Mark Carney says G20 must address major global economic shift

CALGARY - A major shift is taking place in the global economy, and G20 countries must set policies that will prevent another dire economic crisis from taking place, Canada's central banker said Saturday.

Bank of Canada Governor Mark Carney said the global "economic centre of gravity" is moving away from advanced industrialized nations and toward emerging economies in regions like Latin America and Asia.

"This is a fundamentally positive paradigm shift," he said in a speech at the annual meeting of the Inter-American Development Bank. "But it's also disruptive."

Sustained growth from emerging economies means high commodity prices are expected to stick around for a long time. Policy makers who mistake this trend for a speculation-driven flash in the pan do 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 enormous amount of foreign capital looking for a home in booming emerging economies -- risks driving up inflation in those regions.

Carney warned those countries against constraining capital flows or foreign exchange moves as a means to deal with those challenges.

"Some economies are postponing monetary tightening in the hope that old relationships will reassert. Others are resisting capital inflows," Carney said. "And all appear to be underestimating the scale 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 the refounding of the international monetary system, which has degenerated into an increasingly dysfunctional hybrid of fixed and floating regimes."

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 both predictable and mutually consistent," he said.

In the short-term, Carney said he is also in favour of an informal code-of-conduct on how to manage the huge amounts of foreign capital pouring into emerging economies.

Major economies should also stick to flexible, market-based exchange rates unless they agree special circumstances warrant an intervention.

Carney said the G20 is well suited to help "spring the trap."

"However, the G20 cannot relaunch the global monetary system by itself," he said, noting international governance bodies like the 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 upside down," he told a news conference Saturday as part of the meeting of Western Hemisphere financial leaders.

On one hand, it doesn't look good for most mature economies, which are going to grow at a "very subdued pace" for the medium term.

"By contrast the emerging world -- Latin America included -- has a considerable amount of domestic momentum and there's really 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, added Frederick Jaspersen, director of Latin America for the IIF, which represents financial institutions around the world.

For instance, Brazil imposed a tax on outside investment on fixed-income instruments. But it hasn't stopped money from flowing into the country through other venues.

"So if you push it down in one place, and fundamentals are strong and investors want to get into the country, it pops out somewhere else," he said.

"In some countries there's a very strong feeling among policy makers -- I'm thinking of Mexico and 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 his counterparts did not reach any conclusions about some of the challenges Carney highlighted in his speech.

"We had discussions certainly involving some of the ministers and the international financial institutions about the pros and cons of interfering with capital flows and there are differing points of view on that," Flaherty said as the federal election campaign kicked off.

"This forum of finance ministers is not designed as a forum where we will make decisions that are binding on other countries, including ourselves, about any particular issues. It is an important forum for discussion and sharing and planning."