The world is aging, and that matters for growth. In the past, an abundant and growing labor pool was a powerful engine of the world economy; today, the number of workers is starting to decline in many countries. This leaves no alternative but for companies, individuals, and governments to work in smarter ways. In an era of profound demographic change, another productivity revolution is a necessity.
Without an acceleration in productivity growth, the rate of global GDP growth is set to decline by 40% from 3.6% a year between 1964 and 2012 to only 2.1% over the next 50 years. It would take 80% faster productivity growth to fully compensate for the projected decline. Is it feasible for the global economy to achieve such a large acceleration in productivity growth from an already rapid rate? New research we conducted at the McKinsey Global Institute found that while this is a very tall order, it could be do-able. MGI has identified sufficient opportunities to boost productivity growth to 4% in the 19 national economies of the G20 group plus Nigeria, which together account for 80% of world GDP. This would be more than enough to compensate for the demographic shift.
Three-quarters of the potential, or 3% of growth per year, could come from companies and governments catching up with best practice that already exists. This is good news—we can get a long way to the productivity growth we need to support healthy growth without reinventing the wheel in services, manufacturing, and, indeed, government.
Boosting the productivity of services sectors is particularly vital given that they employ more than 75% of non-agricultural workers today and that this share is growing. Liberalized and competitive service sectors could provide a major boost to productivity growth over the next 50 years just as the liberalization of trade in goods did over the past 50.
In retail, for instance, productivity could increase by another one-third in developed economies and double in emerging economies between 2012 and 2025. Moving to modern stores—typically three times more productive than small traditional stores—would make the biggest contribution. Government regulation has a central role here. In Russia, retail productivity more than doubled in just 10 years when the government opened the sector to foreign competitors that brought modern formats with them. However, there is no guarantee that opportunities to do this will be seized. France, for instance, has moved in the opposite direction, choosing to introduce more restrictions on the size of retail outlets, and halting the sector’s productivity growth as a result.
Boosting the productivity of health care is essential, given how fast this sector is growing. Health-care spending already accounts for 10% of GDP in developed economies and an average of 6% of GDP in the four leading emerging economies—Brazil, China, India, and Russia. China’s health-care spending has almost tripled in the past five years and is projected to hit the $1-trillion mark by 2020. In the near term, improving operations and procurement is the most promising lever for higher productivity. Adjustments to the way nurses work is an example. Typically only one-third of a nurse’s time is spent dealing directly with patients; increasing that can boost productivity significantly.
The rest of the opportunity comes from innovation in the broadest sense, not just from using new technology but also finding new and better processes and operations and pushing the frontier of productivity and growth. Some are skeptical about whether technology can continue to deliver the rapid productivity gains it did in the past. We disagree. We see a rich pipeline of innovation ahead in both developed and emerging economies. The move to e-commerce, where labor productivity is more than 80% higher than modern bricks-and-mortar retailers, is a huge and growing opportunity. If China’s e-tailers were to catch up with the productivity of their counterparts in other major markets, the nation’s retail-sector productivity could rise by 14% by 2020.
Innovation in health care is transforming the sector. Japan managed to cut the average length of stay in expensive hospital beds by a full week since 2000 by moving toward less invasive procedures, and remote monitoring and support of patients, allowing them to receive follow-up care at home. ClickMedix uses mobile phones and digital cameras to capture images, transmit information to patients, and deliver remote consultations, cutting administration costs by one-quarter.
While the public sector clearly needs to play its full part in the productivity revolution, companies are the main engine for productivity gains. Without their investment in upgrading capital and technology and risky investments in R&D and unproven technologies and processes, it will be difficult to sustain current productivity-growth rates, let alone improve on them. Companies now need to work harder to attract and train workers, and to help mitigate erosion in the growth of the labor pool by providing a more flexible working environment for women and older workers, and training and mentorship for young people.
Companies need to be prepared for an economic environment that is likely to feel very different. The equitable distribution of growth is not only a pressing issue for governments, but for business. If most of the benefits of global growth accrue to the well-off whose needs and desires have already been met, sales of many goods and services will falter. Companies will only be sustained by broad-based income gains. If these are not forthcoming, rewards for productivity and core performance are only likely to increase.
Productivity and innovation need to be front and center of everything we do. If they are not, global prosperity is in jeopardy. Only sweeping change—and being smarter about growth—can meet the challenge of an aging world. The expertise and experience already exists in a neighboring business or government. The task ahead is to emulate the smartest, most efficient, most technology-savvy ways of doing things—on a grand scale.
This article originally ran in Harvard Business Review.
