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Linkages between Pension Reform and Financial Sector Development

E Philip Davis


In the light of population ageing and the shortcomings of existing means of
old age support, pension reform is viewed as essential in a variety of both
developing and advanced countries. Pension reform's principal objective
should be to ensure income security in old age, in a least cost manner.
However, it may also have some important macroeconomic benefits, by
easing any labour market distortions and by facilitating the development of
financial markets. These elements are of course not independent, since
efficient labour and capital markets should facilitate economic growth
generally, thus helping to provide sufficient resources to cater for the
elderly without an undue burden on the working population.

In this context, this article briefly sets out in Section 1 our own preferences
in respect of pension reform before going on to assess in detail the linkages
between pension reforms introducing an element of funding and financial
market development. In particular, we specify in Section 2 the various effects
that funding and institutional-investor growth have on financial markets, in
Section 3 we illustrate some of these effects with the example of Chile, and
in Annex 1 we discuss some of the preconditions for such reform.

ISSN 1367-580x.