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

  • Vittas, Dimitri
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    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.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2414.

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    Date of creation: 31 Aug 2000
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    Handle: RePEc:wbk:wbrwps:2414
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    1. Levine, Ross & Zervos, Sara, 1996. "Stock markets, banks, and economic growth," Policy Research Working Paper Series 1690, The World Bank.
    2. Vittas, Dimitri, 1998. "Regulatory controversies of private pension funds," Policy Research Working Paper Series 1893, The World Bank.
    3. Salvador Valdés & Rodrigo Cifuentes, . "Previsión Obligatoria para Vejez y Crecimiento Económico," Documentos de Trabajo 131, Instituto de Economia. Pontificia Universidad Católica de Chile..
    4. Queisser, Monika & Vittas, Dimitri, 2000. "The Swiss multi-pillar pension system : triumph of common sense?," Policy Research Working Paper Series 2416, The World Bank.
    5. Zvi Bodie, 1989. "Pension Funds and Financial Innovation," NBER Working Papers 3101, National Bureau of Economic Research, Inc.
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