Where to look for global growth

byRichard Dobbs, Jaana Remes, and Jonathan Woetzel

January 2015 | 

For the last 50 years, the world economy has benefited from a demographic boom that has contributed 1.8 percent to average annual global GDP increases, helping to generate an unprecedented level of growth.1 This demographic headwind is coming to an end. With populations aging and fertility rates dropping around the world, the growth rates of the past 50 years may prove to be the exception, not the rule. The latest research of the McKinsey Global Institute (MGI) suggests that unless increases in labor productivity compensate for an aging workforce, the next 50 years will see a nearly 40 percent drop in GDP growth rates and a roughly 20 percent drop in the growth rate of per capita income around the world.

The potential for diminished growth varies considerably among countries. In the developed world, Canada and Germany are poised for the biggest drops in GDP growth rates. Saudi Arabia, Mexico, Russia, and Brazil are most at risk in developing countries (Exhibit 1). Societies that fail to raise their game for the productivity needed to sustain growth will find it harder to achieve a host of desirable goals, such as reducing poverty in developing economies and meeting current social commitments in developed ones.

Exhibit 1

The demographic drag on growth will vary considerably across countries over the next 50 years. 

But the research also suggests reasons for optimism. Among the countries we studied, fully 75 percent of the needed productivity increases through 2025 could occur if lagging companies and public-sector institutions caught up to the productivity of their best-performing peers. Emerging markets have the biggest opportunities to do so. These opportunities are known and currently available, and they represent a critical link in the virtuous cycle of emerging-market development: rising labor productivity goes hand in hand with growth in disposable income, consumption, and GDP.

To close the gap, companies must seize the opportunity to accelerate productivity growth and the value-creation potential it holds, while governments will need to support them by assessing regulatory barriers to competition in product and labor markets. While these actions tend to grab less attention than, say, the pursuit of boundary-pushing possibilities (such as artificial intelligence and the Internet of Things), boosting productivity by rethinking regulatory barriers holds enormous potential for the global economy.

MGI’s micro-to-macro analysis shows plenty of upside in global sectors such as agriculture, food processing, automotive, retail, and healthcare. As Exhibit 2 shows, the bulk (but by no means all) of these opportunities are found in emerging economies.

Exhibit 2

The biggest opportunities to accelerate productivity growth are in emerging markets. 

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Agriculture. Productivity in agriculture, which accounts for only 4 percent of employment in developed economies but for about 40 percent in emerging ones, could more than double by 2025. The largest opportunities for mechanization and scale are in emerging regions, where, according to UN calculations, nearly 30 percent of crop cultivation is still done by hand. In developed economies—which tend to have larger farms, higher levels of mechanization, and more advanced practices in applying fertilizers, herbicides, and pesticides—further gains are available from technology, including the use of precision sensors and satellite data to increase crop yields.

Food Processing. The manufacture of food and beverages—or food processing—accounts for a range of 1 to 3 percent of GDP in the countries we studied. Globally, the sector’s productivity is 20 percent higher than total worldwide productivity, but significant gaps remain among countries. The overall productivity of food processing could rise by an estimated 59 percent, mostly in developing economies, through operational improvements, such as lean manufacturing, and bigger processing facilities to take advantage of scale effects.

Automotive. The automotive sector, which accounts for an estimated 1.6 percent of global GDP, boasts productivity that is, on average, roughly 95 percent higher than that of other industries. Big differences exist among regions, however, reflecting the productivity performance of tier-two and tier-three component-supplier operations. (For example, in aggregate, auto manufacturing in India operates at less than one-quarter of the productivity level in the United States.) MGI estimates that the automotive industry could raise its overall productivity by 90 percent as of 2025. The opportunity varies by region. The largest—in China and India, which today employ over 40 percent of all automotive workers—involve greater scale and improved manufacturing processes.2

Retail. In most economies, 5 to 12 percent of all employees work in the retailing industry—and more when wholesale is included—so retail matters. Globally, productivity in this sector is 30 percent lower than average productivity across all sectors. Retailing is also an industry with large, sustained productivity differences between developed and emerging economies, as well as among countries at similar income levels. The opportunities in the retail sector fall into three broad areas: increasing the share of more productive formats, narrowing the gap between the least and most productive outlets in a particular format, and improving even the best performers’ productivity by using new technologies and processes. These hold the promise of boosting worldwide retail productivity by more than half.

Healthcare. Healthcare spending accounts for 10 percent of GDP among the member countries of the Organisation for Economic Cooperation and Development (OECD) and for an average of roughly 6 percent of GDP in the four leading emerging economies: Brazil, China, India, and Russia. Moreover, total healthcare spending is growing faster than global GDP, heightening the need to deliver healthcare as efficiently as possible. MGI analysis finds opportunities to save nearly 25 percent of overall healthcare spending by 2025, without compromising health outcomes. Countries could realize this potential by catching up to best practices in operations and procurement, by reducing the number of clinically ineffective procedures, and by developing innovative delivery models (notably, providing care outside of hospital settings and using new digital technologies).

Having ample opportunity to improve productivity does not guarantee that we will do so. There is a robust debate about how much growth is actually desirable, given the economic, social, and environmental externalities that rapid change often creates. Yet without growth, the world is a poorer place—and fulfilling social and debt commitments becomes harder. Business can and should upgrade its capital and technology, pursue innovation, and mobilize talented workers. Governments need to assess whether and how to go on opening up their economies and integrating them into the world economy. Since the rate at which different countries and sectors exploit the opportunities before them is bound to vary, global business leaders will need strong antennae to understand where new opportunities are arising, how to adapt accordingly, and what new competitors they are likely to meet along the way.

About the authors

Richard Dobbs and Jonathan Woetzel are directors of the McKinsey Global Institute, where Jaana Remes is a partner.