DDP 697. Dimitri Vittas. "Pension Reform and Financial Markets." April 1999. 21 pp. Central America Project Series

The question of the links between pension reform and financial markets has two aspects. One concerns the preconditions in terms of financial sector development for the successful implementation of pension reform, while the other refers to the long-term impact of pension reform on the development of financial markets. This paper argues that pension reform and the promotion of private pension funds requires a small core of sound, prudent and efficient financial institutions, such as banks and insurance companies, but does not depend on the prior existence of well-developed securities markets. Private pension funds and insurance companies are likely to have a beneficial impact on financial market development once they reach critical mass and provided they operate in a conducive regulatory environment.

Keywords: pension reform, financial markets, regulation

JEL codes: E61, G23, H55

This is a slightly revised version of the paper that was presented at the conference "Pensions Systems Reform in Central America," Harvard Institute for International Development (HIID), Cambridge, MA, July 17-18, 1998.

Dimitri Vittas is Lead Economist of the Development Research Group at the World Bank, Washington, D.C.