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Globalization patterns are changing, with rapid growth in data flows and a larger role for highgrowth emerging economies

Much of the recent focus on globalization has been on trade pullbacks, rising protectionist measures, and public hostility. As a phenomenon, however, globalization has not gone into reverse; rather, it has shifted gears to become more data-driven and more focused on South- South flows. The seeming flattening of globalization that followed the 2008 financial crisis disguises new patterns of connectedness. While cross-border flows of goods and finance have lost momentum, data flows are helping drive global GDP. Cross-border data bandwidth grew by 148 times between 2005 and 2017, to more than 700 terabytes per second—a larger quantity per second than the entire US Library of Congress—and is projected to grow by another nine times in the next five years as digital flows of commerce, information, searches, video, communication, and intracompany traffic continue to surge. In line with its rising economic role, the developing world is now driving global connectedness. For the first time in history, emerging economies are counterparts on more than half of global trade flows, and South-South trade is the fastest-growing type of connection. In the MGI Connectedness Index, Singapore tops the latest rankings, followed by the Netherlands, the United States, and Germany. China has surged from number 25 to number seven. South-South and China-South trade jumped from 8 percent of the global total in 1995 to 20 percent in 2016. The shifting nature of the Chinese economy, toward a more R&D-intensive focus and away from low-cost manufacturing, plus China’s push through the Belt and Road initiative, may begin to create a new trade ecosystem with China at the core. By comparison, North-North trade and North-South trade have declined as a share of total trade, especially since the 2008 financial crisis. North-North trade is now 33 percent of the total, versus 43 percent in 2005 and 55 percent in 1995. Amid these shifts, our latest research suggests that China’s relationship with the world may be at a turning point. By 2017, China accounted for 15 percent of world GDP. It overtook the United States to become the world’s largest economy in purchasing power parity terms in 2014, according to International Monetary Fund data—for the first time since 1870. (In nominal terms, China’s GDP was 64 percent of US GDP in 2017, making it the secondlargest economy in the world). Behind these headline numbers lies a less-noticed shift: over the past decade, even as its economy has grown, China’s exposure to the world, as measured by the magnitude of flows of trade, technology, and capital with the rest of the world relative to its economy, has declined. At the same time, the world’s exposure to China (the magnitude of flows with China relative to the global economy) has increased since 2000. Metrics used to measure exposure include China’s importance as a market and supplier of goods and services; the importance of Chinese technology exports for global R&D spending; and China’s importance as a supplier of financing (Exhibit 2). Global value chains are also evolving. They are being reshaped in part by technology including automation, which could amplify the shift toward more localized production of goods near consumer markets. And they are changing along with global demand, as China and other developing countries consume more of what they produce and export a smaller share. As emerging economies build more comprehensive domestic supply chains, they are reducing their reliance on imported intermediate inputs. The result is that goods-producing value chains have become less trade-intensive, even as cross-border services are growing briskly—and generating more economic value than trade statistics capture, according to our analysis. Trade based on labor-cost arbitrage has been declining and now makes up only 20 percent of goods trade. Global value chains are becoming more knowledge-intensive and reliant on high-skill labor. Finally, goods-producing value chains (particularly automotive as well as computers and electronics) are becoming more regionally concentrated as companies increasingly establish production in proximity to demand.

2019

Navigating a world of disruption

McKinsey

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The pace of technological progress is accelerating, bringing significant opportunities to create value even as it redefines the future of work

Digital technologies have been reinventing the way we live, work, and organize. Smartphones, the mobile internet, e-commerce, and cloud-based services have opened the door to more mobility and convenience as well as to greater competition. Businesses have been harnessing advanced analytics and the Internet of Things to transform their operations, and those in the forefront reap the benefits: companies that are digital leaders in their sectors have faster revenue growth and higher productivity than their less-digitized peers. They improve profit margins three times more rapidly than average and are often the fastest innovators and the disruptors of their sectors. The forces of digital have yet to become fully mainstream, however. On average, industries are less than 40 percent digitized, despite the relatively deep penetration of these technologies in media, retail, and high tech. Now comes the next wave of innovation, in the form of advanced automation and artificial intelligence (AI). An explosion in algorithmic capabilities, computing capacity, and data is enabling beyond-human machine competencies and a new generation of systemlevel innovation. Machines already surpass human performance in areas like image recognition and object detection, and these capabilities can be used to diagnose skin cancer or lip-read more accurately than human experts. Combining these capabilities is leading to system-level innovation, for example the driverless car, which takes advantage of innovations in sensors, LIDAR, machine vision, mapping, satellites, navigation algorithms, and robotics. Our research finds that companies in the forefront of adopting AI are likely to increase employment rather than reduce it, as innovationfocused adopters position themselves for growth, which tends to stimulate employment. These technologies still have limitations, and deployment can be complex. Nonetheless, productivity gains across sectors are already visible, with AI use cases in functions such as sales and marketing (e.g., “next product to buy” personalization), supply chain and logistics, and preventive maintenance. Our analysis of more than 400 use cases across 19 industries and nine business functions found that AI could improve on traditional analytics techniques in 69 percent of potential use cases. Deep learning could account for as much as $3.5 trillion to $5.8 trillion in annual value, or 40 percent of the value created by all analytics techniques (Exhibit 3). For the global economy, too, AI adoption could be a boon. A simulation we conducted showed that AI adoption could raise global GDP by as much as $13 trillion by 2030, or about 1.2 percent additional GDP growth per year. AI could also contribute to tackling pressing societal challenges, from healthcare to climate change to humanitarian crises; a library of social good use cases we collected maps to all 17 of the UN’s Sustainable Development Goals. Yet AI is not a silver bullet. Significant bottlenecks, especially relating to data accessibility and talent, will need to be overcome, and AI presents risks that will need to be mitigated. It could introduce or exacerbate social challenges, for example through malicious use or abuse, bias, privacy invasion, or lack of transparency.

2019

Navigating a world of disruption

McKinsey

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Aging populations are forcing developed regions worldwide to rely more on waning productivity and greater migration to propel growth

Labor productivity growth has waned and is near historic lows in the United States and much of Western Europe, despite a job-rich recovery after the global financial crisis. Productivity growth averaged just 0.5 percent in 2010–14, down from 2.4 percent a decade earlier. This productivity growth weakness comes as birth rates in countries from Germany, Japan, and South Korea to China and Russia are far below replacement rates and working-age population growth has either slowed or gone into reverse. In some countries with declining populations, such as Japan and Germany, some cities are shrinking. Among their other effects, these demographic trends put a greater onus on productivity growth to propel GDP growth; over the past 50 years, just under half of GDP growth in G-20 countries came from labor force growth, while productivity growth accounted for the remainder. Digitization, often involving a transformation of operating and business models, promises significant productivityboosting opportunities in the future, but the benefits have not yet materialized at scale in productivity data because of adoption barriers and lag effects as well as transition costs. Our research suggests that productivity could grow by at least 2 percent annually over the next 10 years, with 60 percent coming from digital opportunities. However, while crisis-related aftereffects are diminishing, long-term drags on demand for goods and services may persist and hold back productivity, a result of changing demographics, declining labor share of income, rising income inequality, polarization of labor markets, and falling investment rates. In terms of consumption, the aging population in many developed countries (that is, the retired and elderly over 60) are increasingly important drivers of global consumption. The number of people in this age group will grow by more than one-third, from 164 million today to 222 million in 2030. We estimate that they will generate 51 percent of urban consumption growth in developed countries, or $4.4 trillion, in the period to 2030. That is 19 percent of global consumption growth. The 75-plus age group’s urban consumption is projected to grow at a compound annual rate of 4.5 percent between 2015 and 2030. In addition to increasing in number, individuals in this group are consuming more, on average, than younger consumers, mostly because of rising public and private healthcare expenditure. Retirees and the elderly in developed economies today have per capita consumption of around $39,000 per year. In comparison, the 30-to-44 age group consumes on average $29,500 per year. Healthcare spending by those aged 60 and older is projected to grow by $1.4 trillion in the period to 2030. With low fertility in the developed world, migration has become the primary driver of population and labor force growth in key developed regions worldwide. Since 2000, growth in the total number of migrants in developed countries has averaged 3.0 percent annually, far outstripping the 0.6 percent annual population growth in these nations. First-generation immigrants constitute 13 percent of the population in Western Europe, 15 percent of the population in North America, and 48 percent in the Gulf Cooperation Council countries. Besides contributing to output today, immigrants provide a needed demographic boost to the current and future labor force in destination countries. Improving the old-age dependency ratio is of critical importance to countries like Germany, Spain, Canada, and the United Kingdom, where most public pensions have a pay-as-you-go structure and worsening dependency ratios threaten to make many plans unsustainable.

2019

Navigating a world of disruption

McKinsey

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Talent shortages/talent management challenges

54% of the respondents view this as a negative trend. Ensuring access to a skilled talent base is a perennial challenge for most organizations. Talent shortages and talent management challenges are the most often cited trends with a negative impact on business operations. Some of these talent challenges may be due to tight labor markets, particularly in the United States, which may improve with changing economic conditions. A more lasting driver of these talent challenges, however, is undoubtedly the advent of IA and digital labor, which have profoundly changed the profile of skills demanded by many organizations.

2019