Growth under pressure

What business can do to restart growth

Instead of issuing narrow calls for lower taxes, the private sector should take the lead in making the case for driving growth through innovation and investment.

September 2011  |  By Richard Dobbs, James Manyika, and Charles Roxburgh

Adversity can be a great motivator. Confronted by oil shocks in the 1970s, governments and businesses together initiated a wave of innovation that boosted the supply and productivity of resources from energy to agriculture. This achievement set the stage for a 30-year decline in resource prices. Something similar is needed today—urgently. With consumers and governments both sidelined by outsized debts, the lever now must be a new wave of private investment. The goal is to reignite a virtuous cycle of value-added growth, productivity, and job creation of the kind the developed world last saw in the ’90s.

The division of labor is clear: if policy makers remove barriers that act as a disincentive to invest, as well as create the conditions in which business can thrive, the private sector can provide the skills and capital to deliver the innovation the world needs. We see five main areas of opportunity.

1. Bring private capital to public works.

In many developed economies, degraded infrastructure—airports, bridges, ports, power generation and transmission plants, railroads, telecommunications facilities—now drags down the global economy’s long-term growth and competitiveness. The American Society of Civil Engineers, for instance, estimates that the United States needs to spend $2.2 trillion over the next five years to bring its existing infrastructure up to what the organization calls a good condition. This is double the amount currently planned. Many European countries face a similar challenge.

Most governments simply don’t have the money. The creative alternative is to tackle the political challenges—heated debates over private ownership and proper rates of return, for example—and spur a new round of privatization. With strong balance sheets, companies and consortia could take over the operation of new facilities and provide the investment to upgrade old ones. Addressing regulatory barriers would also spur new spending on the infrastructure, such as power stations and telecommunications facilities, already in private hands. McKinsey Global Institute’s (MGI) rough analysis suggests that $200 billion of additional infrastructure expenditures a year could create around two million jobs.

2. Strengthen Internet ecosystems.

In mature economies studied by MGI, over the past 15 years the Internet has accounted for 10 percent of GDP growth, which accelerated to 21 percent in the past five years. The benefits were widely shared. One study of 4,800 small and midsize enterprises found that those with a strong Web presence grew more than twice as quickly as those with a minimal or no presence—and created more than twice the number of jobs.1

But more must be done to leverage the full power of the Internet ecosystem. While the United States currently has the strongest one, an expansion of broadband access and performance is needed to cope with rising demand and innovation. Meanwhile, Europe critically needs to go beyond the provision of Internet service, by creating more high-impact innovators. To encourage them, policy makers must ensure the Internet’s openness and competitiveness, invest to develop and retain the human capital needed to drive Internet innovation, and ensure the availability of capital so that fledgling innovative businesses can grow. If conditions are right, private-sector innovation and jobs will follow.

3. Meet the resource-productivity imperative.

The steady decline in real resource prices enjoyed throughout the 20th century has now reversed course. The entry of three billion new middle-class consumers into the global economy has boosted demand for key resources and increased the risk of price spikes that could curtail global growth. Expanding resource supply alone will not suffice to meet this new demand. Resource productivity—that is, increasing output for every unit of resource input—is also required. By our reckoning, it could address up to 30 percent of projected total resource demand in 2030.

Today, MGI estimates that the world invests about $2 trillion a year in key resource systems. Over the next 20 years, this amount must increase by at least 50 percent and possibly double. Happily, the potential rewards from increased investment are also high. By our estimate, almost 70 percent of the productivity opportunities for some resources have annualized potential returns above 10 percent, giving private capital a strong incentive to step forward. Some countries will continue to spur additional “green” investment through direct support. German companies, for example, are the leading producers of solar cells today. Germany’s policy choices, many embodied in its Renewable Energy Sources Act, are supporting the development of a 300,000-job industry.

4. Close the skills gap.

Many advanced economies are grappling with a severe mismatch between the skills developed by their education and training systems and those required in sectors where job growth will be strongest. On current trends, the United States will produce twice as many graduates in the social sciences and business as in science, technology, engineering, and mathematics. We estimate that the country may face a shortfall of almost two million technical and analytical workers. Europe has too few engineers, as well. Even Germany’s machinery industry has a shortage of more than 8,000 engineers, a figure that is likely to rise.

But it’s not just the young who can help fill the skills gap; older, experienced workers can play a part, too. In the US aerospace sector, 60 percent of the workforce is over 45. A practical response would be for governments to remove barriers—particularly those related to the provision of health care and to benefits rules—that prevent older workers from staying in the workforce longer. Germany and the Netherlands raised the participation rate of the 55-to-64 age group by 21 and 24 percentage points, respectively, between 1990 and 2009. In the Netherlands, there were significant changes to pensions and welfare benefits to improve incentives to work longer, coupled with initiatives to change public perceptions, improve employability, and reduce discrimination against older workers.

To commercialize research more rapidly, companies should make a public case for skilled immigration and step up their collaboration with universities, many of which face severe budget constraints. They can also do more to get their engineering staffs involved in teaching science and in mentorship programs in schools. Ultimately, the only reliable way to encourage students to develop skills in these growth areas is for companies to make these careers more attractive (by raising starting salaries, for example) and market them better in schools and university campuses.

5. Build public–private partnerships.

Governments need their own productivity revolution—and they know it. To take just one example, McKinsey’s research shows that the public sector has substantial opportunities to increase its efficiency and effectiveness by leveraging data more effectively. To reap these and other rewards, however, cash-strapped governments—and their citizens—will need to be more open minded about private involvement in the delivery of public services. The potential economic gains are compelling. If the G8 nations could increase the public sector’s productivity by 1.5 percent annually (in line with what private industry has achieved over the past three decades), they could generate benefits worth $1 trillion a year—equivalent to 1.5 to 2.5 percent of these nations’ combined GDP.

While the need for increased public-sector productivity is urgent at all levels of government, the case for public–private cooperation may be easiest to make at the city level, where most future global growth will occur. A majority of successful cities are already notable for a high degree of collaboration between the private and public sectors. But more must be done, especially to tackle the economic problems that blight many large cities in Europe and the United States. MGI estimates that public–private partnerships could account for as much as 40 percent of operations and maintenance budgets in large cities across the world.

* * *

With a few notable exceptions, business leaders have been slow to raise these issues. When executives make their voices heard, they too often issue narrow calls for lower taxes rather than advance broader ideas for creating a dynamic progrowth agenda. It is time for the private sector to take the lead in making the case for driving growth though innovation and investment. That’s not just the social responsibility but also the self-interest of business.

Richard Dobbs, James Manyika, and Charles Roxburgh are directors of the McKinsey Global Institute and directors of McKinsey & Company. They are based out of the Seoul, San Francisco, and London offices, respectively.

1 See the full McKinsey Global Institute report Internet matters: The net’s sweeping impact on growth, jobs, and prosperity (May 2011).

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