Globalization and Pension Reform in Latin America

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

Their circumstances also differed in critical ways, however. International liquidity was high when Argentina's pension reform came to the top of the political agenda in the early 1990s; U.S. interest rates had fallen from 10 percent in 1990 to 6 percent in 1993. But the supply of global capital was much more restrictive later in the decade, when pension reform became the policy priority in Brazil: U.S. interest rates rose to 8.35 percent in 1998 (World Bank 2005b). The Argentine government also enjoyed a positive, although fragile, fiscal position at the time of its reform, while the Brazilian government struggled with fiscal deficits.

Table 1 compares the primary balance for the two countries in the years when structural pension reform was examined. Both the Argentine and Brazilian technocrats enjoyed considerable autonomy during the design phase of pension reforms. The two governments received extensive support from the World Bank and the International Monetary Fund, with multilateral debt service equaling 23.4 percent of public debt in Argentina and 16.7 percent in Brazil at the time of each country's reform (World Bank 2005b). Yet while Argentina enacted a deep pension privatization in 1993, Brazil did not privatize.

ARGENTINA

In September 1993, the Argentine National Congress sanctioned law 24,241, creating a "mixed" public and private pension system. Under the new pension system, all qualified workers would receive a flat public "universal" pension, and could choose whether to participate in a private pension system based on individual retirement accounts or remain in the reformed public social insurance system for their earnings-related benefit. For workers choosing to participate in the new mixed system, more than half of the average retirement benefit was expected to derive from individual savings. The reform, which took effect in 1994, brought a significant shift in the structure and logic of old age income provision in Argentina.

For President Carlos Menem, who oversaw the enactment of the reform, privatization was attractive mainly for the signal it would send to international market actors of his credibility and commitment to marketoriented reforrri. Government technocrats, for their part, were drawn to the private pension model by its putative long-term fiscal and macroeconomic ends, including the prospect of lowering state pension costs, raising domestic capital accumulation, and deepening local capital markets.

Privatization thus was expected to help end the cycle of Argentina's reliance on unstable foreign investment while curtailing the rapid rise in pension costs since the late 1980s. Yet while Argentina's vulnerability to capital flight enhanced the appeal of this model, the ever more urgent need to signal the government's commitment to maintaining economic stability (i.e., the currency peg) shortened the time horizon for making key decisions on the pension system's design. While key concessions in the proposed reform made democratic approval of the new pension system viable in the short term, they traded off key long-term objectives that had originally drawn reformers to this reform model. In order to understand how these design choices were made, we must examine how the powerful pressures and opportunities emerging from shortterm economic circumstances weighed on technocratic decisions.