Investment, Trade and Growth -- Multilevel Regulatory Governance in Canada

1. Investment, Trade and Growth-- Multilevel Regulatory Governance in Canada Geoffrey Hale and Christopher Kukucha, University of Lethbridge Presentation to CRUISE Conference, Ottawa, Ontario, October 28, 2004

2. The Paradox of Trade, Investment Policies • Trade and investment policies interrelated, driven by North American integration, globalization

3. The Paradox of Trade, Investment Policies • Trade and investment policies interrelated, driven by N.A. Integration, globalization • Canadian trade policies increasingly integrated in North American, global regimes – leading to greater federal-provincial cooperation

4. The Paradox of Trade, Investment Policies • Trade and investment policies interrelated, driven by N.A. Integration, globalization • Canadian trade policies increasingly integrated in North American, global regimes – leading to greater federal-provincial cooperation • BUT – no horizontal policy regime to integrate Cdn. investment, capital markets policies  policies decentralized, fragmented

5. Trade & Investment: suggested explanations for variations in multi-level governance • Capacity of horizontal policy regimes to mediate between domestic political institutions, regionally-varied economic sectors • Capacity to mediate between domestic interests, international “systemic” factors

6. Trade & Investment: suggested explanations for variations in multi-level governance • Institutional choices of Canadian governments (federal + provincial) in responding to external systemic factors

7. Trade & Investment: suggested explanations for variations in multi-level governance • Institutional choices of Canadian governments (federal + provincial) in responding to external systemic factors • Capacity, willingness of senior governments to pursue complementary policies capable of accommodating varied regional interests – NOT zero-sum game.

8. Structuring Canadian Trade Policies • Regulatory frameworks related to international trade exist as a result of overlapping global, regional, and domestic rules-based initiatives • These governance structures can be mutually reinforcing and interdependent - thereby challenging traditional conceptions of regulation

9. International context • At the “systemic” level these forums are created in an anarchic neo-liberal system • Historically, states have attempted to manage international market forces with regimes and more formal agreements • Over time, these international frameworks have become more intrusive into areas of domestic policy space

10. International context - Continued • This intrusiveness has implications for “process” factors at both levels of analysis • Specifically, the emergence of multi-level governance structures is more likely when a mutually reinforcing series of domestic and international regimes is in place • These regimes are in response to increasing intrusiveness - but also maintain state autonomy and policy capacity

11. Evaluating Systemic Intrusiveness • Adopts a neo-liberal institutional approach with a focus on domestic factors (Keohane and Nye, Winham, Ostry) • GATT, Uruguay round, WTO • Regional Considerations - FTA, NAFTA • Intrusiveness still limited. Current impasse re: international governance - Seattle, MAI, Doha, Cancun

12. Domestic Governance Structures • Existing domestic regimes the result of mutually reinforcing international and domestic considerations • CITT, Agreement on Internal Trade, Federal-provincial consultation, ITAC and SAGIT forums • Implications for 1) legitimacy, 2) democratic accountability, and 3) deeper integration

13. Investment and Capital Markets Policies • Fragmented constitutional authority • Multiple legal instruments, sectoral regimes • Varying degrees of market integration

14. Federal FDI Policies permissive (excl. “strategic” sectors) Tax policies* federal primacy* extensive impact on portfolio investments, pension funds Competition Policies Corporation Law Monetary Policies Bank Act Criminal Code Provincial Economic development(industry-specific policies) Regulation of capital markets* securities laws* regulation of securities, mutual fund dealers, pension funds* recognition of SROs Emergence of fed-prov., inter-provincial coordinating bodies to manage jurisdictional overlap Investment and Capital Markets Policies

15. Historical factors affecting regimes governing capital markets • Varied national approaches to financial sector regulation – strategic sector, reflecting “prevailing development strategy” • Reflect wide national variations in structures of banking systems, relation to capital markets • Canada -- accommodation of regional interests, economic diversification through provincial regulation of capital markets

16. Canada’s financial / capital markets regime: historical evolution • “Four Pillars” – functional specialization, segmented ownership and regulation of banks (federal), trust and insurance companies (shared), securities dealers (provincial) • Gradual shift of market dominance to Toronto-based securities dealers, with regional markets in Quebec, BC, Alberta

17. Canada’s financial / capital markets: factors contributing to regime shift • Globalization of financial markets outside direct state control (1970s, 1980s) • U.S. securities dealers “go public” (1980s) • Demonstration effects of regulatory reforms(e.g. Britain’s ‘big bang’ of 1987) • Provincial preemption (Quebec, Ontario) of federal position during FTA negotiations (opening industry to foreign ownership, bank participation)

18. Canada’s financial / capital markets: adapting to constant change (1990s) • Erosion of “four pillars” – “big 6” banks take dominant position in Canada’s securities industry • Large-scale shift of private savings to equity markets, rapid expansion of mutual fund sector • Liberalization of pension fund, RRSP investments • Huge expansion of cross-border direct and portfolio investments • Reorganization, consolidation of Canadian securities exchanges in response to int’l competition (1998-2002)

19. Growing international, regional regimes (WTO, NAFTA) Integrated horizontal policy regime (CITT, AIT, CTRADE) informed by common principles No formal regime – “international network governance” (IOSCO, etc.) Separate regulatory systems for banks, capital markets, corporate governance Emergence of separate domestic governance networks(CSA, CCIR, etc.) Contrasting Trade and Capital Markets Policies

20. Rethinking capital markets policies for the 21st century • Competing regulatory priorities* uniformity / efficiency vs. flexibility / access to capital (limited regulatory “competition”) in domestic market regulation* “uniformity” vs. “comparability” in cross-border regulatory harmonization with United States* “rules” vs. “principles” – enforcement orientation vs. adaptation to evolving market circumstances

21. Rethinking capital markets policies for the 21st century • Responsiveness* balancing interests of Canadian-based MNCs (often inter-listed in US, other markets), small- and mid-cap firms * balancing interests of issuers, intermediaries (investor protection: shared interest)* two-tier, regionalized character of Canadian securities markets

22. Rethinking capital markets policies for the 21st century • Accountability* “rules” vs. “principles”* market participants to regulators* regulators to cabinets/legislatures* corporate management to shareholders(“Public interest” vs. “public choice” views of regulatory processes) • Perceived risks of regulatory capture

23. Proposals for national (federal/interprovincial) securities regulator Enact Uniform Securities Legislation Uniformity  efficiency lower transaction costs  greater efficiency Proposal for “passport system” based on mutual recognition, delegated enforcement Requires minimum standards, ongoing coordination Flexibility  accommodate regulatory innovation  regional responsiveness Rethinking capital markets policies for the 21st century

24. A two-tier, regionalized market? • Top 80 firms account for 80 percent of market cap, equities trading in Canada • Shares of 70% of largest 60 Cdn. firms interlisted on US, other foreign exchanges • Head offices of publicly traded firms by percentage of total market capitalization: Ontario (45%) Alberta (18%)Quebec (14%) BC (5%) • More than 60% of small, micro-cap firms based in BC (39%), Alberta (24%)

25. Federal jurisdictional primacy (treaties, trade) Provincial cooperation necessary for effective federal action Potential for positive-sum game (regional / international) Community of interest in strengthening complementary rules-based systems (int’l / domestic) – “two-level game” Jurisdictions overlap: financial institutions (fed), capital markets (prov.) No international rules-based system or process to structure creation of horizontal policy regime in Canada Provincial cooperation necessary for effective federal / interprovincial action Community of interest limited  incrementalism vs. zero-sum game? Comparing Environments for Trade, Capital Markets Policies

29. Balancing domestic, global pressures in financial market governance Incremental adaptation of “soft law” regimes: • reconcile traditional national emphasis of domestic financial sector and capital markets policies with internationalization of financial markets; • strengthen domestic regulatory oversight of financial markets financial crises of the late 1990s; • US regulatory responses to corporate scandals resulting from the neglect or abuse of existing laws and regulations; and • European efforts to develop and enforce common financial market and related tax policies by fostering compatible international institutions. [Hudson, Honahan, and Majnoni, 2003]