The celestial economy

By 2030 Chinas economy could loom as large as Britains in the 1870s or Americas in the 1970s
Sep 10th 2011 | from the print edition

IT IS perhaps a measure of Americas resilience as an economic power that its demise is so often foretold. In 1956 the Russians politely informed Westerners that history is on our side. We will bury you. In the 1980s history seemed to side instead with Japan. Now it appears to be taking Chinas part. These prophesies are self-denying, according to Larry Summers, a former economic adviser to President Barack Obama. They fail to come to pass partly because America buys into them, then rouses itself to defy them. As long as were worried about the future, the future will be better, he said, shortly before leaving the White House. His speech is quoted in Eclipse, a new book by Arvind Subramanian of the Peterson Institute for International Economics. Mr Subramanian argues that Chinas economic might will overshadow Americas sooner than people think. He

denies that his prophecy is self-denying. Even if America heeds its warning, there is precious little it can do about it. In this section

Fudge, the final frontier Francs for nothing Rubies in the sky with diamonds All in the same boat Capital punishment Offshore thing Happy returns The celestial economy

Reprints Related topics Economics Economic crisis Asian economy World economy Chinese economy Three forces will dictate Chinas rise, Mr Subramanian argues: demography, convergence and gravity. Since China has over four times Americas population, it only has to produce a quarter of Americas output per head to exceed Americas total output. Indeed, Mr Subramanian thinks China is already the worlds biggest economy, when due account is taken of the low prices charged for many local Chinese goods and services outside its cities. Big though it is, Chinas economy is also somewhat backward. That gives it plenty of scope to enjoy catch-up growth, unlike Japans economy, which was still far smaller than Americas when it reached the technological frontier. Buoyed by these two forces, China will account for over 23% of world GDP by 2030, measured at PPP, Mr Subramanian calculates. America will account for less than 12%. China will be equally dominant in trade, accounting for twice Americas share of imports and exports. That projection relies on the gravity model of trade, which assumes that commerce between countries depends on their economic weight and the distance between them. Chinas trade will outpace Americas both because its own economy will expand faster and also because its neighbours will grow faster than those in Americas backyard. Mr Subramanian combines each countrys share of world GDP, trade and foreign investment into an index of economic dominance. By 2030 Chinas share of global economic power will match Americas in the 1970s and Britains a century before (see chart). Those prudent American strategists preparing their countrymen for a multipolar world are wrong. The global economy will remain unipolar, dominated by a G1, Mr Subramanian argues. Its just that the one will be China not America.

Mr Subramanians conclusion is controversial. The assumptions, however, are conservative. He does not rule out a major financial crisis. He projects that Chinas per-person income will grow by 5.5% a year over the next two decades, 3.3 percentage points slower than it grew over the past two decades or so. You might almost say that Mr Subramanian is a China bear. He lists several countries (Japan, Hong Kong, Germany, Spain, Taiwan, Greece, South Korea) that reached a comparable stage of developmenta living standard equivalent to 25% of Americas at the timeand then grew faster than 5.5% per head over the subsequent 20 years. He could find only one, Nicolae Ceausescus Romania, which reached that threshold and then suffered a worse slowdown than the one he envisages for China. He is overly sanguine only on the problems posed by Chinas ageing population. In the next few years, the ratio of Chinese workers to dependants will stop rising and start falling. He dismisses this demographic turnaround in a footnote, arguing that it will not weigh heavily on Chinas growth until after 2030. Both China and America could surprise people, of course. If Chinas political regime implodes, all bets will be off, Mr Subramanian admits. Indonesias economy, by way of comparison, took over four years to right itself after the financial crisis that ended President Suhartos 32-year reign. But even that upheaval only interrupted Indonesias progress without halting it. America might also rediscover the vim of the 1990s boom, growing by 2.7% per head, rather than the 1.7% Mr Subramanian otherwise assumes. But even that stirring comeback would not stop it falling behind a Chinese economy growing at twice that pace. So Americans are wrong to think their pre-eminence is Americas to lose. Bratty or benign? If China does usurp America, what kind of hegemon will it be? Some argue that it will be a premature superpower. Because it will be big before it is rich, it will dwell on its domestic needs to the neglect of its global duties. If so, the world may resemble the headless global economy of the inter-war years, when Britain was unable, and America unwilling, to lead. But Mr Subramanian prefers to describe China as a precocious superpower. It will not be among the richest economies, but it will not be poor either. Its standard of living will be about half Americas in 2030, and a little higher than the European Unions today. With luck China will combine its precocity in economic development with a plodding conservatism in economic diplomacy. It should remain committed to preserving an open world economy. Indeed, its commitment may run deeper than Americas, because its ratio of trade to GDP is far higher. Chinas dominance will also have limits, as Mr Subramanian points out. Unlike America in the 1940s, it will not inherit a blank institutional slate, wiped clean by war. The economic order will not yield easily to bold new designs, and China is unlikely to offer any. Why use its dominant position to undermine the very system that helped secure that position in the first place? In a white paper published this week, Chinas State Council insisted that China does not seek regional hegemony or a sphere of influence. Whether it is precocious or premature, China is

still a tentative superpower. As long as it remains worried about the future, its rivals need not worry too much.

2. The redback abroad

Offshore thing

London wants to become a hub for trading in the yuan

Sep 10th 2011 | Hong Kong | from the print edition

WHEN the pound sterling reigned as the worlds dominant international currency, the City of London claimed the lions share of the market for sterling bills of exchange, with which foreigners financed their cross-border trade and investment. After sterling was toppled by the greenback, London then invented the euro-dollar market, which allowed people to deposit dollars and borrow them in an offshore market beyond the reach of Americas capital controls. Londons banks are now readying themselves to profit from the growing offshore market in Chinas currency, the yuan. According to the Financial Times, Wang Qishan, a Chinese vice-premier, was due to give Chinas official blessing to Londons efforts during a visit to Britain this week. The offshore business is still in its infancy, but is growing fast. China now allows yuan to circulate freely outside its borders, but not across them. Foreigners must earn yuan by selling goods to China or, in some cases, direct stakes in their companies. They can deposit these yuan in banks offshore, or invest them in offshore bonds, but they cannot invest them on the mainland without the governments permission. The bulk of this offshore business now resides in Hong Kong, where yuan deposits totalled over 572 billion (almost $90 billion) in July. All of the offshore bonds launched to date have been issued in Hong Kong, where they are known as dim sum bonds, after the popular Cantonese dishes. Hong Kong and Macau also host the only two banks outside the mainland that can clear yuan claims with Chinas central bank, the Peoples Bank of China (PBOC).
In this section

Fudge, the final frontier Francs for nothing Rubies in the sky with diamonds All in the same boat Capital punishment Offshore thing

Happy returns The celestial economy

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Potential rivals, such as London, are unlikely to knock Hong Kong off its perch. The territory enjoys an inimitable position as an offshore, yet in-country, financial centreits success is even written into Chinas latest five-year plan. But there is little to stop other financial centres competing for a smaller share of the offshore business. In Singapore, for example, banks now offer yuan deposits and bond funds. Its central bank is one of a dozen that have agreements with the PBOC to swap their currencies for yuan. Nigerias central bank hopes to set up a similar swap line; its governor would also like to park up to 10% of the countrys $35 billion of foreignexchange reserves in the yuan. If China wants foreigners to trade its currency, it cannot be too fussy about where they do it. London can boast great depth of experience in foreign exchange and a convenient time zone. Now all it needs is a deep pool of yuan deposits, a generous swap line with the PBOC, an enticing menu of yuan securities, and a catchy, local name with which to market them. Egg-fried bonds, anyone?
3. am@tataref.com.

Privatisation in China
Capitalism confined

Chinese companies, like companies everywhere, do best when they are privately run. In China, however, the state is never far away
Sep 3rd 2011 | BEIJING | from the print edition

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IN 1992 two Chinese cities, one just south of Beijing, the other just north of Hong Kong, were in desperate shape even by the standards of a desperately poor country. Their municipally run companies were in danger of bankrupting not only themselves but the cities too. Zhucheng, near Beijing, was best known as the birthplace of Jiang Qing, Mao Zedongs despotic, doctrinaire fourth wife, who died in jail in 1991. Two-thirds of its revenues were being eaten by corporate losses. Shunde, a small city in Guangdong, was buried in debt. Meanwhile, the authorities in Beijing were becoming concerned that the state banking system, already creaking under the weight of bad debt, would be unable to bear even more. With the quiet acquiescence of the central government, Zhucheng and Shunde ignored doctrine, old laws and 40 years of failed policies in search of a better approach.
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In a carefully constructed phrase subsequently endorsed, in 1993, by the all-powerful State Council, the two cities engaged in gaizhi, which means changing the system and implies the diversification of ownership. Put more simply, in words that even now the Chinese government cannot bring itself to utter, they started to privatise many of their companies. They thus began

one of the Chinese states first attempts to change its relationship with its enterprises. Jiang Qing would not have approved. At first Shunde and Zhucheng turned their firms over to employees. In 1997, again before a broader shift in national policy, the two began selling companies directly to existing managements. Shunde, in particular, thrived. Two of the companies that emerged, a maker of bottle caps and a trader of duck feathers, are now among the worlds largest appliance manufacturers, Midea and Galanz. Other factories have spread like wild flowers among what were once rice fields and fish farms. Early signs of success led to modification of the rules on the ownership of companies. In 1995 the State Council endorsed a policy to retain the large, release the small. In 1997 it approved a huge shift of ownership from the central government to municipalities with the explicit goal of expediting privatisations. These changes provided the foundation for the dramatic efforts in the late 1990s of Zhu Rongji, the then prime minister, that are reputed to have remade Chinas economy. The short version is that Mr Zhu closed thousands of companies and broke the iron rice bowl, a guarantee of living standards for the masses, in an effort to shake China out of economic lethargy. Between 1995 and 2001 the number of state-owned and state-controlled enterprises fell from 1.2m to 468,000 and the number of jobs in the urban state sector fell by 36mor from 59% to 32% of total urban employment. A longer version is that the process involved many more companies and has never ceased, and that the method has changed constantly. As some companies were transformed or closed, others were created, with various forms of state backing. The result has been non-stop experimentation with incentives and structures. Privatisation remains a thorny issue in a country where private property became a constitutional right only in 2004 and where the right to own productive assets remains unclear. Many vibrant, purely private companies have sprung up despite this uncertainty, but take care to stay out of the limelight. Meanwhile, Chinas various experiments with privatisation have created several categories of companies which still have close ties to the state (see table).

A taxonomy of privatisation The first category comprises the vast banks and transport, energy and telecoms providers that were, and to some extent still are, government ministries. Gordon Orr, chairman of McKinseys China business, calls this version 1.0 of the modern state-controlled company. Although these entities have gained a lot of attention outside China, they account for perhaps 1% of privatised companies. The relationship between the state and most other businesses is less direct and more subtle. A second category contains joint ventures between private (often foreign) companies and firms backed by the state. A third consists of companies that are largely in private rather than state ownership, but in which the state remains influential nevertheless. Recently another class has started to emerge, in which the state plays the role of a venture capitalist: local governments invest in or create funds that back companies that they hope will bring both jobs and financial returns. Start with the behemoths. Most of these huge companies have been turned into vaguely conventional-looking businesses. They have been restructured, recapitalised and rebranded. A minority of their equity has been sold to the public and is traded on the stockmarket. They have recognisable corporate structures with boards of directors, chief executives, chief financial officers and sundry other chiefs; and they publish financial reports with carefully presented accounts and dull letters from the bosses. They are steadily climbing up global rankings, symbols of Chinas growing industrial heft. However, few contend that they are truly private companies. The proportion of shares issued is typically no more than 30%. They receive subsidised loans from state-controlled banks, they are given land cheaply and they usually enjoy a sheltered monopoly or oligopoly. Control by the

government is never far away. The state appoints their senior managersincluding a Communist Party committee headed by a party secretary. Often, say insiders, these companies doings reflect not so much the explicit orders of the government as managers anticipation of what will earn its endorsement. An ambitious managers career prospects depend on the partys Organisation Department, which oversees official appointmentsand company bosses frequently move on to senior jobs in the ministries that oversee them. Direct control may have been severed, but rule by inferred command continues. This model provides the government with continuing control of enterprises critical to the functioning of the economy. In particular, it facilitates the execution of big capital projects such as high-speed railways, steel plants, telecommunications networks and ports. However, this comes at a cost. There are plenty of opportunities for graft. A close relationship between regulators and operating companies can mean that problems (with safety, as well as economic matters) are overlooked. The lack of commercial orientation frequently means that too many employees throughout the company are unproductive. At the top, there are often cushy, well-paid jobs for the children of the well connected. And the commercial and regulatory privileges of these companies crowd out private alternatives. At home, it is hard to argue that any of the really big Chinese firmsthe banks, the telecoms firms and petrol companiesdraw customers because of any special appeal rather than their ubiquity and a lack of competitors. Abroad, despite their size, they are yet to become the global champions that the Chinese government would like them to be, even though the Chinese have sought for many years to learn from foreign corporations. This may be partly because the Chinese giants ties to the state limit the extent to which they can imitate foreign multinationals, with senior managers from many countries. In the late 1990s John Thompson, then head of IBMs international operations, and some colleagues attending a conference in Beijing were asked to visit Jiang Zemin, the president of China. Mr Jiang asked the IBMers how such a big company was managed centrally. He also asked how corporations and the American courts dealt with corruptiona worry, said Mr Jiang, when Chinese ministries were being privatised. Some months later, Mr Thompson recalls, Mr Jiang asked Lou Gerstner, IBMs chief executive, if the company would play host to a delegation of newly minted Chinese chief executives and some ministers. The group spent several days at IBMs executive-education centre in New York state. They then visited other organisations to learn more about how American capitalism was run and regulated. Yet there was an unbridgeable gap between IBM and Chinas behemoths. In most successful global companies, a priority for executives from the home country is to prepare local managers who may one day accede to senior jobs at headquarters. The company becomes international inside as well as out. But because the Chinese giants are still in essence tied to the state, their leaders must remain Chinese.

Evidence of how these entities have performed is muddy because so much of their environment is distorted: for example, given cheap enough money and strong enough protection for their franchise, even corporate sluggards can show good profits and return on equity. However, in 2006 three Chinese academics began a vast study of the performance of privatised companies, summarised in a recent working paper*. Jie Gan of Cheung Kong Graduate School of Business, Yan Guo of Peking University and Chenggang Xu of the University of Hong Kong conclude that the return on assets and profitability per employee for companies that have undergone partial share offerings is indistinguishable from those that were not privatised at all. One driver better than two The second category of firms, joint ventures, is also small in number (2% of the academics sample). Such ventures involve a bargain between the two sides. Often the private partner is a Western company hoping to gain access to a huge and growing economy. In return the Chinese gain Western know-how. For the Westerners, this involves obvious risks beyond the usual differences of opinion in a joint venture: that they will be pushed aside once the Chinese have acquired their knowledge. In carmaking, where there have been several prominent joint ventures, a squeeze-out of the Western partner was part of the initial plan, says Michael Dunne, a car-industry consultant, and subtle moves along these lines emerge sporadically. Recently, for example, the government has pushed the Western companies to form indigenous brand joint ventures with intellectualproperty and export rights. And at the end of 2009, Shanghai Automotive Industry Corporation bought an additional 1% of its venture with General Motors, gaining majority control. Ms Gan, Mr Guo and Mr Xu find that, overall, joint ventures have yielded similarly lacklustre financial results to the partially privatised behemoths. However, carmaking appears to be an exception. Early ventures involving Peugeot-Citron and General Motors flopped, but that is now ancient history. More than 20 ventures are currently in existence and although financial information is hard to come by, they seem to be doing well. This may be because in cars joint ventures have been run more as private companies and less as state-owned entities, when compared with other industries. An explanation, says Mr Dunne, lies in the incentives of the two sides. The senior Chinese representative, inevitably appointed by the government, is rarely a car person. He brings valuable political contacts and is likely to move back to a political job eventually. Meanwhile he has little interest in disrupting a venture that produces profits and jobs. Foreign carmakers are interested chiefly in the success of the company. The two sides interests turn out to be aligned, or at least not in conflict. These same incentives, says Mr Dunne, also explain why the efforts of the Chinese joint-venture partners to develop their own brands have yet to produce much success, despite their access to Western technology, vast resources and political pull. The careers of the Chinese partners are tied to the state, not the car market. Private management, party influence

The third group, largely in private hands, contains the most successful privatised companies: the half that ended up in the hands of their managers. According to the three academics, management buy-outs have done much better than behemoths, joint ventures or firms privatised through other methods (such as leases or sales to outsiders or employees). This probably has much to do with another finding: that the degree of government control declined most in this group of companies. In only 1% of these firms did the state have a shareholding of more than 20%, against a sample average of 19%. And in only 16% of them did the state have strong control of corporate decision-making, against 31% overall. The state has thus forgone ownership in an effort to achieve better results. It does, however, continue to exert influence, notably through party representatives. Consider the states involvement with the three Chinese car companies that have done most to build their brands: BYD, Chery and Geely. They are still under the states wing, being thought to receive ample financial help from the provinces where they operate (though much the same could be said of many carmakers in the West). Their leaders surely would not last if the state disapproved of them. Yet they are not state-controlled, unlike the behemoths or the Chinese partners in joint ventures. The bosses are not political appointees but charismatic businessmen in pursuit of commercial goals. There are similar ventures in other industries: ZTE and Huawei, two telecoms-equipment giants; Lenovo, a maker of PCs, in which the Chinese Academy of Sciences has a large minority stake; and TCL, an electronics firm. The number of companies in this group continues to swell, even if they are less well known than these. As a rule, they are in industries designated as strategic notably anything to do with energy, be it wind, solar or storedand can also be found in medical equipment, drugs and technology. Such companies benefit from protection against foreign encroachment, research-and-development subsidies, and subsidised purchases from state customers. Someone involved with a foreign health-care company says that buyers connected with the Chinese state demand such generous termswith payment delayed for up to a year that only domestic providers, backed by accommodating credit from state banks, can bid for orders.

The fostering of successful private companies becomes particularly attractive in markets in which state entities have plainly been found wanting. The clearest example is the internet, in which Chinas state-controlled news providers and broadcasters have the resources and content to succeed but have failed to create much of a buzz. From private internet companies, which were never state-owned, the buzz is deafening. Their managers have often trained abroad. Competition is rampantalthough foreign companies face impedimentsand quick wits are essential for success. Employees often receive a significant amount of compensation in that most Western of forms: shares or share options. Many of these companies, because of their listings in overseas markets, or backing from foreign investors, could technically be considered foreign, a cause of some scathing criticism in China. Yet even these companies depend on the good graces of the state. The Western firms that some of them imitated find obstacles in their way in China. Baidu, Chinas leading internet-search company, profited hugely in the past from being a conduit for pirated Western entertainment. Alibaba, a facilitator of e-commerce, has used Chinese ownership laws to take a large slice of Yahoo!s valuable stake in its electronic-payment company, Alipay. Relations with officialdom are not always smooth. Beijings Communist Party chief recently warned Sina, a social-media firm, that it was too slow to delete remarks that displeased the party. And recent programmes on CCTV, the state broadcaster, have criticised Baidus business methods. Back to the cities The success of this third group of companies has encouraged the development of the fourth. Officials in cities and provinces have created hundreds of municipally backed funds to invest in promising ventures. According to Z-Ben Advisors, a research and consulting firm, the biggest of

these, CDB Capital, a private-equity fund established only in 2009, has raised 40 billion yuan ($6.3 billion) and has a target of 60 billion yuan. Some of these official investors have brought in foreign partners, including big private-equity firms such as Blackstone, Carlyle and TPG. Infinity Group, an Israeli venture-capital firm, has 12 funds, ten of which have direct ties to different Chinese cities. Its earliest effort, founded in 2004 with money from the Israeli and Chinese governments and private sources, has had much success creating companies combining Chinese manufacturing and Israeli technology. In theory, making the state into a purely financial investor rather than an operating partner, as in Shunde and Zhucheng 19 years ago, should be beneficial: entrepreneurs, not bureaucrats, run the business. Practice is rarely so neat. Cities back companies that provide local jobs. That affects acquisitions and disposals, where factories are built and where research takes place. Worse, Chinas private-equity industry has become another lucrative billet for the children of powerful officials. It is also troubling that little is disclosed about the operations and returns of these public funds. Many may be managed cleverly and provide money for municipalities and jobs for their citizens; others, though, may turn out to be financial black holes. Equally troubling, they receive favourable attention from local governments, to the disadvantage of Chinas most dynamic sector, its truly private companies. Taken collectively, these iterations of state engagement reflect how Chinas government has not only held on to economic control but found subtle ways to extend it. At the very least, they constitute an important series of large-scale economic experiments with implications for Chinas economy and, because of Chinas size, the worlds too. Some may see in this a path to follow. China has come far since the trials in Shunde and Zhucheng, but the state has always controlled the itinerary.

4. Economics focus
Krugman's conundrum

The elusive link between trade and wage inequality

Apr 17th 2008 | from the print edition

Illustration by JAC

THIS paper is the manifestation of a guilty conscience. With those words, Paul Krugman began the recent presentation of his new study of trade and wages at the Brookings Institution. Mr Krugman, a leading trade economist (as well as a New York Times columnist), had concluded in a 1995 Brookings paper* that trade with poor countries played only a small role in America's rising wage inequality, explaining perhaps one-tenth of the widening income gap between skilled and unskilled workers during the 1980s. Together with several studies in the mid-1990s that had similar findings, Mr Krugman's paper convinced economists that trade was a bit-part player in causing inequality. Other factors, particularly technological innovation that favoured those with skills, were much more important. At some level that was a surprise. In theory, although trade brings gains to the economy as a whole, it can have substantial effects on the distribution of income. When a country with relatively more high-skilled workers (such as America) trades with poorer countries that have relatively more low-skilled workers, America's low skilled will lose out. But when the effect appeared modest, economists heaved a sigh of relief and moved on. In recent years, however, the issue has returned. Opinion polls suggest that Americans have become increasingly convinced that globalisation harms ordinary workers. As a commentator, Mr Krugman has become more sceptical. It's no longer safe to assert that trade's impact on the income distribution in wealthy countries is fairly minor, he wrote on the VoxEU blog last year. There's a good case that it is big and getting bigger. He offered two reasons why. First, more of America's trade is with poor countries, such as China. Second, the growing fragmentation of production means more tasks have become tradable, increasing the universe of labour-intensive jobs in which Chinese workers compete with Americans. His new paper set out to substantiate these assertions.
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That proved hard. Certainly, America's trade patterns have changed. Poor countries' share of commerce in manufactured goods has doubled. In contrast to the 1980s, the average wage of America's top-ten trading partners has fallen since 1990. All of which, you might think, would increase the impact of trade on wage inequality. But by how much? If you simply update the approach used in Mr Krugman's 1995 paper to take into account today's trade patterns, you find that the effect on wages has increased. Josh Bivens, of the Economic Policy Institute, a Washington, DC, think-tank, did just that and found that trade widened wage inequality between skilled and unskilled workers by 6.9% in 2006 and 4.8% in 1995. But even with that increase, trade is still far from being the main cause of wage inequality. Lawrence Katz, a Harvard economist who discussed Mr Krugman's paper at Brookings, estimates that, using Mr Bivens's approach, trade with poor countries can account for about 15% of the growth in the wage gap between skilled and unskilled workers since 1979. Even this is almost certainly an overstatement. Many imports from China have moved up-market from easy-to-produce products, such as footwear, to more sophisticated goods, such as computers and electronics. As a result, to use economists' jargon, the factor content of American importsin effect, the amount of skilled labour they containhas not shifted downwards. Mr Katz says factor-based models suggest trade with poor countries explains only 5% of rising income inequality. Mr Krugman argues that the effect is bigger, but that import statistics are too coarse to capture it. Thanks to the fragmentation of production, Chinese workers are doing the low-skill parts of producing computers. Just because computers from China are classified as skill-intensive in America's imports does not prevent them from hurting less-skilled American workers. Mr Krugman may be right but, as he admits, it is hard to prove.

Blame it on the rich

Robert Lawrence, another Harvard economist, has looked at the same evidence and reached rather different conclusions. In a new book, Blue Collar Blues, he points out that the contours of American inequality sit ill with the idea that trade with poor countries is to blame. Once you measure income properly, the gap between white- and blue-collar workers has not risen that much since the late 1990s when China's global integration accelerated. The wages of the least skilled have improved relative to those in the middle. Some types of inequality have increased, notably the share of income going to the very richest. But there is little sign that wage inequality has behaved as traditional trade theory might suggest. Mr Lawrence offers two reasons why. One possibility is that America no longer makes some of the low-skilled, labour-intensive goods that it imports. In those goods there are no domestic workers to lose out to foreign competition. Second, even when America does produce something that is imported from China, it may make it in a different way, with more machinery and only a few high-skilled workers. If imports from China and other poor countries compete with moreskilled American workers, they may displace workers but will not widen wage inequality. Given the lack of fine-grained statistics, none of these studies settles the debate. It is possible that globalisation is becoming a bigger cause of American wage inequality. But contrary to the tone of the political debate, and the thrust of Mr Krugman's commentary, the evidence is inconclusive. How can we quantify the actual effect of rising trade on wages? Mr Krugman asked at the end of his paper. The answer, given the current state of the data, is that we can't.