Academic journal article The McKinsey Quarterly

Still Productive after All These Years. (This Quarter)

Academic journal article The McKinsey Quarterly

Still Productive after All These Years. (This Quarter)

Article excerpt

The longest economic expansion in US history is over. Personal and corporate bankruptcies are rising, as is unemployment, while the Nasdaq has tumbled. Making matters worse, terrorist attacks have introduced an extra degree of uncertainty. Instead of offsetting these developments, European and Asian markets, for the first time, are moving in lockstep with those in the United States.

Many observers see the collapse of the Japanese stock market at the end of the 1980s, following a decade of economic exuberance, as a forerunner of March 2000 in the United States. Japan is still suffering from the deflation of its stock market bubble. Is the United States too facing more than a decade of economic stagnation?

We at the McKinsey Global Institute (MGI) believe that such worries are unfounded. Certainly, some of the stock market euphoria of recent years wasn't justified. Still, the underpinnings of the US economy--unlike Japan's--are fundamentally sound. Twenty-five years of deregulation, healthy competition in most sectors, and a renewed tradition of entrepreneurship have made the US economy stronger than ever.

A new MGI study of US labor productivity confirms this belief. Between 1995 and 1999, labor productivity, the basis of the US standard of living, grew by 2.5 percent annually, far better than the 1.4 percent yearly rate from 1972 to 1995. Contrary to popular belief, neither the Internet nor another new-economy technology was chiefly responsible for these gains. Instead, credit is due to product, service, and process innovations--sometimes aided by technology, sometimes not.

What role did information and communications technology play? Apart from on-line securities trading, the Internet didn't figure in this story at all. Many industries invested heavily in IT, without any change in productivity growth. IT, the study found, boosts productivity only when deployed as part of a broader reorganization of core business processes or a plan to create new products.

Competition--essential for diffusing the innovations of Charles Schwab, Intel, Wal-Mart, and a few other companies, thus spurring the nationwide acceleration in productivity--intensified during the period studied, thanks in part to regulatory changes. …

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