The Coming Productivity Revolution

NEW YORK – “Red warnings lights are once again flashing on the dashboard of the global economy,” British Prime Minister David Cameron declared after the G-20’s summit in November. He is right. But the real worry is not the risk associated with near-term challenges, like Japan’s return to recession in 2014 or the eurozone’s enduring sluggishness; it is the gale-force headwinds that the entire world will face over the next half-century.

Despite nerve-wracking ups and downs, the last 50 years delivered an unprecedented global growth dividend. Measured according to GDP (admittedly a flawed metric), the world economy expanded sixfold. Income per capita almost tripled.

In the developing world, sustained wealth creation and public-health advances have increased average life expectancy by 20 years since the mid-1970s, and adult illiteracy has been nearly halved in the last 30 years. Inequality among countries has decreased, with more than one billion people lifted out of extreme poverty in the last two decades alone.

But if we pursue business as usual, the odds of making similarly impressive progress over the next 50 years are not very promising. Since 1964, two key forces have fueled exceptionally fast GDP growth: the expansion of the labor supply, driven by rapid increases in population, and steady productivity gains. According to a report by the McKinsey Global Institute (MGI), the average annual GDP growth rate of 3.5% in the 19 member countries of the G-20 (not including the European Union) and Nigeria owes about 1.8 percentage points to labor and 1.7 points to productivity.