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Politics of Reform: The Spread of Radical Change

By: Katharina Muller
 Insights, June, 2002

Two decades after Chile's radical departure from the Bismarckian model of old-age security, this novel type of pension reform has long ceased to be an isolated event. Not only in Latin America but also in the post-socialist world, compulsory fully funded schemes are being introduced. What accounts for the political feasibility of such radical moves? And how can the peculiar spread of ideas from the south to the east be explained?

These were some of the questions that motivated research at European University Viadrina on the politics of pension reform. A full or partial shift from the state to the market as the main supplier of retirement pensions amounts to a substantial rewrite of the underlying social contract, which does not usually occur in the case of a mere change of the entitlement conditions. The recent waves of radical pension reform are particularly remarkable because it was long believed that old-age schemes were difficult to reform.

Context of reform
The Latin American and East European pension privatizations occurred in a similar political and conceptual setting, as both regions witnessed a move from a state-led approach to market-oriented reforms. While originally not contained in the so-called Washington Consensus, a full or partial shift to funding has long become part and parcel of the neo-liberal reform package.

The research program identified the most important political actors in the pension reform arena, while also considering the policy context that shaped their room for maneuver. In many countries, radical pension reform became feasible when the finance department and the World Bank - its most active advocate - had stakes and leverage in the local reform process. Pension privatization did not usually occur when the social affairs department, traditionally a supporter of public pension provision, was the only relevant pension reform actor. Critical indebtedness makes it more likely that international financial institutions will become involved in the local pension reform arena, while financial imbalances strengthen the role of the finance department.

Inclusion moves
Pension privatization was often pushed through by the use of exclusionary policy styles, for example by decree or mandate, while experts played an important role. This technocratisation of decision-making may weaken democratic institutions and produce reforms that are not politically sustainable beyond the short term. The cases of Uruguay and Bulgaria show that intense efforts at consensus building can be a substitute for exclusive technocratic teams. Moreover, pro-reform constituencies can be created by careful reform design. For example, in several countries, reformers granted unions the right to run mandatory pension funds, thus converting them into stakeholders of pension privatization.

In post-socialist old-age security, the state continues to play an important role, and some countries have refused outright the shift to a private funded scheme. Policy-makers are increasingly becoming aware that there is a flip side to the economic factors that used to drive pension privatization. The move results in substantial fiscal costs in the short and medium term, thus complicating future compliance with budgetary targets. Moreover, nascent capital markets and crisis-ridden financial sectors have led some policy-makers and experts to be cautious about pension privatization and to rely on innovative, unfunded options, such as notional, defined contribution schemes. Thus, there may after all be some potential for diversity in pension reform.

katharina.mueller@die-gdi.de

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