Global Leadership (Research Assignment)

For the last 50 years, the world economy

has benefited from a demographic

boom that has contributed 1.8 percent

to average annual global GDP increases,

helping to generate an unprecedented

level of growth.1 This demographic

tailwind is coming to an end. With

populations aging and fertility rates

dropping around the world, the growth

rates of the past 50 years may prove to

be the exception, not the rule. The latest

research of the McKinsey Global Institute

(MGI) suggests that unless increases in

labor productivity compensate for an

aging workforce, the next 50 years will

see a nearly 40 percent drop in GDP

growth rates and a roughly 20 percent

drop in the growth rate of per capita

income around the world.

The potential for diminished growth

varies considerably among countries.

In the developed world, Canada and

Germany are poised for the biggest

drops in GDP growth rates. Saudi Arabia,

Mexico, Russia, and Brazil are most at

risk in developing countries (Exhibit 1).

Richard Dobbs, Jaana Remes, and Jonathan Woetzel

Productivity gains could make the difference in an aging world.

Where to look for global growth

Societies that fail to raise their game

for the productivity needed to sustain

growth will find it harder to achieve a

host of desirable goals, such as reducing

poverty in developing economies and

meeting current social commitments in

developed ones.

But the research also suggests reasons

for optimism. Among the countries we

studied, fully 75 percent of the needed

productivity increases through 2025

could occur if lagging companies

and public-sector institutions caught

up to the productivity of their best-

performing peers. Emerging markets

have the biggest opportunities to do

so. These opportunities are known and

currently available, and they represent

a critical link in the virtuous cycle of

emerging-market development: rising

labor productivity goes hand in hand

with growth in disposable income,

consumption, and GDP.

To close the gap, companies must seize

the opportunity to accelerate productivity

J A N U A R Y 2 0 1 5

2

Exhibit 1

Web 2014 MGI Global Growth Exhibit 1 of 2

Source: UN population statistics; McKinsey Global Institute analysis

The demographic drag on growth will vary considerably across countries over the next 50 years.

GDP per capitaGDP

Projected change in growth rate by 2064, assuming historical productivity growth, %

−26South Korea −39

−40Australia −36

−7Japan −36

−57Canada −53

−28United States −34

−6France −18

−11United Kingdom −10

−2Germany −52

−14Italy −36

−12China −30

−11Indonesia −32

1India −27

−67Saudi Arabia −73

24Turkey −23

39Nigeria 7

−33Brazil −60

−60Mexico −66

51South Africa −30

2Argentina −37

−20Russia −60

D e

v e

lo p

e d

E m

e rg

in g

3

processing—accounts for a range of

1 to 3 percent of GDP in the countries

we studied. Globally, the sector’s

productivity is 20 percent higher

than total worldwide productivity, but

significant gaps remain among countries.

The overall productivity of food

processing could rise by an estimated 59

percent, mostly in developing economies,

through operational improvements,

such as lean manufacturing, and bigger

processing facilities to take advantage of

scale effects.

Automotive. The automotive sector,

which accounts for an estimated

1.6 percent of global GDP, boasts

productivity that is, on average,

roughly 95 percent higher than that of

other industries. Big differences exist

among regions, however, reflecting

the productivity performance of tier-

two and tier-three component-supplier

operations. (For example, in aggregate,

auto manufacturing in India operates at

less than one-quarter of the productivity

level in the United States.) MGI estimates

that the automotive industry could raise

its overall productivity by 90 percent

as of 2025. The opportunity varies by

region. The largest—in China and India,

which today employ over 40 percent of

all automotive workers—involve greater

scale and improved manufacturing

processes.2

Retail. In most economies, 5 to 12

percent of all employees work in the

retailing industry—and more when

wholesale is included—so retail

matters. Globally, productivity in this

growth and the value-creation potential

it holds, while governments will need to

support them by assessing regulatory

barriers to competition in product and

labor markets. While these actions tend

to grab less attention than, say, the

pursuit of boundary-pushing possibilities

(such as artificial intelligence and the

Internet of Things), boosting productivity

by rethinking regulatory barriers holds

enormous potential for the global

economy.

MGI’s micro-to-macro analysis shows

plenty of upside in global sectors

such as agriculture, food processing,

automotive, retail, and healthcare. As

Exhibit 2 shows, the bulk (but by no

means all) of these opportunities are

found in emerging economies.

Agriculture. Productivity in agriculture,

which accounts for only 4 percent of

employment in developed economies but

for about 40 percent in emerging ones,

could more than double by 2025. The

largest opportunities for mechanization

and scale are in emerging regions, where,

according to UN calculations, nearly

30 percent of crop cultivation is still

done by hand. In developed economies—

which tend to have larger farms, higher

levels of mechanization, and more

advanced practices in applying fertilizers,

herbicides, and pesticides—further gains

are available from technology, including

the use of precision sensors and satellite

data to increase crop yields.

Food Processing. The manufacture

of food and beverages—or food

4

Exhibit 2

Web 2014 MGI Global Growth Exhibit 2 of 2

The biggest opportunities to accelerate productivity growth are in emerging markets.

Productivity-level potential in 20251 Index: base year2 = 100

139 229Agriculture

138 208

130 198

Food processing

Retail

133 Healthcare,3 overall

Emerging Developed

151 255

Automotive

1Estimated for Brazil, China, Germany, India, Japan, Russia, the United Kingdom, and the United States. 2Base year = latest available data. For full methodology, see Global growth: Can productivity save the day in an aging world?, on mckinsey.com.

3Metrics for healthcare outcomes are lacking. Estimates are based on opportunities to reduce costs for delivering the same quality and access while maintaining or improving health outcomes. Underestimates overall productivity potential from increased quality and access. Separate data for developed and emerging markets are not available.

Source: McKinsey Global Institute analysis

sector is 30 percent lower than average

productivity across all sectors. Retailing

is also an industry with large, sustained

productivity differences between

developed and emerging economies,

as well as among countries at similar

income levels. The opportunities in the

retail sector fall into three broad areas:

increasing the share of more productive

formats, narrowing the gap between the

least and most productive outlets in a

particular format, and improving even the

best performers’ productivity by using

new technologies and processes. These

hold the promise of boosting worldwide

retail productivity by more than half.

Healthcare. Healthcare spending

accounts for 10 percent of GDP

among the member countries of the

Organisation for Economic Cooperation

and Development (OECD) and for

an average of roughly 6 percent of

GDP in the four leading emerging

5

1 For a preliminary scoping of the challenge and opportunity, see James Manyika, Jaana Remes, and Jonathan Woetzel, “A productivity perspective on the future of growth,” McKinsey Quarterly, September 2014. For a fuller treatment of the issues discussed in this article, see Global growth: Can productivity save the day in an aging world?, McKinsey Global Institute, January 2015. Both are available on mckinsey.com.

2 World Input-Output Database, 2012 release, wiod.org.

Richard Dobbs and Jonathan Woetzel

are directors of the McKinsey Global Institute,

where Jaana Remes is a partner.

Copyright © 2015 McKinsey & Company. All rights reserved.

economies: Brazil, China, India, and

Russia. Moreover, total healthcare

spending is growing faster than global

GDP, heightening the need to deliver

healthcare as efficiently as possible.

MGI analysis finds opportunities to save

nearly 25 percent of overall healthcare

spending by 2025, without compromising

health outcomes. Countries could

realize this potential by catching up

to best practices in operations and

procurement, by reducing the number of

clinically ineffective procedures, and by

developing innovative delivery models

(notably, providing care outside of

hospital settings and using new digital

technologies).

Having ample opportunity to improve

productivity does not guarantee that we

will do so. There is a robust debate about

how much growth is actually desirable,

given the economic, social, and

environmental externalities that rapid

change often creates. Yet without growth,

the world is a poorer place—and fulfilling

social and debt commitments becomes

harder. Business can and should

upgrade its capital and technology,

pursue innovation, and mobilize talented

workers. Governments need to assess

whether and how to go on opening up

their economies and integrating them

into the world economy. Since the rate

at which different countries and sectors

exploit the opportunities before them is

bound to vary, global business leaders

will need strong antennae to understand

where new opportunities are arising,

how to adapt accordingly, and what new

competitors they are likely to meet along

the way.