This article was written by Jan Mischke, Chris Bradley, Marc Canal, Olivia White, Sven Smit, and Denitsa Georgieva. The original article was published by McKinsey. You can find the article here.
It’s time to raise investment and catch the next productivity wave.
The world’s living standards have climbed sharply over the past 25 years, driven by strong productivity growth.1 Median economy productivity surged sixfold over this period.2
Yet productivity growth is fading, and in many parts of the world, it has failed to start at all. Since the global financial crisis (GFC) around 2008, there has been a near-universal slowdown. In advanced economies, productivity growth had already decelerated before the GFC—from an average of 2.2 percent per year in the five years to 2002 to 1.6 percent through 2007—and then fell further, to less than 1 percent, in the 2012–22 decade.3 In emerging economies, productivity growth accelerated before the GFC, from 2.0 percent in the five years to 2002 to 5.9 percent through 2007, and then fell to 3.4 percent in the decade to 2022.
Productivity growth means getting more from our work and from our investments (see sidebar “Measuring productivity”). It is especially needed now as the world faces the many challenges of a new geo-economic era. Productivity growth is the best antidote to the asset price inflation of the past two decades, which has created about $160 trillion in “paper wealth” and even larger amounts of new debt. Absent a surge in productivity, we could be headed for a Japan-style wealth reset or a period of sustained inflation.5 Second, we need to fund the net-zero transition and keep improving living standards if we are to achieve sustainable inclusive growth. Closing the empowerment gap and the net-zero investment gap requires the equivalent of 8 percent of global GDP annually, which will be very hard to achieve without rapid productivity growth.6 Other looming challenges include aging populations in most advanced economies, China, and elsewhere, along with global trade tensions and supply chain disruptions.
This report provides an overview for private and public decision makers on the most important features of productivity growth, why it slowed, and what reaccelerating it would take.7 It offers a fresh look at the slowdown in advanced economies and quantifies the few drivers that matter most. It analyzes emerging economies that are traveling in different “lanes” at varying speeds and distills what lagging economies would need to do to shift into the fast lane of growth.
It argues for one common imperative across all economies: investment in tangible and intangible capital.
This report consists of four sections. Section 1 reviews worldwide productivity performance over the past 25 years and identifies which emerging economies are in the fast, middle, and slow lanes on the highway of convergence with advanced-economy standards of living. Section 2 offers in-depth analysis of the recent productivity growth slowdown in advanced economies. Section 3 delves into emerging economies and what it takes to be in the fast lane. Finally, section 4 discusses productivity growth in this new geo-economic era, laying out the main challenges and opportunities for businesses and policy makers.
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© 2024 Calleo Solutions (Pty) Ltd. All Rights Reserved.