The diminishing wage gap between emerging and developed economies over the 2011 to 2030 period is set to have significant implications on business strategy, according to a PricewaterhouseCoopers (PwC) report published in September, creating both winners and losers.

The report indicates a potential shift in the attractiveness of low-cost production investment locations due to a change in production and consumer markets. Increased labour productivity growth coupled with the long-term appreciation in currencies is set to transform middle-income economies such as China, Poland, Mexico and Turkey from low-cost production sites to more valuable consumer markets. This will lead to offshoring to relatively cheaper economies such as India and the Philippines.

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As a result, economies such as China are projected to become significant consumer markets as the market exchange rates move towards purchasing power parity. Relative to the US and the UK, emerging economies are projected to show a significant growth in average wages. Consequently, the report emphasises the need for Western offshore companies to alter their business strategies and the mechanics of their operations in emerging economies in the Middle East, Latin America and eastern Europe, largely due to a projected change in consumer needs, among an increasingly affluent local populace.

According to John Hawksworth, chief economist at PwC, shrinking wage gaps can be attributed to “productivity levels catch[ing] up with those in advanced economies and their real exchange rates ris[ing] as a consequence”. This, coupled with the comparatively slower ‘real wage growth’ in advanced economies since the 1990s, which is expected to continue at least in the short term, may see average wages in India more than quadruple over the period in real dollar terms. According to PwC’s projections, India’s average monthly wage, currently 25 times smaller than the UK’s, will increase so that it is only 7.5 times smaller by 2030.

The attractiveness of emerging markets is not solely dependent on low labour costs, however. Although real wages in India and the Philippines remain comparatively low, political uncertainty in these countries could deter companies that are interested in investing there. The Philippines and India ranked low in both the World Banks Ease of Doing Business Index – placing 138th and 132th, respectively – and in the World Economic Forum Global Competitiveness Index, in which both countries scored less than 4.4 on a scale of 7, which were among the lowest scores among the countries included in the report.

The report emphasised the need for prudence when deciding on locations for the manufacturing and production of business operations. “Change is continuous… It’s inevitable that the manufacturing and services industries in countries will transform as the cost base evolves, and also there will be winners and losers. Governments, regulators and business communities need to be ready for that shift,” said Michael Rendell, PwC partner and global human resources services leader.