Economic Growth in an Aging World

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Economic Growth in an Aging World

There are two primary ways an economy can grow.

  • It can expand the amount of work performed by increasing the number of people. 
  • It can expand the amount of work performed by increasing the productivity per people. 

Unfortunately, the first approach is not an option. Demographic trends—such as the aging of the Baby Boom generation and the dramatic drop in the global birth rate—have brought an end to the era in which the global economy could grow simply by expanding the number of people with jobs. From 1964 to 2014, employment grew by an average of 1.7 percent per year. But over the next fifty years, it is projected to plummet to 0.3 percent annually. Clearly, this suggests that the fate of the world's economy depends on the second option: improving productivity.

The need is urgent, because the rate of global GDP growth is projected to decline from the historical trend of 3.6 percent over the past fifty years, to just 2.1 percent for the next fifty years.1 If this happened, average GDP growth for the next half century would be one-third lower than it was during the past five years of the frustratingly slow recovery from the Great Recession. Instead of growing 600 percent as it has since 1964, the global economy would grow by only 300 percent by 2064.

The only way to offset this drop is by growing productivity 80 percent faster than the already blistering pace of the past fifty years: that means jumping from the current 1.8 percent to 3.3 percent.

Is this even possible? According to a compelling study by McKinsey Global Institute (MGI) titled "Global Growth in an Aging World",3 it will not be easy, but it can be done. Drawing on nearly 25 years of research on economic growth, MGI directors Richard Dobbs, James Manyika, and Jonathan Woetzel found opportunities for improvement in the twenty national economies that comprise 80 percent of the world's GDP—that is the G19 countries, plus Nigeria.

We'll explore their specific recommendations a bit later, but the bottom line is that if companies and national governments adopt existing best practices, productivity growth could grow by 3 percent. The rest of the productivity gains could come from innovation.

Before we get to the details, let's quickly examine why the labor pool is running dry. We've covered the impact of the declining birth rate in previous issues of Trends, so we'll keep this brief. The combination of several forces—more women in the workforce, improved contraception methods, and changing societal values toward smaller families—has pushed global birth rates to record lows...

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