Step change in productivity growth can offset slowdown

 The report, Global growth: Can productivity save the day in an aging world?, attempts to clarify long-term growth prospects amid deep uncertainty. It focuses on the 19 national economies in the G20 plus Nigeria, which together account for 63 percent of the world’s population and 80 percent of global gross domestic product.
“Without a step change in productivity growth, global growth is likely to fall from the 3.6 per cent per year we've seen over the past 50 years to 2 per cent. Our new normal growth rate would be slower than we have seen in the five years of recovery since the Great Recession. It would be slower than the energy-crisis decade of 1974 to 1984. It would also result in lower growth in per capita income growth and living standards in much of the developed and emerging worlds,” says Richard Dobbs, MGI’s London-based director.

Government debt
“This slower-growth environment will feel considerably less comfortable for individuals and businesses. Fewer people would be lifted out of poverty, repaying private and government debt will become more difficult, and there will be less money to spend on broader efforts such as combating climate change.”
 Over the past 50 years, global growth was powered by twin engines of employment growth and productivity growth. Fifty years ago, the global economy was the size of China's economy today in purchasing power. And today, it's six times larger.
 “The fact that both engines were at high speed at the same time was remarkable—and quite different from what we had seen previously and from what we are likely to see in future,” says Jaana Remes, an MGI partner.
Declining fertility rates and ageing populations are weakening the power of the demographic engine and in some developed and emerging economies, the demographic engine is even going into reverse.
Most economies will hit peak employment within the next 50 years as a result. The number of employees has already peaked and started to decline in Germany, Italy, Japan, and Russia; their labour pools could shrink by up to one-third by 2064. In China and South Korea, the peak is expected as early as 2024. China’s labour force could shrink by one-fifth over the next 50 years.
There is some scope to limit the decline in the global labour force through policies to boost participation among women, the young, and those aged over 65. But, even in the best case, employment growth would only hit 0.6 per cent, still one-third of the rate of the past 50 years.
The productivity engine therefore needs to be working at full throttle. To compensate fully for weakening labour growth, productivity growth would need to be 80 per cent faster at 3.3 per cent a year, from the very rapid historical annual rate of 1.8 per cent. Without such acceleration, the overall rate of growth could be 40 per cent lower over the next 50 years than it was in the past 50. Instead of a six-fold increase over the past 50 years, the global economy would grow only three-fold.

Extremely challenging
MGI finds that it is possible, but extremely challenging, to boost productivity growth by this margin. Five sector case studies - on agriculture, food processing, automotive, retail, and health care—suggest that annual productivity growth could be as high as 4 per cent, more than needed to counteract demographic trends.
Three-quarters of the potential comes from companies and governments catching up with best practice that already exists. Opportunities include increasing the share of modern formats in retail, increasing the scale of auto assemblers, improving operational efficiency in health care, and reducing waste in food processing.
The remaining one-quarter comes from technological, operational, or business innovations that go beyond today's best practices and “push the frontier” of the world's GDP potential. The potential from innovation could be even greater with the estimate based on only what we can foresee. Some opportunities come from continuing existing programmes such as agricultural research into tailoring and improving seeds and agronomical practices to raise crop yields, and automotive industry initiatives to power cars using more efficient fuel technology.

Intelligent robots
Others rely on technological innovations such as highly efficient and intelligent robots now in use in some retail warehouses, and mobile technology increasingly being used to deliver health care in remote regions. Advanced materials such as nanolaminates-edible lipids can be sprayed on food to provide protection from air or moisture and reduce food spoilage. Carbon-fibre composites can make cars and airplanes both more resistant and lighter.
“Although the outlook for world growth looks very difficult, there is good news. We can get most of the way to the productivity growth we need simply by using productivity tools that already exist,” says James Manyika, MGI’s San Francisco-based director. The challenge is not that the world is running out of technological potential for growth but ensuring that governments have the incentives to pursue higher productivity.