Private Enterprise and Financial Markets > Infrastructure and Financial Markets > Financial Markets
Pension Reform in Small Emerging Economies: Issues and Challenges
By Kenroy Dowers, Stefano Fassina, Stefano Pettinato (12/01, IFM-130, En)
During the last decade consensus has been reached over the need to devise solutions for the looming old-age crisis. This situation is driven by two sets of phenomena: on one side is the gradual decrease in the share of the working population, which is caused by a mix of declining fertility rates and increasing life expectancy; on the other, is the widespread mismanagement and/or structural weakness of existing pension systems. Both developing and emerging economies are paying increased attention to the type of pension reform that should be embraced.
While intensive research work has been directed at the reform issues for emerging economies, significantly less attention has been directed to the specific situation of small emerging economies. In this paper the authors examine the crucial issues that shape the types of pension fund reform and the fully funded elements that could be instituted in small emerging economies (SEEs).
This paper examines the issues in light of the constraints generated by the size and economic characteristics of many of these countries. In particular small developing states are likely to experience high international labor mobility and domestic informality. Their economic systems are often volatile, highly unequal, and based on a single-good export-oriented development model. Moreover, their financial markets tend to be small and poorly regulated, retarding the exploitation of economies of scale. Finally, political volatility and institutional weakness can promote corruption and bureaucratic inefficiencies. All these features limit the applicability and success of the pension reform alternatives that have been and are currently being pro-posed.
The paper includes an alternative model that would maximize the efficiency of a pension program based on fully funded principles, while reducing the costs that such a system would engender given the features of SEEs. In particular, the paper proposes new investment management rules, the introduction of a specific regulatory framework, and the regional integration of many institutions and arrangements critical to the management of the pension system.
Last updated: 06/01/07
