How can the world’s rich countries compete with the rising Asian powers? Not only do the latter possess vast reservoirs of cheap and hard-working labour, but they are rapidly upgrading their exports. Soon, it is alleged, the Asian giants will undercut every producer located in rich countries. Yet local self-sufficiency will save us. Thus goes the argument of two prophets of “localisation”.* But it is nonsense.

The world is indeed suffering a huge supply shock, just as it did prior to the first world war. Then the shock was an increase in the effective supply of land, as the railway and steamship brought the “new world” into the global economy. This time, it is an expansion in the effective labour supply, which has tripled over the past two decades, according to Richard Freeman of Harvard University (see charts). In an integrated world economy, suggests Helmut Reisen of the Organisation for Economic Co-operation and Development, equilibrium real wages in high-income countries should fall by about 15 per cent.**