Commodities in long-term boom?This article has a more positive tone than the one I posted from Newsweek yesterday. The coming months and years are still fraught with danger but it can be managed if the will is there among the global players. Economic forecasting is obviously extremely complicated and consequently frustrating for those of us trying to figure out if its safe to jump to the next pan of ice...
Mark Carney says G20 must address major global economic shift
Lauren Krugel, The Canadian Press, On Saturday March 26, 2011, 9:25 pm
By Lauren Krugel, The Canadian Press
CALGARY - A major shift is taking place in theglobal economy, and G20 countries must set policies that will preventanother dire economic crisis from taking place, Canada's central bankersaid Saturday.
Bank of Canada Governor Mark Carney said the global"economic centre of gravity" is moving away from advanced industrializednations and toward emerging economies in regions like Latin America andAsia.
"This is a fundamentally positive paradigm shift," hesaid in a speech at the annual meeting of the Inter-American DevelopmentBank. "But it's also disruptive."
Sustained growth from emerging economies means highcommodity prices are expected to stick around for a long time. Policymakers who mistake this trend for a speculation-driven flash in the pando so at their peril, Carney warned.
"Even though history teaches us that all booms are finite, this one could go on for a long time."
The commodity price increase — along with the enormousamount of foreign capital looking for a home in booming emergingeconomies — risks driving up inflation in those regions.
Carney warned those countries against constrainingcapital flows or foreign exchange moves as a means to deal with thosechallenges.
"Some economies are postponing monetary tightening inthe hope that old relationships will reassert. Others are resistingcapital inflows," Carney said. "And all appear to be underestimating thescale of what's happening."
"And here lies the risk of another crisis."
Avoiding more major economic upheaval, he said, will require "leadership, purpose and legitimacy."
Longer-term, he advocates "nothing less than therefounding of the international monetary system, which has degeneratedinto an increasingly dysfunctional hybrid of fixed and floatingregimes."
One route is to enforce rules at the World Trade Organization, an option Carney called "divisive."
"A much more constructive approach, favoured by Canada,is to renew the rules of the game so that country actions are bothpredictable and mutually consistent," he said.
In the short-term, Carney said he is also in favour ofan informal code-of-conduct on how to manage the huge amounts of foreigncapital pouring into emerging economies.
Major economies should also stick to flexible,market-based exchange rates unless they agree special circumstanceswarrant an intervention.
Carney said the G20 is well suited to help "spring the trap."
"However, the G20 cannot relaunch the global monetarysystem by itself," he said, noting international governance bodies likethe International Monetary Fund must also play a role.
Philip Suttle, chief economist at the Institute for International Finance, agreed the dynamics are changing.
"We remain stuck in what I call the world turned upsidedown," he told a news conference Saturday as part of the meeting ofWestern Hemisphere financial leaders.
On one hand, it doesn't look good for most matureeconomies, which are going to grow at a "very subdued pace" for themedium term.
"By contrast the emerging world — Latin Americaincluded — has a considerable amount of domestic momentum and there'sreally no reason to expect that pattern to change."
Capital flows into emerging economies is "just a simple fact of life" and it would be a big mistake to resist it, he said.
"In other words, capital controls are a very inappropriate measure to be taking at the current time."
Capital controls tend not to work anyway, addedFrederick Jaspersen, director of Latin America for the IIF, whichrepresents financial institutions around the world.
For instance, Brazil imposed a tax on outsideinvestment on fixed-income instruments. But it hasn't stopped money fromflowing into the country through other venues.
"So if you push it down in one place, and fundamentalsare strong and investors want to get into the country, it pops outsomewhere else," he said.
"In some countries there's a very strong feeling among policy makers — I'm thinking ofMexicoand Chile in particular — that capital controls just don't work."
Carney's remarks came as Western Hemisphere finance ministers held their yearly meeting.
Canadian Finance Minister Jim Flaherty said he and hiscounterparts did not reach any conclusions about some of the challengesCarney highlighted in his speech.
"We had discussions certainly involving some of theministers and the international financial institutions about the prosand cons of interfering with capital flows and there are differingpoints of view on that," Flaherty said as the federal election campaignkicked off.
"This forum of finance ministers is not designed as aforum where we will make decisions that are binding on other countries,including ourselves, about any particular issues. It is an importantforum for discussion and sharing and planning."