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  • Print publication year: 2008
  • Online publication date: July 2010

5 - Pension Reform in an Open Economy: Negotiating Globalization's Double Bind


Although welfare states around the world were resilient in the face of social and economic change for most of the twentieth century, they had begun to undergo dramatic transformation by the century's end. In the case of old age pensions, redistributive social insurance systems that provided a bulwark against the effects of market forces were transformed into institutions that increasingly replicate and reinforce market-based allocations of risk and income. For many scholars, such transformations are inextricably linked to the integration of product and capital markets that accelerated in the last quarter of the twentieth century. Competitive pressures, this argument suggests, along with the enhanced “exit option” of capital, have imposed an agenda of reform on increasingly open economies. The pressures of globalization are said to be especially potent in the developing world, where dependence on foreign savings enhances the tremendous bargaining power of capital holders vis-à-vis domestic governments. And where authority to design and implement reform is concentrated in the hands of executive-branch technocrats, welfare state dismantling is said to be likely to advance the furthest. Such technocrats, the argument goes, are insulated from the time inconsistency problems that bedevil reform-seeking politicians, where the deleterious short-term effects of reform create incentives to depart from a long-term strategy of institutional change. Technocrats thus are freer to design reforms on the basis of long-term macroeconomic objectives and “good policy” concerns. The conventional story is thus that globalization creates pressures for long-term institutional changes in the direction of greater market orientation of social protection, and that such reforms are most likely to be realized when placed in the hands of well-insulated technocratic actors.