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# EXECUTIVE SUMMARY

# A. **Background**

1. Throughout the world, countries of all sizes face difficult decisions about<sup>how best to</sup> provide pensions that cover disability, survivors, and old age. Although a growing<sup>body of</sup> literalture addresses generic issues in designing pension reforms (see World<sup>Bank, 1994; Valdes-</sup> Prieto, 1994), not much attention has been paid to special issues in designing<sup>pension reforms in</sup> small countries. This paper is devoted to the many small countries now in the process<sup>of reforming</sup> their social security systems that are confronting special pension policy problems<sup>related to their</sup> size. Pension policy in this report concerns intervention by a national government<sup>to improve the</sup> economic well being of its people through pensions. This definition<sup>leaves aside other social</sup> forces that affect economic well being in old age, such as the family,<sup>communal organizations,</sup> friendly associations, and private charity. It also leaves out retiree health benefits and other national subsidy programs for the old.

2. Several characteristics of small developing countries make optimal pension policies,<sup>at both</sup> the macroeconomic and microeconomic levels, different from those of larger countries.<sup>Perhaps the</sup> single most important and noncontroversial characteristic of small countries<sup>is the number of</sup> contributors to pension funds. For this purpose, small countries are defined as<sup>having one million or</sup> fewer workers employed in the formal sector; the relatively smaller number<sup>of workers covered by</sup> the pension system in a small country can result in a less than minimum efficient scale<sup>in provision of</sup> some pension services. In addition to the relatively smaller base of contributors<sup>in small countries,</sup> experience suggests there are a number of other characteristics in small relative<sup>to large countries</sup> relevant to pension policy design.] These include:

- relative scarcity of human capital specialized in the financial sector;

- greater international mobility of financial capital;

- greater gains from international portfolio diversification;

- proportionately greater gross migration of the labor force causing demographic instability;

- greater concentration of wealth and ownership in a small number of economic agents (i.e., families) and thus fewer independent interests; and

- a relatively less independent civil service, and therefore greater reliance on patronage.

3. When small countries have some or most of these characteristics, pension<sup>reforms that have</sup> been carried out in larger Latin American countries such as Chile and<sup>Argentina, which involve</sup> adoption of mandatory defined contribution schemes with minimum pension guarantees,<sup>may not be</sup> / The characteristics noted below are indicative and can also apply in large countries. Moreover,<sup>some of these</sup> characteristics will not be prevalent in small countries; however, many small developing<sup>countries feature a large number</sup> of these stylized characteristics. aside from a small contribution base.