Globalization and the need for pension reform

A leading academic makes a connection between social security and open economies.

A recent talk brought home the importance of developing pension systems in Asia, and of getting them right.

Joseph Nye is the dean of the Kennedy school of government at Harvard University and a former assistant secretary of defense. To anyone who studied international politics at an American university, his name is certain to grace several of your old textbooks. That renown attracted a large audience to a talk he gave this week to the Asia Society in Hong Kong on ‘globalization and its discontents’.

He pointed out that globalization is not irreversible. In many aspects, the world economy was more interdependent before the First World War than the half-century that followed. Once again, globalization (he defines it as networks of interdependence across borders) has become a defining theme of our age. The Asian crisis shook the faith of many in this part of the world. Globalization is not inevitable.

But when looking at the likelihood of its being rolled back, Nye points to a crucial difference. In 1914, Europe did not have an effective social safety net. Napoleon promoted the idea of a sovereign’s responsibility to take care of the men it engulfed in its military ranks, and Bismarck mooted the idea of welfare as social insurance against unrest. But by and large when the international trading systems’ inequalities became too much, there was no fallback for most people. Discontent helped support communism and fascism.

Today, in most Western states there is some kind of protection against the worst vagaries. In fact, Europe’s smallest, most vulnerable states to international trade – countries such as the Netherlands and Sweden – also have a highly developed welfare state. Nye believes globalization is unlikely to be rolled back among such countries.

That obviously means emerging markets lacking such an infrastructure are in greater danger of being forced to opt out of these cross-border networks of interdependencies. Malaysia is a good example. The country was forced to close certain aspects of itself to the world with capital controls to avoid a deeper social crisis. But since then, it has merely stagnated because it lacks internal mechanisms to help its people in times of economic hardship.

Nye rejects the notion that globalization only helps evil multinationals but says it does create inequalities. Nowhere is this greater than in China, where opening up to the rest of the world has made coastal urbanites rich while the majority remain stuck in timeless poverty.

At this dinner at which Nye spoke, although there was some talk of institution-building, the discussion on China focused on areas such as democracy and giving China’s people valves to blow off steam. Ronnie Chan, chairman of Hang Lung Group and Asia Society’s moderator, noted as a practical businessman that it may also be sometimes necessary for China to knock a few heads together to maintain stability.

PensionsAsia, FinanceAsia’s magazine dedicated to investment management, may not be the most glamorous magazine in the world, but our readers should know by now that there is no better example of institution-building than a pension system. China is putting a very good model in place, as represented by the experiments now kicking off in Liaoning Province and the establishment of the national state-run social security fund, to be financed by privatizations. Foreign fund managers and insurance companies will some day be allowed to manage these assets as well.

Similarly, things are afoot in South Korea where various ministries are wrangling to scrap the existing corporate Retirement Allowance -- which failed to protect workers in the recent downturn -- and introduce a fully funded corporate scheme. And of course, Hong Kong has just launched its MPF.

These experiments are in early days, and will all require adjustment. MPF contribution levels must rise, for example, to effectively support a retirement. The Chinese experiments have many unanswered questions, particularly about funding. No-one has a clue what may finally emerge from Korea’s political fight.

But the models are being established. The social security requirements are, slowly, being met. These pension fund systems will transform these countries’ financial markets. And that is the best guarantee that the fruits of globalization will weather storms of discontent.