david dodge : policies for changing times remarks by mr david dodge, governor of the bank of canada, to the mexican business coordinating council, mexico city, 17 february 2004. * * * good morning. i am glad to have the opportunity to meet with business leaders in mexico today. i am also glad to have this opportunity to meet with our colleagues at the banco de mexico. our two central banks have had a long and fruitful relationship, one that includes swap facilities, joint research, and close consultations. i believe that public servants and business leaders in canada and mexico have a great deal in common and much to learn from one another. indeed, in many ways, canada and mexico are partners. we share common issues and challenges. we both share borders with the united states, the most important export market for each of us. both canada and mexico have recently faced setbacks in cross - border trade with the united states. these stem not only from weaker u. s. domestic demand, but also from specific trade problems and from border - crossing delays associated with tighter security. we have both been affected by the slowdown in the world economy and by global economic imbalances - although the impact of these factors appears to have been somewhat less in canada than in mexico over the past three years. and we are both working on the structural adjustments that are necessary to weather shocks and to thrive in a changing environment. today, i want to focus my remarks on canada ’ s adjustment to global economic changes. i will talk about our efforts to adjust to longer - term economic forces and about our challenges in this regard. and i will talk about some of the lessons that we have all learned during the past couple of decades. policy - makers in both canada and mexico have drawn on these lessons to improve our macroeconomic policy frameworks, and thus to better manage and adjust to change. i will conclude with some thoughts about how canada and mexico can continue to adjust to the economic changes that face us in the future. the most important lesson that we have all learned is that structural adjustments are key in adapting to change, and that macroeconomic policies have a role to play in making those adjustments with a minimum of economic and social disruption. past adjustments canada has experienced two periods in recent decades when significant economic adjustment was required. the first was during the 1970s, when we were hit by a rapid slowdown in productivity growth and by the effects of the oil crisis. policy - makers in canada used macroeconomic and microeconomic

our economic policies and reduced the risk premium on canadian bonds demanded by investors. canada ’ s economy, like that of mexico and many others, also underwent structural adjustments in the 1990s, in both the public and private sectors. these adjustments were enormously helpful, because they made the canadian economy more flexible. governments moved to reduce distortions in the economy by eliminating many industrial subsidies, reducing personal income taxes, and reforming the unemployment insurance system. at the same time, enterprises responded to the challenges of trade liberalization by improving the quality of their products and marketing them aggressively to new north american customers. these adjustments were not easy. but they did leave canada ’ s economy in a better position to handle economic shocks and, therefore, to grow on a sustained basis. canada ’ s floating exchange rate helped facilitate these structural adjustments. the depreciating canadian dollar in the late 1990s encouraged foreign demand, which helped to compensate for reduced demand from the government sector. it also helped by sending signals to businesses about the kinds of adjustments that were needed. in sum, a sound macroeconomic policy framework, appropriate structural adjustments, and a floating exchange rate all did their part to help canada ’ s economy adjust to the changing circumstances of the 1990s. while these adjustments were difficult, the payoff came quickly. by the end of the decade, canadians were beginning to see higher real incomes. international forces so that ’ s a quick backward look. let ’ s now consider the ongoing international forces at work in our economies. both canada and mexico are going to need to increase productivity in the face of fierce competition from china and other lower - cost countries. indeed, it is clear that all countries are going to have to find ways to become more competitive. in canada, we have an opportunity in the next few years to again realize solid, steady productivity gains, thanks to past investments in information and communications technology. of course, technology alone is not enough to guarantee higher productivity. to actually realize productivity gains, enterprises must make the necessary investments and organizational changes. and they must train their staff to use technology to its best advantage. other forces in the world economy bear watching. these include significant imbalances in global current - and capital - account flows. and new players, particularly in asia, are becoming increasingly powerful in the global economy. as i ’ ve mentioned, that increases the competitive pressure facing our manufacturers. but it also means new, fast - growing sources of demand, and new opportunities. adjustments in the future in the face