I am pretty surprised that people still do software development where costs are high. For example Google are advertising for engineers based in London, Zurich and Dublin. Seems nuts when there are very highly skilled developers around the rest of the world who can deliver the same value for a fraction of the price.
Having said which, the price differentials between countries are themselves pretty staggering. And can change rapidly (e.g. prices in India are now far above the rates you could get in 1999 for millenium-bug testers, as has the level of skill, I am sure).
In this fragmented market I expect to see the development of trans-border outsourcing companies who can deliver quality developers at $10 an hour irrespective of where they happen to be based. And as a customer I could buy the services of this company even if this year that means my development is in India this year, next year in Russia, next year in China and next in Vietnam.