Reasons Why Privatization of the Pension System Did Not Occur in the Czech Republic and Slovenia

Full or partial privatization of the pension system is feasible when the actors in-clined to pension reform, i.e. the Ministry of Finance and the World Bank, partici-pate in the reform process. For example, radical pension reforms have not con-tinued in those countries where the Ministry of Labor and Social Issues existed as the only relevant actors of pension reform.

A fiscal crisis turns the Ministry of Finance into a potential participant in pension reform, especially when financing of pension insurance records deficits and con-sequently becomes dependant on state subsidies.

Another factor is also of importance - namely, under conditions of high foreign debt, governments are prone to stress their general commitment toward market-oriented reforms. In that context, the announcement of privatization of the pen-sion system might be interpreted as a signal. And really, by the mid-90s, agen-cies which rank and assess countries were including radical pension reform as a point in favor of assessing the level of risk in the country in question. Critical in-debtedness also increases the likelihood that international financial institutions will take part in local pension reforms. Policy makers were well aware that finan-cial and/or technical assistance by international finanfinan-cial organizations was re-served only for those pension reforms which involved privatization.

Although full or partial privatization of pension insurance was clearly the major recommendation by external factors to all East European countries facing pen-sion system reforms, ultimately, domestic political decipen-sions resulted in accep-tance or rejection of radical pension reform.

The amount of implied debt⁸ gives a picture of long-term (in)stability of a pension system. Implied pension debt is determined by many factors, in particular by the degree of coverage of a population, the maturity of the system and abundance of

8 Current value of promised pensions owed to present pensioners and workers on the basis of their contributions in the old system.

benefits. When it becomes explicit, it turns into a huge fiscal expenditure. There-fore, the greater the implied pension debt, the smaller the probability for the most radical structural pension reform.

4.1. Slovenia

The reform implemented in Slovenia does not represent fundamental or radical change in the area of social policy. Although the option of introducing a manda-tory funded second pillar was taken into consideration very seriously during the process of reforms, especially since the World Bank’s experts⁹ insisted on it, the proposal was rejected after the government’s reform proposals were made pub-lic. In early 1998, one of the most influential economists in Slovenia, Vladimir Bole, assessed in his study that the total fiscal deficit as a result of the transition to a three-tier system (assuming that 8% of the contribution rate goes to the sec-ond pillar) would reach the level of 75% of GDP in 2030 and 102% of GDP un 2050. Under the second scenario described by this author, which postulates a pension system consisting of the first and the third pillars only, the accumulated fiscal deficit would be much lower, amounting to 16% of GDP by 2030 and 25%

of GDP by 2050. Thus, Mr. Bole was not in favor of the introduction of the second pillar. On that basis, Slovenian trade unions put a veto on pension system priva-tization in 1998 and on the introduction of the mandatory second pillar. Thefore, in the middle of 1998, the Slovenian government decided to begin the re-form of the public PAYG scheme in combination with the introduction of a volun-tarily funded tier. After long negotiations within governing coalition and among social partners, this Law was passed in December 1999. The decision-making process in Slovenia, with the rather wide political coalition that was in power in the period 1997-2000 was more a search for consensus than a rapid implemen-tation of radical structural reforms. Hence, strong opposition by unions and the lack of support on the part of the Ministry of Finance contributed to the rejection of a proposal to introduce the second pillar. Also, owing to a good fiscal position of Slovenia, the World Bank was not in a position to play any major role in the process of pension reforms. Thus, circumstances were not in favor of the estab-lishment of the second pillar.

Public opinion polling was regularly conducted during the pension reform proc-ess, and particularly during the final phase of negotiations among social partners, from October 1998 through April 1999. According to these polls, a large portion of respondents (about 70%) was in favor of reform, but only 10% said they fully understood its basic features. Public support weakened over time, probably as people became more informed and aware of consequences. While in November 1998, 54% of respondents supported reform proposals, this support recorded a constant drop, which shrank to as little as 45% in March 1999.

9 The IMF and World Bank’s experts calculated the implied debt of the pension system in Slove-nia to be very high, between 2 and 2.6 of the annual GDP. In comparison to G-7 countries, only Italy records a higher implied debt. The World Bank recommended a combined approach with three pillars, with a mandatory and fully funded second pillar.

However, reform yielded significant changes, although the approach was grad-ual. Parametric changes within the public pension system significantly tightened retirement conditions and benefit levels, at the same time as increasing the redis-tributive function relative to the insurance function. It is still early to anticipate to what extent decrease in the pension/wage ratio within the first pillar will be com-pensated by supplementary benefits from the second pillar.

The success of the pension reform in Slovenia is highly dependant on successful expansion of voluntary supplementary pension schemes. This, on the other hand, depends on whether future collective bargaining on wages will include em-ployers’ contributions to the second pillar. If the agreement between employers and workers is realized and voluntary scheme coverage grows rapidly, pension reform could achieve the unachievable – i.e. fiscal viability together with satisfac-tory pensions for the elderly.

4.2. The Czech Republic

Pension system reform in the Czech Republic began during a period of relatively stable economic conditions, low unemployment and absence of social conflicts.

These conditions were ideal for implementing experts-lead reforms. By the mid-90s, major conflicts with regard to pension reform in the Czech Republic con-cerned the extent of parametric reforms. After the simulation of total impact and costs linked to partial privatization of the Czech pension insurance, and of alter-native solutions for implementing a thorough reform of the existing PAYG sys-tem, experts at the Labor Ministry concluded that there was still enough room within the existing public PAYG system to face the challenges in the decades to come. The concept of reform adopted by the Czech government in 2001 relies on the continued existence of the pension system based on two pillars, i.e. manda-tory pension insurance (funded from current inflow of contributions) and voluntary supplementary insurance (fully capitalized).

The Czech Government kept refusing privatization of pension insurance (old age) primarily because of the high costs of transition to such as system. Transitional costs that would result from partial privatization of the pension system, assuming the introduction of new and fully capitalized insurance alongside the existing PAYG system, were assessed as very high. Such a privatization would entail that the new pillar is mandatory only for new participants at the labor market, i.e. peo-ple under the age of 20. Transitional costs were calculated in the form of addi-tional percentage points that should be added to current pension contributions.

Bearing in mind the still unstable foundations of the local capital market, the in-troduction of a mandatory capitalized tier is considered to be especially inappro-priate.

Because of low foreign debt, the World Bank did not have considerable influence on pension system reform in the Czech Republic.

Another factor that influenced such a decision is political. Namely, there were three stages of reform in the Czech Republic, each one having included different political actors and several stakeholders set against each other. In 1996, a very

important year when Poland and Hungary started preparing for partial privatiza-tion of their pension systems, the Czech government did not have a majority in parliament. Also, the Czech Prime Minister Vaclav Klaus has never been too much in favor of the idea of a mandatory capitalized pillar; he was more in favor of lower compensation rates in the public pillar in order to stimulate Czechs to voluntary take part in supplementary insurance.

It is clear that the final decision on pension system reform is in the hands of poli-ticians, although other stakeholders have a certain influence, as well. A compro-mise that will result in extensive parametric reform will be the most likely scenario in the future. It will probably involve the promotion of the NDC model and further incentives to the development of voluntary supplementary models.

Dušan Pavlović PRIVATIZATION POLICY IN SERBIA IN 2003

(Policy Recommendations)

Two years after the privatization law has come into force and the process was launched, privatization in Serbia has yet to yield anticipated results. Private prop-erty is still not prevalent; there is little evidence of substantial restructuring in cor-porate governance or of improved performance in privatized companies; and growth is still not picking up. By mid-June, 2003, 20 large firms have been sold (out of 200), and 545 smaller ones (out of 7,000). The revenue totals some $525 million USD ($229 in tenders, $195 in auctions, and $101 in the stock market ex-change).

The complex reality of privatization mandates clean sales, competent and honest owners, and quick privatization. Unfortunately, all this cannot be accomplished at the same time, and some aspects of privatization have to be sacrificed. If one goal has to be traded off for another, experience teaches us that it is better to sacrifice some speed for improved quality. Effectiveness and legitimacy rather than speed of the process are in this paper taken to be essential for a successful privatization at this point. The paper sets out nine recommendations for a privati-zation policy that could make the privatiprivati-zation process more effective and legiti-mate.

1. The privatization policy model should not be changed or amended by