Climbing the global productivity ‘S’ curve

  • Good for MGI – the McKinsey Global Institute – still the only major consultancy that bangs the national productivity drum and recognises it for being the most important peacetime issue facing most nations, at least at present
  • Why is productivity improvement considered so important?
    • In the private sector, to produce more output volume of goods or services at competitive prices for more sales, revenue and so gross profits to fund growth, wage increases, vital product development and pay taxes to provide more/ better public services for all i.e. to increase national prosperity overall
    • In the public sector, to afford more and/ or better services deemed vital by and for a nation’s population
  • However, if productivity is to be improved, it first needs to measured well in order to know where and how best to act
  • But, at organisation unit level, productivity can be ‘difficult’ to measure, especially if the organisation produces many different types/ ranges of output from many different processes spread over many different locations
  • And, at national level, such difficulties are compounded ‘n’ times over – productivity statistics at that level are ‘aggregates of aggregates of aggregates etc.’ of measures which include a host of estimates, assumptions and inevitable errors
  • Despite this, many national wise-men and women continue to follow the ‘national productivity statistic’ stars – some even alarmed if a 0.1% fall in GDP is announced
  • Indeed, such results make regular media headlines 
  • Economic ‘experts’ even base their theories and recommendations on them, considering them to be ‘rocks’, not ‘sand’
  • And this has led them to bump into a so-called ‘productivity puzzle’ – apparently, their data shows that overall productivity impovement in all ‘developed nations’ has slowed right down in recent years, and they don’t understand why 
  • Broad and so vague recommendations for more infrastructure, more training/ skills/ apprenticeships and more R&D have had no apparent effect
  • This has prompted some questions which need to be asked at top tables before next deciding what specific action is needed from whom, where, by when
  • They include:
    • Why measure national GDP and national (labour) productivity stats if they are of little use to anyone on the front-line i.e. organisation managers or government ministers in charge?
    • Why is ‘national productivity’ represented by just ‘national labour productivity’, thus ignoring the major impact of capital inputs – one tractor could do the work of 100 men, say – and why only count FTE numbers or hours as labour inputs, not skills or experience?
    • Why is Japan always bottom of any G7 productivity league table, but never remarked upon, despite everyone knowing how world-beating many of their sectors are?
    • What if we, the general public, have already moved on to a new way of living where we simply replace most stuff which meets our basic physical needs and not want to buy more and more new stuff, so overall GDP is bound to flatten out – and what of our making more use of WFH and ‘Zoom’ which reduces travel demand?
    • What if G7 nations have reached near the top of their ‘materialism’ productivity ‘S’ curve and there’s little scope to improve further, the way ahead being the unlimited growth of meeting ‘mentalism’ needs as our well-being takes centre stage?
    • What if AI/ automation/ robots replace most and then all of the need to pay for human inputs at ‘work’ to meet our material needs, causing infinite growth to the value of the national labour productivity ratio – and no need for anyone to earn wages to acquire whatever they want – AI will meet all their needs?
    • Will this be ‘Nirvana’, or ‘Hell‘?
    • For what would people do with themselves if they had 100% free time to do and obtain whatever they wanted, wherever they wanted, whenever they wanted?
  • With that scenario in mind, enjoy the following extracts from a podcast by some of McKinsey’s finest i.e. senior partners Chris Bradley and Olivia White, joined by editorial director Roberta Fusaro – they discuss how best to measure productivity, what’s behind reduced productivity numbers, and what can be done to ramp up productivity rates again – they say: “Labour productivity over the past 25 years has been a success story for some, a tale of stagnation for others”
  • Roberta Fusaro: What does productivity measure and why is it so important?
  • Chris Bradley:
    • It’s a very simple measure but it has a lot of complexity. The measure of productivity is how much output, how much GDP, is generated for every hour of work. And that matters, because over the long run it reflects two things:
      • First, it reflects how good we are as an economy at doing stuff.
      • Second, it’s the main way by which all of the technical progress of the world, all of the capital accumulation, has found its way into the main way that we share our wealth, which is through wages.
  • Olivia White:
    • Different ways to think about this are (numbers of caffe) lattes produced in an hour or a minute; or cars that move down an assembly line in any given period.
    • It matters a ton because this is the only way that we can raise wages and living standards for people in a country or across the world.
  • Roberta Fusaro: What’s the big-picture view of productivity?
  • Chris Bradley:
    • Globally, median country productivity is now six times more productive than it was 25 years ago.
  • Olivia White:
    • In 1997, labour productivity measured in terms of output per worker per year was about $7,000.
    • In 2022, that number was $41,000.
    • The world has grown much more productive and, as a result, at large, much richer.
  • Chris Bradley:
    • But, while we have improved productivity over this time period, the rate at which we’re currently improving productivity is slowing just about everywhere.
    • The fast lane is going slower, and the advanced economies are going slower as well.
  • Olivia White:
    • Emerging economies are on a highway with fast and slow lanes, with immensely diverging speeds between different lanes:
    • So for a fast-lane economy such as Poland, if it kept up the pace of productivity growth it’s had over the past 25 years, it would reach US productivity levels within the next 11 years. And China would be there in about 15 to 16 years.
    • By contrast, for a country like Indonesia, which has been in the middle lane, it would take 135 years.
    • And for countries in the slow lane, such as Argentina, at its pace of productivity growth over the past 25 years, it would never catch up.
  • Roberta Fusaro: What are some of the contributing factors to stalling productivity?
  • Chris Bradley:
    • If you’ve got a very basic economy where very few people live in cities and you have very little capital, the first tractor, the first freeway, the first skyscraper has a massive impact on productivity. But the millionth one, less so.
    • Hence places like China and India made a big leap forward and caught up a lot. They haven’t caught up all the way, but as those economies get closer to a fully industrialised economy, they are more and more limited by the same things we are in the West, which is fundamentally technical progress.
    • At first, this will emulate and mostly just deepen your capital.
    • Capital per worker, which is the stock of capital, in the US is still way higher. For example, it’s still three times higher than in China.
    • The US is more productive because it has more of that installed capital. But that first surge, that first bit of capital, that first bit of urbanisation has a massive impact on productivity.
    • And as you’d expect, it’s kind of an S-curve – It’s an impact that slows over time.
    • In advanced economies, we point to investment, but instead of surging investment, it’s slowing investment.
    • And you might ask, why am I talking about capital when this is a report about productivity?
    • That’s because about 80% of productivity happens because each worker has more capital, more equipment.
    • So in some ways, a productivity-rich world is an investment-rich world.
  • Roberta Fusaro: What’s the link between gen AI and productivity?
    • And indeed, for people whose jobs may become less relevant as AI rolls out, are these workers being retrained?
    • And are economies helping them find jobs that will enable them to be productive on an ongoing basis?
  • Chris Bradley:
    • Let me talk through the waves that have happened.
    • In the US, for example, in the early 2000s somewhere between a third and a fifth of all the US productivity growth was just from an electronics manufacturing boom.
    • Then the second wave was that we all had ubiquitous connectivity and the internet, and then digitalisation happened.
    • If you’re a bank, you digitised your channels, you did e-commerce, and a lot of interactions were digitised
    • And I can tell you where we saw that in the productivity statistics, and it’s simple: nowhere.
    • And why is that?
    • Well, if you’re a supermarket chain, it’s not 100% clear that adding an e-commerce channel radically improved your productivity. But you had to do it. Customers wanted it. You had to duplicate two channels.
    • So we’re in this kind of mid-game where the digital revolution has partially happened. But it hasn’t yet been a productivity miracle.
    • Which leads us to the third wave, which is intelligent machines and genuine automation and AI.
    • Under most of our mid-point scenarios, within 10 years about one-third of what we do now is going to be automated.
    • I think AI is an interesting one because it can strike fear into people.
    • Within our lifetimes, occupations that have been with us for generations, such as entry-level white-collar jobs, won’t exist because of gen AI.
    • But I don’t think we should be Luddites. Actually, the biggest problem in economies is not unemployment. The biggest problem is that there’s not enough labour supply.
    • We need automation just to get all the things done that we need to do.
    • And what this means is that people will then move into doing jobs that only people can do.
  • Roberta Fusaro: Do we still have the right tools to measure productivity?
  • Chris Bradley:
    • Productivity is an economic concept. It’s mighty hard to measure.
    • How do you value better quality of life? How do you value freer entertainment?
    • And is there a whole bunch going on in our economy that is undervalued or not valued?
    • Since we’re measuring productivity in a consistent way across all these countries and across all these times, whether or not you might add or subtract a little bit (???) of productivity for these measurement issues, the cross-country comparisons still matter.
    • And all this equivocation about whether we are measuring productivity correctly does not disguise the fact that productivity has slowed down.
    • It doesn’t disguise the fact that it’s slowed down in Europe a lot and that Europe has major productivity challenges.
    • And it doesn’t disguise the fact that in the parts of the world that don’t yet have advanced-economy status, half to two-thirds of them are not converging fast enough with our productivity standards.
  • Roberta Fusaro: What role do demographics play in this quest for productivity?
  • Chris Bradley:
    • There were more babies born last year in Nigeria than there were in all of Europe.
    • That’s an instant telescope to the future because it tells us what the future of the world is – the future of the world is African.
    • Currently, the median age in China is about the same as it is in the US – but by 2050, the average age in China will be 51. And we’ll be at a point where more than 30% of its population is over 64.
    • We know the demographic impact on productivity is big – but the bigger impact o is more about not having enough workers to go around.
  • Roberta Fusaro: What are the next big productivity issues to study, beyond demographics?
  • Chris Bradley:
  • A few things really matter.
  •  A pro-productivity world is a pro-investment world.
  • And one of the background features over the past 25 years has been unfettered and highly cooperative global trade – globalisation:
    • Now, it’s not going to disappear, because the world can’t work that way
    • We can’t work without each other.
    • America imports 83% of its chips – China imports more chips than it does oil.
  • So the world can’t work without each other.

 

 

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