Global Economic Growth and Prosperity

Stephen DeAngelis

July 27, 2015

As devastating as natural disasters can be, they are generally localized. In today’s globalized world, economic disasters often affect a much larger area and the effects of such disasters can linger for years. For that reason, the McKinsey Global Institute asked a number of leading thinkers, “What is the single biggest opportunity we can act on now to sustain rising prosperity for the long term?” It’s a very interesting question. Before sampling how those pundits answered that question, I’d like to review another McKinsey & Company article that helps establish a good backdrop for the discussion. The article, written by Richard Dobbs (@richard_dobbs), James Manyika, and Jonathan Woetzel (@JonathanWoetzel), discusses four global trends that the authors believe are rewriting the world economy’s operating system.[1] Those trends are: Urbanization; technological change; aging populations; and connectivity.

 

Urbanization

 

Dobbs, Manyika, and Woetzel explain that the fate of the world’s economic future is moving from developed to emerging market countries. They write:

“These emerging markets are going through simultaneous industrial and urban revolutions, shifting the center of the world economy east and south at a speed never before witnessed. As recently as 2000, 95 percent of the Fortune Global 500 — the world’s largest international companies including Airbus, IBM, Nestlé, Shell, and The Coca-Cola Company, to name a few — were headquartered in developed economies. By 2025, when China will be home to more large companies than either the United States or Europe, we expect nearly half of the world’s large companies — defined as those with revenue of $1 billion or more — to be headquartered in emerging markets.”

Most people know that there are now more people living in urban areas than in rural ones. Concerning this urban revolution, Dobbs, Manyika, and Woetzel write:

“The global urban population has been rising by an average of 65 million people annually during the past three decades, the equivalent of adding seven Chicagos a year, every year. Nearly half of global GDP growth between 2010 and 2025 will come from 440 cities in emerging markets — 95 percent of them small- and medium-size cities that many Western executives may not even have heard of and couldn’t point to on a map.”

 

Technological Change

 

The McKinsey analysts note, “Technology — from the printing press to the steam engine and the Internet — has always been a great force in overturning the status quo. The difference today is the sheer ubiquity of technology in our lives and the speed of change.” They insist that the most significant technological advancement involves digitization. “Processing power and connectivity are only part of the story,” they write. “Their impact is multiplied by the concomitant data revolution, which places unprecedented amounts of information in the hands of consumers and businesses alike, and the proliferation of technology-enabled business models, from online retail platforms like Alibaba to car-hailing apps like Uber. Thanks to these mutually amplifying forces, more and more people will enjoy a golden age of gadgetry, of instant communication, and of apparently boundless information.”

 

Aging Populations

 

Dobbs, Manyika, and Woetzel note that the world is getting older. This is a result of longer life spans and falling fertility rates. The most dramatic result of these two trends, according to the analysts, is that “for the first time in human history, aging could mean that the planet’s population will plateau in most of the world.” This eventuality is likely to place significant pressure on the global economy. “A smaller workforce will place a greater onus on productivity for driving growth and may cause us to rethink the economy’s potential,” they write. “Caring for large numbers of elderly people will put severe pressure on government finances.”

 

Connectivity

 

Dobbs, Manyika, and Woetzel write, “The final disruptive force is the degree to which the world is much more connected through trade and through movements in capital, people, and information (data and communication) — what we call ‘flows’.” They note that the flow of capital, trade, and people slowed during the global recession; “but, the links forged by technology have marched on uninterrupted and with increasing speed, ushering in a dynamic new phase of globalization, creating unmatched opportunities, and fomenting unexpected volatility.”

 

What is the single biggest opportunity we can act on now to sustain rising prosperity for the long term?

 

Obviously, there are a number of opportunities that must be pursued if the world is going to enjoy rising and sustained prosperity. I’m sure that the eight experts (who were asked to restrict their answers to one opportunity) found that a difficult chore. Below are brief summaries of their answers.

 

Martin Neil Baily, the Bernard L. Schwartz Chair in Economic Policy Development at the Brookings Institution, wrote, “The biggest opportunity for future growth is for policy makers and the citizens who elect them to take advantage of market forces. Not all countries have to do the same thing, but all economies that have achieved success have seized this opportunity.”[2] Baily believes there are enormous benefits whenever a country can develop a competitive and innovative economy. Although that may sound easy, Baily recognizes that achieving the right balance is difficult. He explains:

“Too little regulation could trigger another crisis. Too much regulation or the wrong kind could lead to slower economic growth or even stagnation. Competing political ideologies cloud the decision-making process, making it harder to understand and steer market forces in the right way. The most vexing problem for the future of market economies is the rise of inequality. Left unchecked, the growing gulf between haves and have-nots may cause social unrest and a backlash against market solutions.”

Catherine Mann, chief economist of the Organization for Economic Co-operation and Development, also focuses on policy making as the most important thing on which to concentrate.[3] She writes, “To achieve rising and shared prosperity requires not a silver bullet but an arsenal of policies deployed in systematic fashion. Most important, it requires a new level of understanding of how those policies interact and how they play out in the actual workings of an economy: among workers, in factories and offices, and between nations.” Like Baily, Mann is concerned about growing income inequality. “Productivity growth both affects and is affected by the distribution and volatility of employment and income — at the individual and household level — and these feed into well-being, both within and across generations.” Ricardo Hausmann (@ricardo_hausman), director of Harvard University’s Center for International Development, also believes that policy development is the key to sustained growth.[4] “To increase overall productivity,” he asserts, “governments need to improve the provision of millions of different public goods.” Hausmann believes that governments should take advantage of the connectivity modern technology affords. He explains, “The solution is not to attempt to develop an omniscient central planner but instead to develop a market-like mechanism that can generate feedback, crowd-source ideas for reform, and create incentives for improving performance.”

 

Joan Clos, executive director of the United Nations Human Settlements Program, believes that we need to take advantage of two of the trends noted above (urbanization and connectivity) to create smart cities.[5] “In the economic history of humanity,” he writes, “urbanization has always been an accelerator of growth and development.” He continues:

“In my view, there are three areas that we need to address to ensure prosperous urbanization. First is the issue of adequate rules and regulations. Second is having a carefully thought-out urban design. And third is putting into place a financial plan that ensures adequate funding. When you analyze how cities create value and how economies of agglomeration or urbanization are created, it’s clear that you cannot succeed without addressing every one of these areas in parallel.”

International economist and author Dambisa Moy believes that getting a handle on the international flow of people is critical for achieving sustained economic prosperity.[6] “Human capital will be both a key source of challenge and of opportunity for enhancing the prospects for long-term global prosperity,” she writes. “Unfortunately, we don’t treat it that way.” She explains:

“Although labor quality and quantity are key inputs of canonical economic models of economic growth, there remains no globally integrated approach to migration. This is despite the fact that the two other critical determinants of economic growth — capital, in the form of trade and cross-border flows, and productivity, largely driven by the spread of ideas — are governed by international frameworks with rules and regulations overseen by international agencies. Labor policy, however, remains the purview of nation states. Given the challenges in the next 50 years, it seems to me that a globally integrated immigration approach is the single biggest opportunity we can act on now to sustain rising prosperity for the long term.”

Laura D’Andrea Tyson (@LauraDTyson), a professor in the Haas School of Business, at the University of California, Berkeley, also believes that human capital is the key to success; however, she believes we are undervaluing the role that women play in the global economy.[7] She explains:

“Taking bold actions now to increase the economic participation and advancement of women is critical to ensuring a strong foundation for rising prosperity in the long run. Women account for half of the global labor supply and about 70 percent of global consumption demand. Greater gender equality in educational and employment opportunities fosters faster, more inclusive growth, not only because women are half of the world’s population but also because they are more likely than men to invest in the human capital of their families.”

Justin Yifu Lin, a professor and honorary dean of the National School of Development at Peking University, believes that as China goes, so goes the world.[8] He writes:

“As Adam Smith discussed in An Inquiry into the Nature and Causes of the Wealth of Nations, economic growth depends on improvements in labor productivity, which today result from either technological innovation or industrial upgrading. Here, China should be able to benefit from the ‘latecomer advantage.’ Unlike developed countries that are already fully exploiting advanced technology, China can achieve technological advances through imitation, importation, integration, and licensing — a lower-cost and lower-risk avenue to productivity improvement.”

Lin is not alone in his belief that when China sneezes the whole world catches cold. Keeping China economically healthy is important. The final pundit McKinsey & Company asked to respond to their question was Bart van Ark (@bart_ark), a professor of economic development, technological change, and growth at the University of Groningen and executive vice president, chief economist, and chief strategy officer of The Conference Board.[9] Van Ark, like several other of the pundits cited above, believes that productivity is the key to sustained prosperity. He explains:

“Productivity is the only source of sustainable long-term growth. With the benefit of Angus Maddison’s monumental work on deconstructing historical growth, it turns out that at least two-thirds of global GDP growth since the beginning of the first industrial revolution stems from increases in output per worker. History also shows, however, that maintaining a high rate of productivity growth is challenging. … There is no silver bullet to create productivity. And even drivers that work in some circumstances have the opposite effect in others. … To achieve 3.3 percent growth over the long term, therefore, we must stay curious about what works and what doesn’t and create the conditions that are most likely to result in the spread of innovations that can spur greater productivity.”

In the end, I think van Ark got it right — there is no silver bullet solution that will guarantee sustained global economic growth and prosperity. Smart people are going to have to promote smart policies and do smart things in order to make that goal a reality. Unfortunately, history teaches us that humanity can do a lot of stupid things for a lot of stupid reasons. The global trends discussed by Dobbs, Manyika, and Woetzel are realities with which governments, businesses, non-governmental organizations, and private citizens must deal — along with climate change. They need to be dealt with holistically rather than in isolation if the future is going to be a prosperous one.

 

Footnotes
[1] Richard Dobbs, James Manyika, and Jonathan Woetzel, “The four global forces breaking all the trends,” McKinsey & Company, April 2015.
[2] Martin Neil Baily, “Harnessing the power of markets,” McKinsey & Company, February 2015.
[3] Catherine L. Mann, “Designing policies that support growth,” McKinsey & Company, January 2015.
[4] Ricardo Hausmann, “Building agencies to rate public policy,” McKinsey & Company, January 2015.
[5] Joan Clos, “Building better cities,” McKinsey & Company, January 2015.
[6] Dambisa Moy, “Creating a global framework for immigration,” McKinsey & Company, January 2015.
[7] Laura D’Andrea Tyson, “Promoting gender parity in the global workplace,” McKinsey & Company, January 2015.
[8] Justin Yifu Lin, “Enhancing growth prospects in China,” McKinsey & Company, February 2015.
[9] Bart van Ark, “Spreading good ideas and developing new ones,” McKinsey & Company, February 2015.