How do
you govern a disrupted world?
Seismic economic shifts are placing new demands on
governments globally. In this excerpt from the new book No Ordinary
Disruption: The Four Global Forces Breaking All the Trends, its authors
explain how policy makers can respond.
The collision of four
fundamental economic
forces—urbanization, technology, demographics, and globalization—is producing
monumental change. Global competition and technological change have sped up
creative destruction and outpaced the ability of labor markets to adapt. Job
creation is a critical challenge for most policy makers even as businesses
complain about critical skill gaps. Graying populations are starting to fray
social safety nets, and for debt-ridden societies in advanced economies, the
challenge can only get more pressing as the cost of capital starts to rise.
Much-needed productivity growth continues to elude the public sector. Income
inequality is rising and causing a backlash, in some cases targeted at the very
interconnections of trade, finance, and people that have fueled the growth of
the past three decades.
Just as many businesses are being forced to
reassess their strategy and reimagine their assumptions, government must do the
same. The political-leadership challenge triggered by these trend breaks is
made even more urgent by the growing number of outlets for public expression
and participation. Citizens around the world demand that governments deliver
public services in shorter time frames, of consistent quality, and often at
lower cost. In times of tightening budgets, short election cycles, and instant
feedback loops, the room for error by public-sector leaders is small. From
Brazil to Egypt to Hong Kong to Ukraine, it is common to see large groups of
citizens taking to the streets, impatient for change.
For public-sector
officials, often the challenge isn’t lack of vision but short time frames,
competing priorities, and flawed delivery. Many governments have risen to the
occasion. An Asian country reduced street crime by 35 percent in the first year
of a transformation program. A South American government reduced hospital
waiting lists by 80 percent and increased by more than 50 percent the number of
top graduates choosing to become teachers. An emerging-market government
introduced a social-security scheme to hundreds of thousands of workers in two
months. In each of these cases, policy makers used what McKinsey calls a
Delivery 2.0 approach—a well-designed program with appropriate metrics,
experimental “delivery labs,” small and high-powered execution teams, visible
support from leaders, and a culture of performance accountability.
Implications for future
governance
So what makes these
efforts different? Can a government prepare its society for difficult decisions
and remain accountable while making the long-term changes needed to sustain
national prosperity and living standards? We believe it can. And while much
attention is given to the money governments have at their disposal—and how they
raise it—funding is only one way to measure what a government actually does.
Broadly, policy actions geared at achieving desired outcomes tend to fall into
one of three categories: incentives,regulation, and information.
Around the world, governments are employing all three approaches to navigate
the changing landscape with agility, innovation, and best-in-class
implementation.
Using incentives to
accelerate change
Typically, we think
about incentives as carrots and sticks that the government provides to the
private sector. But government can often craft incentives that induce
government itself to work more intelligently. Germany’s Hartz reforms retooled
the country’s labor market using incentives such as changing performance goals
for caseworkers and more targeted placement and training programs. Along with
incentives for companies to hire the long-term unemployed and retain workers in
periods of weak demand, these efforts played a crucial role in changing the
country’s labor-market condition. Other job-creation initiatives under way that utilize
incentives in both advanced and emerging economies involve export promotion,
infrastructure, social services, and fostering entrepreneurship. The US
government’s National Export Initiative seeks to promote job creation in
domestic services and advanced-manufacturing industries by making it easier for
companies to access export markets.
China, which has the
world’s largest diaspora and largest overseas student population, is using
incentives to lure high-skilled professionals back home as part of its National
Medium- and Long-Term Talent Development Plan (2010–2020). Meanwhile, the
Thousand International Talents Program targets Chinese engineers and scientists
living abroad, offering inducements such as large research grants, housing
assistance, and tax-free education allowances for the children of those who
return and work full-time in China for at least three years. Such incentives,
combined with China’s formidable economic momentum, encouraged nearly 300,000
students to return in 2012 alone.
Several countries are
using incentives to cope with the demographic and economic challenges of an
aging population. One key effort toward bolstering the ranks of the employed is
to include more women. In 2012, only 51 percent of working-age women
participated in the labor force globally, compared with 77 percent of men. Denmark has instituted a host of incentives, including the
provision of a child-care facility (such as day care, kindergarten, or a
leisure-time center or school-based center) within three months of a parent’s
request. As a result, more than 80 percent of Danish infants and toddlers and
more than 90 percent of Danish children between the ages of three and five
years are in regular child care.By 2009, Danish women aged 15 to 64 had a labor-force
participation rate of 76 percent, one of the highest in the countries belonging
to the Organisation for Economic Co-operation and Development (OECD). Of those women in the labor force, more than 95 percent
are employed.
Conditional
cash-transfer incentives have proven particularly effective in
poverty-reduction efforts. In Mexico, Oportunidades has been credited with a 10
percent reduction in poverty within five years of its introduction,in part because the program is
designed to provide cash payments for families who meet certain conditions,
such as health-clinic visits and school attendance. More significantly, it has
created strong financial incentives for families to invest in efforts that
boost human capital over the long term.
Using regulation in
direct response to change
Government’s power to regulate—to set
standards and define the rules of conduct and markets—can play a vital role in
modernizing economies and preparing for the future. Regulation can prove a
particularly effective tool in places where market failures are obvious and
structural issues inhibit adoption of best practices. Shareholders of large
financial institutions can’t effectively ride herd on the risk-taking actions
of executives, so regulators must impose capital standards and undertake
careful supervision.
Making buildings more
energy efficient requires owners to make up-front investments that they may not
be able to pass along directly to renters. As a result, smartly designed
industry-wide standards can be useful. To address the problem of aging
populations, some countries have extended the legal retirement age, in some
cases by up to two years. That’s a start, but it’s not nearly sufficient to
keep pace with the demographic changes the world is seeing. A recent analysis
of 43 mostly developed countries found that between 1965 and 2005, the average
legal retirement age rose by less than six months.In the same period, male life expectancy rose by nine years. In
graying Europe, Danish legislation recognized the impending pension time bomb
early, and the country decided to index the pension age to life expectancy and
place restrictions on early retirement. As a result, Denmark’s population of
people aged 55 to 64 has a higher labor-force participation rate (58 percent)
than the average EU country (less than 50 percent) and will have the highest
retirement age (69 years) among all OECD countries by 2050. In response to the demographic tide, Japan’s government in
the early 2000s introduced compulsory long-term-care insurance contributions by
citizens over age 40.
Countries—particularly countries with
underdeveloped financial institutions or specific risk exposures to global
flows—use the regulatory approach to manage their vulnerability to global
participation. For instance, governments have crafted various regulatory
responses to rising capital inflows, ranging from short-term, high-intervention
measures to systemic longer-term changes to their financial markets. Regulation
is usually most intrusive when markets are least developed.
Chile, whose economy
is relatively modern but disproportionately reliant on copper exports,
continued its openness to foreign capital but maintained a conservative
fiscal-policy stance. In 2007, the government set up the Economic and Social
Stabilization Fund with an initial contribution of $2.6 billion. The fund was
set up specifically to reduce Chile’s dependency on global business cycles and
revenue volatility from copper-price fluctuations. It invests primarily in
government bonds, and a portion of its assets can be used to finance deficit
spending or pay down government debt. The fund’s assets have grown to about $15
billion, and Chile has become one of the most financially deepened countries in
the region. The International Monetary Fund recently nominated Chile
as a representative example of resilience to fluctuations from global flows.
Governments have used regulation to mandate
social, environmental, and other broad outcomes in response to global trends,
while letting industries sort out the technologies needed to meet the targets.
In these cases, there is a social consensus about what needs to happen but no
agreement on how to get there. And getting there is most of the battle, because
market participants may be wedded to technologies linked to whatever
environment preceded the trend break. For example, the advent of sharply higher
energy prices caused the promulgation of sharply higher automobile-mileage
requirements in the United States. This, in turn, has spurred a host of
innovations—electric vehicles, hybrid power trains, replacement of steel with
aluminum, and integration of start-stop engine technology. New regulatory
requirements on food safety and tracking in the European Union and the United
States are generating industry interest in data platforms and advanced
analytics throughout the supply chain.
Examples of regulation
abound in the policy response to resources. In the United States, Ohio,
Pennsylvania, and Texas allowed the deployment of fracking, which the state of
New York bans. In Europe, public concerns about the environmental impact
of shale gas have led to drilling bans in Bulgaria, France, and Germany. To encourage recycling, Sweden has used landfill taxes and
the inclusion of recycling costs in the price of goods. As a result, about 99
percent of household waste is either recycled or burned to create electricity
and heat. The German government is using regulation to hasten the
transition to renewables and has mandates for electricity efficiency.
Harnessing information
to improve productivity
Big data isn’t just
for apps and e-commerce. Information is a critical tool to improve
public-sector productivity, especially in an environment where there is
pressure to continually improve productivity and quality of service.
Governments are starting to prioritize information as an effective tool for
better management of the resources and tasks they steward, such as education,
health care, matching labor supply and demand, and even defense and security.
And government is supporting industry in providing information that consumers
can use to make better decisions. Central European countries—Austria, Germany,
and Switzerland in particular—have long been models of industry-based
vocational education. There, vocational programs target more than 200 different
occupations and are intended to ensure a match between labor supply and demand.
The Swiss government oversees certification, and potential employers help
define needed skills and shape curricula. Other countries have similar models,
but on a smaller scale and targeting specific sectors. Brazil’s government is
taking the lead via Prominp (National Oil and Natural Gas Industry Mobilization
Program) to convene firms, universities, and unions to improve education and
keep Brazil’s oil and gas sector competitive.
Under President
Nicolas Sarkozy, France launched the General Review of Public Policies. Dubbed
“do more with less,” it is aimed at reducing the country’s public expenditures,
providing better service quality for citizens, and promoting a “culture of
results.” Among other actions, the review promoted service improvements in
high-visibility areas associated with greater citizen satisfaction. For
example, the review recommended the introduction of 15 quality-of-service
indicators, including waiting times in the accident and emergency departments
of hospitals.
Another step is identifying and monitoring the
economy’s main productivity drivers. Even among the best-performing countries,
a wide distribution of performance exists within sectors. Within the
quasi-public sector, countries have both excellent and poorly performing
hospitals and schools. The best performers have usually understood and
implemented practices honed in the private sector—lean principles, data
analytics, smart procurement, and performance management—to great effect.
Technology and big
data provide another avenue for policy makers to unleash productivity
improvements across all public services. In Kenya, the national government
launched an open data portal to share previously difficult-to-access
information spanning realms such as education, energy, and health. This data
publication has led to the development of more than 100 mobile applications and
an estimated potential savings of $1 billion in procurement costs.Estonia’s 1.3 million residents can use electronic ID
cards to vote, pay taxes, and access more than 160 services online, from
unemployment benefits to property registration; even private-sector firms offer
services through the state portal.
The Brazilian Transparency Portal publishes a wide range
of information that includes federal-agency expenditures, elected officials’
charges on government-issued credit cards, and a list of companies banned from
contracting work with the government.
The trend-break era is imposing on governments
and policy makers uncertainties and pressures that are as significant and
meaningful as those it is placing on companies and executives. Increasingly,
public leadership will be judged by its ability to marshal resources and build
consensus to face these challenges head-on. Ultimately, it is difficult to
prescribe a specific regimen for the appropriate size and shape of government.
Each country must make these decisions for itself. But regardless of a
government’s situation—expanding or contracting, developed or developing, in
surplus or in deficit—it must strive to respond quickly and with agility. Doing
so will allow governments to insulate and protect themselves from some
potentially threatening trends. More significantly, it will allow the public
sector to take advantage of the enormous opportunities being presented. The
intelligent deployment of incentives, regulations, and data is a requirement
for success.
This article is an edited
excerpt from No Ordinary Disruption: The Four Global Forces Breaking
All the Trends,
(PublicAffairs, May 2015).
byRichard Dobbs, James Manyika, and Jonathan Woetzel
http://www.mckinsey.com/insights/strategy/how_do_you_govern_a_disrupted_world?cid=other-eml-alt-mgi-mck-oth-1505
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