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Staff Papers STAFF PAPERS PETER HOLE Chair, Editorial Committee IAN S. MCDONALD Editor and Deputy Chair THOMAS WALTER Assistant Editor Editorial Committee William E. Alexander Paul R. Masson F. Charles Adams Donald J. Mathieson David Burton Guy M. Meredith Peter Isard Ratna Sahay G. Russell Kincaid Subhash M. Thakur Malcolm D. Knight Howell H. Zee Jorge Marquez-Ruarte Among the responsibilities of the International Monetary Fund, as set forth in its Articles of Agreement, is the obligation to "act as a centre for the collection and exchange of information on monetary and financial problems." Staff Papers makes available to a wider audience papers prepared by the members of the Fund staff. The views presented in the papers are those of the authors and are not to be interpreted as necessarily indicating the position of the Executive Board or of the Fund. To facilitate electronic storage and retrieval of bibliographic data, Staff Papers has adopted the subject classification scheme developed by the Journal of Economic Literature. Subscription: US$54.00 a volume or the approximate equivalent in the currencies of most countries. Four numbers constitute a volume. Single copies may be purchased at $18.00. Individual academic rate to full-time professors and students of universities and colleges: $27 a volume. Subscriptions and orders should be sent to: International Monetary Fund Publication Services 700 19th Street, N.W. Washington, D.C. 20431, U.S.A. Telephone: (202) 623-7430 Telefax: (202) 623-7201 E-mail: [email protected] Internet: http://www.imf.org ©International Monetary Fund. Not for Redistribution INTERNATIONAL MONETARY FUND STAFF PAPERS Vol. 44 No. 2 JUNE 1997 ©International Monetary Fund. Not for Redistribution EDITOR'S NOTE The Editor invites from contributors outside the Fund brief comments (not more than 1,000 words) on published articles in Staff Papers. These com- ments should be addressed to the Editor, who will forward them to the author of the original article for reply. Both the comments and the reply will be considered for publication. The term "country," as used in this publication, may not refer to a territorial entity that is a state as understood by inter- national law and practice; the term may also cover some ter- ritorial entities that are not states but for which statistical data are maintained and provided internationally on a separate and independent basis. © 1997 by the International Monetary Fund International Standard Serial Number: ISSN 0020-8027 The U.S. Library of Congress has cataloged this serial publication as follows: International Monetary Fund Staff papers — International Monetary Fund. v. 1- Feb. 1950— [Washington] International Monetary Fund. v. tables, diagrs. 23 cm. Three no. a year, 1950-1977; four no. a year. 1978— Indexes: Vols. 1-27, 1950-80, 1 v. ISSN 0020-8027 = Staff papers — International Monetary Fund. 1. Foreign exchange—Periodicals. 2. Commerce—Periodicals. 3. Currency question—Periodicals. HG3810.15 332.082 53-35483 ©International Monetary Fund. Not for Redistribution CONTENTS Vol. 44 No. 2 June 1997 Pension Reform, Financial Market Development, and Economic Growth: Preliminary Evidence from Chile ROBERT HOLZMANN • 149 Fiscal Policy and Long-Run Growth VITO TANZI and HOWELL H. ZEE • 179 Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects ALBERTO ALESINA and ROBERTO PEROTTI • 210 Is the Phillips Curve Really a Curve? Some Evidence for Canada, the United Kingdom, and the United States GUY DEBELLE and DOUGLAS LAXTON • 249 Comments Internal Migration, Center-State Grants, and Economic Growth in the State of India: A Comment on Cashin and Sahay M. GOVINDA RAO and KUNAL SEN • 283 Internal Migration, Center-State Grants, and Economic Growth in the State of India: A Reply to Rao and Sen PAUL CASHIN and RATNA SAHAY • 289 IMF Working Papers • 292 IMF Papers on Policy Analysis and Assessment • 294 iii ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution IMF Staff Papers Vol. 44, No. 2 (June 1997) © 1997 International Monetary Fund Pension Reform, Financial Market Development, and Economic Growth: Preliminary Evidence from Chile ROBERT HOLZMANN* The Chilean pension reform of 1981, a shift from an unfunded to a funded scheme, is considered to have contributed to this country's excellent eco- nomic performance. Positive growth effects allow, in principle, a Pareto- improving shift in pension financing. This paper highlights the theoretical underpinnings of the reform and presents empirical data and preliminary econometric testing of the conjectured reform effects on financial market developments, as well as the impact on total factor productivity, capital for- mation, and private saving. The empirical evidence is consistent with most but not all claims. In particular, the direct impact of the reform on saving was low, and initially even negative. [JEL G23,O16,O46,O54] HE REFORM of the public retirement scheme is a standing agenda in Tessentially all countries throughout the world (see Holzmann (1988) and World Bank (1994)). It is of particular importance for the emerging economies of Latin America and Central and Eastern Europe as their cur- rent schemes constitute an important drain on the public budget, reducing * Robert Holzmann is Professor of Economics and Managing Director of the Economics Department of the European Institute at the University of Saarland. He is currently on leave and Director of the Social Protection Team of the Human Devel- opment Department of the World Bank. The first version of this paper was prepared while he was a guest professor at the Instituto de Economia, Pontificia Universidad Catolica de Chile in March-April 1995, and a revised version was prepared while he was a visiting scholar at the Fiscal Affairs Department of the IMF in June-August 1995. The author thanks both institutions for their encouragement and support, and the possibility to present the results at their research seminars, where he received many valuable comments. Special thanks for helpful comments and support go to Friedrich Breyer, Peter Diamond, Philip Gerson, Ross Levine, Sandy Mackenzie, and Salvador Valdes-Prieto. All errors and omissions are, of course, his own doing. 149 ©International Monetary Fund. Not for Redistribution 150 ROBERT HOLZMANN national saving, capital formation, and growth. Also, these schemes are held responsible for the main distortions in the labor market. Thus the experience of the Chilean pension reform of 1981 has special attraction for other emerg- ing economies, as this reform was thought to have contributed to the coun- try's excellent economic performance after the shocks of the foreign debt and domestic banking crises of 1981-83 had been absorbed (see Table 1). Very recently, various countries in Latin America, such as Argentina, Peru, Colombia, and Mexico, have begun to imitate to some extent the Chilean approach, and some former centrally planned economies, such as Hungary, Latvia, and Poland, are taking preparatory steps in this direction.1 In a nutshell, the Chilean reform consisted of (1) a shift from a conven- tional unfunded and defined-benefit plan to a funded, defined-contribution plan, (2) the replacement of public administration of the program with pri- vate administration by competing pension funds, and (3) the separation of the social assistance element from the mandated saving element of retire- ment provisions. The government is still involved with supervising and regulating the new mandatory but funded scheme, guaranteeing minimum benefits, and financing the transition; otherwise, the market is allowed to play its role.2 Various advantages for the reform approach are claimed by domestic and foreign observers. At the political level, three effects stand out. First, the approach provides a break in the deadlock of traditional reform attempts since it suggests a time-consistent and, hence, credible reform (Holzmann, 1994). Second, the approach isolates retirement provisions to a large extent from political interference and risk (Diamond, 1997; and Godoy-Arcaya and Valdes-Prieto, 1997). Last but not least, it sensitizes workers to finan- cial issues and enterprise performance, thus reducing the dichotomy between capital and labor (Pinera, 1991). At the economic level, three main reform effects are claimed. First, the reform establishes a close link between contributions and benefits, thus reducing the labor market distortions with which traditional unfunded pro- grams are considered to be fraught (World Bank, 1994). Second, the reform approach furthers and accelerates financial market developments and thus efficiency of resource allocation. Last but not least, the reform affects pos- itively national saving and capital accumulation and, hence, contributes to economic growth (IMF, 1995). 1 For a survey of the Latin American pension reform attempts and further refer- ences, see Queisser (1995); for a review of the current reform approaches in Cen- tral and Eastern Europe, see Holzmann (1997). 2 For a detailed survey and analysis of the Chilean pension reform and further references, see Diamond and Valdes-Prieto (1994). ©International Monetary Fund. Not for Redistribution Table 1. Macroeconomic Indicators and Pension Fund Performance (In percent, unless otherwise indicated) Macroeconomic indicators Pension fund performance AFP assets (in % of market assets) Real GDP Unemploy- Real exchange Private Real rate of AFP assets Enterprise bonds
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