I’m Ian Davis, Managing Director of management consultants McKinsey & Company.

Today I’m not going to talk about business as you might expect, but rather about the public sector, and more importantly, the role we all have in ensuring that we continue to have an effective and efficient public sector.

While it’s very easy to focus on the private sector as a locus of economic activity, fundamental to the strength of any society, and indeed to the private sector, is, I believe, a strong and productive public sector. I emphasise this because public sector productivity and success is not necessarily a given. Indeed, every single major government in the world today is facing a set of challenges in the next decade that will not be easy – not at all. And the ways those challenges are resolved will have a significant impact on the vibrancy of our entire societies. The choices we make will affect our long-term prosperity and stability.

All you have to do is look at the beginning of the twentieth century, to realise that peace and prosperity cannot be taken for granted. In 1910 people believed that the economic boom would last forever, and no-one imagined that the devastation of World War One was just around the corner. The destruction we faced in the first half of the twentieth century was unthinkable, and yet it happened.

As businesspeople, as citizens, we must enter the dialogue on how to help resolve the impending public sector crisis – strong words, but I do believe there could be a public sector crisis. This is not a partisan issue but an issue beyond political stance. In a sense, the job of government is all of our jobs.

The primary challenges governments are facing are two-fold: globalisation and demography. On one front we have globalisation, bringing not only the promise of higher economic growth to those who join its ranks, but also a whole set of new challenges. In the last decade the global economy has grown at a robust 5 per cent annually, but trade flows have grown even faster, at 7.5 per cent, and capital flows faster yet, at nearly 11 per cent. The growth of information flows has been exponential. The world is fundamentally more in-connected, with more goods, more capital, more people and more information moving across more borders than ever before. In 1990 who would have imagined that the Euro, a currency that didn’t exist, would surpass the dollar in terms of cash circulation? Or that China would have surpassed the United States as the world’s largest technology exporter? The world today is fundamentally different than that of a decade ago.

National governments are generally ill-equipped to address problems that increasingly supersede national borders, but they are expected to solve them nonetheless, when global shifts cause distinctly local disruptions. How, for example, are governments supposed to respond to the disruption in local labour markets that globalisation, through the form of off-shoring, can often cause? And how are we best to solve truly global challenges – issues like carbon emissions, intellectual property standards, or efficient global capital markets?

Yet, as challenging as globalisation is for governments it is the other challenge, demography, that may prove even more insidious. In the developed economies, the swelling ranks of retirees will soon outpace the ability of governments to provide historically agreed upon benefits in pensions and healthcare, much less anything else. In almost all of the Western European countries, in Japan, the US, South Korea and elsewhere, tax rates will have to more than double to support current benefit levels, given the expected size of the retiree pool relative to the workforce. The agreements governments have with their citizens about which services are to be provided will be simply unaffordable. Something will have to give.

And this demographic challenge to government is not just one developed economies are facing. In the emerging economies the challenge is at the other end of the age funnel. A population that burgeoned in the fertility boom of the 1970s and 80s is just reaching working age, giving these countries not only a surplus of labour power, but also a strong imperative for economic growth. China for example needs to grow at roughly 8 per cent annually just to absorb its surging labour force. Emerging market governments will need to provide not only the infrastructure, both physical and social, necessary to keep growth on track, but also new social safety nets to catch those who get left behind. In India for example lack of public infrastructure is cited by many as the number one constraint on economic growth. Yes, India is growing fast, but it could grow faster yet if it could reliably provide electricity, running water and roads to ensure that its economy runs smoothly. According to the World Bank, the average Indian manufacturing firm loses 8 per cent a year in revenue from power shortages alone.

How governments rise to meet these challenges will determine both the shape and pace of world economic growth for decades to come, and indeed fundamentally renegotiate the role and purpose of government. We are at a vulnerable point in time. The wrong steps could easily lead to a world of growing protectionism and slowing growth. We must help governments resist the urge to hunker down and close up during periods of stress: that would be the wrong answer. It would be to miss the opportunity to make government better, and to re-invent itself for the twenty-first century.

The first thing we can do to help stave off a public sector crisis – and I use the word with some care – is to continue to facilitate private sector growth through an increasingly open economy. Research from the World Bank, the McKinsey Global Institute, and others consistently show that countries who openly participate in globalisation do better than those who don’t. Prosperity will both help fill government coffers and also reduce the need to provide deep social safety nets. The World Bank for example estimates that in the next two decades, if economic growth continues as projected, average per capita incomes in the developing countries will more than double, lifting literally billions out of poverty.

While the task seems obvious, it is often easier said than done. Indeed, given the current economic expansion, it is all too easy to forget government’s crucial role in creating it: lifting trade barriers, improving global monetary policy, and facilitating open commerce. In such an open environment it is hard, too, to remember that protectionism can return in a minute, and the currents of protectionism are most certainly out there. The Doha round discussions of the World Trade Organisation have been stalled since 2001, as members disagree over the future of open trade.

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