsey & Company fund MGI’s research; it is not
commissioned by any business, government, or other institution.
For further information about MGI and to download reports, please visit
www.mckinsey.com/mgi.
Copyright © McKinsey & Company 2015
GLobaL GrowTH:
Can produCTIvITy
Save THe day In an
aGInG worLd?
January 2015
James Manyika | San Francisco
Jonathan Woetzel | Shanghai
Richard Dobbs | London
Jaana Remes | San Francisco
Eric Labaye | Paris
Andrew Jordan | New York
prefaCe
There is a great deal of emphasis currently on the short- expanding. The size of the overall economy matters for
term outlook for growth as many economies continue to companies. The market opportunities for their products
experience disappointing recoveries from the 2008 global and services reflect both the number of consumers
recession. However, there are pressing questions about in each market as well as their average incomes. In
the long-term growth outlook given fundamental and developed markets, growth would make it easier to pay
dramatic demographic shifts that are now under way. for rising pensions, social services, and public debt, and
provide resources to spend on valuable non-economic
The past 50 years was a period of exceptionally rapid goals, from environmental protection to art and culture,
economic expansion. Average per capita income almost that some consider luxuries. Yet, in many parts of the
tripled, and the global economy expanded sixfold in GDP world, there is still a very large vulnerable class that is
terms. But the long-term growth outlook is extremely nowhere near aspiring to a middle-class life. For them,
uncertain. Some observers raise the issue of challenging continued growth in per capita GDP is an opportunity
demographics; they talk about “secular stagnation” to climb the income ladder, join the expanding global
and express doubts about whether future growth can consumer class, and achieve a basic standard of living
match its rapid upward trajectory of recent decades. enjoyed by so many others.
Others point to the transformative impact of technology
and paint a more optimistic picture. The debate about This research was led by Jaana Remes, an MGI
growth goes even deeper and broader than this. Many partner based in San Francisco, together with the three
question whether—and how—growth can be sustainable directors of MGI: Richard Dobbs, James Manyika,
and inclusive. There is a lively discussion about whether and Jonathan Woetzel, who are based in London, San
GDP is the right measure of growth. Amid such debate, Francisco, and Shanghai, respectively. Eric Labaye, MGI
it is difficult for policy makers and businesses to Chairman and a director of McKinsey based in Paris,
respond effectively. provided invaluable guidance throughout the effort.
Andrew Jordan led the project team. The team comprised
In this report, the McKinsey Global Institute (MGI), which Neha Ajmera, Matt Linderman, Raman Sharma,
has studied growth in 30 industries in more than 20 Yihan Tan, Anna Thomas, Anna Volynets, and
countries over the past 25 years, reviews patterns of Amber Yang. We would like to acknowledge the helpful
global growth over the past half century, focusing on the support and input of MGI colleagues Jonathan Ablett,
two key drivers of that growth—labor and productivity. Tim Beacom, Yougang Chen, Michael Chui,
Our broad finding is that, in the face of declining Alan FitzGerald, Susan Lund, Anu Madgavkar,
population growth that is putting pressure on the pool Jan Mischke, Ganesh Raj, and Vivien Singer.
of available labor, the rate of GDP growth is set to be
40 percent lower than its rate over the past 50 years. We are grateful to the academic advisers who helped
To compensate fully for weakening labor growth would shape this research, providing challenge, insights, and
require productivity growth to accelerate by 80 percent guidance: Martin N. Baily, Bernard L. Schwartz Chair
from its historical rate. Drawing on five detailed sector in Economic Policy Development and senior fellow and
case studies, we find that it is possible—but extremely director of the Business and Public Policy Initiative at
challenging—to boost productivity growth by this margin. the Brookings Institution; Richard N. Cooper, Maurits
However, aggressive action would be needed to enhance C. Boas Professor of International Economics at
competitiveness, harness technology, mobilize labor Harvard University; Richard Cincotta, demographer-in-
and further open up and integrate the world economy. residence at the Henry L. Stimson Center; Dani Rodrik,
Collectively, we need to engage in a frank conversation Albert O. Hirschman Professor of Economics, Institute
about the tough trade-offs that such action would entail. for Advanced Study, Princeton, New Jersey; and
Matthew Slaughter, associate dean of the MBA program
In this analysis, MGI has taken a “classical” GDP and and the Signal Companies’ Professor of Management
per capita GDP–based view of long-term growth. at the Tuck School of Business at Dartmouth College.
However imperfect a measure GDP is, it does provide an In addition to MGI’s academic advisers, we benefited
indication of the rate at which economic opportunities are hugely from insights and feedback provided by
Robert J. Gordon, Stanley G. Harris Professor of the This report contributes to MGI’s mission to help business
Social Sciences, Northwestern University; Nobel and policy leaders understand the forces transforming
laureate Michael Spence, William R. Berkley Professor in the global economy, identify strategic locations, and
Economics and Business, New York University Leonard prepare for the next wave of long-term growth. As with
N. Stern School of Business; and Adair Lord Turner, all MGI research, this work is independent and has not
senior fellow, Institute for New Economic Thinking. We been commissioned or sponsored in any way by any
would also like to thank Alan Wheatley, former global business, government, or other institution, although it has
economics correspondent for Reuters, for his input. benefited from the input and collaborations that we have
mentioned. We welcome your emailed comments on the
We would like to thank many McKinsey colleagues research at [email protected].
for their input and industry expertise: Chirag Adatia,
Praveen Adhi, Manuela Artigas, Tara Azimi,
Gretchen Berlin, Simon Bills, Riccardo Boin, Julia Broide,
Jacques Bughin, Nicola Calicchio, Davide Ceper, Richard Dobbs
Elsie Chang, Cindy Chui, Toos Daruvala, Penny Dash, Director, McKinsey Global Institute
Jean Drouin, Heinz-Peter Elstrodt, Drew Erdmann, London
Yvonne Fahy, David Fiocco, Tomohiko Funaishi,
James Manyika
Stefan Fürnsinn, Paul Gao, Marjorie Goichberg,
Director, McKinsey Global Institute
Avinash Goyal, Brian Gregg, Feng Han, Saskia Hedrich,
San Francisco
Arnt-Phillip Hein, Nicolaus Henke, Brian Henstorf,
Sheng Hong, Daniel Hui, Sascha Israel, Rimpei Iwate,
Jonathan Woetzel
Joshua Katz, Gregory Kelly, Tom Kibasi, Sajal Kohli,
Director, McKinsey Global Institute
Alexander Krieg, Axel Krieger, Raveev Krishnan,
Shanghai
Tasuku Kuwabara, Eric Labaye, Shruti Lal,
Taylor Larson, Acha Leke, Ian MacKenzie, Barnik Maitra,

Christian Malorny, Eric Marohn, Mirko Martich,
Anne Martinelli, Massimo Mazza, Paul McInerney, January 2015
Fareed Melhem, David Meredith, Marina Milred,
Stephen Moran, Sarah Munby, James Naylor,
Derek Neilson, Bernardo Neves, John Newman,
Alexander Ng, Scott Nyquist, Gordon Orr, Juliane Parys,
Felix Poh, Ali Potia, Oleg Prokhorenko, Ankur Puri,
Neil Rao, Vivien Reifberg, Daniel Rexhausen,
Morten Rossé, Sunil Sanghvi, Shirish Sankhe,
Daniel Santos, Kunwar Singh, Sven Smit, Kevin Sneader,
Vaneesh Soni, Natasha Stern, Bernadette Stout,
Alex Sukharevsky, Saum Sutaria, Daniel Swan,
Steven Swartz, Florian Then, Roberto Uchoa de Paula,
Khiloni Westphely, and Tony Zhou.
MGI’s operations team provided crucial support for
this research. We would like to thank MGI senior
editor Janet Bush; Rebeca Robboy, Libbi Lee, and
Vanessa Gotthainer in external communications;
Julie Philpot, editorial production manager; Marisa Carder
and Margo Shimasaki, graphic design experts;
and Deadra Henderson, manager of personnel
and administration.
Worker operating factory computer
© Getty Images
ConTenTS
HIGHLIGHTS In brief
Executive summary Page 1
29
GDP has grown exceptionally rapidly over the past 50 years, powered by the twin engines
of employment growth and productivity growth. But employment growth is set to slow
dramatically, placing the onus on productivity growth to drive the world economy.
1. The growth debate Page 13
Demographic tailwinds wane
At a time of demographic and technological change, the outlook for growth is highly
uncertain, making it difficult for policy makers and businesses to make decisions. There is
41
contention about almost every aspect of the growth story.
2. Employment in an era of challenging demographics Page 29
Slowing growth in number of employees is reining back the rate of GDP expansion over
the next 50 years. Peak employment is likely to occur in many countries within that period.
Productivity-growth potential
Dependency ratios are rising.
53
3. Productivity prospects Page 41
At the (rapid) rate of productivity growth of the past 50 years, the rate of global GDP growth
is set to decline by 40 percent and per capita GDP by almost 20 percent.
4. Productivity opportunities by sector Page 53
Five sector cases
Five sector case studies suggest that there is scope to boost annual productivity growth to
4 percent. Three-quarters of that scope comes from catching up to best practice and the
other one-quarter from innovation.
5. Ten key enablers to unlock long-term growth potential Page 87
Ample opportunities to boost productivity growth do not mean they are tapped into. Ten
enablers that create transparency and competition, encourage innovation, mobilize labor,
and further integrate the world economy can create the right environment.
6. A new conversation about long-term growth Page 113
A frank conversation is needed about the tough trade-offs required to boost productivity
and growth. In the challenging era to come, all aspects of growth need to be debated,
including its sustainability, equity, and even how to measure it.
Technical appendix Page 119
Bibliography Page 125
In brIef
GLobaL GrowTH:
Can produCTIvITy Save THe day
In an aGInG worLd?
What are the prospects for growth in the decades ahead? What will it take to get global
growth going? These are contentious questions that MGI has attempted to answer in a new
report focused on the G19 (the G20 minus the European Union) and Nigeria, which generate
80 percent of global GDP. The main findings include:
ƒ GDP growth was exceptionally brisk over the past 50 years, fueled by rapid growth in
the number of workers and in their productivity. Now the first of these is weakening, and
even reversing in some countries. Employment growth of 1.7 percent between 1964 and
2014 is set to drop to just 0.3 percent a year. Peak employment is likely to occur within
50 years.
ƒ The onus is therefore on productivity to drive long-term GDP growth. Even if productivity
were to grow at the (rapid) 1.8 percent annual rate of the past 50 years, the rate of GDP
growth would decline by 40 percent over the next 50—slower than in the past five years
of recovery from recession. The global economy expanded sixfold in the 50 years after
1964 but would grow only threefold between 2014 and 2064, making it more difficult to
meet social and debt obligations. To compensate fully for slower employment growth,
productivity growth would need to be 80 percent faster, at 3.3 percent a year.
ƒ The declining prime-working-age population share implies a 19 percent decrease in per
capita income growth over the next 50 years. The waning of demographic tailwinds is
expected to affect both developed and emerging economies. In Australia, Canada, Saudi
Arabia, Brazil, and Mexico, per capita GDP could fall by more than 30 percent at historical
productivity-growth rates. Globally, the standard of living would rise 2.3 times in the next
50 years from 2.8 times over the previous 50. To sustain past per capita income growth,
historical productivity growth would need to accelerate by 22 percent.
ƒ Five sector case studies—agriculture, food processing, automotive, retail, and health
care—suggest that annual productivity growth to 2025 in the G19 and Nigeria could be as
high as 4 percent, more than needed to counteract demographic trends. About three-
quarters of the potential comes from the broader adoption of existing best practices—
“catch-up” productivity improvements. The remaining one-quarter—counting only what
we can foresee—comes from technological, operational, and business innovations that
go beyond today’s best practices and “push the frontier” of the world’s GDP potential.
ƒ Ten enablers could lift global GDP growth closer to its potential—although this will
be extremely challenging—by creating transparency and competition, incentivizing
innovation, mobilizing labor, and further integrating the world economy.
ƒ We need a new, frank conversation about the tough trade-offs that will be required. We
need more attention on resource productivity to avoid rapid growth imposing undue
damage on the environment, and on how the fruits of growth are distributed not just
between nations but within them. Finally, we need to improve how we measure growth.

Auto assembly line, Cologne, Germany
© Alamy