Raising the Bar For Sustainable, Inclusive Growth

Growth, inclusion and sustainability are interrelated and often complement each other to raise living standards and create a greener world; however, often, these dimensions also move in different directions.

Recent research by McKinsey Global Institute (MGI) examines the economic aspects of addressing both poverty and climate change decisively, the trade-offs involved, and an estimation of achievable progress through 2030. 

The actions taken (or not) in this decade will determine what kind of world the next generation will inherit. This research therefore considers how much progress could be feasible by 2030. The time frame is intentional. At today’s level of emissions, the world’s carbon budget for holding to a 1.5°C path is expected to run out around the end of the decade. In addition, 2030 is the target for the UN’s Sustainable Development Goals (SDGs). Without faster progress on empowerment, the next generation could enter adulthood ill-equipped for the jobs of the future, putting many at risk of falling further behind.

Since these are urgent, simultaneous challenges, we bring them together to offer a more holistic view, considering the interactions between growth, economic inclusion, and the net-zero transition. Productivity-driven growth lifts incomes and raises living standards while unlocking the financing capacity needed for a low-emissions future. Meanwhile, innovation that goes hand in hand with growth can bring down the costs of low-emissions technologies. This could lower the spending needed for the transition and reduce the risk of households facing higher costs as a result.

Economic Empowerment Improves Living Standards

The extreme poverty line as defined by the World Bank was recently moved from US$1.90 to US$2.15 per person per day (in purchasing power parity, or PPP terms). When people manage income above this line, many dimensions improve as a consequence, including reduced infant mortality, increased life expectancy, increased years of education, and digital and financial inclusion.

The concept of economic empowerment outlined in this research will ensure that everyone has access to the full range of basic means. About 4.7 billion people (approximately 60% of the world's population) are still not fully economically empowered. Although a large part of this population belongs to low- and middle-income countries, more than 300 million people from high-income countries have also not been able to fully cover their basic needs despite not living in extreme poverty.

Achieving universal empowerment by 2030 would imply boosting the accumulated consumption of these 4.7 billion people around the world into a sum close to US$37 billion, which represents the economic empowerment gap. 

Empowerment and the Net-Zero Transition 

Greater economic growth increases the need for financing the transition towards carbon-neutrality, considering the historical relationship of growth with the production and consumption of energy-intensive and emissions-intensive products.

By 2030, the global empowerment gap would be equivalent to about 4% of global GDP on an annual average. In high-income regions, the requirement is equivalent to only 1%of GDP, but in developing regions such as Latin America, the starting point is more difficult as it requires an amount close to 7% of GDP.

Growth, Innovation as Main Drivers 

Innovation at scale is critical. Relentlessly focusing on developing technology is one of the keys to achieving net zero and reducing the price tag. The recent significant drops in the cost of wind and solar energy are reasons for hope. The faster it happens, the lower the risk of more households facing higher energy costs.

On the inclusion side, innovation and technology adoption generate demand for higher skills and better jobs. Companies have a critical role to play here. About half of workers' lifetime earnings come from building skills through work experience and on-the-job learning; and this dynamic is especially important for those without educational credentials who start out in low-wage jobs. Companies can become more productive by speeding up that process, but upskilling doesn't happen without intentional effort.

About 10% of low- and medium-skilled workers could see their wages rise if they were prepared to take on higher-skilled jobs by 2030 in response to technology, sector-specific growth opportunities and other trends.

Decisive Moment

For developing economies, their ability to lift more people out of poverty is tied to their ability for growth. These countries would need to redouble their efforts in terms of productivity, skills development and technological advances. They may also need institutional reforms, from clearer legal frameworks for property rights to stricter oversight to prevent public spending sprees.

The upside is compelling: greater growth and greater innovation could lift some 600 million people out of poverty, making important progress on our path toward full economic empowerment. The size of the challenge is not a reason for worry; it is but a call for everyone to get to work and to work hard on what can be done, today.

We recognize the scope of these challenges as well as the political realities and the gravitational pull of the status quo. Financing is only one aspect of what would need to be done; achieving consensus and moving toward implementation would be incredibly complex. Countries that decide to take on these generational transformations would need an entirely different magnitude of public–private cooperation. The size of the challenge is not a reason for resignation; it is a call for everyone to roll up their sleeves on what can be done today. Every incremental step forward advances the continuum of progress.