Pension funds and domestic debt markets in emerging economies

This chapter reviews the terms of engagement of foreign and domestic pension funds in the domestic financial markets of emerging economies. Given their longer-time horizon, pension funds are expected to contribute positively to the development of large and deep domestic local currency bonds markets, and hence ease fiscal and external constraints in these countries. However, previous research shows that this is not necessarily always the case. In the case of foreign pension funds, the funds embeddedness in a hierarchic and structured international financial and monetary system might maintain external vulnerability and financial market instability. On the other hand, the development of domestic pension funds might promote destabilising financial sector developments, which weigh on productive investment and structural change. This chapter provides a comprehensive discussion of these respective costs and benefits of growing pension fund investments in emerging economies. It concludes by linking the discussion to the wider question of how best to provide long-term finance for productive structural change without the creation of destabilising financial sector developments, drawing out the suggestion that the state itself must be part of the answer.