Canada needs economic flexibility to meet the challenge of competition from emerging economies, says Paul Jenkins, senior deputy governor of the Bank of Canada.

Speaking to the Economics Society of Calgary, the Calgary Chamber of Commerce, and the Canada West Foundation in Calgary yesterday, Jenkins stressed the importance of economic flexibility given the host of challenges facing the country.

Jenkins discussed key challenges such as intensified competition from China and other newly industrialized economies, global financial imbalances, and high energy prices — and their implications for Canada and for Alberta. In short, he suggested that “flexibility is the key to surviving and thriving in a world in constant flux.” Prudent macroeconomic policies, combined with appropriate structural policies, can enhance the flexibility of our economy to weather shocks and to adjust to change over the medium term, he concluded.

He noted that the rise of countries such as China and India poses a competitive threat, but it also provides a large market for Canadian product and presents an opportunity to lower production costs.

Jenkins reiterated that the current global fiscal imbalances are unsustainable. He stressed the importance of flexible exchange rate regimes for accommodatiung the inevitable corrections. “This is why the Bank of Canada has been calling for greater exchange rate flexibility in China and other Asian countries,” he said. “We hope that the recent first step taken by China to widen somewhat the trading band for the renminbi will soon be followed by a more substantial move towards exchange rate flexibility.”

“For many firms, adapting to these rapid changes has been difficult, and in some cases very painful,” Jenkins allowed. However, he noted that evidence from the Bank’s surveys confirms that across Canada businesses have taken steps in response to the new global economic realities. “Some have chosen to import more inputs and finished goods from Asia. Others have moved away from products and markets with low profitability towards those that are likely to yield higher margins. More generally, firms have been investing in machinery and equipment to increase their productivity,” he said.

“Policy-makers can facilitate the adjustment process by continuing to pursue structural reforms that improve the quality and efficiency of human resources and make labour markets more flexible, so that workers can move more easily in response to market signals,” he noted.

Monetary policy should aim to keep inflation at 2% over the medium term and the national economy operating close to its production capacity. “Overall, we at the Bank will continue to look at economic developments across Canada to assess the adjustments and underlying trends in our economy, as well as the balance of risks, as we conduct monetary policy to keep inflation on target over the medium term,” he added.