When Does Diffusion Matter? Explaining the Spread
of Structural Pension Reforms Across Nations
Sarah M. Brooks
The Ohio State University
When and where is cross-national diffusion an important determinant of policy innovation? I posit that the
characteristics of a policy innovation—whether it imposes high or low “sunk” costs on adopters—and country
attributes such as wealth, mediate the importance of diffusion in domestic policy choices. Competing risks analysis of
two structural pension reform models in 71 developing and industrialized countries supports these hypotheses. Peer
diffusion weighs heavily in the adoption of the costly “funded” defined-contribution pension reform model, and does
so principally among middle-income nations, while the less-costly “notional” defined-contribution pension reform is
not governed by diffusion.
A
n important source of policy innovation is the
process by which governments learn from each
other. Although the emulation of social practice across distant societies was long enchained by the
cost of physical movement and communication, technological advances have eased such barriers in recent
decades, slashing the cost of transmitting information
to vast corners of the world. As a result, cross-national
ties have become both more extensive and intensive
(Keohane and Nye 2000), while evidence of common
movements in policy choice has burgeoned. In step
with this trend, a productive stream of scholarly research has yielded important insights into the nature
and causes of international policy diffusion, or the
process by which the probability of adoption of an
innovation in one location is conditioned by prior
adoptions of the innovation elsewhere (Bennett 1997;
Braun and Gilardi 2006; Dolowitz and Marsh 1996,
2000; Jordana and Levi-Faur 2005; Meseguer 2004;
Simmons and Elkins 2004).
As valuable as this research trajectory has been, it
has left important questions unanswered. First, while
much is known about the channels and mechanisms of
diffusion, the domain of innovations over which diffusion forces are likely to hold sway has been less fully
explored. Are all policy choices subject to the influence
of prior innovation decisions abroad? Or, is diffusion
more influential in some types of innovation decisions
than others? In most cases, where the limits of diffusion
are examined, these are taken to be instances in which
policies fail to “catch on” in other locations. But this
definition is not altogether satisfactory; for we may
observe close correlations in the location or timing of
innovations even when such decisions are not interdependent, or causally linked. The task that remains thus
is to define when and where diffusion becomes causally
relevant in domestic policy choice. Second, while
extant research has focused overwhelmingly on the
subset of diffusion processes in which governments
confront a single policy or innovation choice within a
given issue area, it is more common that multiple alternatives are available from which policy makers may
choose. Another major task that remains for the study
of diffusion thus is to understand how state actors
select among competing policy innovations that
respond to a common problem.
I address these questions through analysis of the
cross-national spread of two distinct models of structural pension reform. In the last quarter century, rising
demographic and economic pressures have prompted
governments around the world to apportion greater
responsibility for old-age pension provision to
workers through the creation of individual savings
accounts. Two alternative reform models have
emerged within this trend, which differ in the way that
pension accounts are managed and funded. In the
first model, called the funded defined-contribution
(FDC) pension reform or “privatization,” individual
The Journal of Politics, Vol. 69, No. 3, August 2007, pp. 701–715
© 2007 Southern Political Science Association
ISSN 0022-3816
701
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sarah m. brooks
retirement accounts are managed by private sector
firms and invested in real assets (i.e., the accounts are
fully funded). In the second model, called notional
defined-contribution (NDC) pension reform, the state
retains management of the pension accounts, which are
financed on a pay-as-you-go basis (i.e., they are unfunded) like many traditional state pension systems.
While responding to a common problem using similar
principles, these two policies vary critically in the irrecoverable political and financial costs of adoption, that
is, in the “sunk” costs associated with each innovation:
whereas the FDC model is costly to enact and difficult
to reverse, NDC reforms impose a lighter up-front
financial toll on governments, and may be more easily
revised or repealed ex post. This difference, I argue,
bears powerfully on the question of when diffusion
matters in policy innovation processes, while also
shaping the domestic political economy of reform.
Diffusion research has posited two principal
mechanisms that link innovation decisions across
space and time: information and competition. My
argument about when and where diffusion matters
thus examines how the significance of these two
factors is mediated in domestic policy choices by (1)
characteristics of the innovation itself, namely whether it entails high or low sunk costs, and (2) by
country attributes associated with national wealth. I
expect that as the irreversible political and financial
burdens of adopting an innovation rise, informational
and competitive concerns, and thus diffusion itself,
should weigh more heavily in domestic policy choices.
I also expect diffusion to be more influential in policy
decisions among lower-income nations compared to
more affluent countries. This is, in short, a theory of
when political leaders will rely on internationally
transmitted information that looks both to the particular characteristics of the reform that is being considered and to features of the nation itself.
Global Pension Reform Patterns
Structural pension reform emerged in the last quarter
of the twentieth century as a policy means through
which governments could reduce long-term pension
costs, which rise as populations age. This category of
policy innovations supplants the traditional “definedbenefit” pension rules, in which the state (i.e., society as
a whole) bears the cost and risk of providing a fixed
level of retirement income for the elderly, with a
“defined contribution” (DC) principle, in which each
worker’s pension depends on her own contributions to
a personal retirement account. By legislating only the
contribution rate to individual pension accounts, the
DC principle transfers an array of income and longevity risks to individuals, whose pension is equal only to
the sum of her savings during working life and some
return to those contributions. The losers in this shift
thus are the beneficiaries of redistribution in traditional social insurance pension systems, including lowincome workers and those with interrupted earnings.
While in the funded (FDC) model, the return to
invested pension savings is based on financial market
trends and the wisdom of individual investment
choices, it is the state that determines the interest rate
applied to pension contributions in the NDC scheme
(Palmer 2002, 14).
The first national FDC pension reform was implemented in Chile in 1981 by the military dictatorship of
Augusto Pinochet. Although interest in that reform
was slow to ignite, Chile’s private pension system captured the attention of policy makers internationally
following the nation’s transition to democracy in
1990, when high rates of growth and a thriving new
stock market set Chile apart from its recessiongripped neighbors. By 2005, some degree of FDC
pension reform had been adopted in 23 countries
from the United Kingdom to Kazakhstan, while similar measures were underway in Estonia, Lithuania, and
the Dominican Republic.
The NDC model emerged much more recently,
but has spread even more quickly than the FDC model
did in its early years. Although it was initially proposed
in Sweden in the early 1990s, an NDC reform was first
legislated in Italy in 1995. Within a decade, NDC-style
pension reforms had been adopted in seven additional
countries from Poland to Brazil (see the appendix for
a full list of adopters of each model). Thus, by the start
of the twenty-first century, the question facing policy
makers was not simply whether to enact a structural
pension reform, but rather, which model to adopt?
As Figures 1 and 2 illustrate, moreover, the spread of
each pension model reveals striking temporal and
geographic correlations, raising important questions
about the extent of interdependence among domestic
political processes across adopters of these reforms.
Given that structural pension reform is a policy
choice, rather than an inevitability, I begin by examining the principal actors and their motives in the
decision-making process.
Theories of Policy Diffusion
At the heart of diffusion research is the concept of
interdependent decision making. In this process, a
when does diffusion matter?
FIGURE 1
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Adoptions of FDC Pension Reform 1980–2002
30
25
Total Number
20
Latin America
OECD
Post-Communist
Total
15
10
5
FIGURE 2
19
19
80
81
19
82
19
83
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84
19
85
19
86
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97
19
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19
99
20
00
20
01
20
02
0
Adoptions of NDC Pension Reform 1980–2002
9
8
7
Total Number
6
Latin America
OECD
Post-Communist
Total
5
4
3
2
1
19
80
19
81
19
82
19
83
19
84
19
85
19
86
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99
20
00
20
01
20
02
0
decision in one location is conditioned to some degree
by similar choices made elsewhere in the social system.
Where public policy is concerned, such processes typically involve the transfer of knowledge from one location to the next, which shapes the course of policy
development (Dolowitz and Marsh 1996, 344). While
the enactment of formal policy change in democracy
rests ultimately in the hands of elected legislators,
the task of identifying and analyzing alternative
policy models typically falls to the executive, and in
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particular to highly trained policy specialists, or
“technocrats” within the government (Heclo 1974;
Mintrom 1997). A critical objective of these analysts is
to determine the appropriateness of a policy innovation to their own nation’s problem and context, and
the likely consequences of its adoption. Whether and
how such judgments are conditioned by analogous
decisions abroad is central to understanding the channels and importance of diffusion in domestic policy
processes.
Information. In his pioneering study of the politics
of diffusion, Jack Walker observed that “Uncertainty
and the fear of unanticipated consequences have
always been formidable barriers to reform” (1969,
890). Subsequent research has upheld this view, demonstrating that diffusion is closely linked to the
process of “social learning” (Heclo 1974), wherein
potential adopters draw lessons from previous experiences at home or abroad. In this view, governments
that are uncertain about an innovation will examine
the outcome of previous reforms in order to gain
information about its likely effects. As the number of
previous adoptions of an innovation rises, uncertainty
is said to decline, increasing the likelihood of subsequent adoptions of the policy innovation (Jordana
and Levi-Faur 2005; Meseguer 2004; Simmons and
Elkins 2004).
From whom do government actors acquire such
information? Although information about policy
choices made in far corners of the world may be available to government analysts, many are highly constrained in the time and resources that they can devote
to such analysis. Rather than undertaking exhaustive
searches for the “best” policy alternative, therefore,
decision makers are said to “satisfice” (Simon 1976) by
looking for cues from prior experiences (Walker 1969;
Weyland 2005). Even in the process of cue taking,
however, government actors are unlikely to give equal
consideration to all prior innovation experiences.
Instead, they tend to weigh more heavily the information drawn from a subset of prior adopters that they
consider most relevant to their own country. These
have been shown to be political entities that are geographically proximate and thus which share political
networks and economic and social linkages (Berry and
Berry 1992; Mintrom and Vergari 1998; Rogers 1995;
Walker 1969; Weyland 2005). Such “peers” also may be
defined by cultural ties and shared economic status
(Brune and Guisinger 2006; Simmons and Elkins
2004). In both cases, the likeness among peers makes
information drawn from them more credible and
relevant to the task of discerning a policy model’s
appropriateness at home.
sarah m. brooks
While scholars have focused considerable attention on delineating the sources and channels of information shortcuts, less attention has been paid to the
question of whether such cues are decisive in all policy
reform decisions. Where such heterogeneity has been
considered, it is typically defined solely in spatial
terms, focusing on variations in the rates of diffusion across geographically defined areas (e.g., Anselin
1988). Yet, uncertainty about the benefits of a new
policy is likely to vary across types of innovations as
well, as some new policies may generate more uncertainty than others. Such uncertainty, in turn, should
raise the value of information drawn from prior experiences abroad and thus make diffusion a more powerful factor in that policy process. The next step, then,
is to examine how and when uncertainty and external
cues—and thus diffusion itself—might vary in importance across types of innovations.
Competition. The adoption of an innovation may
not always be motivated solely by the appeal of the
direct functions of the new technology, as research has
shown that the desire to gain secondary, competitive
rewards such as improved status or material gains also
lends powerful impetus to diffusion (Berry and Berry
1992; Gray 1973; Mintrom 1997; Simmons and Elkins
2004; Walker 1969). Where material benefits are concerned, such as the expansion of a firm’s market share,
these rewards typically are attributed to inherent features of the innovation. But in the case of public
policy, competitive benefits for governments more
often arise from an innovation’s effect on the reputation or international status of the government. Policy
innovations, in this sense, may be desired not only for
their direct domestic ends, but also for the “signal”
that the new policy transmits about the state—such as
about its business-friendliness, modernity, democratic
credentials, or the like.
Given that one country’s international standing is
conditioned perforce by that of other nations, reputation and status gains are inherently competitive.
Often, however, there is more at stake than relative
status alone. Where a policy innovation—be it human
rights legislation or economic reform—is salient to
international audiences, the potential gains from its
adoption can raise one nation’s status over that of its
peers, promising greater access to a host of excludable
goods such as international investment, aid, or admission into international organizations. Although previous research has shown that fear of falling behind or
being perceived as a “laggard” may prompt governments to enact policy changes that have been previously adopted by comparable nations (Dolowitz 1997,
26), we know less about the types of policies over
when does diffusion matter?
which these competitive dynamics are likely to hold
sway. Nor is it clear that reputation concerns will carry
equal weight in domestic policymaking processes
across all countries; indeed, it is likely that they will
not. The task that remains thus is to examine how the
characteristics of a policy innovation, and the country
itself, shape the weight of competitive concerns in its
adoption.
The next section offers two hypotheses in response to these questions. The first posits that as the
irreversible or “sunk” political and financial costs of
adopting an innovation rise, the informational and
competitive mechanisms of diffusion will more powerfully shape domestic policy choices. The second suggests that these two diffusion forces should be more
influential among developing countries than for the
advanced industrial nations.Whereas the first hypothesis limits diffusion effects to specific types of innovation decisions, the second narrows the domain of
interdependent effects even further among potential
adopters of an innovation.
When and Where Is Policy
Choice Interdependent?
Innovation is a costly and risky endeavor, not just
financially, but in political terms as well (RoseAckerman 1980). Indeed, recognition of the dampening effects of such costs has justified an array of public
interventions in markets to encourage and reward
technological and scientific advances. But the risks and
uncertainties that inhere in innovative processes do
not fall exclusively on the original innovator; they also
beset subsequent adopters of the innovation (Geroski
2000). The nature and magnitude of such risks are
likely to vary systematically across types of innovations with the cost and ease of reversing the decision.
Costs here are understood in very broad terms,
encompassing both the financial expense associated
with the policy change, the disruption in current
policy practices, and the outlay of political capital to
build public and legislative support for the new policy.
In particular, the “sunk” cost of policy change should
matter critically for questions of diffusion. These are
costs that cannot be recouped either because the
political or financial price of reversal is exceedingly
high or because the decision itself cannot be easily
undone, once taken. Sunk costs are especially relevant
where policy reform initiates a path-dependent
process, as in the case of old-age pension systems
(Pierson 2001). Such costs, moreover, should mediate
the effect of both information and competitive con-
705
cerns in systematic ways depending on the type of
innovation and the country in question.
Information. Economists have shown that sunk
costs, along with uncertainty, are a major source of
investment lags. This is because uncertainty about the
value of a costly or (effectively) irreversible decision,
such as clearing a forest or purchasing a steel mill,
creates an important benefit for the potential adopter
to wait for more information about the investment
(Arrow and Fisher 1974, 317; Pindyck 1991). This
benefit is known as the “option value” of the investment, which is surrendered when an irreversible
action, or one that is effectively irreversible due to its
high sunk costs, is taken. The option value is particularly high for such decisions precisely because there is
an ability to learn about the innovation’s worth by
waiting (Bernanke 1983). In financial markets, for
instance, the right to reverse a decision not to invest (a
“call option”) is given a monetary value for which
investors are willing to pay. By surrendering the option
to wait for more information about a policy choice,
decision makers in effect pay an opportunity cost in
choosing to take an irreversible course of action. In
deciding to adopt a costly innovation when its merit is
uncertain, therefore, decision makers must lower their
overall expected benefits of the endeavor to reflect the
loss of the option that such an action entails (Arrow
and Fisher 1974, 319; Pindyck 1991, 1112). Critically,
the option value of a decision is at its highest early in
the learning process, when the possibility of gaining
valuable information from others’ experiences is
greatest. As time goes on and information is acquired,
the value of waiting declines, reducing in turn the cost
of taking the course of action, and thus raising the
overall expected value of the project (Abel et al. 1996,
74–75; Bernanke 1983, 95).
It is in this respect that the option value of a policy
choice bears upon the question of diffusion. For technocrats weighing the enactment of a policy with high
sunk costs, the value of waiting for more information
about its merit should be greatest when few countries
have enacted the measure, and thus when its effects are
most uncertain. Accordingly, forbearance becomes the
best decision early in the diffusion process where costs
are of concern to decision makers. As more information about the innovation is acquired with subsequent
adoptions, declining uncertainty should diminish the
value of waiting to adopt it, raising both the expected
benefits of the project, and the confidence of government actors in their judgment of the new policy.
Since the value of waiting for information about a
course of action is greatest for policies or investments
that are both uncertain and that have very high sunk
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costs, social learning should be a more influential
component in innovation decisions for policies that
are both costly and difficult to reverse, all else being
equal. Further, since the value of waiting diminishes
with the acquisition of information from the social
system, we should observe that the diffusion of
very costly innovations is quite slow initially, but
increasing steadily as information becomes available
with additional adoptions, and as the value of the
option to wait falls. By comparison, less costly innovations should experience a more rapid spread across
the social system early in the process, owing to the
lower initial value of waiting for more information
about its merit.
Competition. The sunk cost of adopting an innovation should also mediate the weight of competitive
rewards associated with that decision. This effect
works primarily through the consequence of a measure’s political and financial cost on external perceptions of the credibility of a policy, i.e., the likelihood
that it will be maintained (Fearon 1997; Martin 1993).
Schelling first linked cost and credibility by noting that
in international politics, “actions speak louder than
words” (1966, 150) because actions entail the incursion of costs, which are irrevocable (cf. Martin 1993).
This view has found broad support in political science
research. As Martin (1993, 415) has shown, sanctions
are credible when the actors who impose them bear
significant costs, including the outlay of political
capital to build domestic coalitions in support of the
action. Fearon (1997) also found that actions with
high sunk costs are more credible. This is not only
because such costs would deter uncommitted governments, but also because any reversal would be seen as
a political failure, imposing a heavy “audience” cost on
the government. Innovations that are more burdensome to adopt may in this way provide a costly signal
that carries more powerful reputational payoffs and
thus may be subject to emulation by competing
nations. Similarly, because less-costly or easily reversed innovations are more likely to be dismissed as
mere “cheap talk,” these should be less powerfully
subject to competitive emulation.
Country Heterogeneity. Not only may diffusion
effects vary across different types of innovations, but
they should also differ in importance across nations of
distinct political and economic characteristics. In particular, developing countries should weigh the cues
from prior innovations most heavily when evaluating
a new policy. There are two reasons to expect this.
First, the greater resource constraints—both human
and financial—on technocratic processes in lowerincome nations make it more difficult for policy
sarah m. brooks
makers in those countries to arrive at independent
judgments about a project’s merit. The usefulness of
adopting a new, expensive, and effectively irreversible
policy change thus remains more uncertain in such
contexts, raising the (option) value of waiting for
more information about it from the social system.
Second, tighter financial constraints should make
developing country governments at once more sensitive to changes in the option value of waiting and
more vulnerable to the negative effects of adopting the
“wrong” innovation. Information about the benefits of
a new policy from other governments’ experiences
thus should be highly influential in decision-making
processes of governments in capital-scarce countries
and less significant for governments in more affluent
nations.
Competitive rewards to policy innovation also
should weigh more heavily in the policy process of
developing countries than in the advanced nations.
For one thing, gains in international status and reputation offer relatively greater prospects for political or
financial reward for developing countries compared to
the affluent nations. The credibility of a policy decision in the eyes of international market audiences,
moreover, bears directly upon the capacity of capitalscarce nations to compete with peer nations for
foreign investment (Bartolini and Drazen 1997;
Rodrik 1989). To the extent that developing-country
governments use policy reform as a signal to international audiences of the government’s commitment
to a given principle—be it economic liberalism or
democracy—then certain policy innovations salient to
these concerns may become the focus of competition
for governments vying for excludable goods such as
investment or accession into international political or
economic organizations.
The Cases of NDC and FDC
Pension Reform
How does this cost-centric argument help to explain
when diffusion matters in the adoption of NDC and
FDC pension reforms? This section draws out predictions based on the argument above to explain when
diffusion forces should drive the spread of these competing models of structural pension reform. Analysis
of the notional and funded pension reforms offers an
ideal setting in which to examine these hypotheses, for
it holds constant several important variables that may
shape diffusion, such as the issue area, actors involved
in the reform, and the weight of global and demo-
when does diffusion matter?
graphic pressures on a given country, while allowing
the innovations to vary in terms of their political and
financial costs.
Domestic political costs. NDC and FDC pension
reforms differ markedly in the political toll that they
impose on reforming governments. While NDC reforms may be enacted with minimal short-term political costs, FDC models tend to exact a high political
price of reformers. In general, measures such as structural pension reform are considered to be potentially
costly in political terms because they impose direct
losses on significant portions of the electorate while
promising only distant and diffuse benefits (Pierson
1994; Pierson and Weaver 1993). Scholars thus have
shown that a “frontal attack” on the welfare state may
be all but politically deadly for career politicians, who
instead will seek to avoid blame for such losses either
by obfuscating benefit cuts altogether, or by enacting
them through broad multiparty legislative coalitions
that spread political responsibility widely among multiple political actors (Myles and Pierson 2001; Weaver
1986).
In the case of the FDC reform, however, the creation of new private pension accounts makes this
reform highly visible, and thus impossible to obfuscate. Rather, privatizing governments typically face
mobilized protest from beneficiaries of traditional
social insurance programs. Overcoming such opposition is a politically very demanding task, for it obliges
reformers to persuade a skeptical public of the reform’s merit and often to compensate allies for their
support on such a contentious reform. Once adopted,
FDC pension reform is very difficult to reverse since it
empowers politically relevant actors such as private
pension fund managers with large stakes in the
reformed system while also creating new and widely
distributed private property rights. Any repeal of such
rights, if constitutionally feasible, would likely be
viewed as confiscation, imposing additional and very
high political costs on the government.
The political dynamics of NDC reform are quite
different from those of privatization. For one thing, a
notional pension system is considerably more opaque
than its funded analogue. Since pension provision
remains under state auspices, most citizens may not
even be aware of the reform until they enter retirement. In Sweden, for example, despite a vigorous
public information campaign, surveys reveal that most
citizens lacked a basic knowledge or understanding of
the NDC system that had been created five years
earlier (Sundén 2006). The distributional implications
of NDC pension reform are also likely to be less
obvious to most citizens prior to enactment of the
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reform. Indeed, benefits depend not only on each
worker’s future income stream, but also on the evolution of broader labor market conditions and demographic trends, which are difficult for most citizens to
accurately predict (Brooks and Weaver 2006, 368–69).
Thus it is unlikely, at least in the early phases of diffusion, that citizens would be able to identify the distributional effects of a proposed NDC pension reform
and mobilize against its enactment.
The NDC model is not a politically risk-free strategy, however. Once the NDC reform takes effect,
workers may ultimately find that their pension is lower
than anticipated, sparking a political backlash against
politicians who backed the reform. Knowing that
NDC pension reform is fundamentally a means to cut
pension costs, albeit “by stealth” (Pierson and Weaver
1993), career politicians should be willing to support
this measure only where it is enacted by a broad range
of coalition partners, as in multiparty systems (Brooks
and Weaver 2006). Critically, NDC reforms are relatively easy for governments to revise ex post if the
policy does not live up to expectations. Since the government determines the notional interest rate on individual account balances, it can award additional
contribution credits for nonremunerated activities
such as child care or military service or increase the
return to contributions in order to defuse public dissatisfaction with the reform. For this reason economists have criticized the NDC model for maintaining
the “political risk” of unanticipated changes in the
rules of the system (Kruse 2006).
Financial Costs. The two policy models also
diverge markedly in the financial toll that they impose
on reforming governments. Because individual FDC
accounts are fully funded and privately managed,
privatization opens up a wide gap in government
finances as workers begin to divert payroll contributions to private sector funds. This leaves the government without a principal source of revenue for
ongoing pension costs, which may be enormous where
a nation’s elderly population is large. Moreover, the
transition cost of FDC reform cannot be easily recovered later if the policy does not meet expectations,
since any effort to reclaim the funds in citizens’ individual retirement accounts would spur a financial
(and political) panic. FDC pension reform thus entails
very high costs that are difficult, if not impossible,
to recover later. By contrast, NDC pension reform
imposes significantly lower up-front costs on reforming governments. It does so by maintaining the payas-you-go financing and public management of
pension funds and thus allows reforming governments
to sidestep the weighty transition cost associated with
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FDC reform. This lighter financial burden has raised
the appeal of the NDC model to governments struggling with very high pension costs and which lack the
financial leeway to assume the cost of transition to a
private pension system (Brooks and Weaver 2006).
Competitive Benefits. The varied costs of NDC and
FDC pension reform also imply differences in the
importance that competitive rewards are likely to play
in such decisions. In the case of old age pension reforms, while the putative macroeconomic benefits of
the FDC model have so far been unproven, privatization is said to raise the attractiveness of an economy
both to owners of financial capital and to direct investors through its effects on the depth and sophistication
of domestic financial markets and firm management
strategies (Diamond and Valdés-Prieto 1994). Further,
the considerable political and financial toll associated
with privatization has made that reform a costly, and
thus credible, signal to market actors of the government’s commitment to market-oriented reform.
Establishing such credibility became particularly important for developing countries seeking access to
international capital markets in the 1990s, as the
history of default, inflation, and economic instability
made investment in those economies more risky for
international investors. The potential investment rewards for developing countries that could establish
their commitment to stable, market-based policies
thus were great (Bartolini and Drazen 1997).
Concerns for the signal that pension privatization
would send to international market audiences entered
prominently in the decision-making process for many
developing-country governments (Mesa-Lago and
Müller 2002; Müller 1999). In Argentina, for example,
President Menem took the more arduous path of legislative enactment of his 1993 pension reform—unlike
the bulk of his economic reforms, which were enacted
by decree—precisely because market actors insisted on
this costly signal of his commitment to the new private
pension system (Schulthess 1998). For their part,
market actors responded to the embrace of pension
privatization among developing countries by offering
lavish praise for reforming governments, while international banks rushed to join the new private pension
markets. High-profile economists applauded early
adopters such as Chile and Argentina as a “star performer,” and “model” for peer nations, respectively
(e.g., Becker 1996; Edwards 1996; The Economist
12/1995). Other privatizing governments were even
rewarded by sovereign credit-rating agencies following
the enactment of FDC pension reform (James 1998,
466). The FDC model thus promised important competitive advantages—both in international status and
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investment—for developing countries that adopted
this model in the 1990s.
While the NDC model appeals to some governments on account of lower up-front financial costs, it
also promises fewer ancillary reputational gains to
adopters. Indeed, because NDC reform entails a less
significant and costly institutional change from the
traditional state-run system, it may be viewed as a
signal that governments are less committed to the
reform. And since the NDC model can be more easily
revised over time, it may be perceived as less “permanent” than FDC reform. Not surprisingly, there has
been little evidence to date that NDC reforms have
captured substantial attention among international
political or economic audiences.
Expectations. Differences in the political and
financial costs of innovation and country wealth
imply a set of expectations over the category of reforms and the types of countries for which diffusion
effects are likely to be significant. First, all else being
equal, diffusion forces should weigh more heavily in
the adoption of the more politically and financially
costly FDC pension reform, such that the likelihood of
adopting this measure in one country should increase
systematically as the innovation is enacted by a greater
share of the country’s peer nations. Conversely, diffusion should be a less significant influence in the adoption of the NDC pension reform design. Lastly, all else
being equal, diffusion should be a stronger predictor
of innovation adoption among lower-income nations
than among the more affluent countries.
Research Design: Data and
Empirical Model
I test these hypotheses in data from 71 nations with
mandatory national social insurance pension systems
between 1980 and 2002. These countries encompass
the broad risk group over which structural pension
reform models may diffuse. A list of the countries used
in the analysis along with a list of definitions and
sources for each variable are included in the online
appendix at www.journalofpolitics.org/articles.html.
Dependent Variable. The two dependent variables
in the analysis are binary recordings of whether a government adopts an NDC or an FDC structural
pension reform in a given year (coded 1 for each
reform variable). If a structural pension reform is
adopted, the country drops out of the analysis the
following year. A diminishing risk group is justified by
the long time horizon over which structural pension
reforms are implemented—typically three to four
when does diffusion matter?
decades. Given this long transition, governments that
have adopted one pension reform model face little if
any “risk” of adopting the alternative model during the
23 years under observation here. Indeed, such a switch
has not been observed in the last quarter century of
structural pension reform.
Independent Variables. Diffusion is widely defined
as the observation of systematic ties between the likelihood of adopting an innovation in one location and
the number or proportion of relevant prior adopters
in a social system (Gray 1973; Jordana and Levi-Faur
2005; Mintrom 1997). The principal independent
variable of this analysis thus is the percent of “peer”
nations that have enacted each policy innovation by
each year (Peer Adoption). As previous research has
shown, peer status rests upon a firm sociocultural
foundation, which may coincide with geographic
proximity or shared regional status. For developing
countries, peer status is defined geographically by
international institutions such as the World Bank
and International Monetary Fund, which organize
research and operations around regional units. Other
peer groups may be delimited by economic standing,
such as the Organization for Economic Cooperation
and Development (OECD), for which a central part of
its mission is to promote the sharing of policy information among member nations. Peer nations thus
may share common geopolitical and sociocultural
status and are likely to be compared either by their
own governments or by external audiences. Accordingly, the peer adoption variable is calculated for each
reform over three distinct reference groups: (1) Latin
America, which includes the Spanish and Portuguesespeaking nations of the Western hemisphere, (2) PostCommunist nations of Eastern Europe and Central
Asia, and (3) the member nations of the OECD that
are not included in the two previous categories. This
variable is lagged one year.
The domestic politics of pension reform are said
to be governed by a logic of “blame avoidance,”
wherein politicians seek political cover for imposing
losses through large coalitions (Weaver 1986). The
possibility for blame avoidance is captured through
the fragmentation of legislative authority, measured as
the effective number of political parties (Parties) competing in the legislature. This is the inverse of the sum
of the squared seat shares of each legislative party
(Laakso and Taagepera 1979). While this variable is
not monotonic in fragmentation, it captures, albeit
roughly, the dispersion of power among hypothetical
equal-size parties in a given country and year. Where
such authority is widely shared, no party is likely to
hold a majority, and multiparty coalitions must there-
709
fore be built in order to sanction a policy change.
As fragmentation increases, political institutions
thus tend to provide greater opportunities for blame
avoidance.
Control Variables. I include variables to control for
two alternative explanations for the observed patterns
of structural pension reform. The first, population
aging, is a major source of pressure on old-age pension
systems. Rising life expectancy and falling birthrates
mean that higher pension costs must be financed by
ever-smaller working generations, raising the specter
of massive financial shortfalls in state social insurance
programs. Demographic change thus has been central
to what some observers call a looming “crisis” of the
welfare state (Huber and Stephens 2001; World Bank
1994). Other research points to the forces of globalization as the greatest challenge to welfare state sustainability (e.g., Tanzi 2002). In this view, the integration
of markets for goods and capital constrain governments’ ability to finance rising pension costs through
payroll taxes or budget deficits, while weakening the
bargaining power of immobile labor forces to defend
or improve social benefits. To control for these pressures, I include the share of the population over age 65
in each country (Age 65), as well as two proxies for
global economic pressures: trade exposure, measured
as imports plus exports as a share of GDP (Trade) and
gross private capital flows to each nation (Capital
Flows).
Similar policy models also may be transferred
across nations from a common source, such as by
international financial institutions (IFIs). International institutions have long been shown to lower the
cost of acquiring knowledge about policy practice
abroad and to provide direct financial support for
reform (Collier and Messick 1975; Dolowitz and
Marsh 1996, 345; 2000, 7; Finnemore 1993). In the
area of old-age pensions, the World Bank has been at
the forefront of active dissemination of the NDC and
FDC reform models (Holzmann and Hinz 2005) and
thus is a likely source for the transfer of both innovations. For some scholars, the principal instrument of
policy transfer is through the implicit or explicit conditionality attached to development loans and assistance (e.g., Huber and Stephens 2000). In this view, as
the value of World Bank development loans to a given
country increases, the likelihood of adopting one or
the other policy model should also increase. I therefore
include a measure of the level of World Bank loans and
credits as a share of GDP provided to each country in
a given year (World Bank).
Lastly, I include controls for the strength of democratic freedoms using the Freedom House index
710
(Democracy) and for the broader structure of political
authority, particularly whether the country is a presidential (direct or indirect) or parliamentary system
(Political System). Country wealth is measured as per
capita gross domestic product (GDP per capita).
Empirical Model. The data in this analysis are
equivalent to grouped duration data, where observations of the dependent and independent variables
are made over the interval of a year. In such cases,
maximum-likelihood methods may be used to estimate the competing risks model (Beck, Katz, and
Tucker 1998). Although a common method of estimating multiple events is the multinomial logit model,
that estimator suffers the potentially important limitation of assuming independence among the risks
under analysis. This assumption is equivalent to
Arrow’s independence of irrelevant alternatives property, which requires that the ratio of the probabilities
of choosing any two alternatives be independent of the
attributes of any other alternative (Hausman and
McFadden 1984, 1219). Where such an assumption is
not justified, statistical estimates may be inconsistent
and standard errors may be artificially small (Gordon
2002, 201).
When is such dependence likely? Dependence
among risks may be induced by unobserved characteristics of a decision process. As Gordon (2002) has
shown, learning under uncertainty constitutes a
potentially important source of stochastic dependence. Given that learning is an important but unobservable feature of diffusion processes, the possibility
of dependence between the risks of adopting the NDC
and FDC models is high. Accordingly, I employ a
bivariate probit model, which allows unobserved features related to the two reform likelihoods to be correlated while estimating the nature and significance of
that dependence (Box-Steffensmeier and Jones 2004,
180). Where the two likelihoods are jointly determined, the coefficient on the term that captures this
correlation, rho (r), will be statistically significant and
either positive or negative. If rho is zero, then the log
likelihood for the bivariate probit is equal to the sum
of the log likelihoods for the two independent probits
(Greene 1990, 663). By contrast to selection settings,
the bivariate probit that I employ is a recursive model,
wherein one decision is not a precondition for the
other (Maddala 1983, 124). To account for duration
dependence, I include the natural log of time in each
specification (Beck, Katz, and Tucker 1998; BoxSteffensmeier and Jones 2004) and employ robust
(Huber-White) variance estimation with clustering by
country to account for any possible heteroskedasticity
and temporal dependence in the data.
sarah m. brooks
Results and Discussion
Table 1 reports the results of the statistical analysis,
while summary statistics are provided in the online
appendix at http://journalofpolitics.org/articles.html.
The analysis provides broad support for the hypotheses that diffusion effects are circumscribed both by
features of the policy innovation itself and by characteristics of the potential adopter. Specifically, peer diffusion is a significant predictor of the adoption of the
more costly FDC reform model, but cannot account
for the spread of the less politically and financially
costly NDC design. Moreover, while peer decisions
promote the adoption of FDC reform among lowerincome nations, they do not do so among advanced
industrial nations. Lastly, the analysis reveals systematic variations in the domestic political economy of
NDC and FDC pension reform that are consistent
with differences in the political and financial costs of
innovation.
The coefficient on the correlation term between
the disturbances of the two equations, rho, is statistically different from zero and negative across the three
specifications. This means that unmeasured factors
associated with the adoption of one model make
enactment of the other model less likely. There may be
several explanations for this, including the effect of
learning. To the extent that potential adopters of the
FDC model begin to observe certain drawbacks associated with it, interest in the NDC alternative may
increase. The observation of stochastic dependence
between these risks, moreover, confirms the appropriateness of the bivariate probit as the estimator for this
model. The empirical results discussed below for the
NDC and FDC pension reform models take into
account this link between the two estimated
likelihoods.
The three model specifications in Table 1 differ
principally in their treatment of the main diffusion
variable, peer adoption. The first specification does
not control for potential sources of heterogeneity in
diffusion effects across nations, or groups of nations,
while the second and third probe these hypotheses.
Comparing the three specifications, the analysis
reveals a powerful effect of country characteristics in
mediating the importance of diffusion effects. Indeed,
the coefficient on peer adoption in the first model
specification indicates that on average peer dynamics
are not a significant predictor of FDC adoption. However, once country wealth is taken into account in
specification 2, peer effects emerge as a powerful catalyst of FDC pension reform only among lower-income
nations. This is evident in the interaction between
when does diffusion matter?
TABLE 1
711
Predicting the Likelihood of Adopting Notional or Funded-DC Pension Reform
1
Seemingly Unrelated
Bivariate Probit
NDC Peer Adoption
FDC Peer Adoption
NDC Peer Adoption*
GDP per capita
FDC Peer Adoption*
GDP per capita
NDC Peer Adoption*
Post-Communist
FDC Peer Adoption*
Post-Communist
FDC Peer Adoption*
Latin America
Parties
Age 65
Trade
Capital Flows
World Bank
Ln(Time)
GDP per capita
Political System
Latin America
Post-Communist
Democracy
Constant
rho
Number of Obs.
Log pseudolikelihood
Wald chi2
2
NDC
FDC
-.455*
(.176)
—
—
NDC
-.505*
(.174)
—
3
FDC
—
—
—
—
—
.134
(.200)
—
—
—
—
.200*
(.075)
.276*
(.138)
-.022*
(.008)
.008
(.009)
-.324*
(.147)
12.126*
(3.120)
-.039
(.044)
.054
(.340)
1.887
(1.486)
2.019
(1.228)
-.823
(.426)
-37.891*
(1.033)
-.050
(.052)
.119*
(.039)
-.0004
(.004)
.003
(.003)
-.046
(.036)
.418
(.428)
.064*
(.029)
-.173
(.130)
1.519*
(.547)
.703
(.573)
.041
(.130)
-5.199*
(1.277)
-.935*
(.088)
942
-99.796
237.16
.204*
(.084)
.297*
(.136)
-.022*
(.009)
.008
(.010)
-.335*
(.141)
12.701*
(3.809)
-.023
(.028)
.066
(.356)
1.943
(1.328)
1.873
(1.054)
-.742
(.481)
-39.978*
(11.322)
—
—
.003
(.007)
—
—
—
—
-.004*
(.001)
—
—
—
—
—
—
*= p < .05
Robust standard errors are reported in parentheses.
—
—
—
-.033
(.050)
.107*
(.037)
.001
(.003)
-.0004
(.003)
-.042
(.034)
.195
(.294)
.009
(.020)
-.196
(.130)
1.307*
(.505)
.499
(.524)
-.009
(.118)
-4.069*
(.873)
-.934*
(.079)
942
-104.024
72.78
-.524*
(.262)
—
FDC
-.053
(.035)
—
.007
(.016)
—
.195*
(.078)
.281*
(.130)
-.021*
(.008)
.008
(.009)
-.328*
(.148)
11.896*
(3.206)
-.024
(.028)
.054
(.339)
2.085
(1.305)
2.148*
(1.067)
-.773
(.507)
-37.614*
(1.010)
NDC
.025
(.015)
—
.117*
(.047)
.061*
(.030)
-.047
(.054)
.112*
(.0377)
-.001
(.004)
.003
(.003)
-.050
(.040)
.453
(.422)
.016
(.022)
-.163
(.136)
.703
(.525)
-.451
(.743)
.042
(.129)
-4.169*
(1.008)
-.934*
(.078)
942
-99.826
111.26
712
peer adoption and GDP per capita, which suggests
that for a Latin American country whose per capita
income is one-half a standard deviation below the
mean, an increase from one to three peer adoptions
raises the likelihood of adopting an FDC pension
reform by 52%.1 For a similar nation at the average per
capita income, however, an equivalent rise in peer
adoptions reduces the likelihood of enacting FDC
pension reform by 17%. More affluent countries that
are inclined to adopt the FDC model thus may do so
without waiting to gather information from peers,
while those wealthy nations that are more resistant to
pension privatization will be unmoved either by new
information from peers or by the prospective competitive payoffs of reform.
While diffusion effects are positive among the less
affluent nations, it is not the poorest countries that are
most likely to privatize. For instance, where no peers
have privatized, a Latin American country with the
average per capita income is more than two times
more likely to adopt the FDC model than a country
with a per capita income that is one-half a standard
deviation below the mean, all else being equal. This
result is understandable considering the significant
financial and regulatory infrastructure that funded
pension systems require in order to function. Moreover, it is the middle-income nations, rather than the
poorest, that compete most fiercely to attract foreign
investment through policy signals, while the lowestincome nations may be more likely to attend first to
their more basic infrastructure needs.
The interaction between peer adoption and the
group dummy variables in the third specification
probes whether diffusion effects vary across different
peer groups. The interactions show that diffusion
effects lend powerful impulse to the adoption of the
FDC model among postcommunist and Latin American nations, with the former revealing strongest diffusion effects. Among postcommunist countries, the
interaction in specification 3 implies that the likelihood of adopting the FDC model if three peer countries have already done so is three times greater than if
only one peer has enacted this reform, all else being
equal. In Latin America, by contrast, diffusion plays
a less powerful role in this trend, as an increase from
one to three peer adoptions in the region raises the
likelihood of enacting the FDC model by 31%, all else
being equal. Turning to the advanced industrial
1
Predicted probabilities are estimated using the bivariate normal
cumulative density function. I am grateful to Luke Keel for providing the R code for the predicted probabilities.
sarah m. brooks
nations, while broad evidence of policy transfer has
been found among affluent nations in previous
research (e.g., Dolowitz and Marsh 2000; Mintrom
and Vergari 1998) the statistical analysis reveals that
among OECD member nations, pension reform decisions are not swayed significantly by the proportion
of peer countries that have enacted the innovation.
Rather, it is likely that other kinds of information, such
as indicators of the innovation’s performance, are
used in those learning processes.
In the case of the less-costly NDC model, diffusion
cannot explain the rapid spread of this innovation in
the last decade. Rather, the coefficient on peer adoption is negative and significant across the three model
specifications. There are several possible interpretations of this result. One is that government actors may
receive discouraging information about the NDC
model from their peers and thus eschew this reform.
This is less likely, however, given the novelty of the
NDC model and the long time horizon that is required
for this pension reform to take effect. Alternatively,
this result may derive from the broad geographic dispersion of NDC adoptions—from Northern Europe
and the Baltics to Latin America. Most adoptions of
this reform to date thus have not followed closely
upon similar decisions by peer nations, but rather are
likely to have drawn upon the policy models and cues
from more distant countries. Also, since international
competition is likely to be a less salient component of
this decision, given the reform’s opacity, government
actors may have less incentive to emulate their economic peers in this instance. Instead, highly technical
policy models such as the NDC pension reform may
travel across regions through global transnational
policy networks. This was the case in Brazil, where an
an NDC-style pension reform was adopted in 1999. As
the first (and so far, only) Latin American country to
have adopted this innovation, Brazilian technocrats
learned about the NDC design directly from Swedish
technocrats participating in a World Bank-sponsored
pension reform conference at Harvard University
(Pinheiro 2004). In the case of Brazil, then, direct
contact among technocrats from distant and disparate
nations supplanted peer dynamics as a mechanism of
policy transfer. Further analysis of how these technocratic networks and “policy entrepreneurs” (Mintrom
1997) disseminate more opaque and technical innovations thus may be warranted for the case of NDC
pension reform.
Turning to the domestic political variables, the
analysis reveals stark contrasts in the institutional correlates of NDC and FDC pension reform. First, the
blame avoidance hypothesis is supported in the case of
when does diffusion matter?
the NDC pension reform, as this innovation is more
likely to be adopted where greater legislative fragmentation muddies the lines of political accountability.
This is not the case for FDC pension reform, however,
where the political parties variable is negative but
insignificant across model specifications. Contrary to
the conventional view, therefore, the political correlates pension privatization may not be structurally
given as they appear to be in the NDC case. Future
research may productively focus on delineating the
more contingent features of the political process that
allow reformers to diminish the costs of building
public support for this high-profile, but loss-imposing
reform.
For both the NDC and FDC pension reforms, controls for democratic freedom and the structure of the
political system are not significant predictors of the
likelihood of adoption. Demographic pressures, however, do reveal clear and consistent effects across
model specifications. As the population over age 65
rises, the likelihood of adopting both structural
pension reform models increases. This effect is stronger in the case of the notional-DC pension reform,
both in substantive and statistical terms. This result
makes sense considering the significant financial cost
associated with the transition to a funded-DC pension
system, which may be prohibitive in countries with
large elderly populations. For governments struggling with very high pension costs, the less financially
onerous NDC model thus may be most attractive as an
option for decreasing long-term government pension
liabilities. The empirical analysis does not reveal a significant role for financial coercion by the World Bank.
Nor are exposure to trade and capital flows significant
predictors of the likelihood of FDC pension reform.
Contrary to conventional theories, the NDC model is
more likely to be adopted by governments that are less
exposed to global trade flows, while adoption of this
model declines as World Bank loans increase as a share
of GDP. For this innovation, as the case of Brazil suggested above, the World Bank may have still performed
a significant role in the diffusion process, although
through the use of nonfinancial means.
Conclusion
Diffusion research has made important gains in identifying mechanisms such as information provision and
competition, through which policy choices made in
disparate locations may be causally linked. Yet, this
literature has devoted less attention to identifying
when and where such dynamics actually matter in the
713
domestic process of policy innovation. This study has
addressed these questions by arguing first that characteristics of an innovation itself, namely the “sunk” or
irrecoverable political and financial costs of adoption,
mediate the importance of diffusion forces in policy
choice, and second, that country characteristics associated with the level of economic development further
shape the importance of these mechanisms in domestic politics. On the basis of this argument I posited two
hypotheses to explain the adoption of the competing notional and funded models of structural pension reform. First, adoption of the funded definedcontribution (FDC) pension reform, which is costly to
adopt and difficult to reverse, should be swayed more
powerfully by similar reform decisions in peer countries; the adoption of the more easily enacted and
reversible NDC model, by contrast, should not be governed systematically by peer effects. Second, I hypothesized that diffusion effects in general should be more
powerful in developing countries than among the
advanced industrial nations. These expectations were
largely borne out in the analysis, as the likelihood of
adopting the FDC pension reform model revealed
powerful peer diffusion effects among middle-income
countries, and particularly among postcommunist
nations, but there was no systematic effect of peer
adoption among the more affluent OECD member
nations. For the notional defined-contribution (NDC)
pension reform model, which is both less costly to
enact and more easily reversed, peer decisions cannot
explain the rapid early diffusion of this innovation.
Where the NDC reform has been enacted, it is thus
likely to have been swayed more powerfully by domestic considerations, such as the appeal of the policy as a
means to control pension costs, rather than by cues
from peer nations or the prospects of ancillary benefits
such as international praise or investment.
Overall, these findings point to important limits
on the scope of policy decisions over which diffusion
forces may be relevant. Whereas diffusion research
often treats different policy innovations as being
essentially equivalent in theoretical terms, this study
suggests that such a view may not be warranted.
Instead, diffusion research may productively consider
how the features of a policy innovation mediate both
the importance of information from abroad and concerns about competitive status in domestic political
processes. This research should also pay close attention to the question of where internationally transmitted information and competitive concerns are likely to
be decisive in the political process, and thus to the
ways in which country characteristics mediate the
importance of those effects in domestic politics.
714
sarah m. brooks
Acknowledgments
Earlier versions of this paper were presented at the
2004 annual meeting of the American Political Science
Association and at the Joint Sessions of the European
Consortium for Political Research Nicosia, Cyprus. I
am very grateful for comments and suggestions along
the way from Nancy Brune, David Darmofal, Fabrizio
Gilardi, Torben Iversen, Marcus Kurtz, Covadonga
Meseguer, and Anthony Mughan and for methodological advice from Janet Box-Steffensmeier and
Luke Keele. Finally, I am grateful to Kent Weaver for
many insights into the politics of notional definedcontribution pension reform. All errors remain my
own.
Manuscript submitted 9 September 2005
Manuscript accepted for publication 20 January 2007
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Sarah M. Brooks is assistant professor of political
science, The Ohio State University, Columbus, OH
43210-1373.