If global growth slows, as some predict it will, the globe is in for a lot of very big problems
The past 50 years have been the most exceptional period of growth in global history. The world economy expanded sixfold, average per capita income tripled, and hundreds of millions of people were lifted out of poverty. That’s the good news. But according to a new McKinsey report on the next 50 years of global growth revealed today at the World Economic Forum in Davos, it’s very unlikely that we’ll be able to equal that in the future. There are two main reasons for this gloomy conclusion: the global birthrate is falling dramatically and productivity is slowing. Economic growth is basically productivity plus demographics. The result? McKinsey is forecasting that if current trends continue, global growth will fall by 40% over the next half century, to around 2.1% year.
A while back, I wrote a column about what a 2% economy would mean for the U.S. Imagine if the whole world, including emerging markets that need much higher rates just to keep social unrest under control, were growing that slowly too. Not good.
McKinsey got a bunch of big brains—Larry Summers, Martin Sorrel, Martin Wolf, Laura Tyson, Michael Spence, and others—together to discuss all this and figure out some possible solutions. A few interesting points that came out: while we are in the middle of a digital revolution that seems to be disrupting nearly every aspect of business and the economy, not to mention our personal lives and culture, the revolution isn’t showing up in productivity numbers yet. Part of that could be that the way we measure productivity isn’t capturing everything that individuals are doing on their smartphones, tablets, and other gadgets. (It’s also worth noting that a lot of what is being created by individuals on those devices is free, which is an economic problem all its own, in the sense that only a few big companies like Facebook and Google and Twitter capture those creative gains, and they don’t create enough jobs to sustain what’s being lost in the economy.) There’s also the possibility that this “revolution,” simply isn’t as transformative, at least in terms of broadly shared economic growth, as those of the past—the Industrial Revolution or even the 1970s computer revolution. (For more on this, check out research by Northwestern University academic Robert Gordon, who is all over this topic.)
There are things we can do to boost productivity, like getting the private sector more involved in areas like education (for more, see The School That Will Get You a Job), and by allowing the gains from the internet of things (meaning the connection of all digital devices to each other) to filter through over the next few years. It’s not yet clear that will create more jobs though. Indeed, it may create jobless productivity which is a whole new challenge to cope with, one that might require bigger wealth transfers from the small number of wealthy people who do have jobs to the larger number of people who don’t. (Paging Thomas Piketty!)
There are some other ideas on the demographic side. Women are still dramatically underrepresented in the workforce in many countries. (One WEF study estimates it will take 81 more years for global gender parity at the current rate of change—argh!) Putting more of them to work could help a lot with growth; indeed, Warren Buffet once suggested to be that the federal government should provide inexpensive, partly federally funded child care to allow other women to take jobs higher up the food chain, this boosting economic growth. A win win.
Of course, this requires governments to take the lead on what can be politically contentious policy decisions, not easy when most politicians spend much of their terms trying to get reelected. Unfortunately short-termism is rife in the private sector too. CEO tenures are now five years on average and CFOs only last 3. All of which tends to lead to decision-making that benefits corporate compensation more than real economic growth.
Depressing, I know. But I saw one ray of hope when I ran into an emerging market CEO outside the panel, one who runs a family business that does planning in 10- to 20-year cycles rather than quarterly, investing quite a lot in areas like training and education. McKinsey research shows these types of firms will make up the biggest chunk of new global multinationals. Perhaps they can take the long view and come up with some better ideas about how to ensure global growth for the future.