The Aftermath of Pension Reform in Emerging Markets: Creating Credible Commitments to Foreign Investors

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by Heather Bergman, University of California, Los Angeles

In the last two decades, governments throughout the developing world enacted social security reforms that entailed either partial or full delegation of the responsibility of managing pension funds to the private sector. At the same time, these countries experienced rapid development of domestic corporate and government debt markets and gained access to safer forms of debt financing, making them less susceptible to future financial crises. This study draws on research from economics, political science and public policy to address the question of how pension reform and the subsequent creation of both private pension funds administrators enabled governments’ commitments to economic stability seem more credible to international investors.

In this study, I posit a theory and a model that emphasize the roles of both pension fund administrators, and the workers enrolled in them, in making governments seem less risky to international investors. I argue that pension privatization enables governments to convey to foreign (as well as domestic investors) their intention to mitigate risks associated with expropriation, default and inflation. Quantitative and qualitative methods are used to test this argument. I use regression analysis of cross-national, time varying private pension funds’ asset and enrollment data in 16 emerging market countries in Latin America and Eastern and Central Europe. I test the hypothesis that at least one consequence of the growing economic power and social reach of private pension funds is that it enables governments to restructure domestic debt making and better insulate themselves from financial crises. I also incorporate an event analysis. I consider within-country effects of capital accumulation by private pension funds and the responses of different types of international portfolio investors (including mutual funds, hedge funds, pension funds and insurance companies) as measured by their net monthly fund flows to each country. The qualitative component of the study includes a comprehensive survey of international investors that is expected to shed light on investors’ retrospective evaluations of social security privatization in emerging markets and its implication for their investment decisions today. Finally, the study includes a comparative case study of Chile, Peru and Argentina. Face-to-face interviews with policy makers, private pension fund industry managers and regulators will help me assess the validity of the incentives and policy preferences that I have ascribed to the political and economic actors in my theory and model.

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