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. Investment and Capital Markets Policies 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

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. Contrasting Trade and Capital Markets Policies  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.)

20. Rethinking capital markets policies for the 21 st 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 21 st 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 21 st 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. Rethinking capital markets policies for the 21 st century  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

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. Comparing Environments for Trade, Capital Markets Policies  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?

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]