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

Geoffrey Hale and Christopher Kukucha, Geoffrey Hale and Christopher Kukucha, University of LethbridgeUniversity of Lethbridge

Presentation to CRUISE Conference, Presentation to CRUISE Conference,

Ottawa, Ontario, October 28, 2004Ottawa, Ontario, October 28, 2004

The Paradox of Trade, Investment The Paradox of Trade, Investment PoliciesPolicies

Trade and investment policies interrelated, Trade and investment policies interrelated, driven by North American integration, driven by North American integration, globalizationglobalization

The Paradox of Trade, Investment The Paradox of Trade, Investment PoliciesPolicies

Trade and investment policies interrelated, Trade and investment policies interrelated, driven by N.A. Integration, globalizationdriven by N.A. Integration, globalization

Canadian trade policies increasingly Canadian trade policies increasingly integrated in North American, global integrated in North American, global regimes – leading to greater federal-regimes – leading to greater federal-provincial cooperationprovincial cooperation

The Paradox of Trade, Investment The Paradox of Trade, Investment PoliciesPolicies

Trade and investment policies interrelated, driven Trade and investment policies interrelated, driven by N.A. Integration, globalizationby N.A. Integration, globalization

Canadian trade policies increasingly integrated in Canadian trade policies increasingly integrated in North American, global regimes – leading to North American, global regimes – leading to greater federal-provincial cooperationgreater federal-provincial cooperation

BUT – no horizontal policy regime to integrate BUT – no horizontal policy regime to integrate Cdn. investment, capital markets policies Cdn. investment, capital markets policies policies decentralized, fragmentedpolicies decentralized, fragmented

Trade & Investment: suggested Trade & Investment: suggested explanations for variations in multi-explanations for variations in multi-

level governancelevel governance Capacity of horizontal policy regimes to Capacity of horizontal policy regimes to

mediate between domestic political mediate between domestic political institutions, regionally-varied economic institutions, regionally-varied economic sectorssectors

Capacity to mediate between domestic Capacity to mediate between domestic interests, international “systemic” factorsinterests, international “systemic” factors

Trade & Investment: suggested Trade & Investment: suggested explanations for variations in multi-explanations for variations in multi-

level governancelevel governance

Institutional choices of Canadian Institutional choices of Canadian governments (federal + provincial) in governments (federal + provincial) in responding to external systemic factorsresponding to external systemic factors

Trade & Investment: suggested Trade & Investment: suggested explanations for variations in multi-explanations for variations in multi-

level governancelevel governance

Institutional choices of Canadian Institutional choices of Canadian governments (federal + provincial) in governments (federal + provincial) in responding to external systemic factorsresponding to external systemic factors

Capacity, willingness of senior governments Capacity, willingness of senior governments to pursue complementary policies capable to pursue complementary policies capable of accommodating varied regional interests of accommodating varied regional interests – NOT zero-sum game. – NOT zero-sum game.

Structuring Canadian Trade PoliciesStructuring Canadian Trade Policies

Regulatory frameworks related to Regulatory frameworks related to international trade exist as a result of international trade exist as a result of overlapping global, regional, and domestic overlapping global, regional, and domestic rules-based initiativesrules-based initiatives

These governance structures can be These governance structures can be mutually reinforcing and interdependent - mutually reinforcing and interdependent - thereby challenging traditional conceptions thereby challenging traditional conceptions of regulation of regulation

International contextInternational context

At the “systemic” level these forums are At the “systemic” level these forums are created in an anarchic neo-liberal systemcreated in an anarchic neo-liberal system

Historically, states have attempted to Historically, states have attempted to manage international market forces with manage international market forces with regimes and more formal agreementsregimes and more formal agreements

Over time, these international frameworks Over time, these international frameworks have become more intrusive into areas of have become more intrusive into areas of domestic policy spacedomestic policy space

International context - ContinuedInternational context - Continued This intrusiveness has implications for This intrusiveness has implications for

“process” factors at both levels of analysis“process” factors at both levels of analysis Specifically, the emergence of multi-level Specifically, the emergence of multi-level

governance structures is more likely when a governance structures is more likely when a mutually reinforcing series of domestic and mutually reinforcing series of domestic and international regimes is in placeinternational regimes is in place

These regimes are in response to increasing These regimes are in response to increasing intrusiveness - but also maintain state intrusiveness - but also maintain state autonomy and policy capacityautonomy and policy capacity

Evaluating Systemic IntrusivenessEvaluating Systemic Intrusiveness

Adopts a neo-liberal institutional approach Adopts a neo-liberal institutional approach with a focus on domestic factors (Keohane with a focus on domestic factors (Keohane and Nye, Winham, Ostry)and Nye, Winham, Ostry)

GATT, Uruguay round, WTOGATT, Uruguay round, WTO Regional Considerations - FTA, NAFTARegional Considerations - FTA, NAFTA Intrusiveness still limited. Current impasse Intrusiveness still limited. Current impasse

re: international governance - Seattle, MAI, re: international governance - Seattle, MAI, Doha, CancunDoha, Cancun

Domestic Governance StructuresDomestic Governance Structures

Existing domestic regimes the result of Existing domestic regimes the result of mutually reinforcing international and mutually reinforcing international and domestic considerationsdomestic considerations

CITT, Agreement on Internal Trade, CITT, Agreement on Internal Trade, Federal-provincial consultation, ITAC and Federal-provincial consultation, ITAC and SAGIT forumsSAGIT forums

Implications for 1) legitimacy, 2) democratic Implications for 1) legitimacy, 2) democratic accountability, and 3) deeper integrationaccountability, and 3) deeper integration

Investment and Capital Markets Investment and Capital Markets PoliciesPolicies

Fragmented constitutional authorityFragmented constitutional authority Multiple legal instruments, sectoral regimesMultiple legal instruments, sectoral regimes Varying degrees of market integrationVarying degrees of market integration

Investment and Capital Markets Investment and Capital Markets PoliciesPolicies

FederalFederal FDI Policies permissive (excl. FDI Policies permissive (excl.

“strategic” sectors)“strategic” sectors) Tax policiesTax policies

* federal primacy* federal primacy* extensive impact on portfolio * extensive impact on portfolio investments, pension fundsinvestments, pension funds

Competition PoliciesCompetition Policies Corporation LawCorporation Law Monetary PoliciesMonetary Policies Bank ActBank Act Criminal CodeCriminal Code

ProvincialProvincial Economic developmentEconomic development

(industry-specific policies)(industry-specific policies)

Regulation of capital marketsRegulation of capital markets* securities laws* securities laws* regulation of securities, mutual * regulation of securities, mutual fund dealers, pension fundsfund dealers, pension funds* recognition of SROs* recognition of SROs

Emergence of fed-prov., inter-Emergence of fed-prov., inter-provincial coordinating bodies to provincial coordinating bodies to manage jurisdictional overlapmanage jurisdictional overlap

Historical factors affecting regimes Historical factors affecting regimes governing capital marketsgoverning capital markets

Varied national approaches to financial Varied national approaches to financial sector regulation – strategic sector, sector regulation – strategic sector, reflecting “prevailing development strategy”reflecting “prevailing development strategy”

Reflect wide national variations in structures Reflect wide national variations in structures of banking systems, relation to capital of banking systems, relation to capital marketsmarkets

Canada -- accommodation of regional Canada -- accommodation of regional interests, economic diversification through interests, economic diversification through provincial regulation of capital marketsprovincial regulation of capital markets

Canada’s financial / capital markets Canada’s financial / capital markets regime: historical evolution regime: historical evolution

““Four Pillars” – functional specialization, Four Pillars” – functional specialization, segmented ownership and regulation of segmented ownership and regulation of banks (federal), trust and insurance banks (federal), trust and insurance companies (shared), securities dealers companies (shared), securities dealers (provincial)(provincial)

Gradual shift of market dominance to Gradual shift of market dominance to Toronto-based securities dealers, with Toronto-based securities dealers, with regional markets in Quebec, BC, Albertaregional markets in Quebec, BC, Alberta

Canada’s financial / capital markets: Canada’s financial / capital markets: factors contributing to regime shiftfactors contributing to regime shift

Globalization of financial markets outside direct Globalization of financial markets outside direct state control (1970s, 1980s)state control (1970s, 1980s)

U.S. securities dealers “go public” (1980s)U.S. securities dealers “go public” (1980s)

Demonstration effects of regulatory reformsDemonstration effects of regulatory reforms(e.g. Britain’s ‘big bang’ of 1987)(e.g. Britain’s ‘big bang’ of 1987)

Provincial preemption (Quebec, Ontario) of federal Provincial preemption (Quebec, Ontario) of federal position during FTA negotiations (opening industry position during FTA negotiations (opening industry to foreign ownership, bank participation)to foreign ownership, bank participation)

Canada’s financial / capital markets: Canada’s financial / capital markets: adapting to constant change (1990s)adapting to constant change (1990s) Erosion of “four pillars” – “big 6” banks take dominant Erosion of “four pillars” – “big 6” banks take dominant

position in Canada’s securities industryposition in Canada’s securities industry

Large-scale shift of private savings to equity markets, rapid Large-scale shift of private savings to equity markets, rapid expansion of mutual fund sector expansion of mutual fund sector

Liberalization of pension fund, RRSP investmentsLiberalization of pension fund, RRSP investments

Huge expansion of cross-border direct and portfolio Huge expansion of cross-border direct and portfolio investmentsinvestments

Reorganization, consolidation of Canadian securities Reorganization, consolidation of Canadian securities exchanges in response to int’l competition (1998-2002)exchanges in response to int’l competition (1998-2002)

Contrasting Trade and Capital Contrasting Trade and Capital Markets PoliciesMarkets Policies

Growing international, Growing international, regional regimes (WTO, regional regimes (WTO, NAFTA)NAFTA)

Integrated horizontal policy Integrated horizontal policy regime (CITT, AIT, regime (CITT, AIT, CTRADE) informed by CTRADE) informed by common principlescommon principles

No formal regime – No formal regime – “international network “international network governance” (IOSCO, etc.)governance” (IOSCO, etc.)

Separate regulatory Separate regulatory systems for banks, capital systems for banks, capital markets, corporate markets, corporate governancegovernance

Emergence of separate Emergence of separate domestic governance domestic governance networksnetworks(CSA, CCIR, etc.)(CSA, CCIR, etc.)

Rethinking capital markets policies Rethinking capital markets policies for the 21for the 21stst century century

Competing regulatory prioritiesCompeting regulatory priorities* uniformity / efficiency vs. flexibility / access to * uniformity / efficiency vs. flexibility / access to capital (limited regulatory “competition”) in capital (limited regulatory “competition”) in domestic market regulationdomestic market regulation* “uniformity” vs. “comparability” in cross-border * “uniformity” vs. “comparability” in cross-border regulatory harmonization with United Statesregulatory harmonization with United States* “rules” vs. “principles” – enforcement orientation * “rules” vs. “principles” – enforcement orientation vs. adaptation to evolving market circumstancesvs. adaptation to evolving market circumstances

Rethinking capital markets policies Rethinking capital markets policies for the 21for the 21stst century century

ResponsivenessResponsiveness* balancing interests of Canadian-based MNCs * balancing interests of Canadian-based MNCs (often inter-listed in US, other markets), small- and (often inter-listed in US, other markets), small- and mid-cap firms mid-cap firms * balancing interests of issuers, intermediaries * balancing interests of issuers, intermediaries (investor protection: shared interest)(investor protection: shared interest)* two-tier, regionalized character of Canadian * two-tier, regionalized character of Canadian securities markets securities markets

Rethinking capital markets policies Rethinking capital markets policies for the 21for the 21stst century century

AccountabilityAccountability* “rules” vs. “principles”* “rules” vs. “principles”* market participants to regulators* market participants to regulators* regulators to cabinets/legislatures* regulators to cabinets/legislatures* corporate management to shareholders* corporate management to shareholders(“Public interest” vs. “public choice” views of (“Public interest” vs. “public choice” views of regulatory processes)regulatory processes)

Perceived risks of regulatory capturePerceived risks of regulatory capture

Rethinking capital markets policies Rethinking capital markets policies for the 21for the 21stst century century

Proposals for national Proposals for national (federal/interprovincial) (federal/interprovincial) securities regulatorsecurities regulator

Enact Uniform Securities Enact Uniform Securities LegislationLegislation

Uniformity Uniformity efficiency efficiency lower transaction costs lower transaction costs greater efficiency greater efficiency

Proposal for “passport Proposal for “passport system” based on mutual system” based on mutual recognition, delegated recognition, delegated enforcementenforcement

Requires minimum Requires minimum standards, ongoing standards, ongoing coordinationcoordination

Flexibility Flexibility accommodate accommodate regulatory innovation regulatory innovation regional responsivenessregional responsiveness

A two-tier, regionalized market?A two-tier, regionalized market?

Top 80 firms account for 80 percent of market cap, Top 80 firms account for 80 percent of market cap, equities trading in Canadaequities trading in Canada

Shares of 70% of largest 60 Cdn. firms interlisted Shares of 70% of largest 60 Cdn. firms interlisted on US, other foreign exchangeson US, other foreign exchanges

Head offices of publicly traded firms by percentage Head offices of publicly traded firms by percentage of total market capitalization: of total market capitalization: Ontario (45%)Ontario (45%) Alberta (18%)Alberta (18%)Quebec (14%)Quebec (14%) BC (5%)BC (5%)

More than 60% of small, micro-cap firms based in More than 60% of small, micro-cap firms based in BC (39%), Alberta (24%) BC (39%), Alberta (24%)

Comparing Environments for Trade, Comparing Environments for Trade, Capital Markets PoliciesCapital Markets Policies

Federal jurisdictional primacy Federal jurisdictional primacy (treaties, trade)(treaties, trade)

Provincial cooperation Provincial cooperation necessary for effective federal necessary for effective federal actionaction

Potential for positive-sum game Potential for positive-sum game (regional / international)(regional / international)

Community of interest in Community of interest in strengthening complementary strengthening complementary rules-based systems (int’l / rules-based systems (int’l / domestic) – “two-level game”domestic) – “two-level game”

Jurisdictions overlap: financial Jurisdictions overlap: financial institutions (fed), capital markets institutions (fed), capital markets (prov.)(prov.)

No international rules-based No international rules-based system or process to structure system or process to structure creation of horizontal policy creation of horizontal policy regime in Canadaregime in Canada

Provincial cooperation Provincial cooperation necessary for effective federal / necessary for effective federal / interprovincial actioninterprovincial action

Community of interest limited Community of interest limited incrementalism vs. zero-sum incrementalism vs. zero-sum game?game?

Balancing domestic, global pressures in Balancing domestic, global pressures in financial market governance financial market governance

Incremental adaptation of “soft law” regimes:Incremental adaptation of “soft law” regimes: reconcile traditional national emphasis of domestic financial reconcile traditional national emphasis of domestic financial

sector and capital markets policies with internationalization sector and capital markets policies with internationalization of financial markets; of financial markets;

strengthen domestic regulatory oversight of financial strengthen domestic regulatory oversight of financial markets financial crises of the late 1990s; markets financial crises of the late 1990s;

US regulatory responses to corporate scandals resulting US regulatory responses to corporate scandals resulting from the neglect or abuse of existing laws and regulations; from the neglect or abuse of existing laws and regulations; andand

European efforts to develop and enforce common financial European efforts to develop and enforce common financial market and related tax policies by fostering compatible market and related tax policies by fostering compatible international institutions.international institutions.

[Hudson, Honahan, and Majnoni, 2003][Hudson, Honahan, and Majnoni, 2003]