How Asia can boost productivity and economic growth

Growth in China and other parts of Asia will depend on skills training, more process mechanization, and better resource use, says McKinsey director Jonathan Woetzel.

One of the biggest challenges to sustaining growth in Asia is accelerating productivity—yet it also presents opportunities. In this interview, McKinsey director Jonathan Woetzel highlights the need to help people acquire skills and for Asia’s workforce to become more inclusive of women and older adults if the region’s economic growth is to exceed historical rates. An edited transcript of Woetzel’s remarks follows.

Changing demographics

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Age has been the world’s growth driver, the growth champion. For the past 50 years, most countries in Asia have grown faster than their North American and Western European counterparts. China is only the most noteworthy, growing more than 7 percent a year, but it’s by no means alone. Korea, Indonesia, and India are all growing more than 5 percent per year. Even Japan, at 3.3 percent over the past 50 years, has been growing faster than the US and Western Europe.

As we go forward, many of the demographics, the change that was motivating some of that growth, that’s going to slow down. We see Asia, similar to the rest of the world, as having just simply much less of that fertility-driven, longer-life-span-impacted population growth.

That means that kind of growth is going to slow. We’re just not going to see that level of demand. As a result, if it’s all up to historical productivity, growth is going to be slower. Growth is going to slow down not just in the older countries, like Japan, but also across the board, in China, India, and Indonesia.

Specifically, we would say China has, for example, been growing at 7.5 percent over the past 50 years. Going forward, that might only be 5 percent. That might not seem like much. But it’s still 25 to 30 percent slower than it’s been growing in the past.

The productivity opportunity

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There is a lot of upside for making Asia more productive and also for making Asia more inclusive. There’s still a large opportunity to increase the rate of participation in the workforce from women, and increasingly from those aged over 65. In a silvering society, retirement at the age of 60 or 65 is going to be a thing of the past.

Rethinking what that means for work—the nature of work and the kind of support that is needed for the employee in the workplace—these are new topics. They’ll have to be explored, and there’s a great deal of opportunity to do so.

As we look at what kind of work people are doing, and the productivity opportunity there, there’s still a transition going on from agriculture to industry, to cities and services. That means tremendous upsides in agriculture, through mechanization. In China we’re still at the stage where we’re replacing one family with one tractor. That’s where we are.

We’re still nowhere near the large mechanized farming that we see as being most productive in the rest of the world. There is a big transition going on as Asia becomes urban. But beyond that, in many sectors, there’s simply an opportunity to do more with more—that there will be more people in the city.

Helping people become more professional and more skilled, whether we’re talking about manufacturing industries and food processing, which can in turn lead to better quality for urban citizens through food safety, or we’re talking about services, and simply delivering professional services on time at a quality that people expect—these are all great opportunities to increase the productivity of Asian society and its economy. That’s where the real challenge and opportunity lies for Asia.

Driving growth

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Businesses first of all need to be businesses. They need to take advantage of the opportunities that are in front of them, increase their productivity, be attackers, disrupt existing industry structures, challenge the status quo, and deliver a better product or service.

In some cases, we’ve seen industry structures in Asia that are holdovers literally from the colonial era. We have the same companies doing the same things in much the same way as they have for hundreds of years. This is no longer going to be sufficient to deliver the same rate of economic growth that Asia has had. So there’s a real opportunity for business to question itself.

On the same token, government and the public sector has equally an opportunity and a requirement to increase its own productivity, to deliver again public services, and to do more with less for its newly empowered urban citizens. This is true in everything from education to healthcare to the basics of providing business licenses to helping people resolve their disputes. Across the board, we see 40, 50, 60 percent in opportunities for government to do better with what its existing resources allow.

China’s future

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China already has one of the world’s all-time lowest consumption as a share of GDP ratios; it’s somewhere in the 30s. By comparison, the US is about 70. You can argue the US is maybe a little high. But still, there’s a long way to go.

So getting China’s consumers to start consuming is one of those big opportunities. The good news is the kids want to buy stuff—the so-called Generation-2 [G2] consumers, people who are under the age of 25 today. That segment of society is, first of all, rich relative to their parents; these are the ones who have the money. Second, they are increasingly inclined to spend it.

We think that those G2 consumers, by the mid-2020s, will account for 30 to 40 percent of consumption spending. Where does China go from here? Well, the first thing is, of course, China’s still growing. There’s still a long way to go before China becomes world class in regard to infrastructure productivity.

Logistics costs, as a share of GDP—the amount of cost that it takes you to ship something from A to B, including cargo, financing, and administration—in China that’s about 12 or 13 percent today. It’s down from 14 or 15 percent.

But by comparison, the United States is about 5 percent. So there’s a long way to go before China reduces its logistics costs to the level of the Continental United States. How does it do that? It does so through investment—whether it’s in high-speed rail, which is perhaps the single biggest investment and the most visible one, or through metros; China is going to be building more than 40 city metros in the next ten years.

It’s an incredible investment that will only pay off in 30, 40, or 50 years through greater productivity of the city. These kinds of things are great upsides. They’re great upsides for the medium term. In the short term, they represent a large allocation of capital, which, in turn, needs to be done as productively as possible.

Government is going to have to also rethink its role in society. That’s partly because government per se has been very good at getting things done. But nobody really asked the question, How well are they doing it? Now there’s this challenge to government to do more with less. There is going to be a slower growth in tax revenues. There’s going to be a greater cost to the services it provides. It needs to rethink its own processes.

Second, government needs to think about how it is going to work together with the private sector, and more broadly civil society, to deliver the next wave of productivity—productivity that can only come through greater innovation—by providing the sources of that innovation to the private sector and by working together to build the long-terms assets, both physical and virtual, that are needed for knowledge to disseminate throughout the economy. The government is going to have to rethink the playing field with the private sector.

About the author(s)

Jonathan Woetzel is a director in McKinsey’s Shanghai office.

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