david dodge : global imbalances and the canadian economy remarks by mr david dodge, governor of the bank of canada, to the barbados international business association, bridgetown, 6 february 2006. * * * global imbalances and the canadian economy canada and barbados may not have much in common in terms of climate, but we both have very open economies. so we both rely on good economic performance globally for good performance domestically. recently, the global economy has been delivering that performance, and is expected to record real growth of about 4 per cent or better through 2007. it would be nice to think that this solid growth could endure forever. however, we all know that the global economy is subject to a number of risks, and policy - makers in international forums spend a lot of time thinking about how best to handle those risks. most recently, discussions have focused on two major issues that are partly related to the rise to prominence of china and other asian economies. one is that world oil markets remain very tight, and a further increase in oil prices remains a possibility. the other issue relates to the global economic and financial imbalances that we now see, and the way in which they will be resolved. today, i want to spend some time discussing these imbalances and how they might be resolved. then i'll say a few words about the state of the canadian economy before turning to you for questions and discussion. global imbalances - origins and solutions i should start with a definition. when i say " global imbalances, " i am referring to the large and persistent current account deficit in the united states that is mirrored by large current account surpluses elsewhere, especially in asia and in many oil - exporting countries. given that canada and barbados depend on international trade and global financial stability for economic growth, we both have a major stake in seeing that global imbalances are resolved in an orderly way. there has been much written and spoken commentary on the causes of these imbalances. but at the bank of canada, we see them as reflecting the financial flows associated with mismatches in savings and investment within major regions of the global economy. since the latter part of the 1990s, many economies outside the united states have, for various reasons, increased their national savings by a very large amount. at the same time, the united states has reduced its savings and has become increasingly reliant on foreign borrowing. is this a problem? so far, no. global financial markets -

is globally competitive. and we have new and emerging areas of strength, including in green technology and electricity. - 12 to leverage these strengths, we need to invest in trade infrastructure and reduce trade barriers so that integrating canada into the north american value chain is more attractive for businesses. this includes investing in our electricity grid and transportation infrastructure. and businesses need to invest in new equipment and innovation to be globally competitive. as trade is recast for security or strategic reasons, canada is a trusted and reliable trading partner. canada is not going to be the cheapest alternative. but we have a highly skilled labour force, reliable energy and transportation networks and solid financial institutions. moreover, canada has a stable democracy and strong rule of law. and we provide a reliable and important voice at the global table. effective multilateral institutions that brings me to our second priority. we need to invest in effective multilateral institutions — they are more important than ever in this fragmented world. and they will be only as effective as members want them to be. it has never been easy to attain international economic cooperation, and open trade has come under particular pressure. but the trends i ’ ve just outlined increase the urgency. our common interest is shared prosperity. we all benefit from a stable, open, rulesbased global order. we need to build it, protect it, adapt it and ensure the benefits are shared. effective and legitimate multilateral institutions don ’ t just happen. they need good governance, adequate resources, talent and inspired management. canada has long invested in the bretton woods institutions. we have a strong voice at the imf and financial stability board ( fsb ). we know the value of an effective wto that can serve as a forum for negotiations, act as an arbiter of disputes and monitor the implementation of trade agreements. as canada assumes the g7 presidency in 2025, we have a responsibility to lead difficult discussions. that includes trade, global financial stability and mitigating climate change. as central bankers, our particular focus is the imf, the fsb and the international monetary order. we need to be sure that the international monetary and financial system is up to the task and is integrated with the other parts. the fundamentals of economics have not changed, but the need for resilience and agility has increased with changing economic circumstances. managing disruption finally, canada needs to be ready for the trade disruptions that seem inevitable amid a changing trade landscape. the bank of canada doesn ’ t