Bank of Canada governor David Dodge is calling for a variety of co-ordinated policy actions to help ensure that global fiscal imbalances can resolve themselves as smoothly as possible.

Speaking to the New York Association for Business Economics in New York today, Dodge called for an international monetary system that supports market-based solutions to global imbalances.

In an ideal world in which markets operate efficiently, “imbalances can resolve themselves in a smooth and orderly manner,” Dodge said. “But we don’t live in an ideal world. Domestic labour markets in Europe and Asia are not very flexible, and reallocation of labour resources is difficult. Domestic fiscal and social policies often stifle investment and encourage excessive savings in some parts of the world and overstimulate consumption in others. And there are still persistent impediments to the free flow of goods and services across borders.

“Meanwhile, some domestic banking sectors and capital markets continue to operate under rigid and inefficient regulations,” he added. “And some important economies, particularly in Asia, are maintaining undervalued exchange rates through exchange market interventions and capital controls. In the process, they are accumulating excessive reserves.”

The risks from a disorderly unwinding include a drop in U.S. demand without an offsetting increase in demand from other regions, harmful protectionism and dramatically reduced investor exposure to the U.S., “which could cause major disruption in world financial markets.”

Dodge argued that the resolution of global imbalances will require market-based solutions. This includes five major initiatives: microeconomic policies that increase flexibility and raise productivity growth and employment; the development of well-functioning domestic capital and financial markets; resumption of the Doha round of multilateral trade negotiations; sound fiscal policies; and flexible exchange rates.

“To deal with global current account imbalances in an orderly and efficient way that supports continued growth, we have to make progress on all five of these policy fronts. It simply won’t do for countries to pick one or two of these policy priorities and ignore the others,” he said. “And we can’t delude ourselves into thinking that economic imbalances will be resolved in an orderly way through exchange rate adjustments alone. Progress has to be extensive, international, and simultaneous.

“A major economic disruption, such as a disorderly resolution of global imbalances, will affect every country. Collective action is needed now to minimize the chances of such a disruption,” dodge concluded. “Domestically, policy-makers need to promote well-functioning markets for goods, services, capital, and labour. Internationally, policy-makers need to develop a framework that allows an orderly, market-based unwinding of global imbalances.

“We don’t need to create a perfect world. But we do need to make progress — real progress on better-functioning financial markets, more flexible currency regimes, more open international trade, and better fiscal and structural policies. Each country and each region has its work to do. Now is the time for all of us to get on with the job,” he said.