World Bank pension reforms and global capitalism

executive summary from:




World Bank Pension reforms and global capitalism. Macro-quantitative
analyses of their effects on social welfare 


Arno Tausch




Executive Summary


The World Bank starts from the assumption, that the following countries have
reformed their pension systems in the direction of a funded model:

Argentina
Australia
Bolivia
Chile 
Colombia 
Croatia 
Denmark 
El Salvador 
Hungary 
Kazakhstan 
Mexico 
Netherlands 
Peru 
Poland
Sweden 
Switzerland 
United Kingdom
Uruguay 

An insufficient number of scholars around the world, also within the
world-systems research community, realize how far pension funds, that are
raised in a compulsory manner from a given amount of income to the benefit
of private funds, which, one day it is hoped, will pay a pension in exchange
for their privilege to be able to invest your money on the global financial
markets, will alter the overall balance of power in capitalist world society
and in turn will change the structure of supply and demand of capital on
global financial markets. 

Already today, with or without reforms, the assets of pension funds from
either compulsory funded systems (what the World Bank calls the Second
Pillar) and private pension schemes amount to a considerable proportion of
the respective GDP in OECD countries.

Our analysis again confirms the earlier development theory wisdom about
'redistribution with growth': with all the talk about globalization
notwithstanding, there is a neat pattern of bivariate Pearson-Bravais
correlations between long-term economic growth in the world system (n=174
countries with UNDP HDR 2000 data) and indicators of human development and
income re-distribution. The only indicators, that do not fit completely into
this pattern, are the share of women in the professional and technical labor
force and in the administrative and managerial workforce. Values for the
these indicators were very high in the former socialist countries, that
suffered the most from the depression from 1989 onwards in that region.

Pension reform models are not simply turbo-capitalism greatly increasing
inequality, infant mortality, and poverty among the aged. However, pension
funds are part of a new flexibility, associated with the Anglo-American and
overseas (and now, increasingly, also Scandinavian) developed capitalist
model, that is in stark contrast with some continental traditions, most
notably in Germany, and France (not by coincidence the main losers in the
movements towards technological excellence over the last years). The
positive effects of the introduction of pension funds on the macro-behavior
of society, especially what the reduction of unemployment among the young
etc. are concerned, are offset by a sharper societal confrontation between
the main winners and losers. Most notably, a high share of pension fund
assets per GDP will not guarantee automatically a high rate of economic
growth.

The above picture is complicated by the fact that the technology achievement
index is highly related to overall socio-economic development, most notably
real purchasing power and the human development index. For all practical
purposes and with around 4/5 of variance in common, the technological
achievement index is 'part and parcel' of the overall development process. 

It can be also shown, that mean years of education are a solid precondition
of long-run socio-economic development. Times and times again, it could be
shown that educational attainment matters for economic growth. 

Globalization, understood as net foreign direct investment inflows per GDP,
highly negatively affects part of the gender balance in society, and it also
blocs sustainable development (GDP per kg energy use). On the other hand,
not all indicators of gender equality suffer under globalization -
especially those indicators, that refer to the political superstructure, and
not the economic distribution relationships between the genders. It has also
to be stressed, that globalization positively affects employment, and also
female employment - after all, (global) capitalism is interested in the use
of the industrial reserve army. Thus we arrive at the proposition, that
globalization is associated with an increased appropriation of what Marxian
economists would turn the growing 'relative appropriation of the surplus
value of the female labor force':

The partial significant correlations of World Bank pension models again
confirm, what we have stated above: certainly the economic gender balance
deteriorates, while the political superstructure is largely left untouched
from the times of Communism, when there was still a large presence of 'real
socialist feminism' in the political processes of Eastern Europe and the
ex-USSR.

Any somber re-analysis of the tendencies of world development in the 1990s
must start from the assumption, that the original development level has a
decisive, most of the time non-linear trade-off with subsequent development
performance: poor countries increase rapidly their average life-expectancy
or economic growth and they quickly reduce their income inequality.

The curve-linear function of growth, being regressed on the natural
logarithm of development level and its square, is sometimes called the
'Matthew's effect' following Matthew's (13, 12):

'For whosoever hath, to him shall be given, and he shall have more
abundance: but whosoever hath not, for him shall be taken away even that he
hath'

Social scientists interpreted this effect mainly in view of an acceleration
of economic growth in middle-income countries vis-à-vis the poor countries
and in view of the still widening gap between the poorest periphery nations
('have-nots') and the 'haves' among the former Second and Third World
(Jackman, 1982):

economic growth = a1 + b1* ln (PCItn-1)-b2* (ln(PCItn-1))2

The same function is also applied to income inequality, following a famous
essay published by S. Kuznets in 1955. Redistribution gets underway after
1000 $ per capita income is reached; the share of the richest 20% diminishes
from approximately 55% to around 40%. Growth and adjustment accelerate with
redistribution. In general terms, we explain development performance by the
following standard multiple cross-national development research equations:

development performance 1980 - end 1990s = a1 + b1*first part curvilinear
function of development level by around mid 1990s - b2*second part
curvilinear function of development level by around mid 1990s -
b3...*transnational investment inflows per GDP (UNDP) and other dependency
indicators mid 1980s - b4...*state sector influence indicatorsmid 1990s +
b5...*social security reform indicators mid 1990s - b6...* social policy
indicators mid 1980s + b7...*political feminism indicators mid 1990s

In each of the equations, investment inflows, social policy and state sector
influence form part and parcel of the predictor variables. 

We should also stress here, that our exploratory investigation assumes that
means can substitute missing values.


How pension reforms come about


What has basically to be understood is that three-pillar models are the most
probable outcome in societies that are characterized by a slow demographic
dynamic, a relatively high institutional feminism, a slow growth rate over
the past years and a relatively high degree of world economic openness.

Among the myriads of possible explanations, the following results of SPSS
stepwise regression with the UNDP-data set should be taken into account,
that suggest that - ceteris paribus - the success chances for pension
reforms to be implemented are:

1. Institutional feminism
2. Relatively slow preceeding economic growth
3. A relatively slow or even negative demographic development
4. A relatively high degree of already achieved sustainable development
(i.e. society starts to set other priorities apart from the ecological
conflict dimension)

All these factors would suggest that countries like Germany and Austria soon
would follow suit the other pension reform countries. 

Also, our factor analytical model shows that the links are rather weak. 

Our investigations with n = 174 countries led us to the conclusion that
social security reform in the traditions of the World Bank (three pillar,
funded model) has only a marginal influence on growth, inequality and life
expectancy, while the effect on the human development index is somewhat
bigger, and positive, but it fails to achieve a standard level of
significance (5% or 10% error probability; p = 14.0%). 


Determinants of economic growth


Economic growth in our age on the one hand is a positive consequence of the
sustainable development efforts (GDP per kg energy use) efforts of a
society, on the other hand ageing has a very negative influence on the
growth process. All those, that have reservations about contemporary
migration processes (mostly labor organizations in industrialized countries,
political parties opposed to large scale immigration etc.) should carefully
look at our significant -.469 path coeffcient that goes from ageing to
growth. A high food import dependence, high military expenditures and a high
income inequality will all reduce the chances of a country to grow, quite
according to the assumptions of dependency theories, peace groups and
socio-liberal reformers alike. However, the saturation effect of mature
economies on economic growth (see Tausch, 2001a) is taken over by the
achieved level of human development of a country; i.e. those with a high
rate of social development in the past grow now slower than the late-comers.


Determinants of inequality


Female employment chances, a high rate of economic growth all reduce, while
infant mortality increases income inequality in a very expected fashion.
Ageing contributes to somewhat lower rates of overall societal inequality,
principally also because of the up to now very generous pension packages
existing in advanced societies of the world. Although militarism decreases
economic growth, it has a somewhat paradoxical effect on income inequality,
most probably because of it's military Keynesian effects on the employment
situation. 

The established feminism that exists especially in the countries of East
Central Europe and in some countries of the Carribean and Latin America
might conceal the fact that government jobs including the top ones, because
they are not as well paid as those in the private economy, are relatively
open for women in societies where there is a great duality on the labor
market between government and the private sector. Future research could look
into this interesting relationship and establish, whether or not the
influence of women in government on income inequality still holds, when we
take the wage differentials between men and women as well as between the
government and the private sector constant. In the following countries, more
than a 1/6 of total top government employees were female.


Determinants of life expectancy


Some of the empirical determinants of life expectancy correspond to
conventional wisdom as well, while others don't. Public health expenditures
increase, while income inequality and Maastricht type austerity packages
decrease life expectancy, ceteris paribus. The negative influence, wielded
by government expenditures on life expectancy, corresponds at least to the
essence of a neo-liberal vision of socio-economic development. But the
burdens of unequal exchange decrease, while countries with high rates of
unequal exchange (1/ERDI) tend to have a higher life expectancy, all other
factors being equal. 


Sustainable development


One of the main contradictions of the contemporary political economy -
especially the European one - is that there is a contradictory relationship
between different official goals, proclaimed at the famous 'European
Summits'. You cannot have sustainability (high GDP per kg energy use) and
the new economy at the same time; since internet density, as well as
indicators of the spread of earlier technological achievements (TV density,
telephone density) negatively influence our sustainability indicator. At the
same time, the third main tenet of European official summit conference
political economy, balanced or surplus budgets, also negatively influence
the sustainable development process, with militarism and unequal exchange
influencing the sustainabile development indicator in a fashion, expected by
the anti-globalization movement. Interestingly enough, ageing and
sustainable development need not contradict each other.


Human development


Some of the empirical determinants of the UNDP human development index
correspond to conventional wisdom as well, while others don't. Public health
expenditures increase, while income inequality and Maastricht type austerity
packages decrease the HDI, ceteris paribus. The negative influence, wielded
by government expenditures on the HDI, again corresponds at least to the
essence of a neo-liberal vision of socio-economic development, just as in
the case of life expectancy, above. Again the burden of unequal exchange
decrease, while countries with high rates of unequal exchange (1/ERDI) tend
to have a higher life expectancy, all other factors being equal, thus
repeating Gernot Kohler's apprehension, that unemployment in the
industrialized north, benefitting from unequal exchange, is increasing.


Female economic activity rates


The determination of female economic activities rates in the 1990s
corresponds well to the logic of political feminism on the one hand and the
industrial reserve army on the other hand. Net foreign direct investment as
well as an aged population determine that female economic activity rates are
being pushed upwards, while women in government and parliaments with a
higher share of women tend to favor measures that end up in increasing the
female economic activity rates. Finally, income concentration negatively
affects female economic activity rates (inter alia, because conditions of
relative poverty and bad education, that especially affect women, deter
women from taking up jobs), while the relationship in the final model is
thought to be the other way around (high female employment rates lowering
overall inequality).


Social security reform, globalization and world development


The inclusion of the World Bank Social Security Reform Dummy only minimally
changes the above multiple regression models:


                                Beta for the Social Security            p
(error probability)
                                Reform variable

Economic growth                 +.021
84.9%
Inequality                              +.064
87.8%
Life Expectancy                         +.037
91.5%
Human Development Index         +.052
14.0%


Main results: graphical presentation of the multiple regressions with n =
174 countries

We also analyzed the fundamental relationships that evolved in the
capitalist world economy in the 1990s and beyond with the technique of
factor analysis. The main properties of this analysis on the basis of the
UNDP HDR 2000 data set are specified in the annex of this paper. Since the 8
extracted dimensions, whose Eigenvalues are above 1.0 are highly
interrelated with each other, we have chosen an oblique rotation according
to the SPSS for Windows. The human development theory oriented message of
this analysis basically repeats the results already achieved in the multiple
regression analyses.

High social development in a country like Japan, France, or most of the
other European Union countries in a human development theory fashion
positively affects growth and female employment (highest in Norway and the
USA), and that, in turn, positively is related to growth. This is, if you
want, the social Keynesian part of the argument. Now, neo-liberals also
receive their share of the prize: high social development in the globalized
economy is only possible under one important precondition: the integration
of a country into the international regime affecting the free trade of
agricultural products. Thus, a high rate of social development tends to be
associated with a higher rate of food dependency and world economic openness
(like in Switzerland or Sweden). Globalization critics are right in pointing
out some of the negative consequences of this process: food dependency and
world economic openness negatively affect female employment, but they have -
that is the way, global capitalism works - a positive effect on economic
growth (which is highest in Singapore and China). The size of the state
sector halts, as is to be expected, the process of turbo-capitalism and the
feminization of the labor force, which can be observed most prominently in
countries like the Bahamas, Colombia, Grenada and Jamaica. Third world and
western hemisphere female reserve-army oriented turbo-capitalism in turn
also leads, as is to be expected from dependency theory, to a higher ratio
of food dependency and world economic openness, and in turn leads - ceteris
paribus - to a higher rate of people affected by communicable deseases. The
factor 'Transformation countries and post-communist feminism', that is
strongest in the Ukraine and Latvia, negatively affects economic growth, it
has - as it is to be expected - a positive trade-off with the size of the
state sector, and there is also a lamentable positive association with
communicable deseases (a process to be found at work most devastatingly in
the countries of the Southern and Eastern cone of Africa and in the
ex-USSR). Transformation countries in the capitalist world economy tend to
be food dependent as well. 

We also calculated a path-analytical model of economic growth from the
factor score values that resulted from the 8-factor analytical model. The
result again confirmed the above interpretation.


A final model


To integrate and to finally test the theoretical reasoning above, we also
developed a model of real per capita income growth 1975-99 and income
concentration (top 20%/bottom 20%), that uses the following variables from
the UNDP 2001 HDR data set, our above list of pension reforms and Fischer
Weltalmanach, 2001:

Country is a Pacific rim country (Weltalmanach)
Country is on the African continent (Weltalmanach)
Former Communist country (Weltalmanach)
Mean years of education (UNDP, 2001)
Membership in the European Union (Weltalmanach)
Net foreign direct investment inflows (UNDP, 2001)
Population growth, 1975-99 (UNDP, 2001)
World Bank Pension reform (see above)


Explaining economic growth


21% of variance of this variable are explained in our final investigation.
Pension reforms contribute positively to economic growth, while population
growth and the status as a former communist countries impedes growth.


Explaining income inequality in 71 countries


There are powerful forces at work, which determine, that inequality - also
and especially in Europe - is on the rise again. Both former Communism as
well as net foreign direct investment flows contribute significantly to
inequality.


So what to do with Pension reforms?


Pension reforms do lead to a higher economic growth rate and to a slightly
higher rate of inequality, while globalization as such significantly
contributes to inequality and does not necessarily lead to a higher economic
growth rate


Not all the ills of the European economy in the world could be cured by the
introduction of such a model, but some glaring deficiencies could be
(co)remedied

(i) the technological gap

It has been shown already above that pension funds and a good performance on
the technology achievement index are compatible with each other, mainly by
the injection of capital into the economy

(ii) Europe suffers from underemployment, for that reason, Pension funds at
least indirectly would be welcome as well

(iii) Europe suffers from an employment flexibility gap

Our estimates from EUROSTAT/Commission data lead us to believe, that to
reduce unemployment to 5%, the US needs only 4% growth, while Europe needs
more than 7% growth

(iv) Pension funds, by helping to remedy the technological backwardness of
parts of Europe, would most probably also contribute to alleviating the
regional gaps that still exist

It would be wrong to portray all the economic ills of the European continent
- stagnation, rising inequality - as a consequence of pension reforms. On
the contrary, we have shown with ample evidence that Europe suffers from an
ageing labor force and that globalization, and not pension reforms, has done
much to further the gaps that have arisen over the last years. Stagnation is
very closely connected to the phenomenon of a stagnant or even shrinking
population, and it is no wonder that several European countries belong to
the group of nations in world society with a population growth rate of less
than 1% per year.

The evidence of rising relative poverty in Europe is overwhelming, but it
would be wrong to associate pension funds with rising poverty.

(v) a more flexible and technology-friendly environment would also help to
alleviate the discrimnation patterns that still exist against foreign
nationals and possibly also the EU enlargement process-


Under the pressure of globalization and stagnation, that results from an
ageing population, Europe has tended over the last years to increase the
fragmentation of its social systems and labor markets. A typical
characteristic of these processes is the great and often still rising
poverty risk of foreigners among the still existing plenty of the ageing
continent.

This process is also one of the powerful motives of the rejection of the
enlargement process of the European Union by a sizeable minority of the
European electorate


Most likely to appear in:

The three pillars of wisdom? A reader on globalisation, World Bank pension
models and welfare society.



Arno Tausch (Ed)



with contributions by 




Ted Wheelwright, Franz Rothenbacher, Jeja Pekka Roos, Walter Cadette, Göran
Normann, Daniel J. Mitchell, Eva Belabed, Stephen J. Kay, Gord Laxer, Frank
Stilwell, Kunibert Raffer, and Arno Tausch

and a documentation on the ongoing Internet debate on social security reform


The following important articles on pension reforms were first published in
the Internet

Cadette W. (1999), 'Social Security Privatization: A Bad Idea' Policy Notes,
Jerome Levy Economics Institute, 10; available at:
http://www.levy.org/docs/pn/99-10.html
European Commission (2000) 'Modernising and Improving Social Protection in
the European Union' available at:
http://www.itcilo.it/english/actrav/telearn/global/ilo/seura/eumode.htm
Gray C. and Weig D. (1999), 'Pension System Issues and Their Relation to
Economic Growth' CAER II Discussion paper No. 41, Harvard Institute for
International Development, available at:
http://www.hiid.harvard.edu/projects/caer/papers/paper41/paper41.html
Hausner J. (1999), 'Poland: Security Through Diversity' Deutsche Stiftung
für Internationale Entwicklung, available at
http://www.dse.de/ef/kop5/hausner.htm
Kay St. J. Testimony Before the House Committee on Ways and Means Hearing on
Social Security Reform Lessons Learned in Other Countries. Available at:
http://www.house.gov/ways_means/fullcomm/106cong/2-11-99/2-11kay.htm
Korpi W. and Palme J. (2000), 'Distributive Conflict, Political Mobilization
and the Welfare State: Comparative Patterns of Emergence and Retrenchment in
Westernized Countries' Swedish Institute for Social Research, Stockholm
University, available at:
http://www.kub.nl/~fsw_2/home/worschot/rc19/papers/korpi.htm
Laxer G. (1993), 'Social Solidarity, Democracy and and Global Capitalism'
The 1993 Porter Lecture, Canadian Sociology and Anthropology Association,
available at: http://www.socsci.mcmaster.ca/soc/porterlectures/laxer.htm
Norman G. and Mitchell D. J. (2000), 'Pension Reform in Sweden : Lessons for
American Policymakers' The Heritage Foundation, Backgrounder, 1381, June 29,
2000, available from http://www.heritage.org/
Paul S. S. and Paul J. A. (1996), 'The World Bank and the Attack on Pensions
in the Global South' Global Action on Aging, New York:
http://www.globalaging.org/
Pfaller A. (2000), 'Social Democracy in the Globalized Post-Industrial
Society' Politik und Gesellschaft Online, Friedrich-Ebert-Stiftung, 2,
available at: http://www.fes.de/IPG/ipg2_2000/artpfaller.html
Roos J. P. (2000), 'The Consequences of the Crisis of the 1990s to the
Nordic Welfare State: Finland and Sweden ' University of Helsinki,
Department of Social Policy, available at:
http://www.valt.helsinki.fi/staff/jproos/Nordsocp.htm
Rothenbacher F. (2000), 'The Changing Public Sector in Europe: Social
Structure, Income and Social Security'  Mannheim Center for European Social
Research, University of Mannheim, available at:
http://www.mzes.uni-mannheim.de/eurodata/newsletter/no8/feature.html
Rutkowski M. (1999), 'The Quest for Modern Solutions: Pension Reforms in
Transition Economies' Presentation for the World Bank Conference 'Ten Years
After: Transition and Growth in Pst-Communist Countries', Warsaw, poland,
October 15-16; paper, available in two parts at
http://www.wne.uw.edu.pl/~liberda/additional_materials/liberda/pan_pension2.
html
Scherman C. G. (2000), 'The Future of Social Security' Ministry of Social
Affairs and Health, Finland, available at:
http://www.vn.fi/stm/english/tao/publicat/financing/scherman.htm
Schwartz H. (2000), 'Social Democracy Going Down or Down Under:
Institutions, Internationalized Capital and Indebted States' University of
Virginia, Department of Government and Foreign Affairs, available at:
http://www.people.virginia.edu/~hms2f/social.html
Stilwell F. (2000), 'Globalisation: How did we get to where we are? (and
where can we go now?)' available at:
http://www.phaa.net.au/conferences/stilwell.htm
The Twelve theses of New Delhi are available at:
http://www.valt.helsinki.fi/staff/jproos/delhi.htm
Wheelwright T. (2001), 'Developments in the Global Economy and their Effects
on Australia' available at: http://www.angelfire.com/ma/rank/tedw.html


humbly, as always, my own private opinion






MR Doz. Dr. Arno Tausch
EUI 13/EUI 12
BMSG Stubenring 1
A-1010 Wien

Tel. 71100-2272
e-mail: arno.tausch@bmsg.gv.at