Driving sustainable and inclusive growth in G20 economies

| Report

The desire for human progress fueled by sustainable and inclusive growth represents a widely shared aim, one that increasingly informs the agendas of G20 economies. Tremendous advances over the past half century have succeeded in raising living standards worldwide. More recently, global efforts are increasingly focused on the urgent need to combat climate change.

However, several trends across G20 economies underscore the need for greater action on both fronts. These include slower global growth, technologies like artificial intelligence (AI), whose promised productivity gains may be offset by significant labor displacement, and net-zero goals that remain elusive despite global commitments made under the 2015 Paris Agreement.

This research examines what it would take for G20 economies to deliver on two bold aspirations by 2030: making progress toward raising minimum living standards even further across the globe and accelerating low-emissions investments to get on track to meet 2050 net-zero commitments. This report is a companion piece that draws on the concepts and analysis developed in a McKinsey Global Institute report, From poverty to empowerment: Raising the bar for sustainable and inclusive growth, which offers a more comprehensive perspective on these challenges for the entire global economy.

What it would take to close economic empowerment gaps in the G20

While considerable progress has been made toward eliminating extreme poverty, development literature has argued for a higher bar that addresses the challenge of sufficiency more holistically, enabling billions of people to realize more of their potential. Based on this concept, we define "economic empowerment" in our research as people having the means to meet the full range of essential needs and begin attaining economic security. Based on our analysis, more than half the population of G20 countries—about 2.6 billion people—live below this economic empowerment line.

The greatest proportion of people living below the economic empowerment line, measured as a share of total national population, live in India and South Africa (more than 75 percent), followed by Indonesia, Mexico, Brazil, and China (more than 50 percent). Even in the more advanced economies of Europe and North America, 20 to 30 percent of the population lives below the empowerment line (Exhibit 1). (Empowerment is a per-person measure. Families that combine their resources have better prospects for meeting their basic needs than individuals living alone.)

In the G20, 2.6 billion people live below the empowerment line, with poverty levels that vary across regions.

Establishing the empowerment line makes it possible to determine each country’s empowerment gap—the percentage of the population in each country whose consumption falls short of self-sufficiency—and the dollar amount needed to bridge that gap.

Our analysis suggests that closing the empowerment gap in G20 economies would require a cumulative increase in spending on essentials of $21 trillion by 2030. Our model assumes a gradual ramp-up each year, but if the increase were spread evenly, it would total approximately $2 trillion per year. This average increase represents approximately 30 percent of 2020 levels of spending after current government transfers.

Low-emissions investment will need to ramp up swiftly by 2030 to put the G20 on the path to net zero

To achieve the second aspiration, getting on track to reach net-zero greenhouse gas emissions by 2050, our analysis suggests G20 economies would need to invest upwards of an additional $35 trillion this decade.

A broad range of global decarbonization efforts are currently underway and yielding tangible results. By 2019, the global average of CO2 emissions per capita had fallen to 2010 levels of 4.8 metric tons. However, the current decade is a critical one since CO2 emissions will need to plunge by roughly 50 percent by 2030 to reach net zero by 2050. To achieve that goal, much of the investment needed to transition to a low-emissions economy must be made upfront to successfully transform the world’s energy and land-use systems.

The reductions in CO2 emissions needed to reach net zero varies by country and region, with the greatest cuts needed among high-income economies, followed by upper-middle-income and lower-middle-income countries. Within the G20, Argentina, China, and Mexico need to make the largest cuts in emissions among upper-middle-income countries, while Germany, Canada, Japan, Australia, and the United States lead the pack among high-income countries (Exhibit 2).

Our analysis indicates G20 economies currently emit approximately 31 Gigatons of CO2 annually and need to be halfway to net zero by the end of this decade.

G20 economies need to reduce CO2 emissions substantially to meet 2030 goals.

Economic growth and business-led innovation can close about half of the G20’s empowerment and net-zero gaps

In our analysis, economic growth and increased business innovation will be critical factors for all G20 economies, regardless of income level. These two levers could account for approximately 80 percent of the efforts to close the empowerment gap, as well as 35 percent of the increased net-zero investment (Exhibit 3).

The portion of the economic gaps that can be filled by growth and business-led innovation varies by region.

Growth represents the single most important driver for boosting inclusion and accounts for half of the total needed to achieve spending goals by 2030. Baseline growth accelerated by additional business-led innovation can provide 80 percent of the resources needed to meet empowerment goals. (Our growth-impact calculations are based on estimates of how current empowerment and net-zero spending would increase proportionately.)

Besides boosting baseline growth, additional productivity can help address empowerment gaps by lifting incomes, training workers for more productive and better-paying jobs and supporting higher transfers. Growth can also help address the net-zero gap by creating additional financing capacity, spurring reductions in technological costs, making low-emissions alternatives more cost-competitive, and enabling incremental public support in areas too challenging for markets to finance on their own.

Even after accounting for economic growth and greater business innovation, residual economic gaps remain. Each country faces unique disparities, depending on its current development challenges, prospects for economic growth, and the carbon-intensity levels of its economies.

A range of levers beyond market forces and government policies could help close these gaps. Societies need to consider significantly greater public-private commitment and collaboration, new incentives, and even bolder innovation possibilities.

G20 countries finding ways to bridge inclusion and sustainability gaps can learn from one another

Successful efforts by G20 countries to close the empowerment and net-zero investment gaps are gaining momentum, and the full version of the report describes some of them. In terms of empowerment, these efforts include training workers to improve productivity and income growth, as well as increasing the availability of affordable housing. Other promising initiatives focus on improving nutrition, access to quality healthcare, and the availability of good schools.

Promising examples exist at all levels, including national, regional, and local initiatives. These include a job-matching program in Ohio that helped attract more than 500 new companies to the state and created more than 210,000 new jobs between 2011 and 2020. More broadly, India's national digital ID program helped improve financial inclusion and increased transparency in the delivery of government subsidies. As a result, more than 94 percent of India’s population is now documented, granting more than 460 million people access to the banking system for the first time--including more than 260 million women.

In terms of affordable housing, Vienna’s historic social housing program and Hong Kong’s Mass Transit Railway both adopted a long-term, land value capture model that significantly increased mobility and improved access to affordable housing. Meanwhile, both China and Brazil have implemented successful programs. China’s “Grain for Green” afforestation program provides grains, cash, and other incentives to farmers who convert their land back to forest, alleviating poverty and helping the environment by improving soil quality and reducing erosion. In Brazil, the “Bolsa Familia” anti-poverty program uses conditional cash transfers to reduce poverty and provide free education to some 13 million families.

To accomplish these ambitious net-zero goals, economies and companies must rapidly scale burgeoning technologies to move away from fossil fuels, retire carbon-heavy assets such as coal-burning plants, and adopt lower-emissions technologies in challenging sectors such as cement and steel. Our analysis finds that in China, Europe, and the United States, between 20 and 30 percent of the net-zero investment needed in the power sector and 40 percent in mobility is already viable, or will be soon given rates of technological advancement.

Progress in some areas is already quantifiable, as in electrical vehicle (EV) sales, which have been increasing rapidly in recent years. With new supply chains producing batteries and a wider array of models hitting the market, EVs are beginning to compete with internal combustion vehicles on price. In the power generation sector, hydropower has been an established technology for decades (already providing more than 40 percent of electricity in Latin America, for instance), and it will remain an important investment lever going forward.

Growth, technology, and finance will play a central role in eliminating empowerment and net zero gaps in G20 countries

Learnings from G20 economies underscore the central role for growth, technology, and finance in closing the empowerment gap and boosting net-zero investment.

New high-growth opportunities across sectors, from healthcare to renewables, can fuel long-term economic growth to drive progress toward empowerment and net-zero goals. These opportunities range from clean technologies and manufacturing (including EVs and batteries) to next-generation healthcare services that focus on preventive care, synthetic biology, and gene therapy. Cities offer opportunities as well, as modern construction methods make housing and mass transit greener and more resilient.

Technologies such as artificial intelligence (AI) and robust broadband access offer positive, cross-cutting impacts on the productivity of large, small, and micro enterprises, and make public services more efficient. For businesses, broadband opens the door to new and innovative technologies that can improve operational efficiency and scale up new offerings. For governments, broadband increases the efficiency of administrative interactions with citizens, facilitates the digitization of healthcare systems, and enhances distance learning opportunities, among other benefits.

Thoughtful efforts will be needed to ensure a sufficient supply of capital across economies and sectors to scale initiatives and drive innovation. This need for capital is greatest in poorer countries, where levels of investment needed to close empowerment and net-zero gaps remain substantial. Despite some commitments by advanced economies to help accelerate decarbonization in developing countries, the methods and mechanisms of this financing are evolving and will be pivotal in scaling up priority projects. Private capital can help support viable projects, while less bankable ones could potentially be supported by blended finance to catalyze additional private funding.

Several key questions remain unanswered by G20 members. Among them:

  • What efforts could be made to bring down capital costs of net-zero technologies and increase cost competitiveness relative to fossil fuel alternatives?
  • What more can be done to boost the flow of capital from advanced to emerging economies to close empowerment and net-zero investment gaps?
  • Is there an appetite for new types of financial instruments linked to sustainability and inclusion goals?
  • Given the essential role of economic growth, could greater incentives help boost productivity and raise workforce skills in G20 countries?
  • Could more be done to foster global carbon markets to help meet net-zero goals?

We hope this research helps spur greater collaboration and innovation among G20 business leaders and policymakers as they strive to scale promising opportunities and push new frontiers of innovation. We plan on returning to many of these topics in the future.

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