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Pension reform and capital market development -"feasibility"and"impact"preconditions

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  • Vittas, Dimitri

Abstract

The link between pension reform, and capital market development, has become a perennial question, raised every time the potential benefits, and pre-conditions of pension reform are discussed. The author asks two questions. First, what are the basic"feasibility"pre-conditions for the successful launch of a pension reform program? And second, what are the necessary"impact"pre-conditions for the realization of the potential benefits of funded pension plans for capital market development? His main conclusion is that the feasibility pre-conditions, are not as demanding as is sometimes assumed. In contrast, the impact pre-conditions are more onerous. The most import feasibility pre-condition is a strong, and lasting commitment of the authorities to maintaining macroeconomic, and financial stability, fostering a small core of solvent, and efficient banks, and insurance companies, and creating an effective regulatory, and supervisory agency. Opening the domestic banking, and insurance markets to foreign participation, can easily fulfill the second requirement. The main impact pre-conditions include the attainment of critical mass; the adoption of conducive regulations, especially on pension fund investments; the pursuit of optimizing policies by the pension funds; and, a prevalence of pluralistic structures. The author argues that pension funds are neither necessary, nor sufficient for capital market development. Other forces, such as advances in technology, deregulation, privatization, foreign direct investment, and especially regional, and global economic integration, may be equally important. But pension funds are critical players in"symbiotic"finance, the simultaneous and mutually reinforcing presence of many important elements of modern financial systems. They can support the development of factoring, leasing, and venture capital companies, all of which specialize in financing new, and expanding small firms.

Suggested Citation

  • Vittas, Dimitri, 2000. "Pension reform and capital market development -"feasibility"and"impact"preconditions," Policy Research Working Paper Series 2414, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2414
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    References listed on IDEAS

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    1. Zvi Bodie, 1989. "Pension Funds and Financial Innovation," NBER Working Papers 3101, National Bureau of Economic Research, Inc.
    2. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-558, June.
    3. Salvador Valdés & Rodrigo Cifuentes, "undated". "Previsión Obligatoria para Vejez y Crecimiento Económico," Documentos de Trabajo 131, Instituto de Economia. Pontificia Universidad Católica de Chile..
    4. Vittas, Dimitri, 1998. "Regulatory controversies of private pension funds," Policy Research Working Paper Series 1893, The World Bank.
    5. Queisser, Monika & Vittas, Dimitri, 2000. "The Swiss multi-pillar pension system : triumph of common sense?," Policy Research Working Paper Series 2416, The World Bank.
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    Citations

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    Cited by:

    1. Reece, Christopher & Sam, Abdoul G., 2012. "Impact of Pension Privatization on Foreign Direct Investment," World Development, Elsevier, vol. 40(2), pages 291-302.
    2. Milos Laura Raisa, 2012. "Spillover Effects Of Pension Funds On Capital Markets. The Eu-15 Countries Case," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 4, pages 164-170, December.
    3. World Bank, 2005. "Benin : Financial Sector Review," World Bank Other Operational Studies 8300, The World Bank.
    4. Yu-Wei Hu, 2006. "China's Pension Reform: A Precondition Approach," Global Economic Review, Taylor & Francis Journals, vol. 35(4), pages 413-424.
    5. Roger Charlton & Roddy McKinnon, 2002. "International organizations, pension system reform and alternative agendas: Bringing older people back in?," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(8), pages 1175-1186.
    6. World Bank, 2004. "Republic of Tunisia : Strategy for Public Debt Management," World Bank Other Operational Studies 14673, The World Bank.
    7. Federico Escobar & Osvaldo Nina, 2004. "Pension Reform in Bolivia: A Review of Approach and Experience," Development Research Working Paper Series 04/2004, Institute for Advanced Development Studies.

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