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International Studies Quarterly (2005) 49, 273294

Interdependent and Domestic Foundations

of Policy Change: The Diffusion of Pension
Privatization Around the World
Ohio State University
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.

In the second half of the twentieth century, gains in longevity and declining fertility
combined to increase the ratio of elderly to working age citizens in countries
around the world. Just as the looming retirement of large baby-boom generations
presaged yawning financial shortfalls in national old age pension programs, social
budgets came under strain from lagging growth and industrial restructuring. In
response to these pressures, many governments took measures to strengthen the
funding of public social security programs through incremental revisions to the
parameters of these systems, such as by increasing the retirement age, raising contributions and/or cutting pension benefits. Since the 1980s, however, an increasing
number of governments around the world have chosen to privatize old age
pensions, and in doing so, have in varying degrees transformed both the instruments and ends of old age income protection schemes.1 Privatization involves some
Pension privatization is a simplified term to describe a category of structural pension reforms involving two key
changes: a shift within the mandatory pension system from a defined benefit mechanism, in which retirement benefits
are set in relation to working income, toward a defined contribution scheme, in which only the contributions are

r 2005 International Studies Association.

Published by Blackwell Publishing, 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK.


Interdependent and Domestic Foundations of Policy Change

degree of structural shift from public to private management of pension funds, as

well as a transfer of certain risks and responsibilities for old age income provision
from society as a whole to individuals, who under private pension systems must save
for their own retirement. By replacing the principles and instruments of social
insurance with those of individual responsibility and forced savings, privatization
constitutes a significant paradigm shift in social protection (Hall, 1993:279; Beland,
As a financial strategy, privatization seeks to limit the states long-term unfunded
pension liabilities, which rise steadily as populations age. Since the late 1980s,
pension privatization has been touted also as a means to increase domestic savings,
enhance growth, and build domestic capital markets in the long term (World Bank,
1994; Feldstein, 1996). In the short-to-medium term, however, the transition from
public to private pension systems exacts a high financial toll of governments. As
individuals begin to divert payroll contributions from public coffers to private
pension funds, privatization opens a wide gap in the finances of pay-as-you-go
pension systems, which experience a reduction in the resource pool with which to
finance ongoing benefits. Beyond the financial cost, privatization is a high-risk
political strategy as wellFsparking intense opposition from organized beneficiaries
of state pension systems. Indeed, despite growing uncertainty about the long-term
finances of state pension systems, these institutions continue to enjoy broad public
support around the world (Arnold, Graetz, and Munnell, 1998; Boeri, Bo
rschSupan, and Tabellini, 2001). Given that the social, economic, and distributive implications of pension privatization are yet unknown (as it takes a full generation for
workers to begin retiring fully under the rules of a private pension regime), this
policy innovation is shrouded in great uncertainty as to its long-term effects, while
in the short term presenting significant political and financial costs to potential
reformers. Why, then, have so many governments undertaken this measure?
Despite the uncertainty, high risks and costs associated with this measure, interest
in pension privatization spread rapidly throughout the world in the last quarter of
the twentieth century.2 Between 1980 and 2000, governments in 18 nations from
Western Europe (Britain, Switzerland, Denmark, the Netherlands, Sweden) to
Latin America (Chile, Argentina, Peru, Bolivia, Colombia, Mexico, El Salvador,
Uruguay), Eastern Europe (Poland, Hungary, Croatia), Central Asia (Kazakhstan),
and Australia adopted some degree of market-based pension provision. Figure 1
illustrates this global trend, while highlighting the striking correlations in the timing and location of private pension reforms across sub-groups of nations. These
trends also raise important questions. Why did this measure gain such momentum
before its long-term consequences were known? Why, moreover, does its adoption
reveal such striking temporal and geographic correlations?
To address these questions, I examine the micrologic of structural pension reform from the perspective of domestic policy makers in nations with national
compulsory old age pension systems. I argue that once policy makers become aware
of a policy innovation such as pension privatization, the decision to adopt this
model turns critically on the perceived balance of short-term political and financial
costs of the measure, and the certainty that policy makers attach to expectations of
the viability and success of privatization in their nation, at least over the medium
term. Such confidence in the feasibility and success of pension privatization, I argue
specified ex ante, and benefits vary according to the individuals payroll contributions, and the return to those
invested funds. In addition, privatization implies a shift from a pay-as-you-go financing method, wherein the payroll
contributions of current workers are used to finance the benefits of current pensioners, toward one in which old age
benefits are funded wholly by each workers contributions to an individual pension account during working life, and
the returns to invested funds. Accordingly, privatization does not capture the adoption of notional defined contribution pension reforms, which retain state management and pay-as-you-go financing.
Diffusion refers to the process by which an innovation is communicated through certain channels over time
among the members of a social system (Rogers, 1995:5).


Latin America
E.Europe & C. Asia


Number of Adoptions


































FIG. 1. The Diffusion of Pension Privatization: Global and Peer Group Trends 19801999

further, is gained from the observation of reform experiences in nations like their
own. Accordingly, I expect the probability of adopting pension privatization in a
given country to increase as the proportion of comparable, or peer nations that
have adopted this innovation rises. I test this hypothesis using event history analysis
of 59 countries from the Organization for Economic Cooperation and Development
(OECD), Latin America, Eastern Europe and Central Asia (EECA). The analysis
reveals a powerful interdependent logic underlying the adoption of pension privatization in Latin America and EECA, wherein the policy decision in one country is
systematically influenced by the prior adoption of like measures in peer nations, as
well as by domestic political factors. The force of such horizontal links is not perceptible among the advanced industrialized nations, however, where domestic demographic, political, and economic concerns emerge as the principal forces behind
this measure.

1. Explaining Market-Oriented Social Policy Reform

A prominent stream of research on the wave of market-oriented social policy reform in the final decades of the twentieth century linked such measures to the
pressures of globalization. In this view, economic openness, which expanded dramatically since the 1980s, compels governments to cut social spending as a means to
combat inflation, control domestic spending, and enhance competitiveness (Tanzi,
1995; Strange, 1996; Rodrik, 1997). Although prominent research has dismissed
the notion that global pressures have impelled convergence on a single, marketoriented model (Kitschelt, Lange, Marks, and Stephens, 1999; Hall and Soskice,
2001), pressures associated with trade exposure and capital mobility remain central
to the study of social welfare reform in developing and industrialized nations (Kay,


Interdependent and Domestic Foundations of Policy Change

2001; Swank, 2001; Rudra, 2002). Yet, research in this vein assumes in general that
market-oriented reforms are adopted as independent responses to common global
pressures. Few studies have systematically tested the possibility that domestic policy
choices in one country may be systematically tied to the policy decisions taken
elsewhere, rather than to the common circumstance of exposure to global pressures
(see, however, Simmons and Elkins, 2004).
A second stream of research has looked to the influence of international financial
institutions (IFIs) to explain the prevalence of market-oriented reform of social
policies, particularly in the developing and transitional nations. In this view, conditions attached to loans from IFIs have effectively narrowed the range of policy
models available to governments, thereby eroding domestic policy autonomy
(Cruz-Saco and Mesa-Lago, 1998; Huber and Stephens, 2000). Yet, quantitative,
cross-national research has yielded little evidence to support the view that IFIs can
impose the adoption of a specific policy reform on governments receiving development aid (Hunter and Brown, 2000). Nevertheless, qualitative research has
shown that institutions such as the World Bank play a significant role in the dissemination of ideas about pension reform, and thus powerfully influence the kinds
of policy models embraced by government actors around the world (Kahler, 1992;
ller, 1999, 2003; Orenstein, 2003; Weyland, 2004; Brooks, 2004a). Although this
research forms part of a growing stream of literature joining causal explanations at
the domestic and international levels (Mesa-Lago, 1994; Esping-Andersen, 1996;
Kay, 1998; Madrid, 1999; Mu
ller, 2002a, b, 2003; Orenstein, 2003), few studies
have systematically probed the relative influence of horizontal connections (such as
the borrowing of policy models from peer nations, see, however, the pioneering
study by Collier and Messick, 1975) and IFI coercion in a systematic model of policy
reform. As a step in this direction, this study joins the literature on the diffusion of
policy innovations with that on the politics of economic reform to test both the
interdependent, domestic, and international sources of policy diffusion. By estimating the nature and magnitude of these cross-national links, I seek to provide a
more fully specified, and hence accurate, model of the political economy of adoption and diffusion of policy innovations, and a clearer sense of the mechanisms by
which international developments shape domestic politics.
a. The Origin and Diffusion of Pension Privatization

The first national pension privatization was adopted in 1981 by decree of Chilean
dictator Augusto Pinochet. That measure, which replaced the public social insurance pension system with a fully private individual savings scheme, was a deeply
political and ideological project, seeking to shift power from the state and private
actors while weakening the mobilizational capacity of labor (Kurtz, 1999; Borzutzky,
2002). Given the association of pension privatization with the political goals of the
Pinochet dictatorship, interest in Chiles pension reform was slow to ignite around
the world. Only in the late 1980s did state and market actors around the world take
a second look at Chile. While most Latin American countries languished in recession at the end of the lost decade, Chile enjoyed high and sustained rates of
growth and elevated rates of domestic savings and investment. When prominent
voices associated these positive macroeconomic outcomes with Chiles pension reform, moreover, government actors around the world took notice. Although scholars continue to debate the existence or magnitude of this connection, the very
possibility of a link between this measure and the elusive goals of sustained growth
and higher savings catapulted pension privatization to the forefront of policy discussions and reform agendas throughout the world.
By the late 1990s, pension privatization had spread rapidly from Latin America
to EECA as well. For many countries in that region, the deterioration of public
finances during the transition from planned to market economies strained the



finances of generous public pension systems at the same time as populations began
to age (Mu
ller, 1999, 2002a, b; Ney, 2003). In less than a decade after the fall of the
Berlin wall, governments in Hungary, Poland, Croatia, and Kazakhstan transitioned from having cradle-to-grave public social protection systems, to the adoption of
varying degrees of private pension provision through individual retirement accounts. The movement toward private pension reform has not been limited to
recent liberalizers and developing nations, however, as governments in the advanced industrial world began to restructure state pension systems in the 1980s. In
many instances, structural pension reforms were animated by the goal of reducing
state pension liabilities in advance of steep demographic shifts of rapidly aging
populations. Rather than replacing public and redistributive pension systems,
however, structural pension reforms in Europe and Australia centered largely on
the expansion of existing occupational pension markets to cover the entire work
force (Disney and Whitehouse, 1993; Hepp, 1998).
Pension privatization marked a dramatic shift in the paradigm of social protection, from redistributive social insurance models that dominated the expansion of
social welfare systems in the post-war era, toward an individual savings paradigm
corresponding to the resurgence of neoclassical economic ideas. The market-oriented paradigm offered more than simply a technical solution to the challenges of
demographic and economic change, but altered as well the very language and goals
embraced in debates over social security reform. Where issues of collective responsibility, risk pooling, and the mitigation of inequalities once dominated, concepts such as individual responsibility, domestic savings, and rates of return became
the defining language of social security debate. While the degree to which governments have shifted toward private pension provision has varied in systematic
ways across nations (James and Brooks, 2001; Brooks, 2002) the adoption of any
degree of market-based pension reform represents a significant departure from the
path of previous welfare state development (Hering, 2003).

2. An Interdependent Model of Paradigm Diffusion

Understanding when and where government actors choose to embark on the risky
and high-cost path of structural pension reform demands careful attention to the
decision-making challenges that confront government technocrats who are charged
with the responsibility for designing such reforms. Although advances in communication technology make a profusion of information available to government actors, IFIs have played a powerful role in bringing attention to specific policy
paradigms. Nevertheless, given the potentially high political and financial costs of
such reforms, government actors may seek greater assurance of the viability of this
measure in their country prior to adopting it. Such assurance may be gained by
observing the outcome of corresponding decisions made by a relevant subset of
prior adopters, namely, peer nations.
a. Linkage Politics in the Internet Age

Scholarly interest in interdependent decision making and the spread of policy

practice across borders is not new. In the 1960s, Rosenau (1969:76) wrote of the
shrinking of world politics upon viewing the similarity of political conditions
across disparate nations. Although founding studies of transnational relations
brought greater analytic focus to the nature of these links (Keohane and Nye,
1974), the subsequent study of regimes returned emphasis to the common structures
that foster interdependent decision making (see for example Krasner, 1982), rather
than on the direct state-to-state mechanisms connecting policy change in one
country to that in another. The latter, interdependent focus, is central to the diffusion literature.


Interdependent and Domestic Foundations of Policy Change

Revolutions in information technology powerfully catalyzed the dissemination of

ideas and policy paradigms around the world in the last quarter of the twentieth
century. By vastly diminishing the cost of global communication, the expansion of
information networks significantly increased the density of social and economic
interactions. This deepening of complex interdependence has dramatically
shaped how ideas and information, specifically policy models and paradigms, flow
across borders (Keohane and Nye, 1977, 1998). Indeed, technocrats in San Salvador can now view policy reforms from Stockholm to Hong Kong cheaply, quickly,
and in full technicolor. As a result, the personal diffusion channels that scholars
once traced through educational and professional networks have diminished considerably in importance relative to the vastly expanded impersonal connections
permitted by global television and internet links.
b. Bounded Rationality and Policy Paradigms

Although most government actors possess such vast information-gathering capacity,

it is unlikely that they can, or do, follow closely the policy decisions in every country
of the world. While information gathering is not very costly in financial terms, acquiring complete knowledge of the range of policy options and their consequences
for governments remains a highly time-consuming process. Moreover, the uncertainty that policies adopted in far and disparate nations will be relevant or effective in
ones own country is likely to diminish government actors incentive to conduct
exhaustive studies of all possible alternative courses of action. Rather, policy makers,
like normal citizens, may be expected to use information shortcuts to circumvent the
task of acquiring complex knowledge by selecting from a limited range of salient
options (Simon, 1955; Lupia, 1994:71). In the face of uncertainty, policy paradigms
furnish a powerful device that helps solve the task of diagnosing policy problems,
while identifying and evaluating viable solutions and goals of policy change.
IFIs have aided governments significantly in this policy-making process by promoting the dissemination of distinctive paradigms of structural reform. Although
scholars have viewed IFIs variably as teachers of norms, coercive actors, or even
strategic scapegoats (Stallings, 1992; Finnemore, 1993; Vreeland, 1999), empirical research has rarely demonstrated the conditions under which governments
adopt the ideas promoted by IFIs, and when these fall by the wayside (RisseKappen, 1994:187; see, however, Hunter and Brown, 2000). Moreover, in the
realm of old age pension reform, international policy experts divide sharply over
the merits of competing paradigms of social protection, offering no clear consensus
or focal point around which the expectations of domestic policy makers can easily
converge. Given this lack of consensus, we must consider how one paradigm advanced by an IFI can gain prominence over another.
Few institutions have rivaled the impact of the World Bank on the thinking and
practice of pension reform since the 1990s. In its 1994 report, Averting the Old Age
Crisis: Policies to Protect the Old and Promote Growth, the World Bank advanced a
broadly defined three pillar model of pension reform that separates the functions
of redistribution and individual savings, while advocating the latter as the dominant
pillar. The World Bank was not the only international organization engaging in
dialogue on pension reform in the 1990s, however, as the International Labor
Organization (ILO, 2003) promoted a rival prescription for structural pension reform within the traditional social insurance paradigm (Beattie and McGillivray,
1995; Queisser, 2000). Nevertheless, the World Bank enjoyed considerable resource advantages over the ILO in the 1990s. With approximately half of the World
Banks social protection resources dedicated to lending, vast resources remained
for investment in research and the dissemination of ideas (World Bank, 2003).
Indeed, following the publication of its 1994 report, the World Banks social protection team launched a multi-year dissemination project, sponsoring conferences



and training workshops on structural pension reform around the world. By the end
of the 1990s, translations of the World Banks (1994) report had become the text
for policy makers from Beijing to Braslia who were confronting the political and
technical challenge of old age pension reform (Brooks, 2004a).
c. Hard and Soft Power

Despite the broad scholarly attention given to the question of IFI influences on
policy reform, it remains unclear precisely how the World Bank has influenced the
policy-making processes of governments around the world. Given that the World
Bank (like the International Monetary Fund) possessed, and used, considerable
resource power to induce developing country governments to swallow the bitter
pill of macroeconomic stabilization in the 1980s and early 1990s, it is reasonable to
expect that such coercion, or hard power, was wielded also to advance the market-oriented reform of social security. Nevertheless, unlike radical macroeconomic
stabilization measures, pension privatization has only exceptionally been adopted
by decree or without the sanction of representative democratic institutions. Indeed,
for such a deeply penetrating social institution, policy makers understood that
citizens and market actors alike needed assurance that the new pension system was
both permanent and fair. Such assurances, moreover, could not be gained where
the pension system was adopted by decree or solely on the basis of a narrow
technocratic consensus. For this reason, unlike the adoption of macroeconomic
stabilization plans, loan conditionality and reform by decree became less effective
tools through which IFIs could promote the adoption of second generation social
policy reforms such as that of pensions (Nelson, 1994, 2004).
Rather, the principal means through which the World Bank promoted the diffusion of multi-pillar pension reform is likely to be through the exercise of soft
power, or the ability to get desired outcomes because others want what you want
(. . .) through attraction rather than coercion (Keohane and Nye, 1998:86). Such
power, according to Keohane and Nye (1998), can derive from the appeal of ones
ideas, or from the ability to set the agenda and to shape the preferences of others. In
the case of pensions, the ideas and language used by the World Bank to frame and
communicate the market-oriented paradigm made pension privatization not only a
salient policy model for technocrats around the world, but an attractive one as well.
Specifically, the appeal of the market-oriented paradigm in developing and transitional countries drew from the attractiveness of the macroeconomic ends with which
it was associated, including higher growth, increased domestic savings, and deeper
capital markets (World Bank, 1994; Feldstein and Samwick, 1997; Stokes, 2001). In
Latin America, these claims were particularly powerful in the wake of devastating
debt crises in the 1980s, which many state actors attributed to the perennial scarcity
of domestic capital accumulation and reliance on unstable foreign savings.
The broad appeal of the market-oriented paradigm was enhanced, moreover, by
the ability of the World Bank to generalize the private pension model. Indeed, rather
than promoting a Chilean model of pension reform, representatives of the World
Bank advanced a broad three-pillar design, downplaying the cultural and political association of privatization with the authoritarian regime that christened the
archetypal reform. Thus, the standard endorsed by the World Bank came to be
known widely as the World Bank model of pension reform, therein enhancing
the salience of this model far beyond Latin America, allowing it to be embraced by
government actors from Europe and Central Asia as well.

3. Peer Dynamics and Interdependent Decision Making

Putting the market-oriented reform model on the radar screen of technocrats does
not, however, assure that structural pension reform will be adopted. Indeed, with-


Interdependent and Domestic Foundations of Policy Change

out some assurance that this model is both viable and appropriate for their home
country, government actors may be unwilling to assume the high costs and risks of
privatization. Accordingly, I expect that government actors will seek out such reassurance by looking to the prior structural pension reform decisions of other
nations. A central hypothesis of diffusion research is thus that decisions made
within one state may be cued by a set of external archetypal behaviors or practices (Most and Starr, 1980). In this section, I argue more specifically that such cues
are not taken from any prior reform decision, but rather are drawn from a particular subset of prior adopters, namely peer nations. Peers are nations with
comparable geopolitical, economic, and cultural landscapes, as well as countries
that belong to common economic or political organizations (Berry and Berry,
1992). Peer decisions may spark competitive concerns to the extent that such nations trade extensively or contend for investment, while also signaling whether a
general reform model is appropriate for their own country.
a. Competition

Competitive motives may provide strong impetus to the adoption of the marketoriented paradigm within groups of peer nations. As economic integration advanced in the 1990s, market-oriented reforms became important means through
which countries remained competitive vis-a`-vis trade or investment rivals. Such fear
of missing out on investment, or worse, of being punished by international
market actors for failing to adopt a policy innovation that is deemed beneficial has
been linked also to the adoption of reforms such as central bank independence and
capital account liberalization (Maxfield, 1997; McNamara, 2002). In this sense, as
an increasing proportion of like nations adopt pension privatization, competitive
concerns may lead state actors to privatize in order to avoid the loss of investment
or international competitiveness.
b. Expectation of Success

Similarly, policy makers may be expected to adopt an external policy paradigm as a

means to emulate the success of an innovating country (Simmons and Elkins, 2004).
In the mid-1990s, market actors from Wall Street and Washington lavished praise
on Chile as the star performer and model for pension reform (Edwards, 1996).
Observing the success of a policy innovation in a peer state may lower government
actors inhibitions to reform by increasing the expectation that a policy can be
successfully adopted in their country as well (Li and Thompson, 1975:66). In this
sense, the expectation that if it worked for them, it will work for us may lead
policy makers to attach a higher expected probability of success to the launching of
a proposal in their own country that has been implemented with success by a peer.
This argument does not require that expectations of success that are inferred on
the basis of the market-oriented paradigm and peer dynamics be accurate or rational. Indeed, what makes a paradigm powerful, Hall (1993:279) argues, is that so
much of it is taken for granted and unamenable to scrutiny as a whole. To the
extent that policy makers take for granted the hypothesis that pension privatization
is the source of positive macroeconomic outcomes, or simply ignore the prior
probability that this is true, inferences of the likely success of privatization in their
own country are likely to be biased.3 I expect that the certainty attached to ex3
Proper application of Bayes rule requires that actors understand the prior and posterior probabilities as
conditionally independent, and take into consideration both when revising beliefs. Research has shown, however,
that failure to properly revise beliefs may owe to the use of heuristics (Tversky and Kahneman, 1980), confusion
about probabilistic information that leads people to ignore the base rate, or prior probability that a hypothesis is
true, based upon the way that information is transmitted (Bar-Hillel, 1980).



pectations that this measure will succeed, whether rational or not, will increase with
the number of peer governments that adopt the innovation, raising therein the
probability of privatization among the diminishing number of unreformed peers.
I test the hypothesis that this interdependent mechanism shapes pension privatization by measuring the proportion of privatizing countries within each peer
group for every year under study (Peer Privatization). The nations examined in this
study fall into three broad peer groups, organized on the basis of shared geopolitical and economic characteristics: Latin America and the Caribbean, EECA, and
members of the OECD.4 In order to test whether diffusion dynamics vary across
peer groups, I interact the density of peer privatization for each country and year
with the dichotomous variables for each peer group. The empirical model includes
interactions for the Latin America and EECA groups, with OECD omitted as the
reference category.

4. When do Ideas Take Hold?

In order to disentangle the interdependent sources of pension reform from the
array of domestic incentives and constraints on the adoption of this measure, this
section identifies prior sources of heterogeneity in the proneness to adopt private
pension reform. Indeed, some governments may be compelled to adopt structural
pension reform purely on account of domestic considerations, such as population
aging and economic conditions. To isolate these independent motives, I identify
next the domestic demographic, political, and economic factors that may be associated with the likelihood of privatizing old age pensions.
a. Demographic and Economic Pressures

In many countries, gains in life expectancy coupled with declining fertility dramatically increase the cost of providing old age pensions while raising the specter of
massive shortfalls in revenue with which to finance these rising pension liabilities
(Disney, 2000). Adding to this financial squeeze in many countries has been the
slowdown in macroeconomic growth attendant upon post-industrial economic
transitions (Iversen, 2001). Together, these pressures have brought attention to
market-based structural pension reform as a way to indemnify the rising costs and
risks of providing old age pensions in the context of demographic and economic
While demographic and post-industrial pressures are hardest-felt in the advanced industrialized nations, government actors in the developing world, with
younger (but more rapidly aging) demographic profiles, responded to a distinct
array of financial incentives to privatize. Indeed, government actors in capitalscarce nations viewed pension privatization as an effective means to raise long-term
domestic savings and diminish reliance on increasingly volatile foreign capital flows.
Although the potential savings effects would obtain only in the medium to longterm, IFIs and capital market actors lavished immediate praise, and rewards, on
privatizing governments. As a result, the uncertainty surrounding the longer term
macroeconomic impact of pension privatization was in many cases overshadowed
by the certainty that this measure would send an immediate and positive signal to
market actors, and that it would thus bring the great reward of access to foreign
savings in the short term.
Independent of any diffusion processes, therefore, the likelihood of adopting
pension privatization should be higher in nations where demographic pressures are
high (where population aging is advanced) and in nations where macroeconomic

This excludes countries that are members of the previous categories. Hungary and Poland are coded in the
EECA category, while Mexico is coded in the Latin America group.


Interdependent and Domestic Foundations of Policy Change

incentives are strong (such as where domestic capital markets are underdeveloped).
To capture these technocratic motives, I use a measure for the percent of the
population over age 65 (Age 65), to proxy for the magnitude of demographic
pressure, while macroeconomic incentives to privatize are estimated using stock
market capitalization as a percent of GDP (Stock Market).5 International financial
pressures are measured as trade exposure, or imports plus exports as a percent of
GDP (Trade), and net inflows of foreign direct investment as a percent of GDP
(Foreign Direct Investment).
b. Short-Term Financial Constraints

Although the potential cost savings associated with pension privatization are greater
where population aging is more advanced, so too is the potential transitional cost
of privatization. Such costs emerge in the process of privatization as workers begin
to divert payroll contributions to privately managed pension funds. To the extent
that governments at the same time must uphold pension commitments to large
elderly populations, the resulting fiscal shortfalls may be enormous, constituting
what Myles and Pierson (2001:313) deem an insurmountable barrier to privatization or the capitalization of existing public [pension] schemes in nations with
mature pay-as-you-go pension schemes. As population aging advances, therefore,
the potentially massive transitional costs should make it increasingly difficult for
governments to privatize old age pensions, all else being equal.
In reality, however, all else is not equal in this respect, since governments possess
very different capacities to finance the transitional costs of privatization. Governments may finance these costs either by increasing fiscal outlays, raising taxes, or by
issuing new government debt (or some combination of these measures). Realistically, however, since the imposition of a double payment burden on working
generations may be politically toxic for elected officials, the use of fiscal revenue or
government debt have been the principal means of covering the financial gap
opened up by privatization. Yet, for some governments, the ability to sustain large
budget deficits and debt burdens in the 1990s became increasingly constrained by
the vigilance of international market actors, IFIs, or by institutions such as the
European Union (Mosley, 2003). Thus, for governments already sustaining large
budget deficits or debts, the leeway with which to finance the transitional costs of
privatization is effectively much narrower, even to the point of foreclosing the
option of privatizing (Brooks, 2002, 2004b). I test this hypothesis that domestic
financing constraints may preclude the adoption of structural pension reform in
some countries using a measure of the fiscal budget balance as a percent of GDP
(Budget Balance).6 As fiscal deficits grow larger, the probability of privatizing old age
pensions is expected to decline, all else being equal.
c. Political Institutions

As a highly visible and redistributive measure, pension privatization often sparks

fierce opposition from organized beneficiaries of the existing pension system, which
may encumber or even undermine the task of winning majority support for pension privatization in legislative assemblies. Indeed, a broad stream of research has
demonstrated that the task of gaining support for redistributive measures such as
pension privatization is complicated to the extent that a wider range of distinct
interests, or veto players are represented in the political process. In this view, the
range of negotiations and compromises needed to win legislative support increases

All macroeconomic data are from the World Development Indicators (World Bank, 2002).
Because of the limited data coverage on government debt, and high collinearity between government debt and
deficit levels, government debt is not included in the model.



with the number of veto actors, therein diminishing the possibilities for radical
policy change (Immergut, 1992; Kay, 1998; Tsebelis, 1999). I expect, therefore, that
as political power is shared broadly across distinct political parties in the legislative
process, the likelihood of winning majority support for a private pension reform
will decline. I test this hypothesis with a widely used indicator of party fragmentation, the effective number of political parties (Parties).7 This variable captures,
albeit roughly, the range of compromises that are likely to be required to win
majority support for a measure such as pension privatization. I include a measure
of democratic freedoms (Democracy) as reported by Freedom House (20012002).
The Freedom House index is reversed so that higher scores on this 17 scale
represent stronger democratic freedoms.

5. Empirical Model and Estimation

In this section I test the hypotheses developed above to explain the striking temporal and geographic correlations in the adoption of pension reform around the
world. In particular, I evaluate the diffusion hypothesis that all else being equal, the
likelihood of adopting pension privatization in one country will increase systematically with the proportion of peer nations that have adopted some form of private
pension reform. I employ event history, or duration analysis to model the hazard
rate of privatization, or instantaneous probability that this event occurs at any time t
(measured here in years), given that it has not yet occurred prior to t (BoxSteffensmeier and Jones, 1997:1419). Choosing the proper shape of the baseline
hazard has a strong bearing on the inferences that can be drawn with regard to the
process under analysis. Some duration models assume that the hazard that some
event occurs is monotonically increasing or decreasing (Weibull), or is constant over
time (exponential). In the absence of clear theoretical guidance on this issue, I
employ the more flexible Cox model, which allows specification of the parameters of
ordered duration times in terms of a set of covariates, but leaves the distributional
form of the baseline hazard unspecified (Kalbfleisch and Prentice, 2002:9598;
Box-Steffensmeier and Jones, 2004:49). The Cox proportional hazards model is thus
estimated as the product of an unspecified baseline hazard, which may vary over
time, and a unit-specific but time-invariant component (Beck, 1998).
Cox regression with time-varying covariates is an extension of the proportional
hazards model that allows us to examine how the hazard of privatization responds
to changes over time in the domestic political and economic conditions, and to the
privatization decisions among peer nations. An important assumption of the Cox
model, however, is that of proportional hazards.8 This assumption requires that a
change in the independent variables brings about a change in the hazard rate by a
factor of proportionality, and that the size of that effect remain constant over time
(Box-Steffensmeier, Reiter, and Zorn, 2003:34). The proportional hazard assumption is violated, therefore, if the effect of a certain variable on the hazard rate
increases or diminishes over the duration under analysis. In such cases, the estimated partial likelihood coefficients may be biased and inefficient (Box-Steffensmeier and Zorn, 2001). Testing this assumption is particularly important for this
analysis, since the values of most covariates change over time, including the basic
mechanism of policy diffusion, the density of privatization among peers. To test the
robustness of the model to the inclusion of time-varying covariates, I employ a
standard residuals-based test of the proportional hazards assumption. The results
This is measured as the inverse sum of the squared seat shares of each party for each country year under
observation (Laakso and Taagepera, 1979).
In the Cox model, the baseline hazard is treated as a nuisance parameter and integrated out of the likelihood
function. Although it may vary with time, it does not vary with individuals, such that the ratio of hazards for
individuals i and j are independent of time, and are constant (Box-Steffensmeier and Zorn, 2001:974).


Interdependent and Domestic Foundations of Policy Change

of this test suggest that while the model as a whole and the main independent
variables of interest are robust and proportional in their effects, the trade variable
reveals a slight violation of the proportional hazard assumption (at 10 percent).9
I correct for this violation, and discuss the results below.
a. Dependent Variable

The dependent variable in this analysis, the adoption of some degree of private
structural reform to a mandatory national old age pension system, is measured as a
binary recording of whether or not each country privatized between 1980 and
1999. The year 1980 is a natural time origin for this analysis because pension privatization did not exist as a national policy model prior to that year. Each country
observation on the dependent variable is coded 0 for each year of the study until the
year in which the privatization is implemented, in which case the country is coded
1 for that year.10 Privatizing countries then drop out of the analysis in the following
year, creating a progressively smaller risk set of potential privatizers.
The analysis encompasses 59 countries that fit the key criteria of universal and
mandatory public social insurance pension systems, and available data on variables
of interest. Of these 59 countries, 18 privatized during the years under observation
(see Appendix for countries included and dates of adoption of funded definedcontribution pension reform, or pension privatization). The remaining 41 countries that did not privatize by 1999 are therefore treated as censored, because we do
not know when or if they will privatize after our period of observation terminates.
Duration models, such as the Cox, are well suited to handle the problems such as
bias that may arise from the use of ordinary regression techniques with censored
data (Box-Steffensmeier, 1996).
b. Alternative Diffusion Mechanism and Controls

I test the alternative international diffusion mechanism of IFI coercion, the hard
power hypothesis, with a measure of World Bank loans and credits to each country
as a percent of GDP (World Bank). This variable serves as a proxy for the potential
magnitude of coercive power that this institution may wield over recipients of
development loans. Although the soft power hypothesis is not amenable to direct
measurement in this type of quantitative analysis, qualitative research could productively focus on the identification and testing of attraction mechanisms through
which soft power is wielded. Lastly, every model specification includes a control for
country wealth, the per capita gross domestic product (GDP per capita), and a control for the size of the economy, measured as the natural log of gross domestic
product (LnGDP).

6. Empirical Results
The results of the empirical analysis are reported in Table 1. The hazard ratios that
are reported for each variable are simply the exponentiated coefficients, ebi, or
partial likelihood contributions to the hazard of adopting structural pension
reform. The hazard ratios may be interpreted as relative and proportional to the
baseline hazard rate, which represents the risk of adoption when the values of the
covariates in the model are zero. Since the peer group categories leave OECD as
See Box-Steffensmeier and Zorn (2001) and Box-Steffensmeier et al. (2003) for a discussion of the test of
proportional hazards based on the correlation of the scaled Schoenfeld residuals and time. The results of this test are
available upon request.
Year of implementation, rather than the year in which the law was sanctioned, is coded for the date of
adoption on the dependent variable in order to avoid the cases in which pension reforms are sanctioned, but never
implemented, or are long delayed.


TABLE 1. Explaining the Diffusion of Pension Privatization: 19801999
Cox Proportional Hazards Model
Explanatory Variables

Hazard Ratio

Hazard Ratio

DV: adoption of private pension reform

Peer dynamics
Peer Privatization
Eastern Europe and Central Asia
Latin America
Eastern Europe and Central Asia  Peer Privatization
Latin America  Peer Privatization
Common international pressures
World Bank
Trade  Ln(Time)
Foreign Direct Investment
Demographic change
Age 65
Political institutions
Parties  Democracy
Domestic financial incentives and constraints
Budget Balance
Stock Market
GDP per capita
Log likelihood
No. of observations













po.1, nnpo.05, nnnpo.01.

Note: The standard errors are estimated using a robust clustering method and the z-scores are for the null hypothesis that eb 1.

the reference category, the hazard for this group is absorbed into the baseline
hazard against which the effects of the peer privatization in the EECA and Latin
America groups are compared. When the estimated hazard ratio is greater than 1, it
indicates that a change in the covariate raises the hazard of privatization, or decreases the time at risk prior to adoption of this measure. Hazard rates less than
one, accordingly, imply that changes in the covariate bring about a decline in the
hazard of privatization, or increase the survival time prior to adopting a private
pension reform.
Overall, the empirical analysis reveals a significant interdependent logic shaping
the decision to privatize national pension systems, while also confirming the importance of domestic political and economic correlates of this deep institutional
change. The violation of the proportional hazards assumption on the trade variable
is remedied in the second specification by the inclusion of an interaction term with
trade and the natural log of time. Accordingly, the discussion of the empirical
results below focuses on the second, corrected specification of the empirical model
reported in Table 1.11

Each model specification is fit with robust standard errors, which are corrected for clustering by country, and
the Efron method for dealing with ties in the data, where more than one country reforms in a given year. For
further explanation, see Box-Steffensmeier and Jones (2004:55) and Kalbfleisch and Prentice (2002:10506).


Interdependent and Domestic Foundations of Policy Change

a. Peer Dynamics

The empirical model confirms the presence of a forceful interdependent logic shaping the adoption of structural pension reform. This peer effect is statistically significant and powerful in the Latin America and EECA peer groups, but does not
contribute strongly to the likelihood of privatization among the member nations of
the OECD. Indeed, the estimated hazard ratio on the Peer Privatization variable in
Table 1 is not statistically significant, meaning that for members of the OECD group,
which is the reference category, a change in the density of peers adopting a private
pension reform does not significantly alter the hazard of privatization among the
nations remaining at risk of adopting this measure. By contrast, the significant and
potent effects of peer dynamics on the hazard of privatization among the EECA and
Latin American nations are evidenced in the estimated hazard ratios of the interaction terms. The estimated effects of peer privatization for these interaction terms
(Eastern Europe and Central Asia  Peer Privatization and Latin America  Peer Privatization) in the second column of Table 1 are interpreted relative to the baseline
hazard rate of an OECD member nation with no peer adoptions. The insignificant
hazard ratios on the Latin America and EECA group variables indicate that with zero
peer adoptions, the baseline hazard functions for countries in these groups are not
different from those of countries in the OECD group. That temporal and geographic
correlations in the adoption of pension privatization do not owe to underlying characteristics shared by countries in these groups lends confidence to the expectation
that information gleaned from prior peer adoptions, estimated in the interaction
terms with the group variables, has systematically shaped the adoption of pension
privatization in the developing and transitional world.
Examining first the interaction term of peer privatization and the EECA group, we
may interpret the marginal effect of peer adoption in the following way. The average
peer privatization density in this group is 6.35 percent, or just over one out of 16
peer adoptions in a given year (see Table 2 for summary statistics). At this level, the
hazard of privatization for the remaining EECA countries is 8.47 times greater than
the baseline hazard category of an OECD nation with zero peer privatizations. For
the Latin American group, the hazard ratio estimated in the second column of Table
1 indicates that if one peer has privatized, or 5.26 percent of the group, the hazard
ratio is 4.23 times higher than the baseline hazard category. If two Latin American
countries have privatized, or 10.5 percent of the group, which is closer to the Latin
America average (of 11.49 percent), the risk of privatization for the remaining Latin
American countries is 17.9 times greater than the baseline hazard category. Peer
dynamics thus powerfully shape the risk of privatization among nations in EECA and
Latin America, increasing dramatically the risk of adoption as more peers turn to
market-oriented pension reforms. The lack of significance of changes in peer adoption on the risk of privatization in the OECD does not suggest that peer decisions are
ignored altogether among the advanced industrialized countries. Rather, the empirical analysis suggests that peer decisions are likely to weigh less heavily in policy
decisions of the advanced industrialized nations. With vastly greater technocratic
resources with which to undertake independent policy analysis, it is not surprising
that advanced industrial nations rely less heavily on information gained from peer
decisions to estimate the viability of this policy innovation in their country. At the
same time, the consensual nature of policy-making structures offer greater influence
to organized constituents of existing social policy institutions, and thus offer a powerful counterweight to technocratic interests in the policy process.

b. International Pressures

The coefficient on the variable measuring World Bank loans and credits as a percent of GDP is not significant in the empirical analysis, leading me to reject the


TABLE 2. Summary Statistics
Peer Privatization
World Bank
Foreign Investment
Age 65
Budget Balance
Stock Market
GDP per capita
Peer Privatization
World Bank
Foreign Investment
Age 65
Budget Balance
Stock Market
GDP per capita
Latin America
Peer Privatization
World Bank
Foreign Investment
Age 65
Budget Balance
Stock Market
GDP per capita
Eastern Europe/Central Asia
Peer Privatization
World Bank
Foreign Investment
Age 65
Budget Balance
Stock Market
GDP per capita





















hard power hypothesis that more extensive commitments of resources from this
institution are associated with a higher risk of pension privatization. Although this
analysis cannot bring evidence to bear on the soft power hypothesis, qualitative
research could productively delineate whether and how multinational development
institutions have disseminated ideas and policy models around the world (see, for
example, Weyland, 2004).


Interdependent and Domestic Foundations of Policy Change

Examining international economic pressures, however, the second specification

of Table 1 includes the correction for the violation of the proportional hazards
assumption on the trade exposure variable. The corrected effect of trade exposure
is interpreted in the following way. The hazard ratio on the direct effect of trade
exposure reveals that early in the risk process, a one percentage point increase of
trade exposure as a share of GDP brings a slight (5 percent) increase in the hazard
of adopting a private pension reform. However, this early boost in the hazard of
privatization for countries with greater trade exposure is only slightly significant (at
the 10 percent threshold). The interaction term of trade with the natural log of time
reveals moreover that this positive effect of trade exposure diminishes gradually
(but in a statistically significant way) over time.
The hazard ratio on foreign direct investment reveals a significant effect of multinational corporations in the transmission of policy practice. Specifically, a one
percentage point increase in foreign direct investment inflows as a percent of GDP
raises the hazard of privatization by nearly 24 percent. This result suggests that in
the broad attention placed on the role of IFIs in the diffusion of innovation, scholars have largely overlooked an important transnational mechanism through which
policy practice is communicated across nations. Future research could productively
focus on specifying the causal mechanisms through which multinational corporations promote the transfer of ideas and policy models across nations (see, for example, Mosley and Uno, no date).
c. Demographic Change

The measure for population aging (Age 65) is positive and significant in both model
specifications. This result confirms the importance of demographic pressures in the
upsurge of interest in pension privatization in the last quarter of the twentieth
century. The coefficient on the age variable in the second specification indicates that
all else being equal, one percentage point increase in the share of the population
over age 65 years raises the hazard of privatization by 48 percent. Importantly, this
mechanism helps to explain the correlations in the adoption of privatization among
governments of advanced industrial nations, where demographic pressures
reached crisis levels in the 1990s, but where peer dynamics are less important
in domestic policy decisions. As the aging process continues in the twenty-first
century, interest in structural pension reform as a way to control long-term state
pension liabilities is unlikely to abate. What remains to be seen, however, is whether
pension privatization, or an alternative model of structural pension reform such as
the unfunded and publicly managed notional defined contribution pension reform will emerge as the dominant archetype for old age pension reform (Brooks,
2004c; Brooks and Weaver, forthcoming).
d. Domestic Political Institutions

The empirical analysis reveals an important role for domestic political institutions in
explaining when and where private pension models are adopted. While the effect
of legislative fragmentation on the hazard of privatization is strong and significant,
it is not linear. Rather, as evidenced in the interaction with Democracy, the effect of
legislative fragmentation on the risk of privatization is mediated by the strength of
democratic freedoms in a country. Looking first at the political parties variable, the
estimated hazard ratio suggests that at the lower range of effective political parties
competing in the legislature, the hazard of privatization increases as the number of
political parties rises. However, in its interaction with the democracy variable, the
hazard ratio reveals that where political power is broadly shared and where democratic freedoms are strong, the hazard of adopting pension privatization declines.
Indeed, in nations such as Italy where legislative power is highly fragmented and



democratic freedoms are strong, opponents of pension privatization may take advantage of the broad range of veto opportunities in the political process to undermine or delay the adoption of this frequently controversial measure.
e. Domestic Financial Pressures and Constraints

The budget balance variable captures the short-term financial constraints on the
adoption of pension privatization. The estimated hazard ratio on this variable confirms expectations that as greater fiscal resources are available to finance the transition to a private pension system, the hazard of adopting pension privatization
increases. Specifically, the hazard ratio on the budget balance variable in the second
specification indicates that all else being equal, one percentage point increase in the
overall government budget balance (as a share of GDP) increases the hazard of
privatization by 24 percent. The broader financial leeway afforded by a more positive budget balance thus reduces the duration that potential privatizers are at
risk prior to adoption of this policy innovation, while governments facing tighter
financial constraints are systematically more likely to postpone privatization or
avoid this measure altogether.
The long-term macroeconomic incentives to privatize are captured roughly in
the stock market variable. Contrary to expectations, the hazard ratio on this variable is greater than 1, indicating that a one percentage point increase in stock
market capitalization as a share of GDP increases the hazard of privatization by
approximately 3 percent. Although the substantive effect is small, this result suggests that nations with the most rudimentary domestic capital markets, which may
also lack adequate domestic financial structures and regulatory capacity to rapidly
implement a market-based model of pension provision, typically delay or avoid the
adoption of private pension reform. Control variables for wealth (GDP per capita)
and economy size (LnGDP) do not reveal a significant effect on the hazard of
Overall, the empirical model provides evidence of a forceful interdependent logic
of domestic policy-making decisions. This peer dynamic helps to explain the striking temporal and geographic correlations in the adoption of structural reforms in
the developing and transitional nations at the end of the twentieth century. Even
when controlling for the powerful effects of concomitant demographic and economic change, as well as domestic political institutions, policy decisions made by
peer governments reveal systematic influences on the pension reform decisions by
governments in EECA and Latin America. The evidence of such interdependent
links offers a counterpoint to claims that market-oriented reforms have been imposed by IFI coercion or induced by globalization. The empirical analysis did not
bring evidence to test the possibility of soft power influence of IFIs, however. Nor
did it test the effect of harmonization efforts by institutions such as the European
Union. Future research could therefore focus productively on the modeling of
social learning processes among the OECD member nations (see for example
Hering, 2004; van Wijnbergen, 2004), as well as on the effect of regional trade
integration and policy coordination in the developing world.

7. Conclusion
Demographic transformations around the world have spurred intense debates over
how to revise the terms on which risk and income are shared within and across
generations through old age pension systems. Whereas some governments have
chosen to make revisions to the parameters of existing public pension systems to
realign them with changing demographic and economic trends, others have chosen
to adopt a fundamental change in the structure and function of social protection
through pension privatization. Faced with the complex policy problem of re-


Interdependent and Domestic Foundations of Policy Change

forming old age pension systems, and without a clearly defined right solution to
this dilemma, policy makers in many countries, particularly those of the developing
and transitional nations, began to look abroad to find cues to solving their national
pension problems. In the past two decades, such cues have focused on a private
pension reform model, which spread rapidly throughout the world in the 1990s.
While the claim that there has been diffusion of a policy model across nations is
far from novel, the more significant and challenging task of this study has been to
identify and demonstrate the mechanisms through which policy outputs in one nation may be influenced by corresponding decisions made in another country. The
empirical analysis provided evidence to suggest that peer dynamics powerfully
inform the policy-making processes of governments around the world. Multinational corporations also emerged as an important mechanism through which policy
practice transfers across nations, pointing to a causal process that demands further
investigation (see, for example, Mosley and Uno, no date).
With deepening integration into the global economy, governments are compelled increasingly to respond not only to their domestic constituents, who remain
important, but also to a broader international constituency, comprised of peers
competing for trade and investment, market actors and owners of mobile financial
resources. Evidence of powerful horizontal links across nations suggests that scholarly emphasis on the downward pressures of globalization, or the imposition of
reforms by third-party actors such as IFIs, may be displaced. With new forms of
structural pension reform on the horizon, however, and as potentially unfavorable
information about the financial, social, and distributive effects of privatization
emerges, the task that remains for future research is to predict whether (or when)
the market-oriented paradigm will reach exhaustion, or how this model will compete with alternative structural pension reform designs.

I am grateful for many helpful comments on earlier versions of this paper from
Janet Box-Steffensmeier, Martin Hering, Robert Keohane, Layna Mosley, Marcus
Kurtz, John Stephens, Craig Volden, Kurt Weyland, the participants in the Duke
University Summer Institute on Globalization and Equity, the Yale University
Conference on Interdependence, Diffusion, and Sovereignty, and three anonymous reviewers. I am also indebted to Justin Lance and Dinna Wisnu for research
assistance on this project. All errors remain my own.

Countries Included in the Study
Latin America
Argentina (1994)n
Bolivia (1997)n
Chile (1981)n
Colombia (1994)n
Costa Rica
Dominican Republic
El Salvador (1998)n
Mexico (1997)n

Australia (1992)n
Denmark (1992)n

Eastern Europe and Central Asia

Croatia (1999)n
Czech Republic
Hungary (1997)n
Kazakhstan (1998)n
Poland (1998)n
Russian Federation
Slovak Republic



Appendix (Continued)
Latin America
Peru (1993)n
Uruguay (1996)n

Netherlands (1993)n
New Zealand
Sweden (1999)n
Switzerland (1985)n
United Kingdom (1988)n
United States

Eastern Europe and Central Asia


Countries that implemented pension privatization by 1999 (with date of implementation).

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