World Bank Pension reforms

and development patterns in the world system
and in the “Wider Europe” / By Arno Tausch

Conference 24 and 25 September 2004
Castle of Schengen, Luxembourg

Abstract:

This research paper compares the cross national effects of pension reform on 33 indicators of social, economic, political and ecological well-being of nations with the effects on these 33 variables by dependency, the adherence to the advice by international financial institutions, world political or world cultural identities; the aging process; feminism, militarism; the public education effort and the development level.

Traditionally, world system approaches explain human and economic misery by the dependent insertion of the periphery and the semi-periphery into the global economy.

It is true that the ascending countries of East Asia, whose investment is often much higher than their savings rate, are at the winning side in the global social equation. It is also true that unequal exchange (*) (1/ERDI) is still an important phenomenon, significantly explaining many processes of development. However, the privatization of public education, especially at the Third level, the developmental negative consequences of female distribution coalitions as well as the imperative of pension reform have been up to now neglected in cross-national development research. Interestingly enough, „economic freedom“ as such is also not as relevant as pension reform in explaining economic or social success in the world system. We can say that foreign savings and pension reforms are among the most highly influential positive determinants of development today, while culturalist theories and dependency theories fail to achieve the levels of significance we had originally expected when compared to the new cross-national variable “pension reform”. These findings have important repercussions for the European debate on pension reform and the Lisbon strategy to catch up with the US by 2010 to make Europe the most competitive region in the world economy.

European Union membership years by themselves are lamentably enough a rather negative determinant of the processes of development due to the cumbersome mechanisms and distribution coalitions that European institutions present, and the reliance of many countries in the European Union on publicly financed systems of education also has to be re -considered. Political feminism is another master variable of the European political discourse and it is the main loser in the 1990s and the early years of the 21st Century, indicating again that political distribution coalitions are likely to lose today and tomorrow. The results reported clearly indicate that world systems studies would be well advised to take the processes of pension reform very seriously.

To neglect pension funds in investigations about the capitalist world economy would be misleading at any rate. Private pension funds already amount to 44 % of current world GDP, with countries like the United States; Japan; United Kingdom; Netherlands; Canada; Switzerland; Australia; Sweden; Ireland; Finland; and Denmark taking the lead in fund development either via the introduction of a “World Bank” three pillar models or simply via a strong element of private pensions (“the third pillar”) besides the first, traditional PAYGO pillar (like presently in the United States of America). Slow pension fund development in most countries of the €-zone determines that the overall share of private pension funds from the €-zone is just over 2 % of world GDP. If Europe wants to fulfill its Lisbon agenda of catching up with the United States, it must overhaul its pension systems and introduce some form or other of private pension funds, which are a major force in financing technological advance in the capitalist world economy today.

Our investigations also clearly show that World Bank pension reforms are associated in a positive way with the rates of change of a country’s performance to the better. The time-series correlations for each country in the world system from 1980 onwards with economic growth (World Bank data series), unemployment (ILO data series), and economic inequality (University of Texas Inequality Project) are neatly explained by our explanatory variables; the direction of the influence of pension reform on the three dependent variables each time indicating that pension reform is compatible with economic growth, full employment and the redistribution of incomes.

The same positive effects are also at work in explaining economic growth, full employment and reductions of unemployment over time in Europe’s over 300 different regions. The European regions, whose countries realized a three-pillar pension model, developed more rapidly and had – ceteris paribus – a better employment record than non-reformers. Persistent non-reform, as the German example especially dramatically shows, can lead to a circulus viciosus of stagnation and unemployment under the conditions of globalization.

JEL Classification: C21, F02, H50, I30, J00, J14, J26, J32, O00, O52 Key words: Cross-Section Models, International Economic Order, Economic Integration: General; National Government Expenditures and Related Policies: General; Welfare and Poverty: General; Labor and Demographic Economics: General; Economic Development: General; Economy wide Country Studies: General, Retirement; Retirement Policies, Private Pensions; Economics of the Elderly