Investing in productivity growth

This article was written by Jan MischkeChris Bradley, Marc Canal, Olivia WhiteSven 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.

At a glance

  • The past quarter century has been a success story for global productivity. Median economy productivity has jumped sixfold. Thirty emerging economies, with 3.6 billion people, are in the “fast lane” of improvement; if they maintained this pace, they would converge to advanced-economy productivity levels within roughly the next quarter century.
  • Yet amid this global revolution, many economies have experienced productivity stagnation. Advanced-economy productivity growth has slowed by about one percentage point since the global financial crisis (GFC). At their current pace of improvement, “slow-lane” emerging economies, home to 1.4 billion people, would never catch up to advanced-economy levels.
  • Today the world needs productivity growth more than ever. It is the only way to raise living standards amid aging, the energy transition, supply chain reconfiguration, and inflated global balance sheets.
  • By investing to regain pre-GFC productivity growth, advanced economies stand to gain between $1,500 and $8,000 in incremental GDP per capita by 2030. These economies experienced their slowdowns as two waves of productivity growth in manufacturing (powered by Moore’s law and offshoring) came to an end. Post-GFC investment declined sharply and persistently, failing to generate anything to take their place. But today, directed investment in areas such as digitization, automation, and artificial intelligence could fuel new waves of productivity growth.
  • Investment is also the primary driver for emerging economies to reach or remain in the “fast lane.” Current fast-lane economies (China, India, parts of Central and Eastern Europe, and Emerging Asia) have sustained high investment, at 20 to 40 percent of GDP. They have channeled it into building the cities and infrastructure that underpin successful urbanization, higher productivity in service sectors, and globally connected manufacturing. Economies in the middle and slow lanes might follow suit.
  • There is reason for hope and motivation for action. Higher inflation and interest rates may signal stronger demand and encourage productive capital allocation—while discouraging the increasing debt and inflating asset prices of the past two decades. AI has potential to change work rapidly and broadly, creating fertile conditions for such investment.

The world needs to—and can—accelerate productivity growth

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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