Globalization and Pension Reform in Latin America

Latin American Politics and Society, Winter 2007 by Brooks, Sarah M

ABSTRACT

While financial globalization has created powerful incentives for Latin American governments to privatize old age pension systems, reliance on short-term capital flows has also constrained the ability of cash-strapped governments to enact that reform. Analysis of the technocratic process of pension reform in Argentina and Brazil provides evidence. Instead of simply generating unidirectional pressures for structural pension reform, financial globalization has created a double bind for Latin America's capital-scarce governments, fostering long-term incentives to privatize pension systems while heightening the risk of punishment in the short term.

Since 1980, more than 25 governments around the world have implemented some form of market-oriented pension reform, or "privatization." More than a third of these reforms have been conducted in Latin America; 10 governments had implemented some form of pension privatization by 2005. Although the specific design of pension privatizations has varied considerably across the region, this trend is striking as much for its geographic and temporal clustering as it is for the deeply transformative implications of the privatization measure, which fundamentally rewrites the basic social bargain of old age income protection in privatizing countries.

Pension privatization, moreover, is costly to implement, both in financial and political terms. Not only must governments impose new risks and costs on beneficiaries of traditional social insurance pension systems while offering only long-term and uncertain benefits, but they also must continue to finance current benefits owed to retirees, even as workers divert payroll contributions to their private pension accounts. Pension privatization is therefore far from a quick fix for ailing state pension systems; instead, it is a costly and perilous measure for any government, and particularly for the young democracies in Latin America.

A rich body of scholarly research has emerged to address the puzzle of why and how so many Latin American governments have privatized their national pension systems. For some scholars, the answer rests heavily on international financial pressures, which buffeted Latin American governments in the 1990s. This view holds, first, that global economic forces, such as trade competition and capital mobility, generate strong pressures on governments to lower domestic production costs and diminish inflation risks as a means to enhance trade competitiveness and attract foreign investment. It also underscores the financial rewards and punishments wielded as critical power resources by international financial institutions (IFIs). In both dimensions, globalization emerges as a powerful force pushing inexorably toward the adoption of more market-oriented reform, especially in the most capitalscarce nations.

This study affirms the importance of international economic forces in domestic political decisions about pension reform, but offers an alternative conceptualization of their role and ultimate impact on privatization decisions in Latin America. It argues that the most significant effects of global economic forces and IFIs have not been wielded through coercion; nor have they conduced strictly toward greater privatization in the most cash-poor nations. Instead, while global financial integration and IFI promotion of structural pension reform have combined most powerfully to enhance the attractiveness of private pension reform models, exposure to increasingly volatile international capital markets has created powerful obstacles to the adoption of this costly structural reform in the most cash-strapped nations.

Comparative analysis of the technocratic process of pension reform in Argentina and Brazil brings evidence to this argument. In the technocratic arena, state actors weigh the long-term goals of state action against short-term constraints on their proposed solutions. By focusing the analysis on just the technocratic component of the reform process, this study sets aside the broader social and political processes associated with institutional reform in order to isolate the arena in which global financial influences are likely to be most clearly defined. These countries also were selected in order to control for important factors shaping the influence of global economic forces, including country wealth and democratic status, while providing broad variation in the key factors expected to shape the intensity of global incentives and constraints on globalization.

In both Argentina and Brazil, government actors counted on extensive financial support from IFIs, such as the World Bank, while also facing strong pressures to attract and maintain the confidence of owners of increasingly footloose international capital. In both cases, however, it was the threat of punishment by private market actors that more powerfully influenced decisions on the final reform design. Paradoxically, by attending to the short-term concerns of global capital, reformers in both countries wound up limiting the extent of market orientation in proposed pension reform designs.