Special Report: How Productivity Can Save An Aging World

To overcome the drag on growth of an aging world, we need to be smarter and more effective in everything that we do. We don't need to reinvent the wheel -- just by adopting best practices that already exist will get us most of the way to where we need to be. Fully embracing new technologies will do the rest.

Global economic growth is under threat because populations are aging, shrinking the size of the pool of people able to work. The only answer to the growth question in an era of dramatic demographic change is productivity growth.

If historical rates of productivity growth were to remain constant, global GDP growth would be 40 percent lower over the next half century than it was in the previous 50 years -- 2.1 percent, down from 3.6 percent, according to recent research by the McKinsey Global Institute. In the United States, GDP growth could slow by about 34 percent. That would be slower than past growth in France and the United Kingdom, for instance.

To compensate, and to meet social and debt obligations, global productivity growth would need to accelerate by 80 percent. This is a big ask -- but not impossible. MGI has identified opportunities to boost productivity growth to 4 percent in the 19 national economies of the G20 group plus Nigeria, which together account for 63 percent of the world's population and 80 percent of global GDP. Globally, three-quarters of the scope comes from catching up with best practice and the rest from innovation -- and that's only what we can foresee. For a developed economy like the United States, close to half of the potential comes from catching up, and the rest from "pushing the frontier" of the economy's GDP potential through innovation.

Having ample opportunities to improve productivity does not guarantee that those opportunities will be realized. We have identified 10 key areas where change is necessary to help achieve a step change in productivity growth:

1. Remove barriers to competition in service sectors. Service sectors employ more than 75 percent of all non-agricultural workers, and that share is growing. But regulation often hinders higher productivity. MGI estimates that one-third of the opportunity depends on policy change. Removing regulatory barriers that prevent a shift to more productive modern formats could increase retail productivity in developing economies by 55 percent.
2. Focus on efficiency and performance management in public and regulated sectors. In developed economies, these sectors employ one-quarter of the workforce. But the (limited) evidence available suggests that productivity is weak. Nearly one-quarter of global health care spending could be saved by 2025 through greater efficiency without compromising health outcomes. There are many ways to do this. For instance, Japan has cut the time people spend in costly hospital settings by nearly a week since 2000 by moving toward less invasive surgical procedures. The use of digital technologies is powerful, too. When the Afghan police started paying salaries via mobile phones rather than in cash, officers assumed that they had received a 10 percent pay rise -- the reality was that middlemen were no longer getting their cut.
3. Invest in physical and digital infrastructure, especially in emerging markets. Public infrastructure needs to be in place to grasp catch-up productivity improvements. In South Asia, for instance, 40 percent of companies said limited electricity supply was a major problem. Finance is one issue, but just as important is investing wisely. MGI found that 40 percent, or 1 trillion a year, can be saved by picking the right projects, streamlining their delivery and making maximum use of infrastructure already on the ground.
4. Craft a regulatory environment that incentivizes productivity and supports technology. Governments need to avoid red tape and lower barriers to new businesses. In U.S. retail, virtually all of the rapid productivity growth in the 1990s came from productive new stores replacing less productive ones. Government standards are effective, too. U.S. fuel efficiency standards sparked a wave of innovation in the auto industry. In China, a certification system for high-quality compact fluorescent lamps has fostered a major shift to this technology.
5. Foster demand for, and research and development investment in, innovative products and services. Investment in R&D continues to grow, which is welcome. But there is a shift underway that developed economies need to bear in mind: the share of investment from emerging regions is soaring. China alone accounted for 17 percent of global R&D investment in 2010. Also notable is the fact that a Chinese telecom equipment maker, ZTE, is the world's leading patent filer.
6. Exploit existing and new data to identify transformational improvement opportunities. Making the most of big data has enormous value. Using big data could increase net margins in U.S. retail by at least 60 percent. In manufacturing, big data could cut product development and assembly costs by up to 50 percent. In auto manufacturing, Toyota says its use of big data has eliminated 80 percent of defects before the first physical prototype is even built. MGI has estimated that using sensor data for precision agriculture could raise yields 10 to 20 percent globally.
7. Harness the power of new actors in the productivity landscape through digital platforms and open data. Digital technologies are empowering citizens. There is an enormous variety of ways to use digital platforms and open data. Individuals can raise money anywhere through a platform like Kickstarter, and work remotely -- anywhere -- through sites like oDesk and Mechanical Turk. During the cholera outbreak that followed the 2010 earthquake in Haiti, Boston Children's Hospital and Harvard Medical School analyzed posts on social media and unearthed vital information about the spread of the disease two weeks earlier than official sources.
8. Put in place regulation and social support to boost participation in the labor market among women, young people and older people. As demographics take their toll on the world's labor pool, acting to boost the participation in the world of work among women, young people and older workers could add 390 million employees -- double Brazil's population -- to the labor forces of the G19 and Nigeria. Removing unnecessary restrictions on working hours, support through taxation and childcare and fighting age discrimination need to be in the mix.
9. Improve education and matching skills to jobs, and make labor markets more flexible. To mobilize as many potential workers as possible will take action to boost skills. A 2012 McKinsey survey found that 4 out of 10 employers couldn't find workers to fill entry-level positions. The other imperative is to make it easy for people to move from one type of job to another. In the United States, about one-third of the new jobs created over the past 25 years were types that did not exist, or barely existed before.

Open up economies to cross-border economic flows. Being open to flows of people is vital to counter demographic headwinds and power growth. The U.S. labor force will buck the trend and grow -- by 23 percent between now and 2064 -- largely reflecting the nation's openness to immigration.

To overcome the drag on growth of an aging world, we need to be smarter and more effective in everything that we do. We don't need to reinvent the wheel -- just by adopting best practices that already exist will get us most of the way to where we need to be. Fully embracing new technologies will do the rest. But achieving the full potential will necessitate strenuous efforts by business owners, managers and workers -- and governments -- to change established ways of doing things.