Dragos Adascalitei, Stefan Domonkos
When Less Is More: The Politics of Pension Privatization during the Financial Crisis of the Late 2000s

26th SASE Annual Meeting, Northwestern University and University of Chicago, July 10th to July 12th, 2014

This paper analyzes pension-privatization strategies in the Czech Republic and Romania – two countries that introduced a World Bank (WB) type pension reform during the recent global financial crisis. The laws establishing the Romanian and Czech second pillars entered into force as late as in 2008 and 2013, at a time when the global financial crisis already hit the region and earlier reformers were in the process of reversing their WB-type pension reforms. We ask why these two states opted for the introduction of private pensions at a time when the prevailing policy trends were turning against the privatization agenda. Second, we ask what factors account for their specific reform choices. Using a theoretical framework that makes use of the literature on policy diffusion, we argue that the decision to privatize was determined by the ideological preferences of the policy-makers in charge with pension reform. Moreover, we claim that the political bargains that took place prior to the introduction of second pillars in the two countries were conditioned by a process of bounded learning that raised awareness over some of the mistakes made by policy-makers in countries that privatized earlier. Geographical proximity and perceived structural similarity were key in determining what earlier privatizers were considered as relevant examples to learn from. Nevertheless, in both countries, this process resulted in a cautionary approach towards privatization that resulted in small and tightly regulated second pillars. We substantiate these arguments by a comparative historical analysis of the Czech and Romanian cases.