Investing in productivity growth

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Investing in productivity growth

By Jan Mischke et al., | McKinsey & Company | March 27, 2024

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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.

3 key takeaways from the article

1. 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.
2. 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.  Radically high capital investment, building cities in the right way and mechanizing agriculture, achieving distinctive productivity growth, making manufacturing more sophisticated and global, all these enabled by solid institutions, innovation, and education enabled fast lane to keep their momentum.
3. 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.  Nevertheless, directed investment in areas such as digitization, automation, and artificial intelligence could fuel new waves of productivity growth.

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Topics:  Global Economy, Productivity, Growth