Photo courtesy of the Crown
In a speech at the annual meeting of the Inter-American Development Bank in Calgary, Bank of Canada Governor Mark Carney told the delegates that G20 leaders must think about setting policies that will reflect the major shift taking place in the global economy and be capable of preventing another global financial crisis. “Leadership, purpose and legitimacy," will be required to address the challenges faced by the world. He further specified that the global “economic centre of gravity” is moving closer toward dynamic emerging economies in Latin America and Asia, while the role of Western industrialized nations is becoming less dominant.
Getting over the hurdle
While, fundamentally, the paradigm shift is a positive trend, it may also be described as a rather disruptive one, considering the current world economy, Canada’s central bank leader said. Stable growth from emerging economies leads analysts to predict that commodity prices will remain high for a long time. Politicians who do not realize this trend and mistake it for a short-term, speculation-driven phenomenon may end up disappointed. “Even though history teaches us that all booms are finite, this one could go on for a long time,” Carney added.
There is a risk of an increased inflation rate in the aforementioned regions as commodity prices go up, together with the huge amount of foreign capital pouring into their economies. The concern about prices is mirrored in the increase in demand for shorter-term bonds. However, Carney warned governments against limiting capital flows or foreign exchange moves as a tool to tackle potential problems and urged them not to underestimate the ongoing process since doing so might risk another crisis. “The stakes are very high,” he added.
One solution to the situation may be a radical reform of the international monetary system, which evolved into “an increasingly dysfunctional hybrid” containing both fixed and floating regimes and stopped playing its original role long ago. Carney proposed two options: enforcing the rules at the World Trade Organization or renewing the rules so that the actions of governments become “both predictable and mutually consistent." He views the latter as a much more constructive and favourable approach, as well as the one being backed by Canada.
Countries should go for flexible and market-based exchange rates unless there is an agreement on special circumstances. Occasional multilateral intervention could be justified, as Carney demonstrated using an example of the G7 countries stepping in recently to stabilize the Japanese yen.
