Here is a brief excerpt from an article written by James Manyika, Jaana Remes, and Jonathan Woetzel for the McKinsey Quarterly, published by McKinsey & Company. They explain why, if demography is destiny, global growth is headed for a slowdown. History, however, suggests that productivity could ride to the rescue. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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Throughout history, economic growth has been fueled by two factors: the expanding pool of workers and their rising productivity. From the perspective of rising prosperity, however, it is productivity that makes all the difference. Disparities in GDP per capita among countries—or between the past and the present in the same country—primarily reflect differences in labor productivity. That in turn is the result of production and operational factors, technological advances, and managerial skills. As managers improve efficiency, invest, and innovate to be competitive, their collective actions expand the global economy.

The past 50 years have seen unusually rapid growth in GDP and GDP per capita (Exhibit 1). How likely is this growth to continue? Given the demographic drag that’s already coming into play, prospects for future growth—and the related implications for debt levels and future pension liabilities—will depend very heavily on sustained productivity growth. But arriving at useful forecasts of the productivity of future workers can be difficult.

The role of productivity in global GDP growth has been on the rise since the start of the Industrial Revolution, with major surges following World War II and the mid-1990s.

It may be helpful to look back at lessons from the research of the McKinsey Global Institute (MGI), which during the last 25 years has analyzed the causes of differences in labor productivity between industries, sectors, and countries. These lessons help explain why some have thrived while others have fallen behind. To help celebrate McKinsey Quarterly’s 50th anniversary—and to examine the future prospects for economic growth around the globe—MGI looked forward and backward in time at productivity performance and economic growth.

We found that a simple extrapolation from the past does indeed suggest an impending decline in global growth—the result of a sharp decline in the number of available workers. A closer look, however, reveals substantial opportunities to maintain relatively high GDP growth rates through continued growth in labor productivity. Whether these opportunities are realized will depend on the reforms of policy makers and the ingenuity of managers and engineers, particularly in sectors with big productivity gaps. Can companies harness machine learning and artificial intelligence to raise the productivity of knowledge workers? What potential remains for shop-floor productivity gains as telematics and other advanced technologies pave the way for major process improvements? How far will we be able to expand the talent pool through the fuller economic engagement of women?

The bottom line is this: while half-century forecasts are hazardous—particularly for the forecaster!—a productivity-based perspective on the future of growth suggests that a demographic slowdown today need not lead to economic stagnation tomorrow.

The cross-country productivity approach

For nearly a quarter century, the McKinsey Global Institute has focused on the role productivity growth plays in economic performance. Along the way, MGI’s findings have challenged conventional thinking about the sources of productivity growth and clarified two primary lessons for policy makers and executives. The first lesson is to accept no sweeping generalizations regarding the state of a country’s competitiveness or the prospects for its future economic performance; macrolevel insights can be generated only by rolling granular examination of individual businesses up to the industry, sector, and country levels. The second lesson is to recognize productivity improvements as the primary source of sustained and long-term economic growth. To raise economic performance, we must focus on the causes of productivity differences among companies, industries, sectors, and countries.

Some examples help illustrate these lessons. The first requires going back to the 1970s and 1980s, when the export prowess of Japan led to a consensus, in the United States and Europe, that its economic performance had surpassed theirs. MGI tested this pervasive thinking through a set of cross-country comparisons at the sector level in each economy. These revealed that while Japan’s steel industry, for example, was 45 percent more productive than the US one, its food-processing industry was only a third as productive (Exhibit 2). By examining a range of representative sectors at the microeconomic level, MGI debunked the popular notion that the Japanese economy, overall, was outperforming the US economy.

MGI’s 1993 study of manufacturing productivity debunked the then-popular notion that the Japanese and German economies had become more efficient than that of the United States.

This same set of cross-country productivity comparisons also highlighted the ways in which operational factors, from scale to production processes, had a far greater influence on productivity than education, the usual suspect at the time. Moreover, MGI found that productivity was highest in industries and countries that are exposed to, rather than protected from, competition. The research also revealed a shadow side of Japan’s strong productivity in the automotive and consumer-electronics sectors: weak service-sector performance (Exhibit 3). Low productivity in the service sectors, which accounted for a growing majority of jobs, soon became the Achilles’ heel of Japan’s overall economic growth.

MGI’s 1992 study of service-sector productivity showed that performance was strongest in sectors and countries that were most exposed to competition.

The overarching insight to emerge from this early MGI research continues to hold a powerful validity: companies, industries, and nations can change their economic prospects only by identifying what it would take to improve their productivity growth. Sweden, for example, raised it by removing land and pricing barriers identified in a 1995 MGI study. These policy actions enabled the productivity of Sweden’s retail sector to rise at up to twice the rate of most of its counterparts in the rest of Europe during the decade that followed.

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Here is a direct link to the complete article.

James Manyika and Jonathan Woetzel are directors of the McKinsey Global Institute, where Jaana Remes is a partner. The authors would like to thank Richard Dobbs and Lindsay Pollak for their contributions to this article.