The disruption is intensifying

Powerful forces are changing our world. Their impact is touching all countries, sectors, companies, and, increasingly, workers and the environment. They are also morphing in some unexpected ways and combining to create even greater impact than we expected.

The center of economic gravity is shifting east and south

Emerging economies, led by China and India, have accounted for almost two-thirds of global GDP growth and more than half of new consumption in the past 15 years. Among emerging economies, our research has identified 18 high-growth “outperformers” that have achieved powerful and sustained long-term growth—and lifted more than one billion people out of extreme poverty since 1990. ¹ Seven of these outperformers (China, Hong Kong, Indonesia, Malaysia, Singapore, South Korea, and Thailand) have averaged GDP growth of at least 3.5 percent for the past 50 years. Eleven other countries (Azerbaijan, Belarus, Cambodia, Ethiopia, India, Kazakhstan, Laos, Myanmar, Turkmenistan, Uzbekistan, and Vietnam) have achieved faster average growth of at least 5 percent annually over the past 20 years. Underlying their performance are pro-growth policy agendas based on productivity, income, and demand—and often fueled by strong competitive dynamics. The next wave of outperformers now looms, as countries from Bangladesh and Bolivia to the Philippines, Rwanda, and Sri Lanka adopt a similar agenda and achieve rapid growth.

The dynamism of these economies has gone hand in hand with the rise of highly competitive emerging-market companies. On average, outperformer economies have twice as many companies with revenue over $500 million as other emerging economies. These companies play a growing role on the global stage: while they accounted for only about 25 percent of the total revenue and net income of all large public companies in 2016, they contributed about 40 percent of the revenue growth and net-income growth from 2005 to 2016. More than 120 of these companies have joined the Fortune Global 500 list since 2000, ² and by several measures, they are already more innovative, nimble, and competitive than Western rivals. They can also earn better returns for investors. Between 2014 and 2016, the top quartile of outperformer companies generated an average total return to shareholders of 23 percent, compared with 15 percent for top-quartile companies in high-income countries (See Exhibit 1).

Globalization patterns are changing, with rapid growth in data flows

Much of the recent focus on globalization has been on trade pullbacks, rising protectionist measures, and public hostility. As a phenomenon, however, globalization has not gone into reverse; rather, it has shifted gears to become more data driven and more focused on south–south flows. While cross-border flows of goods and finance have lost momentum, data flows are helping drive global GDP. Cross-border data bandwidth grew by 148 times between 2005 and 2017, to more than 700 terabytes per second—a larger quantity per second than the quantity contained in the entire US Library of Congress—and is projected to grow by another nine times in the next five years as digital flows of commerce, information, searches, video, communication, and intracompany traffic continue to surge.

The developing world is driving global connectedness. For the first time in history, emerging economies are counterparts on more than half of global trade flows, and south–south trade is the fastest-growing type of connection. South–south and China–south trade jumped from 8 percent of the global total in 1995 to 20 percent in 2016.

Amid these shifts, our latest research suggests that China’s relationship with the world may be at a turning point. By 2017, China accounted for 15 percent of world GDP. For the first time since 1870, it overtook the United States to become the world’s largest economy in purchasing-power-parity terms. (In nominal terms, China’s GDP was 64 percent of the United States’ GDP in 2017, making it the second-largest economy in the world.) Over the past decade, even as its economy has grown, China’s exposure to the world, as measured by the magnitude of flows of trade, technology, and capital with the rest of the world relative to its economy, has declined. At the same time, the world’s exposure to China (the magnitude of flows with China relative to the global economy) has increased since 2000. Metrics used to measure exposure include China’s importance as a market and as a supplier of goods and services to the global economy, the importance of Chinese technological exports to global R&D spending and China’s technology import and its influence in domestic R&D, and, for capital, China’s importance as a supplier of financing and as a destination for investments (See Exhibit 2).

Global value chains are also evolving. They are being reshaped in part by technology, including automation, which could amplify the shift toward more localized production of goods near consumer markets. And they are changing along with global demand, as China and other developing countries consume more of what they produce and export a smaller share. As emerging economies build more comprehensive domestic supply chains, they are reducing their reliance on imported intermediate inputs.

The result is that goods-producing value chains have become less trade intensive, even as cross-border services are growing briskly—and generating more economic value than trade statistics capture, according to our analysis. Trade based on labor-cost arbitrage has been declining and now makes up only 20 percent of goods trade. Global value chains are becoming more knowledge intensive and reliant on high-skill labor. Finally, goods-producing value chains (particularly those for automotive as well as computers and electronics) are becoming more regionally concentrated, as companies increasingly establish production in proximity to demand.

The pace of technological progress is accelerating

Businesses have been harnessing advanced analytics and the Internet of Things to transform their operations, and those in the forefront reap the benefits: companies that are digital leaders in their sectors have faster revenue growth and higher productivity than their less-digitized peers do. They improve profit margins three times more rapidly than average and are often the fastest innovators and the disruptors of their sectors. The forces of digital have yet to become fully mainstream, however: on average, industries are less than 40 percent digitized.

Now comes the next wave of innovation, in the form of advanced automation and artificial intelligence (AI). An explosion in algorithmic capabilities, computing capacity, and data is enabling beyond-human machine competencies and a new generation of system-level innovation, such as the driverless car. Machines already surpass human performance in areas like image recognition and object detection, and these capabilities can be used to diagnose skin cancer or lip-read more accurately than human experts can.

While these technologies still have limitations, massive productivity gains across sectors are already visible, with AI use cases in functions such as sales and marketing (for example, “next product to buy” personalization), supply chain and logistics, and preventive maintenance. Our analysis of more than 400 use cases found that AI could improve on traditional analytics techniques in 69 percent of potential use cases. Deep learning could account for as much as $3.5 trillion to $5.8 trillion in annual value, or 40 percent of the value created by all analytics techniques (Exhibit 3). For the global economy, too, AI adoption could be a boon, potentially raising global GDP by as much as $13 trillion by 2030, or about 1.2 percent additional GDP growth per year, according to a simulation we conducted.

AI could also contribute to tackling pressing societal challenges, from healthcare to climate change to humanitarian crises; a library of social-good use cases we collected maps to all 17 of the United Nation’s Sustainable Development Goals. Yet AI is not a silver bullet. Significant bottlenecks, especially relating to data accessibility and talent, will need to be overcome, and AI presents risks that will need to be mitigated.

As populations age, developed regions must rely more on waning productivity and greater migration

Labor-productivity growth is near historic lows in the United States and much of Western Europe, despite a job-rich recovery after the global financial crisis. Productivity growth averaged just 0.5 percent in 2010 to 2014, down from 2.4 percent a decade earlier. This weakness comes as birth rates in countries from Germany, Japan, and South Korea to China and Russia are far below replacement rates and working-age-population growth has either slowed or gone into reverse. These demographic trends put a greater onus on productivity growth to propel GDP growth: over the past 50 years, just under half of GDP growth in G-20 countries came from labor-force growth, while productivity growth accounted for the remainder.

Digitization promises significant productivity-boosting opportunities in the future, but the benefits have not yet materialized at scale in productivity data because of adoption barriers and lag effects as well as transition costs. Our research suggests that productivity could grow by at least 2 percent annually over the next ten years, with 60 percent coming from digital opportunities.

The retired and elderly over 60 in many developed countries are increasingly important drivers of global consumption. The number of people in this age group will grow by more than one-third, from 164 million today to 222 million in 2030. We estimate that they will generate 51 percent of urban consumption growth in developed countries, or $4.4 trillion, in the period to 2030. That is 19 percent of global consumption growth. The 75-plus age group’s urban consumption is projected to grow at a compound annual rate of 4.5 percent between 2015 and 2030. In addition to increasing in number, individuals in this group are consuming more, on average, than younger consumers are, mostly because of rising public- and private-healthcare expenditure.

With low fertility in the developed world, migration has become the primary driver of worldwide population and labor-force growth in key developed regions. Since 2000, growth in the total number of migrants in developed countries has averaged 3.0 percent annually, far outstripping the 0.6 percent annual population growth in these nations. Besides contributing to output today, immigrants provide a needed demographic boost to the current and future labor force in destination countries. Improving the old-age-dependency ratio is of critical importance to countries like Canada, Germany, Spain, and the United Kingdom, where worsening dependency ratios threaten to make many pay-as-you-go plans unsustainable

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