For the last 500 years the West has grown rich from exploiting the income delta between its home markets and the rest of the world. It works because incomes in the "emerging markets" are so low compared to the Global North. The human capital wealth of the Global South is exported to the North. But as the "income delta" narrows thanks to rising wages in the rest of the world, that system is breaking down. 

After the first technological revolution – ships that can cross an ocean and the cannon – European traders began travelling the world, growing rich by swapping pots and pans for valuable spices and silk. Trade turned into conquest and the appearance of empires, before modern times when companies build factories bleeding the Global South of wealth. An iPhone made in China is far cheaper than one made in the US. The cheapness of the US sold phone is an increase in wealth for an American, but the value of that wealth is the human capital exported from China’s low wages where it was made.

This process met its apogee in the 1990s following the Great Unification of the socialist world with the capitalist, and was a golden age of globalisation as foreign direct investment (FDI) poured into the new markets that opened up. However, “globalisation” is just a polite term for an updated version of the neo-colonial system that has been in place for centuries.

Since the Great Unification that equation is starting to break down. That FDI has slowly closed the gap between North and South through the transfer of skills and technology, catalysed by local governments investing heavily in education and innovation. As incomes in the Global South rise, as these markets boom, the income delta between North and South is shrinking, eroding the flow of human capital wealth from South to North.

The appeal of this imperialistic model is obvious and is one of the many factors driving geopolitical tensions. During his Munich Security Conference (MSC) speech, Secretary of State Marco Rubio very explicitly laid out an agenda to rebuild an American empire and invited Europe to join as partners. This mercantile imperialism is also the logic of the Trump administration’s tariffs: protect home markets from the cheapness of production in the Global South, while at the same time keeping their markets open to the most expensive US-made goods.

The transfer of wealth is not just about finding countries with the lowest wages and setting up production there. There is a trade-off as productivity also counts and there is a “sweet spot” between the two that pulls in investment and accelerated growth.

Following the end of the socialist experiment European companies rushed into Central Europe. The process started with light manufacturing to capitalise on the low wages, but as the FDI had its effect, production moved up the value chain as the local workers and technology became more sophisticated. That process only accelerated after the 2003 accession to the EU of many of these countries. In the meantime, automotive plants have mushroomed and many accession countries are on a par or better off than their \ traditional member states.

Notably the Balkans was passed over as although wages were even lower than in Prague or Budapest, so was the productivity making it less profitable to set up in Sophia or Belgrade. That has only recently started to change and as bne IntelliNews has been reporting, the Balkans has been booming. Even more recently, the same process has started to unfold in Central Asia which has been the biggest winner for the war in Ukraine as manufacturing and FDI flows flourish.

However, there are some restrictions to this process too as countries are also prone to the so-called middle-income trap as they go up the value chain. Income growth can be limited by limited technology transfers by the inbound multinationals and an overreliance on foreign owned companies to drive industrial development, that is explored in a bne IntelliNews article Going up the value chain.

Income delta

Using the European Union as a benchmark (EU = 100) for an index that compares nominal wage levels in major emerging markets, incomes in all emerging markets remain far below European levels. (The smaller the index number, the bigger the difference.)

On a current-dollar basis, the US stands out as one of the few countries well above the EU benchmark, with an index of 188, reflecting average wages almost double the EU level.

Indexing the leading emerging markets and China and Russia sit in the next tier, with nominal indices of 39 and 34 respectively, implying wage levels around one-third to two-fifths of the EU average. Brazil and South Africa follow at 22 and 20, while India and Nigeria remain in single digits, at seven and six.

In absolute terms, the nominal income delta versus the EU ranges from around $25,000 in China to nearly $39,000 in Nigeria.

Adjusting for purchasing power narrows the headline gaps, particularly for large emerging markets where domestic prices are lower than in Europe. On a PPP basis, China approaches two-thirds of EU purchasing power, while India and Nigeria improve meaningfully from their nominal positions but remain far below the European benchmark. The US remains above the EU after adjustment, reflecting both higher pay and comparatively strong purchasing power.

The age of imperialism is clearly not over as long as these income deltas persist and remain so large. It is still possible to export a significant amount of human capital wealth from the Global South by setting up shop there, but for example in the case of China and Central Europe, the gap has narrowed sufficiently to increasingly cut into profits created by the income delta.

Widget unit cost

To move from abstract income deltas to something more tangible, the table below models the unit cost of producing a simple manufactured widget across a range of countries. 

The widget is assumed to require one kilogram of globally priced commodity metal, one hour of industrial labour at prevailing local wage rates, and 20 kWh of electricity at domestic industrial tariffs. 

The differences in the unit costs highlights how income delta translate directly into production cost gaps and the foundation that globalisation is built on. Some economies sit inside the global manufacturing “sweet spot”, while others have either moved beyond low-cost competitiveness or remain too underdeveloped to convert wage advantages into scalable industrial output.

The contrasts are stark. A widget produced in Germany costs roughly $50, more than eight times the $6 cost in India and almost nine times the $5.7 cost in Bangladesh. Even compared with China, long the anchor of global manufacturing, Germany’s cost base is more than three times higher - the end of cheap Russian energy has been catastrophic for the German model, which now has energy prices twice the European average.

Within the rest of Europe itself, the gap remains material: at $22, Poland’s unit cost is less than half that of Germany, illustrating why Central Europe became such a powerful nearshoring destination after EU enlargement.

The shift within Asia is equally revealing. China, at roughly $14.8 per unit, now sits close to Bulgaria and above Serbia, reflecting how rising wages have eroded its ultra-low-cost advantage. By contrast, Vietnam at $7.6 and Indonesia at $6.8 occupy a distinctly lower band, explaining the steady migration of labour-intensive production southward. Yet the marginal difference between India and Bangladesh — just $0.3 per unit — underlines a broader point: once wages fall to very low levels, electricity and productivity constraints begin to matter more than headline labour costs alone.

Russia and China standout in this analysis as manufacturing has become a key battleground in the changes being wrought to the global economy. China and Russia have emerged as manufacturing powerhouses – China globally and Russia in Europe thanks to their heavy investments and the Soviet emphasis on industry respectively. In Russia’s case, its manufacturing power exceeds that of even Germany in Europe, and it can make a widget considerably cheaper than the Germans can. As bne IntelliNews reported, since the start of the war in Ukraine, productivity at Russia’s largest enterprises has been rising in an effort to keep the economy competitive.

Russia’s estimated unit cost of $16.4 is roughly one-third of Germany’s $50, giving it a substantial nominal cost advantage. The key structural difference lies in energy: Russia’s cheap domestic gas and electricity significantly compress the power component, partially offsetting labour costs that are now similar to Romania and above Bulgaria or Serbia.

However, Russia’s competitiveness advantage is narrower than the headline gap suggests. German labour productivity per hour remains materially higher, infrastructure and supply-chain integration are deeper, and Germany benefits from EU market access without sanctions risk. In pure wage-energy arithmetic Russia appears highly competitive; in effective export manufacturing terms, institutional and geopolitical constraints dilute that advantage.

Nevertheless, Russia has, like China, been going up the value chain thanks to import substitution forced on it by sanctions. It started with cheese, and the appearance of the famous Siberian camembert, after Russian President Vladimir Putin imposed an agricultural product import ban on EU goods after the first round of 2014 Crimea annexation sanctions. Russia used to import all its fancy cheeses from Europe as they were of higher quality and lower prices. But since then it has moved on to start producing things like high efficiency gas turbines that used to be the exclusive preserve of Germany’s Siemens. More recently it has started to make inroads into the production of precision tools, long a gaping lacunae in its industrial portfolio. Still, Russia’s prowess in producing difficult-to-make products remains very spotty.

Sweet spot

Lower wage economies often export labour-intensive or manufactured goods to higher-income markets. China’s large delta vs the EU coincides with very high export penetration. India’s delta supports services exports and pharmaceuticals.

However, where incomes are very low, such as in Nigeria, trade volumes remain relatively modest despite large deltas. Low productivity is a problem, but so is the smaller industrial base, infrastructure constraints and lower domestic demand.

The result is there is a strong correlation between income convergence and a rising index level; higher inward FDI; and integration into advanced supply chains.

China’s rise from single-digit EU parity in the 1990s to nearly 40 today coincided with massive Western FDI inflows. Countries like the Balkans, India, Vietnam and other hot spots are now following a similar path, albeit at an earlier stage. On the flip side, most countries in Africa have income deltas which are still too low to make them appealing as investment destinations with all their other problems. The gap reflects underdevelopment rather than competitive advantage.

According to an IntelliNews Lambda analysis, the sweet spot emerges when the income delta rises into the range of 25–60 relative to the EU base of 100. At this level conditions often align: labour remains cost-competitive but workers are more skilled; industrial clusters exist to support local production; infrastructure is improving and domestic demand becomes meaningful to provide a local market for production.

China (index: 39) sits in this zone. So did South Korea in the 1990s and eastern European states in the 2000s. South Korea attracted peak export FDI when it was roughly one-third to one-half of US income. Poland saw major manufacturing inflows when its income was roughly 40%–60% of Germany’s. Mexico’s integration under NAFTA intensified once income reached the mid-tier range. The optimal zone is not “as poor as possible,” but “poor enough to be competitive, rich enough to be productive.”

With an index of only 7, India is nominally still too poor to be of interest, however, this is an aggregate number and drilling into the details shows there are already regional clusters where the conditions are much more attractive. Moreover, on a PPP basis the real purchasing power in India is roughly four-times higher than the nominal dollar figure suggests. All the other BRICS nations have multiples close to two-times, so while India’s income delta remains below the sweet spot, as an investment destination it is more appealing than it first appears.

Once a country enters the sweet spot a virtuous circle starts the turning of rising trade turnover, supply-chain integration, technology transfer and industrial upgrading. As bne IntelliNews reported at the time, this was clearly the case in Russia in 1999, and into the early Putin era when the country took off, the size of the economy doubled in the next decade with incomes rising 10% each year for that entire period.

Today Russia is on a par with the rest of the EU in adjusted GDP per capita terms and was reclassified by the World Bank as a “high income” country in 2012 – in other words, Russia ceased to be an emerging market a decade and a half ago. By comparison, China is still an upper-middle income country. With a GNI per capita income of $13,000 it is just below the $14,005 threshold where it will be promoted. Brazil is also upper-middle income ($10,000) and India is lower-middle income ($2,700).

The income delta effect starts to wear off when it moves into the 70-100 range relative to the EU baseline. Labour cost arbitrage weakens. Production shifts toward higher value-added sectors. Trade becomes more intra-industry rather than cost-driven

SE Europe income deltas

The income delta effect is also working at a regional level. The Western Balkans sit broadly in the 20–40 index range with income levels that are roughly one-quarter to one-third of the EU average putting the region on a par with Brazil and South Africa. As a whole, the region is now in roughly the same place as where the Central European states (Poland, Slovakia, Hungary) were in the early 2000s before they took off on the back of EU-driven convergence.

Serbia and Montenegro, at index levels in the mid-30s, are closest to what historically has attracted strong manufacturing FDI in Central Europe. However, smaller domestic markets, political risk and a never-ending EU accession process still constrain capital inflows relative to their central European peers during the 2004–2015 enlargement phase.

Bulgaria, with an index of 44, is also a candidate for a boom, sitting squarely inside the historical convergence band. Labour remains significantly cheaper than the EU average. EU membership has reduced institutional risk, and its geographic position supports nearshoring from western Europe. Today Bulgaria is closer to where Poland stood 15–20 years ago.

Romania, at an index around 50, is almost perfectly positioned within the historical 30–60 convergence band. Labour remains materially cheaper than western Europe. EU membership reduces regulatory and political risk. The domestic market (19mn people) is large enough to support scale. And infrastructure and industrial clusters have deepened significantly over the past decade.

Romania today resembles where Poland stood in the early-to-mid 2010s and it has already attracted some large-scale middle weight industrial investment such as the Darcia car plant as well as emerging as a leading tech hub in Europe.

Poland, with an index around 70, has moved well beyond the classic 30–60 convergence band and has begun to qualify as a driver of the income delta process, no longer a beneficiary. In the 2004–2015 period, Poland sat roughly in the 40–55 range relative to Germany and the EU average which saw it boom. It remains one of the best performing countries in Europe and recently became a trillion-dollar economy for the first time. Poland is in the middle of transitioning from a low-cost manufacturing hub to higher value-added production, services, logistics and technology hub.

Asia income deltas

The income delta effect is also operating within Asia, but here the anchor is no longer Brussels or Berlin — it is Beijing. China now plays the role that the EU played in central and southeastern Europe two decades ago. It is the lead trade partner for every country in Asia and given that typically every $8 of trade generates $1 of FDI, it is increasingly playing the same “globalising” role in its backyard that the Western multinationals used to play between the Global North and South.

Rising wages in China are pushing labour-intensive production outward, but supply chains remain anchored to Chinese intermediate goods, capital equipment and technology. However, unlike the Western-led neo-colonial system, in general China is not limiting technology transfers and encouraging partners to develop. In higher-tech sectors (telecoms, EVs, renewables), technology transfer tends to occur through joint ventures, licensing, or embedded supply chains — but not always full upstream capability.

This cooperative spirit is part of its wider Belt and Road Initiative (BRI) and the Regional Comprehensive Economic Partnership (RCEP) programme, lowering tariff barriers and institutionalising Asia-centric production networks.

Indexing regional wage levels to China = 100, a similar convergence band appears. China, with an average annual wage of roughly $16,000, now functions as Asia’s industrial core in the same way Germany anchors central Europe. It is both the largest source of manufacturing demand and an increasingly important source of outward foreign direct investment.

The income delta “sweet spot” in Asia is slightly broader than Europe, coming in between roughly 30–70 relative to China, due lower than the global average incomes. At this level, labour remains significantly cheaper than China, but productivity, infrastructure and supply-chain integration are sufficiently developed to support scaled manufacturing. Vietnam, Thailand and increasingly Indonesia sit in this band.

Vietnam, at roughly 45–50% of Chinese wage levels, most closely resembles Poland in the early 2000s relative to Germany. It has absorbed large volumes of manufacturing FDI as firms diversify away from China without leaving Asia. Electronics, garments and increasingly higher-value assembly have shifted south, but remain deeply integrated with Chinese upstream supply chains.

Thailand and Malaysia, sitting between 55–70, resemble Romania or Bulgaria in the European story. They are no longer ultra-cheap but offer skilled labour, industrial depth and established export platforms. These countries increasingly compete not on cost alone but on reliability and embeddedness in regional production networks.

Indonesia, at roughly one-third of Chinese wage levels, is entering the convergence band from below. Its domestic market of 270mn people gives it an advantage over Vietnam in terms of scale, though infrastructure and regulatory complexity still constrain its ability to fully capitalise on the income delta.

The African equivalents of the global story in Asia are India, Bangladesh and Pakistan which sit far below the sweet spot on a nominal basis.

India, at roughly 20% of China’s wage level, appears highly competitive. However, as in Africa, the extreme income gaps reflect underdevelopment as much as cost advantage. Infrastructure gaps, logistics friction, regulatory complexity and lower industrial density, not to mention the geopolitical tensions between Beijing and New Delhi, limit the translation of the wage delta into large-scale manufacturing inflows.

Bangladesh has successfully leveraged its ultra-low wage base in garments, but it got stuck there. The concentration of production and exports in just the textile sector illustrates the limits of extreme deltas without broader industrial upgrading.

Pakistan remains constrained by macroeconomic instability and its own tensions with India that resulted in a short war last year, which compressed FDI regardless of the income delta advantage.

The Asian income delta dynamic suggests that over the next decade:

Vietnam and Indonesia are most squarely in the sweet spot.

Malaysia and Thailand are transitioning toward middle-income plateau territory.

India will become more attractive as logistics and industrial clustering deepen.

Bangladesh will need to diversify beyond garments to move into the 30–40 band.

China’s income delta relative to the rest of Asia is shrinking, just as Germany’s did relative to central Europe. But the hierarchy remains clear. The process of imperial arbitrage has not disappeared — it has regionalised.