Economic growth allows people to enjoy a higher material standard of living without working longer hours or having to sacrifice more leisure time. It also helps them fulfill basic needs by increasing the availability of nutrition, housing, and medical care. As a result, economic growth has lifted billions of people out of poverty and improved many more lives than ever before.
But the benefits of growth are unevenly distributed, and increasing inequality is a concern for governments and businesses alike. McKinsey research shows that economic inclusion, or giving everyone a chance to participate and benefit from economic growth, is key to sustaining its positive effects.
There are three main sources of economic growth: growing the supply of capital or labor, improving the use of existing resources (increasing productivity), and changing the incentives that drive behavior. Each of these has its limitations. For example, while more capital is helpful, it doesn’t necessarily translate into greater per-capita GDP and income; adding another chicken to a coop increases the number of eggs but does not double them.
Sustainable long-term economic growth requires a combination of these factors. For instance, new ideas that lead to better uses of existing resources (e.g., a computer that enables faster tax filings than older models) are a critical source of continued economic growth. However, it takes a combination of savings and investments to create the knowledge that leads to such innovations. The same is true for increasing labor productivity; it takes a combination of hiring and productivity improvements to increase the overall size of the economy, but only strong productivity growth can raise per-capita GDP and income.
