Of boosting productivity

Keep spreading good ideas, and develop new ones

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. Achieving, never mind sustaining, the McKinsey Global Institute’s goal of an 80 per cent improvement in annual average productivity growth from a historical 1.8 per cent to 3.3 per cent, is a very tall order.

According to The Conference Board Total Economy Database, a 3.3 per cent global average productivity-growth rate was reached most recently during the period 2003–07. It resulted from a decade-long commitment to rapid globalisation, innovation, and deregulation.

Emerging markets strongly contributed to those exceptional growth rates, as mature economies didn’t go beyond their long-term average of about 2 per cent productivity growth. But it didn’t last long. Once the global crisis hit in 2008, productivity growth slid back to only 2.3 per cent globally.

So how to bend the slowing productivity curve? There is no silver bullet to create productivity. And even drivers that work in some circumstances have the opposite effect in others. For example, more competitiveness doesn’t bring innovation under all conditions; labour market flexibility doesn’t always bring about higher skills; and, more generally, aggregate productivity growth will only rise if the winners gain more than the losers give up. In other words, allow failure to create success.

To achieve 3.3 per cent 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. McKinsey’s research shows that as much as 75 per cent of the gains necessary to meet its target can result from simply “catching up” with existing best practices. These catching-up opportunities are right on our doorstep. To realise them, government should remove barriers to competition, domestically and across nations. Second, within organisations, management practices can still greatly improve to drive out inefficiencies, which should help to shorten the long tail of inefficient business practices that often remain.

The remaining 25 per cent will be much more difficult to realise for the same reason that maturing economies grow more slowly than emerging economies. “Moving the productivity frontier out” results from breakthrough technologies and subsequent incremental innovations. Governments can support basic research to strengthen innovation, but after that, the best thing they can do is to get out of the way.

The outcomes of innovation are highly uncertain. Even successful innovations often do not translate immediately into productivity gains. Each business needs to seek its own optimal efficiency by experimenting, learning, practicing, and implementing. Some call it entrepreneurship.

To raise productivity by 80 per cent while managing a drop in workforce growth is historically unprecedented. But we have been surprised by major turnarounds in growth before. It seems too early to write off that possibility. As Roberto Unger of Harvard Law School said, “At every level the greatest obstacle to transforming the world is that we lack the clarity and imagination to conceive that it could be different.” Nothing is truer as we contemplate the future of productivity.

By: Bart van Ark