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Economic Growth in an Aging World

There are two primary ways an economy can grow.

- It can expand the amount of work performed by increasing the number of people.

- It can expand the amount of work performed by increasing the productivity per people.

Unfortunately, the first approach is not an option. Demographic trends - such as the aging of the Baby Boom generation and the dramatic drop in the global birth rate - have brought an end to the era in which the global economy could grow simply by expanding the number of people with jobs. From 1964 to 2014, employment grew by an average of 1.7 percent per year. But over the next fifty years, it is projected to plummet to 0.3 percent annually. Clearly, this suggests that the fate of the worlds economy depends on the second option: improving productivity.

The need is urgent, because the rate of global GDP growth is projected to decline from the historical trend of 3.6 percent over the past fifty years, to just 2.1 percent for the next fifty years.1 If this happened, average GDP growth for the next half century would be one-third lower than it was during the past five years of the frustratingly slow recovery from the Great Recession. Instead of growing 600 percent as it has since 1964, the global economy would grow by only 300 percent by 2064.

The only way to offset this drop is by growing productivity 80 percent faster than the already blistering pace of the past fifty years: that means jumping from the current 1.8 percent to 3.3 percent.

Is this even possible? According to a compelling study by McKinsey Global Institute (MGI) titled "Global Growth in an Aging World",3 it will not be easy, but it can be done. Drawing on nearly 25 years of research on economic growth, MGI directors Richard Dobbs, James Manyika, and Jonathan Woetzel found opportunities for improvement in the twenty national economies that comprise 80 percent of the worlds GDP - that is the G19 countries, plus Nigeria.

Well explore their specific recommendations a bit later, but the bottom line is that if companies and national governments adopt existing best practices, productivity growth could grow by 3 percent. The rest of the productivity gains could come from innovation.

Before we get to the details, lets quickly examine why the labor pool is running dry. Weve covered the impact of the declining birth rate in previous issues of Trends, so well keep this brief. The combination of several forces - more women in the workforce, improved contraception methods, and changing societal values toward smaller families - has pushed global birth rates to record lows.

As we discussed in our September 2011 issue, according to the UNs World Population Prospects,3 populations in fifty of the worlds countries will shrink substantially between now and 2050. For example, Russias population will drop by 22 percent. Ukraine will lose almost half its population, with a decline of 43 percent.

In China, according to demographer Philip Longman, author of The Empty Cradle,4 each generation after 2050 will be 20 to 30 percent smaller than the preceding one. And in his book Fewer: How the New Demography of Depopulation Will Shape Our Future,5 Ben Wattenberg writes that Europe is now losing 700,000 people each year, and will lose three million or more each year by 2050.

Overall, according to MGI, population growth is projected to drop in every one of the G19 countries.

In Germany, Italy, Japan, and Russia, the number of employees is already shrinking, and the total workforce in these countries could drop by as much as 33 percent over the next fifty years. In most other countries, employment is expected to peak by 2064, but it could happen by 2024 in China and South Korea. The only notable exceptions are India, where the number of workers is expected to jump by more than 50 percent by 2064; and the U.S., South Africa, and Indonesia, where employment should continue to increase, though much more slowly than in the past.

This is a sharp reversal from the trend of the past half-century, when the number of workers in the world economy grew steadily. Declining infant mortality rates, improved healthcare, safer jobs, and fewer wars were all factors that led to population growth and increased participation in the labor force. From 1964 to 2014, according to MGI, employment in the G19 and Nigeria increased by an average of 1.7 percent per year. This doubled the labor force and accounted for 48 percent of GDP growth in the twenty leading economies.

At the same time, productivity improvements accounted for the other 52 percent of the increase in GDP. Computers, the Internet, automation, and globalization of the worlds economies created a powerful boost to productivity, and as a result todays average employee produces 2.4 times more output than the average worker of 1964.

However, not all economies have taken advantage of available productivity-enhancing technologies and practices, and this provides an opportunity to generate much of the productivity growth that will be needed to offset the decline in labor-force growth. In fact, according to MGI, emerging economies are still 80 percent less productive than developed economies.

Dobbs and his colleagues estimate that if those countries embraced what they call "catch-up" productivity improvements, the world economy could realize about three-quarters of the potential for productivity growth theyve identified. As they point out, all of these improvements have already been discovered and are being implemented in other parts of the world. Some of their recommendations include:

- Increasing the share of modern retail formats.

- Increasing the scale and capacity utilization of auto assemblers.

- Improving operational efficiency in health care.

- Reducing waste in food processing.

- Shifting to a greater share of higher-value products and services.

What about developed economies? The MGI study found that 55 percent of their potential productivity increases would result from low-productivity industries, companies, and factories adopting the practices and technologies of those higher in productivity. Examples include:

- Using lean supply-chain operations in retail.

- Scheduling doctors and nurses time more efficiently in hospitals and medical clinics.

- Adopting best practices from competitors in industries such as automotive manufacturing and agriculture.

However, "catch-up" improvements will, at best, only generate about a 3 percent growth rate in productivity. To generate another 1 percent, companies - particularly those in the developed world - will need to innovate.

Opportunities for innovation include new technologies and business models. Breakthroughs in biotech, nanotech, 3D printing, robotics, the "Internet of Things," and other technologies that are still being developed will lead to leaps in productivity that cant even be imagined at this point.

Looking ahead, we forecast the following developments arising from this important trend:

First, productivity improvements and innovations in both emerging countries and developed nations will compensate for the shrinking labor force and enable global GDP to grow at an average annual rate of between 3.5 percent and 4 percent over the next half century.

This will enable individuals to increase their standard of living by at least 5.8 times over the next fifty years, in line with the gains over the past fifty years. This is more than double MGIs projection of just 2.3 times if productivity growth slows. At the same time, businesses will benefit from higher consumer incomes and larger markets for their offerings, which in turn will enable them to invest in R&D to generate further productivity enhancements. Governments of emerging economies will be able to pay for the infrastructure and other investments needed to modernize their countries and expand the size of the middle class. Likewise, governments of developed nations will be able to meet their pension obligations and programs like Social Security despite the aging of the population and the dwindling of the workforce. This will all depend, however, on the presence of the ten "enablers" identified by Dobbs and his colleagues, which we have outlined in the remaining forecasts.

Second, businesses in emerging economies will make "catch-up" improvements to grow productivity at an annual rate of 3 percent.

This will depend on them implementing the first three enablers:

1. Removing barriers to competition in service sectors.

2. Focusing on efficiency and performance management in public and regulated sectors.

3. Investing in physical and digital infrastructure, especially in emerging markets.

Third, companies will have incentives to innovate in such ways as to increase productivity growth by another 1 percent annually.

This depends on implementing the following four key enablers, particularly in advanced economies:

1. Crafting a regulatory environment that incentivizes productivity and supports innovation.

2. Fostering demand for and R&D investment in innovative products and services.

3. Exploiting existing and new data to identify transformational improvement opportunities.

4. Harnessing the power of new actors in the productivity landscape through digital platforms like Innocentive and Kickstarter.

For our fourth forecast, the Trends editors foresee that society will compensate for the slowing growth of the global labor pool by encouraging and enabling people who arent working to work, while training nearly everyone in the skills they need to succeed in the modern workplace.

This will require implementation of two additional enablers:

1. Creating regulation and social support to boost labor-market participation among women, young people, and older people.

2. Improving education, match skills to jobs, and make labor markets more flexible.

Fifth, we forecast that the worlds economies will become more fully integrated in order to unleash the efficiency that leads to higher productivity.

This depends on the implementation of one final enabler identified by McKinsey: Opening up economies to cross-border economic flows, ranging from trade in goods and services to flows of people. By embracing new ideas and best practices from around the globe, individuals, businesses, and governments can make the changes that will boost productivity and create a better standard of living for all of the worlds people.

References
1. Harvard Business Review, January 20, 2015, "The Productivity Challenge of an Aging Global Workforce," by James Manyika, Jaana Remes, and Richard Dobbs. ⓒ 2015 Harvard Business Publishing. All rights reserved.

https://hbr.org/2015/01/the-productivity-challenge-of-an-aging-global-workforce

2. McKinsey Global Institute, January 2015, "Global Growth: Can Productivity Save the Day in an Aging World?" by James Manyika, Jonathan Woetzel, Richard Dobbs, Jaana Remes, Eric Labaye, and Andrew Jordan. ⓒ 2015 McKinsey & Company. All rights reserved.

http://www.mckinsey.com/insights/growth/can_long-term_global_growth_be_saved

3. To access data from the United Nations report "World Population Prospects," visit their website at:

http://esa.un.org/unpd/wpp/index.htm

4. The Empty Cradle: How Falling Birthrates Threaten World Prosperity and What to Do About It by Philip Longman is published by Basic Books, a member of the Perseus Books Group. ⓒ 2004 Philip Longman. All rights reserved.