How long will emerging markets stay cheap?

By John Hawksworth and Conor Lambe

The wage gap between advanced economies like the US and the UK and emerging economies such as China, India and the Philippines will shrink significantly by 2030 according to new analysis we have just published (see table below). This builds on an earlier analysis of current relative wage levels reported in a previous blog post.

Projected average monthly wage levels relative to US index = 100

Economics-chart
Source: PwC projections based on ILO data for 2011; real wages index relative in each year to US = 100 

India and the Philippines remain at the lower end of wage projection in relative terms, but average wages in India could more than quadruple over the period in real dollar terms and more than triple in the Philippines. Real wages in the UK and US are projected to rise by only around a third over the same period, remaining at similar levels to each other (although other estimates by the US Bureau of Labour Statistics suggest US wages may be around 10% higher than the UK in manufacturing). 

More striking is how far the wage gap could close by 2030. India’s current average monthly wage is around 25 times smaller than that of the UK. By 2030, it’s likely it be seven and a half times smaller. Average wages in US are currently seven and a half times greater than in Mexico, but the gap could close to a factor of less than 4 times by 2030. Over the same time period, the average monthly Chinese wage could rise to around half that of Spain.

While any such projections are subject to significant uncertainties, the direction of change is clear. The large wage advantages enjoyed today by many emerging economies will shrink as their productivity levels catch up with those in advanced economies and their real exchange rates rise as a consequence.

Places like Turkey, Poland, China and Mexico will therefore become more valuable as consumer markets, while low cost production could shift to other locations such as the Philippines. India could also gain from this shift, but only if it improves its infrastructure and female education levels and cuts red tape.

These trends have a number of potential implications for business strategy: 

  1. Companies may consider ‘re-shoring’ some of their manufacturing or service operations, as
    some US companies have already started to do, or move them to cheaper locations.
  2. As current large cost advantages decline, companies may move to locations that are
    initially more expensive but closer to home, gaining more control over supply chains and service or product quality.
  3. Middle income economies Turkey, Poland and China will begin offshoring to relatively
    cheaper economies like Vietnam, India and the Philippines.
  4. Current offshorers in countries like China may choose to reorient their operations to sell their goods and services to increasingly affluent local populations.

In short, emerging markets like China will not remain cheap forever, but will become progressively more attractive as consumer markets at the same time as moving upmarket in the production supply chain.

John Hawksworth:
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