3.4 - The global shift and its costs and benefits

Manufacturing and service shifts

The global shift changes where economic activity is concentrated and how different locations contribute to production networks.

The global economic centre of gravity describes the spatial balance of economic activity. As a region's share of output and trade grows, that balance moves towards it. It does not mean that all businesses physically move to one Asian point, that all Western industry disappears or that every Asian country gains equally. New production can grow in an emerging economy without an identical factory closing elsewhere.

China's manufacturing growth illustrates how several causes combine. Economic opening and coastal SEZs allowed more trade and FDI; infrastructure connected factories to overseas markets; expanding labour and supplier pools helped firms organise production. Lower costs mattered, but firms also needed reliable logistics, skills, components and growing markets. Agglomeration can reinforce the shift as connected suppliers, training and transport concentrate in industrial regions. Different stages retain different values: assembly may earn less than design, finance or ownership of a brand, even when many products pass through the assembly region.

India illustrates the shift in services, including software development and business support delivered to overseas clients. ICT makes outputs transmissible without shipping a physical product. Firms seek suitable technical and language skills, cost advantages and reliable communication; clusters can develop around training, networks and service providers. India's Software Technology Parks of India, formed in 1991, supported software exports. The official Bengaluru history records satellite-based data communication services launched there in 1992. This shows that communication infrastructure and policy helped make remote service delivery possible rather than the shift being explained by wages alone.

Outsourcing and offshoring must remain distinct. A foreign client buying support from an independent Indian provider is outsourcing across borders; a company operating its own Indian support centre is offshoring without outsourcing. Both can shift activity towards India. Service growth is geographically concentrated and skill-dependent, so an urban software cluster's gains do not establish gains for every rural household.

Benefits and unequal costs in receiving regions

Receiving investment can raise incomes and capabilities while also widening differences between groups and locations.

Investment in roads, ports, power and communications can support factories and improve access for other businesses. Waged work can provide a more regular income than some previous livelihoods. Workers' spending supports shops and services, creating a multiplier effect, while governments may gain revenue to support education and infrastructure. Training can develop technical and management skills; supplier links can transfer knowledge to local firms. Benefits are stronger when jobs are secure, skills progress and local firms participate rather than all inputs being imported.

China's experience provides substantial but carefully bounded evidence. A joint Chinese-government and World Bank report released in 2022 estimated that almost 800 million fewer people were below its then-used international poverty line of US$1.90 per day over about four decades. Broad economic transformation, infrastructure and targeted poverty policies contributed. The figure supports major poverty reduction; it does not show that FDI or manufacturing alone caused it, that inequality disappeared or that the same result will occur everywhere.

The distribution of gains matters. Skilled employees, owners and well-served urban districts may gain more than informal workers, displaced farmers or distant rural communities. Wages can rise while inequality also increases if higher incomes grow faster. Rapid demand for housing can raise rents, reducing the gain for low-paid workers. Investment may convert productive farmland to industrial and urban land, removing livelihoods and increasing dependence on purchased food. Compensation, bargaining power and access to replacement jobs determine the effects on displaced households.

If population and jobs grow faster than housing, water, sanitation and transport provision, unplanned settlements may expand. Electricity and water demand put pressure on resources, and congestion reduces accessibility. These outcomes are risks arising from rapid change and weak provision, not inevitable characteristics of developing countries. Planning, worker protection, skills investment, public services and environmental enforcement can alter the balance. Judge an outcome by the groups affected, the timescale and the policy context, rather than calling an entire country a winner or loser.

Environmental pressure and wellbeing

The environmental costs of production can be concentrated near workplaces and settlements even when products are consumed far away.

Factories, power generation and freight can release pollutants into the air. Fine particles can enter the respiratory system; exposure may worsen illness and reduce people's ability to work or study. Industrial effluent discharged without adequate treatment can contaminate rivers and groundwater, damaging aquatic organisms and reducing safe water availability. The substance, concentration, duration of exposure and people's vulnerability determine the harm; not all industrial processes produce identical risks.

Land degradation can follow mining, construction, waste dumping or poorly managed industrial sites. Soil contamination or erosion may reduce agricultural productivity. Over-exploitation of resources occurs when extraction exceeds replacement or sustainable availability: intensive groundwater abstraction can lower water tables, increasing pumping costs and competing with domestic or farming needs. Clearing or fragmenting habitats for industry, housing and infrastructure can reduce biodiversity, disrupting ecosystem functions and local livelihoods. A resource pressure may extend beyond the factory's immediate boundary through river systems, air movement or supply chains.

These costs can affect health and wellbeing through several pathways: direct exposure, reduced livelihood income, insecure water supply, loss of recreation and stress over displacement. Low-income communities may have less ability to relocate or pay for treatment. Firms and consumers can receive benefits while nearby residents bear an external cost, meaning a cost not fully paid by the activity that causes it. If this cost is ignored in prices, apparent cheap production understates its wider burden.