Thursday, August 26, 2004
The current hearings on securities
regulation in Ontario will again bring the issue of a single securities
regulator to the forefront of political debates. There are good economic
arguments against a regulatory monopoly, but the first question that needs
to be answered involves the constitutionality of a single regulator.
The Supreme Court has always recognized
that financial securities fall under provincial jurisdiction under the
Constitution Act, 1867, which deals with "property and civil rights in the
province." However, two recent decisions (Multiple Access Ltd. v.
McCutcheon, in 1982, and Global Securities Corp. v. British Columbia, in
2000) raise doubts about this long tradition: The Supreme Court said that
if it were shown evidence the securities business is now interprovincial
and even international in character, it could grant jurisdiction to the
federal government under the Constitution Act provisions that deal with
"regulation of trade and commerce."
It was on this basis that the federal Wise Persons' Committee concluded,
in its December, 2003, report that the federal government has the
constitutional power to establish a single Canadian securities commission.
The committee argued that globalization
of financial markets is a new phenomenon that justifies federal intrusion
under the "regulation of trade and commerce" clause. According to the
committee, the capital markets are now more global than in the late 19th
century. As stated: "There was a time when Canadian businesses seeking to
raise capital were primarily located in the same region as the investors
who bought their securities" and "Those days are gone. Capital markets
that were once local are now national and international."
The problem is that this is not true.
Globalization of financial markets is not a new phenomenon. There were two
waves of globalization. As shown by Richard Baldwin and Philippe Martin in
a recent National Bureau of Economic Research (NBER) study, the first wave
began around 1820 and ended in 1914. The second wave began around 1960 and
continues up to this day. The only real debate among informed observers is
whether the present wave of globalization has or has not achieved the high
level of financial integration observed in the first wave.
With the (final) laying of the transatlantic
cable in 1866 and the efficient network of London financial institutions,
major capital movements were generated around the world by investors
trying to obtain the best possible returns. These capital movements
fostered the rapid economic growth of countries such as Argentina,
Australia, Canada and the United States. Since a large part of the
investment stimulated the development of natural resources and the
occupation of new territories, international trade in goods followed.
One way to measure capital movements or
mobility is through the current account balances (net imports or net
exports). By definition, a country's net imports are equal to its net
capital inflow, or its net exports, to its net capital outflow. In a NBER
study, Alan Taylor used an average of current account balances (in
absolute values) as a proportion of GDP for 12 countries (Germany,
Argentina, Australia, Canada, Denmark, United States, France, Great
Britain, Italy, Japan, Norway and Sweden) to measure the evolution of
capital mobility since 1870. The higher the current account balances, the
larger the capital movements.
This data (see chart) shows that capital
mobility has gone through major fluctuations over time, but has never gone
back to the high peaks of the first globalization wave. The 1880s were a
period of great capital mobility, marked by major international
investments, some of which related to the massive expansion of railway
systems in Europe, Canada and the United States. The recession of the
early 1890s attenuated capital movements, but the boom of the 1920s
brought them to new peaks. The crash of the 1930s started a period of
greater autarchy, made much worse by the imposition of strong restrictions
on capital movements. Capital movements during the 1940s were war-related.
After the Second World War, the restrictions on capital mobility were
slowly reduced. Capital movements started increasing again, especially
from the 1980s on. Note, however, that capital mobility still remains
lower than during the previous economic booms of the 1880s and 1920s.
Many other studies show that, at the end
of the 19th century, financial integration was significantly higher than
today. This evaluation is shared by Federal Reserve chairman Alan
Greenspan, who said "the degree of globalization today is not measurably
greater than that prevailing in the century-ago world of our great
In the pre-Confederation era, the
international financial markets were already highly integrated. Moreover,
most of the Fathers of Confederation were involved in business and
finance, and could not be ignorant of globalization. It thus becomes
pretty clear that they intentionally did not grant the federal government
the constitutional power to regulate financial securities. The only
serious argument for the constitutionality of a single securities
regulator is flawed because it is based on false assumptions about
Maxime Bernier is vice-president
corporate affairs and communications, Standard Life (Montreal).