Driving Economic Empowerment for Millions According to McKinsey & Company

Driving Economic Empowerment for Millions According to McKinsey & Company

Reducing the cost of basic goods and services is crucial for improving people's quality of life. Post-pandemic inflation has highlighted a persistent structural problem: the high cost of essential goods, which remains out of reach for many households, both in Guatemala and worldwide. According to a report by the McKinsey Global Institute (MGI) titled “A Better Life Everyone Can Afford: Lifting a Quarter Billion People to Economic Empowerment,” reducing these costs is essential for achieving global economic empowerment.

Importance of Economic Growth

MGI introduced the concept of the “empowerment line,” which estimates the daily expenditure necessary to cover a basket of essential goods and services, such as housing and food. This standard is higher than the international “poverty line” and is designed to include those who, while not formally considered poor, still struggle to make ends meet. In 2020, while 9% of the global population lived in extreme poverty, 60% were below the empowerment threshold.

MGI's research shows that economic growth is crucial for economic empowerment, especially in low and middle-income economies. As GDP per capita increases, so does the cost of basic services, absorbing much of the additional income of the poorest population. This pattern prevents even wealthier countries from achieving universal economic empowerment.

Key Findings

  1. Income Increase: This remains the primary factor for economic empowerment in low and middle-income economies. In low-income economies, only 20% of the population is fully empowered, while this figure rises to 50% in middle-income economies and 80% in high-income economies.
  2. Affordability of Basic Goods: For the poorest 20% of households, the high cost of essential needs prevents them from improving their standard of living. An increase of $100 in GDP per capita results in an additional consumption of $18 to $22, but nearly all of this is offset by the additional costs of basic needs.
  3. Housing and Food: In high and middle-income economies, housing is the biggest affordability obstacle, while the cost of food is a significant factor in low-income countries.

If all countries could reduce the cost of essential goods and services to match those with the best performance at their income level, nearly 250 million people could reach the economic empowerment line, increasing the fully empowered global population by about three percentage points.

Role of the Public and Private Sectors in Economic Inclusion

Public Sector Initiatives

The public sector can improve the welfare of low-income households through fiscal policies, cash transfers, and labor regulation. Additionally, governments play a crucial role in affordability by providing public goods and services such as housing, education, and healthcare.

Private Sector Contributions

The private sector is fundamental in providing jobs with stability, benefits, and decent working conditions that pay a living wage. Promoting such job opportunities may involve adopting a long-term vision of increased productivity potential through investment in skills, rethinking job roles, and expanding recruitment opportunities. Large multinationals can significantly influence wages and working conditions, according to MGI's analysis.

Economic growth is indispensable for empowering households, especially in low and middle-income economies. However, when the cost of basic goods rises faster than household incomes, people are excluded, challenging individuals, families, and communities. For countries like Guatemala, ensuring that housing, food, education, healthcare, and other essential goods are affordable for everyone is vital. This is crucial for building more balanced economies where everyone has the opportunity to develop their potential and live securely.