to clean water
today than in 1990
McKinsey Global Institute 6. A new conversation about long-term growth 116
of the population to less than 20 percent today. In India, the share of people in poverty dropped from 82 percent in 1994 to 61 percent in 2011—reflecting a GDP-growth rate of nearly 7 percent a year during this period. The Millennium Development Goal of halving poverty will be met by 2015, ahead of schedule. Child mortality has almost halved since 1990, 2.3 billion more people have access to clean water today than they did in 1990, and women are increasingly gaining access to education.227
In the developed world, including the United States and Europe, there are increasingly vocal concerns about stagnant median incomes and rising inequality. But recently Thomas Piketty started a firestorm of debate with his analysis that concluded that declining inequality during the 20th century was an exception and that inequality will continue to rise in the coming decades.228 Piketty advocates a progressive global tax on capital. Others, including
Robert Shiller, have long warned about the inequalities produced by advanced technology. Schiller argues that we need to plan now and enact legislation to head off a “disaster,” which he defines as a return to levels of inequality not seen since the late 19th and early 20th centuries. He has suggested indexation of the tax system that would automatically raise taxes on the rich in the future if inequality becomes much worse.229
While perspectives vary on potential solutions for rising inequality, the reality is that, given slower population growth in the decades ahead, expanding global GDP will come from rising per capita income. In most regions, individual markets for goods and services will depend on increasing the purchasing power of consumers who are likely to expand their consumption as their incomes rise. Changes in average income—or per capita GDP—will not be enough to increase sales if most of the gains accrue to individuals whose needs and wants have been met. Broad-based income gains will therefore also matter for the growth of markets for many products and services.
If GDP alone is not the right measure, what is?
There is almost universal agreement that GDP alone is an imperfect metric for growth and prosperity. As the Financial Times has put it, “GDP may be anachronistic and misleading. It may fail entirely to capture the complex trade-offs between present and future, work and leisure, ‘good’ growth and ‘bad’ growth. Its great virtue, however, remains that it is a single, concrete number. For the time being, we may be stuck with it.”230 Our choice to use GDP
has been dictated by limitations on data across a large number of countries and over a long historical time frame.
GDP has not been able to keep pace with the changing nature of economic activity. Designed to measure the physical production of goods in the market economy, GDP is not well suited to accounting for private- and public-sector services without an output that can be measured easily by counting the number of units produced. Nor does GDP lend itself well to the assessment of improvements in the quality and diversity of goods and services or to estimating the depletion of resources or degradation of the environment associated with production. Transformative change in technology is not easy to measure using GDP, either, because so much of its benefit accrues to consumers. Perhaps most importantly, GDP was not meant to become an anchor metric for targeting national economic performance or a measure of national well-being when expressed as average per capita GDP. For the
227The Millennium Development Goals report 2014, United Nations, 2014.
228 Thomas Piketty, Capital in the twenty‑first century, translated by Arthur Goldhammer, Belknap Press of Harvard University Press, 2014.
229 See Robert J. Shiller, The new financial order: Risk in the 21st century, Princeton University Press, 2004, and an interview with Shiller in “The great decoupling,” McKinsey Quarterly, September 2014.
230 David Pilling, “Has GDP outgrown its use?” Financial Times, July 4, 2014. For an overview of the evolution of GDP as a measure of economic performance and the challenges in its measurement and use, see Diane Coyle, GDP: A brief but affectionate history, Princeton University Press, 2014.
117 McKinsey Global Institute Global growth: Can productivity save the day in an aging world?
latter, there are many alternative measures, including the Human Development Index (HDI) introduced by the United Nations in 1990 and the OECD’s Better Life Index.231
We acknowledge that there is opportunity for improvement, and we welcome the portfolio of initiatives that aspire to improve the GDP accounts, define new metrics of importance, and create dashboards that reflect a more robust picture of well-being. Statistical agencies including the Bureau of Economic Analysis in the United States are continuously refining the GDP measurement system, with recent efforts to add subaccounts that provide insight into income distribution and consumer surplus. Others are calling for a new metric or set of metrics—the “dashboard approach”—that captures elements of mental and emotional health and sustainability.232
The search for new ways to measure growth needs to take into account the fact that the geographical centers of economic growth are changing rapidly. It is no longer adequate to track the growth of nations when there are megacities whose economic output is larger than the economies of some nation-states.
•••
The impending global growth challenge is an opportunity to have a radical rethink about how to shape the world for our children and grandchildren. This research, taking a classical view of growth through the lenses of GDP and per capita GDP, has found that the past half century was exceptional largely because the world’s population was expanding so rapidly that the world economy needed to grow robustly to cater to people’s aspirations. But these demographic trends have shifted—and are continuing to shift—dramatically, transforming the outlook for growth.
It is difficult to be certain how the growth story will play out. The evidence suggests that the global economy will expand at a much slower pace in the next 50 years, but there is still the possibility that this analysis could prove to be unduly pessimistic. There is much that can collectively be done to mitigate the impact of the demographic shift on growth by being smarter about every aspect of running a business or how to work. There is significant scope to accelerate global productivity growth, but doing so will be hard work and require accepting trade-offs that might feel uncomfortable. In this new era, business leaders need to think ever harder about every aspect of how they do business and conduct their working lives—placing the emphasis on being smart about growth, rather than on an absolute number, perhaps—and debating every assumption about growth and the role it plays in people’s lives.
231 Country performance measured using per capita GDP and broader measures of well-being such as the HDI are not identical, but they correlate with one another. This reflects positive feedback mechanisms in both directions: healthier, more educated people are more productive, while higher national incomes generate resources that can be used to improve health and public services. For further discussion, see Human Development Reports published by the United Nations Development Programme (UNDP) since 1990 at www.hdr.undp.org/en; Millennium Development Goals reports and Beyond 2015 reports at www.un.org/ millenniumgoals/reports.shtml; and the OECD’s Better Life Index at www.oecdbetterlifeindex.org/. Also see Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi, Report by the Commission on the Measurement of Economic Performance and Social Progress, 2009.
232 See, for instance, Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi, Report by the Commission on the Measurement of Economic Performance and Social Progress, 2009; Yusuf J. Ahmad, Salah El Serafy, and Ernst Lutz, eds., Environmental accounting for sustainable development, World Bank, June 1989; and Moving towards a common approach on green growth indicators, Green Growth Knowledge Platform scoping paper, April 2013.
Welder working on car doors in an assembly line, Newark, Delaware © Getty Images
This appendix provides details on the data sources and methodologies used in this report. Our detailed discussion of definitions and methodologies falls into the following sections:
1. Historical GDP, employment, and productivity analyses
2. Future demographic projections
3. Future productivity-growth potential in five industry case studies
4. Aggregate future productivity-growth potential
5. Estimating the investment required for productivity growth
1. Historical GDP, employment, and productivity analyses
For all retrospective analysis on GDP, employment, and productivity from 1964 to 2012, we relied on the Total Economy Database of The Conference Board and the Groningen Growth and Development Centre (GGDC). GDP numbers are in constant 2012 dollars based on purchasing power parity. Employment refers to the number of employees including both the self-employed and people who work for someone else and are remunerated for their labor. The self-employed include subsistence farmers. Productivity is calculated as GDP per employee.233 The data for 2013 and 2014 are extrapolated from past trends.
2. Future demographic projections
For our estimates on employment, we focused on four population segments:
Youth. Individuals of both genders aged 15 to 24.
Adult female working-age population. Women aged 25 to 64.
Adult male working-age population. Men aged 25 to 64.
Older population. Individuals of both genders aged 65 or over.
For our study of the demographic transition and employment projections, we used the following metrics and their respective data sources:
Historical population and employment data. We used historical population and employment data by country from the Conference Board between 1964 and 2012 for the G19 and Nigeria, and then extrapolated population data for 2013 and 2014 from past trends.
Historical working-age population data. We took the working-age population (aged 15 to 64 years) as the major supply of labor and human capital. We used United Nations Population Division data on the share of population by age group to develop an estimate of the working-age population using Conference Board data.
233 For more on data and details of sources and data adjustments, see www.conference-board.org/economics/database.cfm.