Productivity is destiny

Is demography really destiny? Let’s hope not.

The last half century has been one of unprecedented economic growth and improving living standards. Average per capita income nearly tripled as the global economy expanded six-fold. Behind those gains were technological innovation, trade liberalization, and the spread of practices that made businesses and governments more efficient.

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That golden era of growth now appears stalled. One reason is that the abundant pool of workers who powered economic expansion as producers and consumers is shrinking as working-age populations get older in both advanced economies and important developing countries such as China, Brazil and Russia. As a result, the demographic “tailwind” that helped generate historic gains in economic growth “is coming to an end,” the McKinsey Global Institute says. A second, related factor is that, in emerging economies, the huge returns from education and innovation are unlikely to be as large as they were in the high-growth years that began in the 1990s.

That means the search for future economic growth is almost entirely a drive for better productivity. We won’t be able to grow a business or economy without finding ways for workers and capital to produce more goods and services.

“Without an acceleration in productivity growth, the rate of global GDP is set to decline by 40% from 3.6% a year between 1964 and 2012 to only 2.1% over the next 50 years,” Harvard Business Review says.

I’m optimistic. I believe that emerging markets in particular offer significant opportunities for productivity improvement that will have a global impact. The tools we need to close the productivity gap are already at hand.

  • Technology. We have to speed the transformation from manual to automated processes and systems where it clearly lags — small and medium-sized enterprises, frontier emerging markets, and government bureaucracies.
  • Public sector reform. In developing economies, the public sector often acts as employer of first, second, and last resort, crowding out talent that could earn, innovate and achieve more in the private sector. A more streamlined public sector — and an environment that makes it easier to start and run a business — can have huge productivity dividends.
  • Education transformation: We must  be relentless in efforts to offer better education for youth in developing countries. Young people need a focus on math and science, opportunities for vocational training, and on the-job-experience that prepares them for the workforce. It’s not a question of spending. GCC countries, for example, spend more per capita on education than any region in the world, yet still see poor results on standardized math and science tests. We need to drive measurable outcomes.
  • Labor market reform. Companies have to work harder to attract and train workers, develop and mentor young talent, and provide flexible working conditions for women and older workers.

Our experience shows big productivity gains are possible. To give just one example, Agility partnered with the Pakistani government to modernize and automate customs processes at the Karachi port. As a result, dwell times for inbound cargo dropped from an average of 15+ days to five days; customs processing time fell from 10 days to less than six hours; one electronic declaration replaced the old system that required 34 signatures. The implications are enormous: goods flow faster to Pakistan’s consumers and producers; goods made with imported inputs turn around for export at a quicker pace; the government collects revenues and data more efficiently. Businesses can free up capital by reducing inventories. Consumers benefit from cheaper prices.

We don’t need to wait for The Next Big Thing in technology. We have the tools to boost productivity. We just have to be more determined to use them.