policies. domestic reform is important because if each country works to get its own house in order, we increase the odds of doing the same on an international scale. in well - functioning domestic economies, savings flow across sectors and regions without much risk of disruption, because market - based mechanisms — such as changes in relative wages and prices — are allowed to work. authorities everywhere need domestic policies that promote well - functioning markets for goods, services, capital, and labour. in particular, labour markets need to be flexible enough to facilitate the movement of workers from sector to sector as the economy adjusts to events. if they are not, confidence is undermined : businesses hesitate to hire when labour market rules are restrictive, and households lack the confidence to spend when unemployment rates are high. by promoting domestic flexibility, policy - makers everywhere could support confidence and boost growth. this would be good for national economies, and it would also help to resolve global imbalances over time, provided that macroeconomic policies can smooth demand in the short run. since boca raton, we have seen some efforts to increase flexibility in some regions, but progress has been minimal. this is understandable because, politically, measures to increase the flexibility of labour markets can be very difficult. but labour market rigidities, particularly in europe and japan, remain significant barriers to adjustment. the second policy priority is the development of domestic capital and financial markets. the goal is to have markets that are not distorted by capital controls and other interventionist policies. it is important that asian policy - makers let their domestic financial systems do their job. we must acknowledge the difficulty and the time that this will take. and we should acknowledge that progress has been made in the banking and financial systems of several countries since the asian crisis of 1997 - 98. but even with that progress, it will still be some time before markets in that region are functioning at their optimal efficiency. and it will be some time before households in asia have sufficient and appropriate incentives to reduce savings and increase their consumption. this is not just an asian problem. europe, too, has a long way to go before it can establish a single euro capital market, let alone one that is open beyond the boundaries of that region. and i note, with some dismay, the rising economic nationalism with respect to foreign direct investment, not just in asia and europe, but in the united states as well. the third priority we outlined in boca raton was resumption of the doha round of multilateral trade

negotiations. it is critical that all countries work to protect and enhance the free flow of goods and services by pushing the doha round to a successful conclusion and by strengthening the world trade organization to ensure proper compliance with the rules of trade. all of us need to be vocal in resisting calls for protectionism. yet, two years after boca raton, progress on trade appears to be stalled. protectionism is a real and rising threat, and we see mounting restrictions on the flow of capital. instead of more openness in trade and investment, we see signs of increasing insularity. our fourth priority was sound fiscal policy over the medium term. countries should pursue policies that promote sustainable levels of household and government consumption and a low ratio of public debt to gdp. and while we didn't discuss monetary policy goals in the boca raton communique, we all recognize that prudent fiscal policy works best when it is combined with monetary policy that promotes low and stable inflation. such policies give businesses and consumers confidence that the value of their money will not be eroded over time by high inflation or excessive rates of taxation. sound fiscal and monetary policies are needed in the united states, europe, and japan to support investor and household confidence. fiscal consolidation in the united states would also be helpful in resolving global imbalances. the fifth priority is a policy of more flexible exchange rates that reflect economic fundamentals and promote smooth adjustments. given the fact that labour markets are still fairly inflexible and that wages and prices are slow to absorb shocks, a floating exchange rate is an important adjustment mechanism for many economies, including canada's. a market - based exchange rate can be a useful " shock absorber, " helping the economy to react to external swings in demand more efficiently than a fixed exchange rate. some asian economies have pursued an export - led growth strategy by fixing the value of their currencies to the u. s. dollar through persistent, sterilized, foreign exchange market intervention. this has resulted in an accumulation of excessive foreign exchange reserves and has exacerbated global imbalances. in theory, there is nothing wrong with countries having fixed nominal exchange rates. but in practice, this leads to major problems, because real rates do have to adjust to external shocks. the first problem is that under a fixed rate regime, the economy must adjust to these shocks through sharp changes in domestic prices. this means that countries with current account surpluses should experience high rates of domestic credit expansion,