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The Relationship between Financial Markets and Economic Growth:
Implications for Canada

Research Study Prepared for the

Wise Persons’ Committee

Gordon Boissonneault
Senior Economist, WPC Staff

October 24, 2003

The Relationship between Financial Markets and Economic Growth:
Implications for Canada

Executive Summary

The financial sector has experienced significant change over recent decades, driven by advances in information and communications technology and widespread reductions in international barriers to trade and investment. International integration is advancing rapidly, reflecting in part the development of global production chains and the rapid growth of emerging market economies. As a result of the forces of integration, international competition has become more fierce and firms are under increasing pressure to cut costs and differentiate their products to survive.

Canada’s economy has numerous linkages beyond its borders, particularly with the United States. The future improvement of Canadians’ standard of living will depend in large part on foreign investment in Canada and the ability of Canadians to invest abroad. In this regard, a thriving financial sector will be a key component of our success.

Canada has a small share of the global capital market. Thus, to be competitive, the Canadian capital market must be efficient and offer a low cost of capital. As much as possible, the policies and institutions that govern the Canadian financial sector should be harmonized to international standards. Made-in-Canada policies risk dampening or distorting international investment flows and should exist only where there is a demonstrable domestic imperative.

Economists’ understanding of the role of financial systems as a driver of long-term economic growth has evolved considerably in recent years. Financial systems are recognized to

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