Interdependent and Domestic Foundations of Policy Change: The Diffusion of Pension Privatization Around the World

Abstract

In the last two decades, striking correlations in the location and timing of structural pension reforms have raised important questions about the kind of information used by policy makers in their decisions to adopt such measures. This study tests the hypothesis that the adoption of pension privatization is shaped systematically by an interdependent logic, wherein the decision to privatize pensions in one country is systematically linked to corresponding decisions made by governments in relevant peer nations. Duration analysis with time-varying covariates of data from 59 countries between 1980 and 1999 reveals that the decision to adopt a private pension reform in one country increases systematically as the proportion of peer nations that have adopted corresponding measures rises. Importantly, the effect of this peer dynamic varies across groups of nations, with the most powerful impact of peer decisions being found among Eastern European and Central Asian nations. Peer dynamics likewise contribute powerfully to the adoption of private pension reforms in Latin America, but do not significantly shape the hazard of privatization among the Organization for Economic Cooperation and Development member nations. Even controlling for diffusion mechanisms, the analysis shows that pension reform decisions remain subject to domestic political and economic considerations, including demographic pressures, financial costs and incentives to reform, and constraints delimited by the political institutions in each nation.