Politics and Schools of Thought. Canadian Policy

Introduction

Canada faces increased international migration and social diversity, which has led to economic restructuring. The restructuring of the Canadian financial sector in 1998 imitated through the merger of Royal Dutch Bank and Bank of Montreal led to a great deal of controversy in the financial services sector. The argument on which the merger was based was to increase their economies of scale to invest in new technology. Merger was an extension of the banks to the Canadian government’s earlier decision to open up the financial market to foreign and non-traditional financial services competition. Soon, the Canadian Imperial Bank of Commerce and Toronto Dominion informed the government of their merger proposal. Though the banking sector expected the government to approve of the merger requests, this was more complicated than apparent. Canada would be down to three banks, if the mergers were approved. The government, eventually rejected the merger requests, and had made new rules which could bloc such proposals.

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The Government has appointed a task force on the Future of Canada’s Financial Sector in 1998, chaired by Harold MacKay. The task force was responsible for comprehensive review of the policies related to the financial services. The mergers were not politically popular. The banks and the financial sector were pushing the government to see the benefits of globalization and the need to have bigger banks in Canada, the people of the country were not convinced. The public was skeptical of the banks’ claims of impending financial doom on the sector in absence of merger, in light of the record-breaking bank profits and proliferation.

Though the public was totally opposed to the merger, it fit the policy requirements of the country. Priory there evolved a census in Canada supporting the transition, which allows the country’s banks to take advantage of the ever-increasing group of financial services and economies of scale. The change of the financial policy of the government in 1987, 1992, and that after the MacKay Task Force, all supported this policy belief. The Canadian policymakers also supported the conglomeration of the financial houses in order to enable the Canadian banks to compete against global competition. Thus, the banks expected the support of the policymakers. So, as expected, the task force supported the conglomeration of the banks, however, policymakers moved in a different direction. Therefore, post-1998 brought Canada into a phase of financial re-regulation.

The financial policy in Canada since 1998 has entered into a phase of regulation. The mergers of banks are curbed through further rules, and new consumer protection rules have been set which has consequently increased the competition faced by the domestic banks. Thus, the banks were unable to form a lobby to influence the policy-making of the government. This paper studies this paradoxical shift in government policymaking. The thesis posed by the paper is that the policy in Canada related to the financial sector moved from an interest group driven i.e. pluralistic in nature. Pluralism is the political ideology that dominates the Canadian policy-making system. The paper argues that a sector that has always been dominated by interest groups of financial sectors had adopted a policy that went against the groups’ interests. The domination of the financial sector did not occur in this particular instance, and led to an almost extreme closed policy for the sector.

Canadian Policy Making and Pluralism

Little research has been done on the new politics related to the financial sector in Canada. Early political thinking about deregulations and globalization was initiated by Helen Miller’s work “Resisting Protectionism” (Miller). Following the ideology of pluralism Milner argues that domestic interest groups, as in case of Canada the financial houses, were influencing the policymakers. Pluralistic influence has been predominant in American as well as Canadian political systems and Marxist and social movement approaches were critics of the politics (Smith 19). Pluralism is the political philosophy that believes that the society is made of individuals. The Canadian political system is pluralistic in nature. This assertion can be supported by observing the government policy of Canada which asserts the influence of the interest groups in politics rather than individuals. This is the point of difference from rational choice theory. Rational choice theory provides the importance of the role of individuals in politics, while pluralism or Marxism puts stress on group dominance. Pluralism is better than rational choice as the latter does not consider influence of interest groups (Flanagan 5).

Canada as a society formed on the basis of several groups based on ethnicity, class, class, language, religion, etc. Groups are formed when people with similar minds set pursue common interests or lobby to change the decision of the government in their favor. As there are many such active group switch have the capacity to influence the policy-making of the government, pluralists argue that many groups will be in a position to dominate the decisions made by the policymakers. The pluralistic ideology also argues that no one group will be in power to dominate the policy-making for long. The argument posed by the pluralists is such that if one of the groups becomes too powerful, another will rise in order to counterbalance the power (Smith 21). Thus, Smith argues that in Canadian society there are “multiple interests of individuals mean that there are many possible groups and that society is characterized by cross-cutting cleavages along different lines” (Smith 22). Pluralist theory states that the class forces in politics feel that the pressure from one group is reduced to a great extent due to the member’s loyalty to another group. They, therefore, state that the society is not only singularly based on class cleavages, but on manifold distinctions. That is why no single group can become the dominant group.

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However, pluralists do not explain how groups are formed in a society. The theory believes that when the interests of individuals are same, they automatically form into a group. Thus, they believe that individuals’ preferences are shown through what they say and what they believe in. Therefore, the individuals’ preferences may depend on their religious beliefs. However, pluralistic ideas do not explore the reason for the influence of these ideas or interests on individuals.

Interest group politics have been a dominant force in Canadian policymaking. Pluralists believe that group politics assumes its importance due to the struggle of the groups to secure the best advantage of the group. The struggle between the groups assumes the form of a political struggle between the groups. For the pluralists’ group politics and public policy is the manifest for political conflict and instances where power is exercised by structural forces and the other groups are marginalized. In case of the financial sector policy of Canada, pluralism acts to its full extent. Interest groups had been influencing the politics of policymaking in Canada. Thus, the next section will demonstrate how politicians, bureaucrats, government, etc. Have been influenced by interest groups to change the policy decisions in favor of the group.

Policy Paradigm of Canadian Banking Sector

Before 1998, the financial sector in Canada, especially, the banking sector went through a two-decade-long evolution in policy, from traditional closed systems to deregulation. There were a complex set of changes in regulations and redistribution process of jurisdiction from the provincial to the central regulatory body.

Under the traditional system, Canada had developed a system of “pillarization” in order to ensure public confidence in the banks which was done through regulated restriction of the services that the companies could provide (Porter 4). The pillarization was done into four sections: banking, insurance, securities, and trust and mortgage services (Porter 4). According to the supporters of this system, the positive effect of this was that it was required for prudential reasons i.e. to limit the banks of their deposit-taking ability, or restrict entry of foreign firms due to complexity of ownership[ structure. Overall the idea was to dissipate risk and encourage positive externalities such as ensuring availability of credit to small-scale businesses (Harris 367). This provided the Canadian consumers the luxury to choose from financial providers.

However, the Canadian “pillarization” of the financial sector was hardly foolproof as most of the players had stake in other segments of the market (Coleman, Financial Services, Globalization and Domestic Policy Change 201). The reason for this is the ill-defined pillars which did not strictly reflect on the market functions. Functionally three sectors of the market segment evolved in the financial sector market i.e. banking, insurance, and securities. The provincial banking system implied that Canada duplicated the banking sector to form another pillar. The reason behind this was that the firms would compete with firms from other pillars and provide greater choice to the consumers. However, with the advent of deregulation, Canadian system of financial pillars came under pressure (Tickell 2). Thus the prevalent argument that formed the basis of the initiation of the process of deregulation was the eccentricities of the system became increasingly difficult to justify due to globalization (Coleman, Financial Services, Globalization and Domestic Policy Change 203). Thus, the concept of ‘universal bank’ was brought forward which insisted on diversification of the business activities of the banking sector and thus, become a broader financial service provider than the traditional narrow bank concept (Coleman, Financial Services, Globalization and Domestic Policy Change 21). Thus, the changes in the financial sector were brought forward to make the financial service providers a one-stop shop for the consumers.

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The change in the financial sector in Canada was brought forward a transition that allowed centrally regulated banks to move to diversify into other financial services. Thus, apart from the question of bank mergers, the other debate that evolved was that if banks should be allowed to provide full array of financial services, especially insurance, in the same branch.

Apparently this transition of the financial regulatory process brought about in Canada benefitted the big banks mostly. The big banks which were under federal regulation had effectively increased the role of the government in the financial sector to a greater extent with the process of de-pillarization. Therefore, the interest groups which influenced such decisions were the big banks that wanted to increase their stake in the other financial sectors. Thus, the most powerful bodies in the financial sector were most benefitted from the scheme and presumably had been the instigators of the deregulation process. However, the subsequent re-regulation process brings forth the inevitable question as to what brought about the re-regulation of banks. Thus, the question arises is that how did one of the most strong political influencers in policy matters failed to influence the policymakers to change the policy agenda related to financial sectors. Canadian “big banks” had enjoyed a close and strong relationship with the federal government. Thus, the recent change in the cordial relationship requires greater understanding.

In the 1960s the Canadian banks were large and held 15 percent of the international market (Darroch 153). The traditional success of the banks has been attributed to the benefit of the domestic policy condition which was “… instrumental in creating a protected market in which banks could develop competitive strengths, and these competitive advantages provided the cornerstone for international growth strategies.” (Darroch 154) Further the federal government wanted to keep the financial control under them in order to maintain a stable financial service sector and restrict inward flow of foreign direct investment in the sector. Further the dominance of a few large banks in the market ensured both the objectives (Darroch 154). Thus, when it sought to expand the power of the banks, it inadvertently increased theory jurisdiction. Thus, if the federal government intended to influence the market which was outside their regulation, it could do it by expanding the power of the banks (Coleman, Financial Services, Globalization and Domestic Policy Change 184).

The close relationship between the banks and the federal government ensured continued dominance of the banks in the domestic market, even with increasing international competition. However, competition made the situation complex, especially advancements in technology. This increased the possibility for the big banks to expand their services and diversify (Darroch 164). The reason for the deregulation was from global effort to remove barriers in the financial market via trade agreements (Williams 65). Thus, the Canadian banking sector opened up when the banking sector was struggling under increasing international competition (Darroch 165). Thought the deregulation process in Canada was ill-planned and ad hoc was intended to maintain stability in the financial sector as well as maintain the competitiveness of the ‘big banks’ (Coleman and Porter, ‘Playing’ Along: Canada and Global Finance 242). The question that arises is what went wrong?

One such explanation was provided by Millers who showed that due to US hegemony, Canada had changed its policy. In other words, it was the international interdependence that framed the state policies. The re-regulation of the financial sector in Canada arose due to cooperation among states (Porter 25). Thus the reason for the re-regulation process of the Canadian financial sector was due to political interest groups in Canada was pluralist. Thus, it is clear that the transformation of the economic power into political power by the big banks “… have a clear upper hand in this more pluralist game” (Coleman, Financial Services, Globalization and Domestic Policy Change 66).

Conclusion

Though pluralist ideologies enforce taking of the individual as the benefits provided to interest groups, it is a better philosophy than rational choice as the latter does not consider any groups which usually are seen to be of greatest influence in policymaking (Flanagan 5). The transformations of the Canadian financial sector especially that related to the banking mergers can be related to the influence of the political groups on the policymaking. Initially the big banks influenced the process of regulation of the financial sector, and then with globalization, the international trade policies and international bodies were instrumental in bringing about the financial de-regulation in Canada. However, the interest groups influencing the regulation process were stronger, which was then backed by the adjoining interest of the Canadian people, who insisted on re-regulation of the financial sector. Thus, the public policy in Canada has always been under the pressure from interest groups, and therefore can be considered to be pluralist in nature.

References

Coleman, William and Tony Porter. “‘Playing’ Along: Canada and Global Finance.” Clement, Wallace and Leah Vosko. Changing Canada: POlitical Economy as Transformation. Montreal: McGill-Queen’s University PRess, 2003. 241-264.

Coleman, William. Financial Services, Globalization and Domestic Policy Change. London: Macmillan, 1996.

Darroch, James. “Global Competitiveness and Public Policy: The Case of the Canadian Multinational Banks.” Marchildon, Gregory P. and Duncan McDowall. Canadian Multinationals and International Finance. London: Routledge, 1992. 153-175.

Flanagan, Thomas. Game Theory and Canadian Politics. Toronto: University of Toronto Press, 1998.

Harris, Stephen. “The Globalization of Finance adn the Regulation of the Candaian Financial Services Industry.” al., G. Bruce Doern et. Changing the Rules: Canadian Regulatory Regimes and Institutions. Toronto : University of Toronto Press, 1999. 361-381.

Miller, Helen V. Resisting Protectionism: Global Industries and the politics of International Trade. Princ, n.d.

Porter, Tony. Globalization and Finance. Toronto: Polity Press, 2005.

Smith, Miriam Catherine. A civil society?: collective actors in Canadian political life. Toronto: University of Toronto Press, 2005.

Tickell, Adam. “Restructuring the British Financial Sector intot he twenty-first Century.” Capital and Class Vol. 21 No. 2 (1997): 13-19.

Williams, Russell Alan. “Liberalizing “Trade in Services”: Ideas in International Political Economy.” McBride, Stephen, et al. Global Instability: Uncertainty and New Visions in Political Economy. Dordrecht, Netherlands: Kluwer Academic Publishers, 2002. 65-88.

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