A Global Perspective on Financial Regulation
Edited by John Evans, Michael Orszag and John Piggott
Chapter 3: Pension and Corporate Governance Reforms: Are They Twins?
Mario Catalán* 1. INTRODUCTION In the last two decades, an impressive wave of pension reforms involving transitions from pay-as-you-go to partially or fully funded schemes has occurred in many developing countries, especially in Latin America.1 The Latin American pension reforms have two characteristics: first, they were followed by legal reforms aimed at improving investor protection in capital markets; and second, governments restricted pension funds to holding mainly domestic securities. These characteristics motivate the questions addressed in this chapter: why do pension and corporate governance reforms occur together, and why do governments restrict pension funds to holding domestic securities only?2 I argue that pension reforms must be followed by improvements in investor protection and provide a rationalization for the existence of portfolio restrictions aimed at preventing the international diversification of pension funds’ assets. In short, the complementarity of pension and corporate governance reforms results from the fact that policy making is influenced by special interest groups that have the political power to block the reforms.3 Publicly traded firms in developing countries are typically owned by a handful of powerful groups that are able to influence the government and determine the level of investor protection in capital markets according to their interests. Workers and labour unions may also be powerful enough to block pension reforms. In such an environment, reforms can only occur if the relevant interest groups benefit from them. This chapter extends the ‘crime and punishment’ framework of corporate finance developed by Shleifer and Wolfenzon (2002) for a...
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