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21 Feb 2023

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GHG Efficiency is the Key to Improved Economic Productivity

A return to consistent productivity in the US will add $10 trillion to the world’s largest economy, according to a new McKinsey report.This would add almost 50% to the current level. The report emphasizes the role of technology, finding a 70% correlation between productivity growth and digital adoption in the US between 1989 and 2019.

The report adds that most future productivity growth will come in US cities, particularly the nation’s top eight tech-focused cities: San Jose and San Francisco, Seattle, Houston, San Diego, Los Angeles, New York, and Boston.

Productivity in the US economy averaged 2.1% per year between 1947 and 2018, according to US Bureau of Labor statistics. More recently, it took off in the 1990s, sailing along at levels of 3 to 4.5% per year until 2004. The twin dot-com and housing busts in the first decade of the 21st century slowed things down; a couple years of strong recovery ensued, but the last strong year for productivity growth in the US was 2010.

Rewind the Tape, Please
Those who remember the early days of PCs will remember that US companies spent $1 trillion during the 1980s on computers, modems (giggle), networks, and upgrading their enterprise systems to accommodate the new “microcomputer” wave, but found they could not measure any productivity gains correlated with this expense.

Then the 1990s happened. The advent of the Worldwide Web, better connectivity, and strong deficit reduction during the Clinton Administration conspired to kick the overall economy in high gear. The consensus was that the 80s were spent building a modern computing ecosystem, and the 90s benefited from it.

Now it’s time to get that mojo back, according to this new McKinsey report in more formal language. The report focuses on economic productivity in a general way across traditional sectors that hearkens back to industrial productivity gains.

Relative to modern times, it covers the ongoing debate about online collaboration and WFH; it also focuses exclusively on the United States, with asides about how a migration to renewable energy can impede things, how productivity will be the exclusive province of cities, and how to create a “reimagined globalization.”

Focus on Emissions Efficiency
IDCA Research focuses on productivity, too, but on a worldwide scale in a world that embraces renewable energy and delivers benefits throughout countries. The IDCA EESG Digital Readiness Index of Nations Report provides an overview of 147 nations and their Digital Infrastructure, viewed through the lens of EESG – Economy, Environment, Social, and Governance.

The report integrates hundreds of parameters into overall scores and separate EESG category scores to paint a picture of where nations stand and a path forward for each of them.

In particular, developing nations have a need to upgrade their economies by building out substantial new Digital Infrastructure and creating the sustainable energy and vibrant social fabric needed to make good use of the technology. A key measure of productivity within the data is economic efficiency relative to GHG emissions. The measurement addresses the question, “what is a nation’s level of GHG emissions per $1 billion of economic output (GDP nominal)?”

This is a complementary measure to the traditional view of emissions per-person, or per capita. It can be a more effective way of looking at things. Most nations in the lowest economic tier – known as Least-Developed Countries (LDCs) have very low emissions per capita.

This may seem like good news, but in these nations it’s a reflection of how undeveloped its economy and infrastructure are. Measuring economic output per levels of emissions provides a measure of efficiency, or perhaps better stated, productivity.

Follow the Leaders
Switzerland, Scandinavian nations, and other EU nations, particularly France (due to its high use of nuclear energy) finish in the top tier of this category. The United States has an efficiency 30% to 50% lower than these nations. But China produces three times the emissions per GDP output than the US, India four times the US, and Russia five times the US. The bottom 40 nations are almost exclusively developing nations, with the exception of a few oil kingdoms in the Middle East.

This leads to the thought that sustainable grids must be a priority for developing nations if they are to improve their industrial output, then leverage wealth gained from this sector to start migrating toward a more service-oriented economy.

The costs to do this – to build out sustainable electricity in developing nations – seems modest compared to the size of a global economy that now stretches across $100 trillion annually. The foundation of building a Digital Economy is sustainable electricity.

This is an area where the underdeveloped electricity grids of developing nations may be a feature, not a bug. The cost to bring the developing world (outside of China and India) in sustainable fashion from to 25% of the per-person electricity consumption of the EU runs to about $1.2 trillion; to bring it to 40% runs less than $2 trillion.

Achieving either goal over the next 17 years – from now to 2040 – would consume a tiny fraction of the global economy of less than 0.1% per year.

The American Challenge
In comparison, the United States will need to replace 85% of its current, massive fossil-dominated electricity grids – more than 450GW in capacity – while adding another 200GW by 2040 even if demand rises only 2% per year. This amounts to $1.3 trillion in power-plant construction costs in today’s dollars, in the same general neighborhood as developing the entire developing world’s grids.

Layering up through the Digital Infrastructure accompanying the power would add several times that amount, as would the physical infrastructure maintenance and development associated with it. The McKinsey report says $1.7 per year will be needed to get the US to Net Zero by 2050 - a total of $47.6 trillion in today’s dollars, or twice the size of the entire annual US economy. This is a colossal sum that bears examination.

There will be large investments required in developing nations, too, to build out the digital and physical infrastructure, housing, and economy associated with all this new power. No projection would reach the level of McKinsey’s US projection, however.

Just One Example
Personal note: I was looking out over the skyline and cityscape of a large Latin American city on a YouTube video the other day, a city I first visited decades ago. Things have changed since then. The country has progressed steadily, has almost reached developed-nation status, and sits just outside the world’s Top 25 in the IDCA EESG Index.

Yet achieving further progress is a daunting task. The country must improve its economic efficiency relative to its emissions significantly. A lack of Internet bandwidth is a problem, income disparity needs to be improved, the country’s server fabric is thin, and its society is occasionally riven by sudden bursts of violence.

Gazing across the sea of buildings reminds one of the scale of work involved in achieving real-world change rather than envisioning it abstractly. This country has a fraction of 1% of the world’s people yet requires plenty of investments, project initiatives, and love from a large number of people and organizations to continue to progress.

The McKinsey report cited here says more productivity is needed. I agree. Looking at the efficiency of GHG production, with a goal of driving the emissions number to zero, is a way to achieve this.

Photograph of Santiago, Chile.

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