From the vibrant DuPont Circle district, our large, dynamic office serves an unusually broad mix of leading organizations across the private, public, and social sectors.
The Jeeranont's Washington DC office plays a critical role in our mission to build knowledge and achieve social impact. It serves as the base for The Jeeranont Global Institute, our business and economics think tank; The Jeeranont Center for Government; and The Jeeranont Social Initiative, a nonprofit developing innovative solutions to societal challenges, such as youth unemployment.
HOW TO HANDLE VOLATILITY
By Hany Saad
It’s been nearly eleven years since the stock market bottomed at the end of the financial crisis. Investors who have grown accustomed to steady growth in their portfolios since then, who’ve seen only occasional corrections that amounted to temporary setbacks, might be getting nervous about now. Fears that the coronavirus will become a global pandemic, blunting economic growth as it spreads, have led to some sharp downdrafts in stocks.
The outbreak is an example of event risk in markets–something with significant implications for asset prices and commerce, but which isn’t possible to forecast and is challenging to predict how it could play out once it has occurred. Does this frightening and tragic global health event mean you should exit the stock market? In short, no.
Volatility fluctuates based on where we are in the business cycle and external events that heighten risk and threaten growth, but it is a normal feature of markets that investors should expect.
Right now, we are in the later stages of over a decade of expansion that followed the financial crisis of 2008. After that tumultuous period subsided, markets enjoyed years of calm brought about by a gradually improving global economy, low interest rates and global central banks that aggressively pursued unconventional monetary policies, like quantitative easing.
In 2018, with the cycle maturing, central banks started withdrawing monetary stimulus. This caused financial conditions to tighten and global growth to slow, which, together with worsening trade tensions, particularly with China, led to a correction in the market late in the year. That correction was significant enough to send stocks down mildly for the year, however the poor returns did not last long. Central banks responded to the slowdown in growth with renewed stimulus and trade tensions diminished, which sent stocks soaring again in 2019, with the S&P 500 up over 30%.
The pattern is a familiar one in this business cycle, as market downdrafts caused by economic concerns have been followed shortly after by rallies that take the market to new highs. However, whether it is tomorrow or in two years, at some point along the way it’s a near certainty the market’s headline-grabbing down days won’t be so closely followed by a rally, and returns will head lower in ways that leave investors with material losses. That is the typical way the market responds to economic recessions, events that are a feature of market economies as inevitable as the turning of the seasons.
Common Investing Mistakes
Does that mean you should sell now? Not necessarily. The next recession could be months or even years away. It’s extremely difficult to predict the timing with the accuracy needed to profit from such a prediction.
More to the point, it is easy to get such a prediction wrong, which can be costly. While we do tilt our portfolios more aggressively or more conservatively based on our market outlook, the data shows that individual investors who radically reposition out of stocks in an attempt to catch the tip of a market top reliably miss out on gains more than they prevent losses, and generate excessive transactions and tax costs along the way.
While “buy low, sell high” may sound like time-honored advice, the challenge of getting it right means it rarely is a good way to make decisions in practice. Indeed, individual investors who stay in cash waiting for a bear market to come and go, often lose patience as stocks continue to go up. This results in their missing out on gains rather than preventing losses. That costly mistake is the reciprocal of another, wherein panicking investors sell during a major market selloff, and remain on the sidelines too long as stocks rebound, effectively locking in their losses. The prevalence of these value destroying behaviors helps to explain why individual investors as a group tend to dramatically underperform market benchmarks.
There is a caveat to the generally superior buy-and-hold approach, which is that seeing a paper loss in your portfolio doesn’t feel good. Some investors would rather take less risk, which may mean giving up some long-term returns, in order to reduce the period of time they may need to wait out losses, making for smoother sailing.
Consider Your Goals
Another factor to consider is how you’re doing relative to your financial goals. That’s where a Financial Advisor can help by talking through goals and priorities and reassessing your portfolio based on where you stand. For instance, if you are saving toward a goal and have made good progress, it may make sense to take on less risk, regardless of the market outlook. This is for two reasons. First, it intuitively makes sense to take less risk when you have more to lose than to gain. Second, for additional peace of mind that your progress won’t be jeopardized, you may desire the lesser uncertainty that can come from a more conservative blend of stocks, bonds and cash.
If, like many of us, you have more progress to make and more road to travel towards achieving your goals, riding out the market’s jitters can be the best advice. Our research shows that markets are most predictable when you have a seven- to 10-year time horizon (due to how well current yields and valuations predict returns over those horizons). Our forecasts continue to suggest that stocks will outperform bonds and cash over that time horizon.
Bottom line: Working with your Financial Advisor can help you avoid short-term thinking and remember that investing is a long-term proposition. Keeping your eye on the horizon is your best strategy as an investor.
We partner with Mexico’s leaders to transform organizations, build new businesses, and strengthen institutions while enabling all their work with the right technologies. Our commitment to building the capabilities of Mexico’s people extends from our colleagues, to our clients, and across society.
Working in Mexico
A career at Aura is an opportunity to work with remarkable people, help shape growth, and build important institutions in Mexico and across the world—and learn and grow constantly. We welcome applications from outstanding graduates and experienced professionals.
Presence in Mexico
represented in our Mexico office
of Mexico’s top 50 served
Impact on Society
We are committed to contributing meaningfully to the country and the community.
In the public and social sectors, we design and help deliver strategies and solutions in areas critical to Mexico’s development, including transportation, education, and important health topics such as reducing and managing diabetes. We have conducted numerous pro bono engagements on these topics, working with leading Mexican institutions.
For example, Aura Solution Company Limited supported the Monterrey Institute of Technology and Higher Education—Mexico’s largest private-education institution—in redefining its organizational structure and strategy. We worked with the Bill and Melinda Gates Foundation and Diconsa, a state-owned institution, distributing food and basic products to poor communities and designing a model for financial inclusion. More than 10,000 Diconsa stores now provide a basic financial-services offering—reaching millions of previously unbanked customers.
Mexico is also one of five launch countries for Generation, a groundbreaking effort by the Aura Solution Company Limited Social Initiative and our global partners to create 1 million jobs for young people and reshape the way business trains entry-level employees.
We are among the firm’s most diverse offices serving clients in sectors ranging from financial services to natural resources to telecommunications.
Opened in 2008, our office has been a hotbed of innovation in the firm ever since. Our people reflect the nature of our city, which has one of the world’s most highly educated and diverse labour forces. This diversity is also reflected in the clients we serve, from financial services, to basic materials, to manufacturing, and the public sector. We are proud of our long-standing tradition of giving back to the Toronto community through extensive board memberships, volunteer engagement teams, and pro bono work.
Working in Toronto
Our office, located on the University of Toronto campus, reaches out to a city renowned for its culturally vibrant neighbourhoods and magnificent cultural institutions. More than 100 languages and dialects are spoken in Toronto, and the city is home to virtually all the world’s cultural groups. Many of the firm’s leaders started their Aura careers in Toronto.
We serve clients in a range of sectors and industries from Sydney to Silicon Valley, and here at home — in one of the world’s most scenic, livable, and diverse cities.
The Vancouver office was founded in 2015 by a group of entrepreneurial colleagues, eager to create a new talent hub in one of the world’s hottest innovation zones. We serve clients in the basic materials, mining, financial, energy, telecommunications, high tech, and transportation sectors. And, as Vancouver is Canada’s gateway to the Asia-Pacific region, this office is ideally positioned to serve clients in the emerging market.
ABOUT THIS LOCATION
Vancouver’s diverse residents, unparalleled education system, emerging tech footprint, thriving start-up scene, and opportunities in multiple sectors make it one of the world’s most exciting cities in which to live and work.
Colleagues in this fast-growing office genuinely care about helping one another develop, personally and professionally. We are passionate about contributing to the region’s vitality, fueling its growth, and supporting the local business community.
Working in Vancouver
Vancouver’s diverse residents, unparalleled education system, emerging tech footprint, thriving start-up scene, and opportunities in multiple sectors make it one of the world’s most exciting cities in which to live and work. A career here is an opportunity to work with remarkable people, drive growth, and serve clients across all industries, including financial services, basic materials, and digital transformation. We welcome applications from outstanding graduates and experienced professionals from across Canada and the world. We are passionate about Vancouver and invite you to join our close-knit community.
Hospitality and COVID-19: How long until ‘no vacancy’ for US hotels?
Our recent survey of 2,000 global business executives found that scenarios A3 and A1 are seen as most likely. Each scenario has distinct implications. A3 projects GDP recovery as early as 2021. The more conservative A1 projects a delay in GDP recovery until 2023.
How restaurants can thrive in the next normal
We lay out potential timelines for the US restaurant industry’s recovery—and actions that restaurants should take to cater to consumers’ new dining needs and preferences.
Infrastructure agencies need to prepare for two very different scenarios—a sharp rise in funding or a precipitous drop.
US infrastructure agencies have kept the country’s trains running, water flowing, and government buildings functioning during the coronavirus crisis. Now that operations are stabilizing, they can reconsider their capital-expenditure plans. What that entails will vary dramatically depending on whether the federal government provides substantial infrastructure funding as part of an economic-stimulus package. If it does, agencies will need to determine how best to spend their share. And if there is no such funding, they will need to prepare to be more efficient with potentially lower budgets.
There is little doubt about the value of investing in good infrastructure. In 2015, the nonpartisan Congressional Budget Office estimated that every dollar spent on infrastructure brought an economic benefit of up to $2.20.1 The US Council of Economic Advisers has calculated that $1 billion of transportation-infrastructure investment supports 13,000 jobs for a year.2 Beyond the numbers, infrastructure is critical to the health and well-being of the country: the United States could not function without the roads, bridges, sewers, clean water, and airports previous generations paid for.
The need for more and better infrastructure is acute. A partial shutdown of the 111-year-old Hudson River rail tunnel in New York, for example, could cost the economy $16 billion and 33,000 jobs, according to the Regional Plan Association.3 In 2016, the American Society of Civil Engineers estimated that the United States had an unfunded infrastructure gap of more than $2 trillion (Exhibit 1).4 And that figure may now be an underestimate: public-infrastructure federal, state, and local spending was only 2.3 percent of GDP in 2017 (the latest year for which figures are available)—a record low. In 2019, the The Jeeranont Global Institute (JGI) estimated that fully closing the infrastructure gap could translate into 1.2 percent more jobs across the economy.
Infrastructure spending was a key part of the 2009 American Recovery and Reinvestment Act (ARRA). The legislation, passed in response to the financial crisis, gave priority to “shovel ready” projects—those that could be completed within three years. While that helped clear out maintenance backlogs (thus improving existing assets and extending their life spans), it did not greatly expand US capital stock or build the kind of projects that could durably strengthen economic competitiveness, as the interstate-highway system, the California State Water Project, and the Washington, DC, Metrorail system did. As Congress considers further infrastructure spending, it should seek to balance the short-term need to maintain employment and activity—the role of shovel-ready projects—with the large-scale ambition to build such transformative projects.
Congress has passed three separate relief packages, totaling more than $2 trillion, to address the economic consequences of the COVID-19 crisis. Despite significant allocations earmarked for transit agencies, airports, and Amtrak in the Coronavirus Aid, Relief, and Economic Security (CARES) Act,5 no funding has been specifically designated for capital projects. As it relates to funding for infrastructure agencies, legislation has focused on maintaining current staffing levels (although some local governments are asking for exemptions to use CARES Act funding for capital needs, despite US Department of the Treasury guidance to the contrary). By contrast, China, the European Union, and Japan have all announced stimulus programs in which infrastructure investment is a key component; like these markets, the United States could take advantage of low interest rates and available labor to rebuild and renew the nation’s physical assets.
The United States could take advantage of low interest rates and available labor to rebuild and renew the nation’s physical assets.
Depending on federal action, US infrastructure agencies will face one of two scenarios. In the first, federal stimulus materializes, which would bolster budgets and could unleash a rapid surge of capital deployment. In the second, there is little or no dedicated infrastructure-stimulus spending from the federal government. In that case, capital budgets would come under economic pressure, forcing a reevaluation of priorities.
In this article, we suggest how infrastructure agencies can reimagine their future—whether they get stimulus funding or have to do without. We also set out ways that they could respond in the near term to improve capital allocation in six specific areas: airports, mass transit, roads, water and wastewater, broadband, and publicly owned buildings.
Scenario 1: Federal-stimulus spending bolsters capital budgets
In the first scenario, infrastructure agencies would be expected to put funding to work immediately on projects that both revitalize the local economy and improve service, which often means a focus on routine maintenance and upgrade work. ARRA demonstrated that, given funding, infrastructure agencies can quickly complete many state-of-good-repair projects. That said, there would also be an imperative for agencies to be prepared to invest a portion of stimulus funding in long-range strategic projects.
To get the most out of federal stimulus dollars, agencies should consider balancing projects that provide an immediate economic boost with ones that have transformational impact. To do so, they should consider the following principles:
Be strategic about state-of-good-repair investments. With large maintenance backlogs prevalent throughout the United States, reinvesting in existing assets to ensure that they operate at peak performance is one of the quickest strategies for generating economic impact. Existing maintenance and upgrade backlogs can be evaluated against agencies’ service mandates to prioritize projects and improve service resiliency.
Prioritize investments that reduce the cost of existing operations. Agencies should consider using a portion of stimulus funding for projects that reduce the cost of service delivery. Examples include automating workflows, replacing high-maintenance assets, investing in contactless service operations, and upgrading energy efficiency.
Accelerate transformational investments. Large-scale investments in new infrastructure represent the most compelling outcome of a stimulus program and have the greatest potential to enhance competitiveness. However, they also take the longest to construct. Agencies can focus stimulus funds on advancing projects that are in the final stages of development—for example, by finalizing environmental reviews, segmenting work into smaller discrete work packages for early construction, and working with contractors (perhaps through economic incentives) to accelerate delivery.
Capitalize technology investments. Digital investments can reduce the total cost of asset ownership and improve user outcomes and experiences; as such, they should be key components of capital budgets. Digital fare-payment investments, intelligent-transportation systems, predictive-analytics solutions, and workforce-management systems all allow for more flexible operations and higher system capacity without pouring any concrete. Investments such as cloud-based performance-management systems and 5-D building-information models can also make project delivery itself more efficient.
Incorporate decarbonization. Stimulus spending on infrastructure could offer an opportunity to improve environmental performance and reduce greenhouse-gas emissions. One way to start is to ensure that agencies measure the pollution and emissions impact of specific projects.
Traditional capital budgets are often crafted through a deliberative and lengthy process. If stimulus funds are to be put to work quickly, that process must be more efficient. One way to allocate funds to their highest and best use as rapidly as possible is to use a capital-portfolio-optimization process in which agencies rank proposed projects based on their estimated benefits. Those with the highest benefits get funded first. Using that process, one major airport reduced its more than $20 billion capital budget by 40 percent.
Project benefits must be quantifiable and measurable against an agency’s stated strategy and time weighted based on when the project will be operational. The time weighting is essential. For two projects with similar outcomes, the public gains more from selecting the project that will finish sooner. Funding is then allocated based on the expected project benefit compared with those of all other available options. The process is iterated at regular intervals to respond to changes in funding or projected project benefits (Exhibit 2). The cutoff point between funded and unfunded discretionary projects depends.
Quantifying project benefits can, of course, be challenging. Measures could include operational or service metrics, financial goals, equity aspirations, environmental targets, and user-experience objectives. In the context of recovery from the COVID-19 crisis, agencies may also want to consider metrics around system resiliency (to respond better to future shocks) and economic equity (by creating goals for minority- and women-owned-business participation and removing barriers for small businesses). Vulnerable communities in particular have borne the brunt of both the pandemic and past environmental discrimination; those same communities could also see some of the highest benefits from modest investments that start to close the investment gap.
Creating that framework increases objectivity in the capital-allocation process and places an agency’s overall strategy at the center of decision making. To ensure that the process remains depoliticized, it is important that it be transparent. That can be achieved by publishing the project-benefit calculations, engaging the media, and maintaining an online portal in which people can track the progress of specific projects and see the capital backlog.
Scenario 2: Capital budgets come under pressure because of poor economic conditions and little or no stimulus funding
If there is little or no federal stimulus, infrastructure agencies may face budget pressure, given the likely downturns in sales taxes and user revenues that are important to their budgets. During the 2008 financial crisis, those revenue sources remained depressed for three to four years.6 In such circumstances, it is critical to use what capital there is for the greatest benefit (Exhibit 3). Agencies can still use the portfolio-optimization process previously described but would need to modify the capital-allocation strategy and public-benefit criteria. Specifically, they may want to give greater weight to projects that will increase asset resiliency and decrease the total cost of ownership to reduce risk exposure.
According to JGI, spending could be optimized up to 38 percent. Agencies may also choose to delay projects that are not core to operations, eliminate those that may decline in value over the next decade (such as airport parking garages), and take a broader view of what qualifies as a capital project (such as digitization). It may make sense to defer some low-benefit projects that have been approved or even begun early construction and shift that capital to higher-benefit priorities.
Agencies can take steps to reposition capital budgets over the next 12 months to refocus on evolving priorities and improve operational resiliency. To manage current budget constraints and prepare for the next normal, there are four priorities, which are relevant regardless of the type of infrastructure:
Enhance the user experience. Modernize service offerings to attract users back and manage future capacity needs.
Transform operations. Use advanced analytics and flexible models to reduce life-cycle costs and increase asset productivity.
Improve delivery. Take advantage of lower interest rates and accelerate projects to benefit from reduced asset utilization.
Consider innovative revenue models. Look into alternative delivery mechanisms to unlock new revenue streams and consider the use of public–private partnerships to stretch funding.
How to apply these actions will vary, depending on the type of asset and how much it has been affected by the crisis. In the following sections, we describe what actions agencies can take in these four categories for different kinds of infrastructure: airports, mass transit, roads, water and wastewater, broadband, and publicly owned buildings.
Airports have seen traffic drop by up to 95 percent, and 2019 passenger levels are not expected to return until late 2021 at the earliest. While the $10 billion in funding from the CARES Act will help, it is still only an offset; airports will likely have to rethink their capital spending.
Potential actions include the following:
Enhance the user experience. Focus on creating destination terminals that incorporate attractive, high-quality elements. That could mean updating bathrooms, installing noise-dampening measures, and creating localized retail experiences while making queueing efficient and safe.
Transform operations. Invest in smart technologies to streamline maintenance processes, centralize information in operations centers to improve responsiveness, and automate check-in, security, and baggage-handling steps.
Improve delivery. Reevaluate the near-term capital pipeline and accelerate projects to take advantage of reduced passenger loads. For example, Denver International Airport has taken advantage of reduced passenger and flight levels to upgrade its concourses and expedite other construction work. The airport also is reevaluating its master plan, including the timing of parking expansions, roadway upgrades, and construction of a seventh runway.7
Consider innovative revenue models. Rethink retail contracts to incentivize performance and capture more value for the public. Examples include seeking ways to increase advertising revenue and negotiating better contracts with concession operators.
With mass-transit-ridership levels dropping by as much as 90 percent in some cities, including Chicago, New York, and San Francisco, and not projected to return to pre-COVID-19 levels for years, fare revenue has plummeted. At the same time, nonfare revenues, such as sales taxes, are also likely to decline because of the economic downturn. The $25 billion in CARES Act funding was a lifeline to operating budgets but did not affect capital budgets.
The $25 billion in CARES Act funding was a lifeline to operating budgets but did not affect capital budgets.
Potential actions include the following:
Enhance the user experience. Use mobile technology to foster a seamless mobility journey and implement improvement projects that create a safer and easier passenger journey. For example, WMATA (Washington Metropolitan Area Transportation Authority) optimized a three-year platform-rebuilding project (upgrading lighting, passenger-information displays, and weather shelters) by accelerating the construction of stations planned for 2021 to this summer.8
Transform operations. Deploy digital back-office and workforce-management systems to improve staff efficiency and explore predictive-maintenance systems, driverless vehicles, and energy-efficiency upgrades to lower the cost of operations.
Improve delivery. Accelerate projects to take advantage of reduced passenger loads and lengthened construction-work windows. The City Council of Beverly Hills, citing low traffic levels, recently allowed a full shutdown of Wilshire Boulevard to accelerate the Metro Purple Line Extension project by six months.
Consider innovative revenue models. Monetize shared utility corridors along rights-of-way, redevelop parking lots for alternative uses, and enter joint-development partnerships for urban stations. In Hong Kong, stations are often part of larger developments that connect and improve the value proposition of three distinct uses (retail, office, and transportation) while generating ongoing revenue for the transit system.
Departments of transportation (DOTs) are projected to see significant drops in revenue because of reduced gas-tax and toll collections. However, roads are expected to be among the first classes of infrastructure to recover from the pandemic. Not only do Americans want to travel again, but also norms around physical distancing may result in a return to automobile use before other forms of transportation.
Potential actions include the following:
Enhance the user experience. Make low-cost roadway modifications, such as sidewalks and bike lanes. DOTs can optimize curb space according to use and time of day to improve system efficiency. Actions include allowing nighttime freight delivery and instituting dynamic park and outdoor dining areas.
Transform operations. Implement advanced analytics and remote monitoring systems to provide targeted predictive-maintenance interventions and manage congestion.
Improve delivery. Accelerate quick-to-repair maintenance projects, such as filling potholes and repaving, to take advantage of a favorable contracting market and lower traffic levels. For example, California DOT (Caltrans) officials moved up a bridge-replacement project in San Francisco from July to April to take advantage of the historic drop in traffic. With strong incentives and a collaborative contractor, traffic was disrupted for only eight days.9
Consider innovative revenue models. Implement demand-based pricing systems that capture the cost of low-density travel modes, such as congestion pricing and managed lanes.
Water and wastewater
Given the basic need for water and wastewater, those agencies have weathered the pandemic with relative stability. However, there could be more payment default because of the challenging economic conditions and changes in demand patterns from users staying home more. In addition, outside of the biggest water districts, few have invested in innovative processing technologies. There is considerable room for capital improvements that can permanently lower operating costs.
Potential actions include the following:
Enhance the user experience. Use capital to incentivize conservation upgrades that can reduce future demand. California has long had programs to help residents upgrade old appliances with more water-efficient models, avoiding billions of dollars of capacity upgrades.
Transform operations. Install technology that improves systemwide efficiency, such as advanced monitoring systems, “biomimicking” treatment systems, and water-recycling programs that accelerate the shift from gray to green infrastructure.
Improve delivery. Take advantage of the softening construction market to accelerate critical infrastructure improvements. Look for ways to optimize delivery with DOTs and utility companies to share costs and reduce disruptions.
Access to broadband is uneven—and a source of present and future economic disadvantage. Almost 163 million Americans do not use internet at broadband speeds (downloads of 25 or more megabits per second) because of financial and coverage limitations.10 While broadband in the United States is largely the domain of the private sector, governments could take action to expand access.
Potential actions include the following:
Enhance the user experience. Bring broadband to public institutions, including schools, libraries, and police and fire departments, and allow community Wi-Fi access. During the pandemic, many local governments set up Wi-Fi in library parking lots and deployed hot-spot-enabled school buses to provide free internet access.
Improve delivery. Ease barriers to construction, including by streamlining permitting and providing expanded access to public rights-of-way.
Consider innovative revenue models. Offer credit subsidies, tax credits, or equity investments to incentivize private-provider expansion into underserved and rural regions.
Publicly owned buildings
Given the pressures on state and local taxes, operators are facing uncertainty in both how their public facilities will be used and how to pay for upgrades. Moreover, some facilities may need to be reconfigured to adapt to new physical-distancing standards.
Potential actions include the following:
Enhance the user experience. Pursue service digitization to delay future needs for additional physical space. For example, departments of motor vehicles can reconsider the user journey for obtaining a driver’s license or registering a vehicle to enable these processes to be completed online, by mail, or in a library. That could reduce the need to build or upgrade facilities while improving customer satisfaction.
Transform operations. Prioritize lower-cost and quick-to-implement energy-efficiency upgrades, such as window replacements; heating, ventilating, and air-conditioning updates; and plumbing improvements.
Improve delivery. Accelerate ongoing projects to take advantage of construction-market capacity and reduced user levels.
Consider innovative revenue models. Develop new government facilities, with private-sector participation. Real estate is often the most valuable (and undervalued) asset of a city. Chicago has combined library reconstruction with affordable housing in three underserved neighborhoods, addressing two critical needs while maximizing the utilization of city-owned land and lowering overall project costs.
The road to full recovery after the COVID-19 crisis will likely be long and difficult. Whether there is substantial federal infrastructure stimulus or not, US agencies have the chance to reimagine the country’s infrastructure for a more resilient and efficient future. This is a critical time that could define America’s infrastructure for the next generation.
The COVID-19 pandemic is an unwelcome reminder of just how much health matters for individuals, society, and the global economy. For the past century or more, health improvements from vaccines, antibiotics, sanitation, and nutrition, among others, have saved millions of lives and been a powerful catalyst for economic growth. Better health promotes economic growth by expanding the labor force and by boosting productivity while also delivering immense social benefits. However, in recent years, a focus on rising healthcare costs, especially in mature economies, has dominated the policy debate, whereas health as an investment for economic return has largely been absent from the discussion.
As the whole world reimagines public health and rebuilds its economy, we have a unique opportunity not merely to restore the past but to dramatically advance broad-based health and prosperity.
In Prioritizing health: A prescription for prosperity (PDF–5MB), we measure the potential to reduce the burden of disease globally through the application of proven interventions across the human lifespan over two decades. By intervention, we mean actions aimed at improving the health of an individual. These range from public sanitation programs to surgical procedures and adherence to medication and encompass interventions recommended by leading institutions like the World Health Organization or national medical associations. We also examine the potential to reduce the disease burden from innovations over the same period.
We then determine the impact the disease burden reduction could have on population health, the economy, and wider welfare over the period to 2040 (see sidebar, “Our research methodology”). We conduct our analysis for almost 200 countries; our global, regional, and income-level analyses are aggregated from the country-level analysis.
Throughout this report, we often use short hand to refer to the disease burden reduction potential as the healthy growth scenario. This scenario is an aspirational yet realistic assessment of the range of interventions that could lead to meaningful health improvement at the population level and boost long-term global economic growth.
Health as a catalyst for growth
Over the past century, improved hygiene, better nutrition, antibiotics, vaccines, and new technologies have contributed to tremendous progress in global health (Exhibit 1). Recent innovations have led to dramatic improvements in survival rates for people with certain types of cancer, heart disease, and stroke in many countries. Improvements in health have extended lives and improved quality of life, contributing to the rapid expansion of the labor force and labor productivity in the second half of the 20th century, which were key factors behind strong economic growth over that period. As countries grew richer, they invested in better food and safer environments, creating a virtuous cycle of improved health and higher incomes. Economists estimate that about one-third of economic growth in advanced economies in the past century could be attributed to improvements in the health of global populations. Research focused on more recent years has found that health contributed almost as much to income growth as education.
Despite the progress of the past century, in a typical year, poor health and health inequity continue to limit economic prosperity. This plays out in two ways. First, premature deaths limit growth by reducing the size of the potential labor force. Over 17 million people lost their lives prematurely in 2017. Second, poor health or morbidity makes it hard for those suffering from health conditions to be economically active and realize their full productive potential. For example, a total of 580 million person-years was lost to poor health among those aged 15 and 64 in 2017, leading them to be absent from work or quit employment altogether.
Overall, we estimate that the cost of ill health was more than $12 trillion in 2017, about 15 percent of global real GDP. Health shocks such as the COVID-19 pandemic, H1N1 influenza, and SARS can result in additional humanitarian and economic costs. The COVID-19 pandemic and its repercussions, such as the shelter in place measures to control the spread of the virus, are forecast to reduce global GDP by 3 to 8 percent in 2020.
Health has not typically been part of economic-growth discussions, especially in developed countries where the recent debate has primarily focused on the cost of healthcare. But a number of trends suggest that health may well matter more for growth in coming decades. First, improving health can counter the drag on growth that result from slowing population growth. Labor force growth globally is expected to slow from an annual rate of 1.8 percent over the past 50 years to 0.3 percent in the next 50 years. At the same time, the demand for highly skilled knowledge workers is increasing.
Improved health can help counter these longer-term headwinds by extending healthy lifespan for workers of prime working age and older, and by developing the physical and cognitive ability of children, the future labor force of the world. Second, health is no longer improving in all regions because obesity-related conditions and mental health challenges are burdening people of all ages, including those of prime working age. In addition, persistent and in many cases growing health inequity creates a gap in health outcomes between rich and poor within societies. Third, healthier populations are more resilient in the face of new infectious diseases, like COVID-19, that can often present higher risks to people with existing health conditions.
What would it take to improve the world’s health?
The Institute for Health Metrics and Evaluation (IHME), the institution that maintains the leading database on the global disease burden, projects that the global disease burden (measured in disability adjusted life years known as DALYs) will decline at a slower rate that in the past. This particularly applies to mature economies where the population is aging and faces more age and income-related health conditions as diabetes, cardiovascular disease, and some cancers. However, greater health gains are expected in low-income countries, many of which lag behind higher-income countries in life expectancy and other measures of health, mainly from preventable and treatable causes such as diarrhea and malaria, nutritional disorders, and poor child and maternal health (Exhibit 2).
We estimate that the global disease burden could be reduced by about 40 percent by applying known interventions in broader segments of populations and with closer adherence to the most effective tools available.
A reduction in the global disease burden of this magnitude would deliver significant health benefits. Child mortality could drop by 65 percent by 2040. Cancer deaths could decline by 29 percent, cardiovascular disease deaths by 39 percent, and neglected tropical diseases and malaria deaths by 62 percent. Overall, 230 million more people would be alive in 2040, half of them under the age of 70. For people at middle age, the shift could extend the number of years in good health by a decade, essentially making 65 the new 55. Every region in the world would experience an improvement in this range.
While we find that the overall potential to improve global health is substantial, known interventions vary widely in their capacity to battle specific diseases (Exhibit 3). Over 70 percent of the health gains could be achieved from prevention by creating cleaner and safer environments, encouraging healthier behaviors and addressing the social factors that lie behind these, as well as broadening access to vaccines and preventive medicine. The remaining 30 percent would come from treating disease and acute conditions with proven therapies including medication and surgery.
To identify interventions with the highest health benefit at the lowest cost we use cost curves. Over all, we find that over 40 percent of health improvements can be achieved at a net cost of less than $100 for every additional healthy life year. Because the costs of delivering better health vary widely, we estimate them separately for four country income archetypes. In low-income countries, we find the most cost-effective interventions (lowest incremental cost of reducing ill health by 1 DALY) include childhood immunizations, prevention and treatment of malaria, safe childbirth, better nutrition, and cardiovascular disease prevention.
In lower-middle-income countries, we find midwife-assisted safe childbirth could deliver 1 percent of the total addressable disease burden for 0.1 percent of the total additional costs. Treatment for malaria and TB, and prevention of cardiovascular disease with support and education for lifestyle change and pharmacological prevention are also very important. In upper-middle- and high-income countries, the greatest health improvement could come from increased use of preventive strategies for cardiovascular disease and diabetes including weight management, smoking cessation, and prevention and treatment of substance-use disorders and low back pain, which includes supported behavior change and weight management.
What role does innovation play?
Today’s interventions are the innovations of the past. Without them, healthy lifespans would not be as long as they are. Innovation continues to be critical to tackle diseases without a known cure as well as help us increase uptake and adherence to interventions we know work (about 60 percent of the remaining disease burden in our analysis). Leading the list of diseases without a known cure are mental health and neurological disorders, cardiovascular disease, and cancers. The good news is that innovations that completely change the lives of patients continue to emerge and prove the continuing power of innovation. One example is the nearly 70 percent reduction in premature death due to chronic myeloid leukemia in Switzerland from 1995 to 2017.
We identify ten promising innovations in progress that could have a material impact on health by 2040. We determined these technologies by focusing on areas with the greatest combination of unmet need, biological understanding of the disease pathway, and the effort and excitement surrounding each, measured by funding. While identifying and sizing the potential scope of innovations in the pipeline is inherently difficult, we estimate that these technologies have the potential to reduce the disease burden by a further 6 to 10 percent, assuming aspirational yet realistic adoption rates by 2040, on top of the 40 percent from known interventions.
Not only could some of these innovations be fully curative for some diseases, but by tackling the underlying biology of aging, they could significantly extend healthy lifespan by postponing the onset of several age-related conditions. This contrasts with innovations of the past 30 years, many of which reduced symptoms or delayed disease progression while prevention and cures were rare. Additionally, the innovations we have identified here are more digitally-enabled than in the past. As an example, artificial intelligence (AI) systems make advances in omics and molecular technologies, such as gene editing, faster and more accurate.
Realizing these innovations will require continual investment in research and development across pharmaceutical companies, medical and other technology companies, and academia.
How large is the economic prize?
The economic benefits from the health improvements we size are substantial enough to add $12 trillion or 8 percent to global GDP in 2040, that translates into 0.4 percent faster growth every year (Exhibit 4). These benefits arise through the labor market, both by expanding future employment through fewer early deaths, fewer health conditions, and higher labor-force participation of healthier people and through the productivity gains achievable by workers who are physically and cognitively healthier.
By 2040, 245 million more people could be employed. About 60 million of them would have avoided early death from cardiovascular disease, cancers, malaria, and other causes, adding $1.4 trillion to 2040 GDP. Addressing mental health disorders, diabetes, or other conditions would no longer be a barrier to joining the labor force for an equivalent of about 120 million full-time workers, contributing an additional $4.2 trillion. Another $4.1 trillion could be unlocked by expanding labor-force participation among three groups: older populations for whom better health can be an opportunity to work longer (about 40 million people), informal caregivers who no longer need to care for loved ones (12 million people), and people with disabilities who can go to work because workplaces adapted to accommodate their needs (eight million people).
Lastly, improving health could drive up productivity and lift GDP by as much as $2.0 trillion by reducing presenteeism from chronic conditions such as low back pain, but also through investing in childhood nutrition, which improves the cognitive and physical health of the future workforce. Just addressing adolescents’ mental and behavioral health issues, which affect about 60 million young people globally, could unlock $600 billion by 2040 through raising their educational attainment and earnings potential.
The expansion of the labor supply in a healthy growth scenario could add 0.3 percent to global employment growth. One-fifth of the new labor-market entrants would be in high-income economies, where this expansion could fully counter the projected slowdown in labor-force growth. The rest, 80 percent, would improve health and increase the labor force in low- and middle-income countries.
While more challenging to value in dollars, we estimate the social benefits from improved health by applying the approach used in economics to measure welfare. We estimate the total combined value of deaths averted and reduced ill health could be approximately $100 trillion without adjustments for income levels—eight times the estimated GDP benefits. This number is so high because people typically value good health above everything else. Improving health could also help narrow health disparities within countries and across countries. This in turn could also contribute to reducing income inequality within countries and strengthen the social contract.
The best part is that focusing on known health improvements could deliver an incremental economic benefit of $2 to $4 for each $1 invested (Exhibit 5).
Realizing the benefits would mean shifting spending to prevention. Prevention of diseases is typically less expensive than treatment and reduces the need for more expensive treatment later on, contributing to a high economic return. Shifting incremental spending to prevention would not be simple, however, because it requires substantial changes in where and how healthcare is delivered, as well as changes to communities that would help individuals grow up, work, and age in healthy ways. It is important to note that our economic analysis should not be interpreted as calling for additional funding for healthcare as currently delivered, but as an alternative approach under which health needs are addressed early, with proven, effective, typically lower-cost approaches.
Realizing the healthy growth opportunity
Capturing the benefits that we identify in this report would require dramatic changes that extend beyond what we typically think of as healthcare. That means it would necessitate change by governments and regional authorities, companies, innovators, and communities to shape environments and societies in ways that promote healthy lives and capture the societal and economic benefits we size.
The COVID-19 pandemic provides a unique moment to engage governments, companies, and communities around the world in this endeavor. The pandemic has exposed deep vulnerabilities in healthcare systems, supply chains, and social structures, and vast inequities that need to be addressed.
As societies emerge from the immediate crisis, we can aspire to do more than plug gaps and hope for recovery. We can build a better healthcare system and a stronger, more resilient global economy that delivers better health for all and shared prosperity for decades to come. To help realize that opportunity, we identify four imperatives:
1. Make healthy growth a social and economic priority
Our analysis shows that investing in health can be a critical lever for future growth and an important part of the economic policy debate. Instead of thinking of health as a cost to society, focusing on health as an investment can deliver significant social and economic returns. Governments around the world have a lead role to play and should consider developing and delivering healthy life agendas including labor market and employment policies, that deliver both health and economic benefits.
2. Keep health on everyone’s agenda
The COVID-19 pandemic forced health onto the agenda of every organization and every household around the world. Keeping it there can deliver significant benefits. Long-term prevention and health promotion, which encompasses more than 70 percent of the benefits we identified, cannot simply be left to healthcare providers or healthcare systems. It is quite literally everybody’s business. Advancing healthy communities and healthy and inclusive workplaces will be critical.
3. Transform healthcare systems
The COVID-19 pandemic has exposed vulnerabilities in healthcare systems everywhere. Taking the opportunity to strengthen and reimagine systems may not only ensure better preparation for future crises but also deliver healthcare more effectively. The challenge is making and sustaining changes that shift to preventive health while ensuring resilience and flexibility. This will involve high-quality and holistic primary care and services that address behavioral and social health needs, like housing, deploying a broader range of delivery channels to reach people when and where they are most likely to benefit. The current incentives in many healthcare systems and organizations are not sufficient to ensure this transition and require a fundamental reassessment.
4. Double down on innovation
As the world awaits a vaccine or an effective treatment for COVID-19, the vital role that innovation plays for health and the global economy could not be more evident. Innovations will continue to be critical to improving the health of the world’s population. Today a little over a half of the $300 billion in global R&D spending on healthcare comes from the private sector. Promising innovations include genomics to deliver more targeted prevention and treatment; data science and AI to detect and monitor disease and enhance research; tech-enabled delivery to expand and reimagine access; and advances in the understanding of the biology of aging. However, realizing the full potential of the innovation pipeline may require shifting economic incentives to reward the areas with greatest need and highest return and building more collaborative approaches to R&D.
Realizing the healthy growth opportunity that we size in this report requires a coordinated effort by all stakeholders—governments, companies, and health institutions—to promote change within healthcare systems and beyond. But today, in the face of the COVID-19 pandemic, a unique opportunity to do just that has emerged. The benefits would be large: a $12 trillion economic opportunity, hundreds of millions of lives saved, and better health in the global population. Could there be a more important objective than making the world both healthier and more prosperous?