Privatisation leaves billions in the lurch

The privatisation of social security systems in developing countries has ruined the lives of billions, says a new report.

Nirode Masson

BILLIONS of poor people who lack adequate access to healthcare and old-age security are posing a key challenge in developing countries that undertook drastic reforms and privatised social security systems at the behest of the World Bank.

A new report by the London-based Bretton Woods Project (BWP) says that the privatisation reforms, which were first launched more than three decades ago, are failing to benefit the majority. But national governments, pressed by local elites, multilateral agencies and global corporate and financial interests, have contributed significant public resources towards enacting the reforms.

What is more, despite having their image tarnished by the global financial crisis, international corporate and financial interests are still pushing the increasing 'financialisation' - the expanding systemic power and scope of finance and financial markets and actors - of people's lives in developing countries, says the report authored by Sheena Sumaria.

Social security systems matter as they can impact existing inequalities, and have the potential to transform society where markets are failing to do so. Private systems, in the hands of private finance, are embedded in existing social structures and serve to further marginalise the large numbers of those in poverty.

'This is especially important in today's globalising world in which inequalities between and within countries are widening, and ever increasing numbers of the world's poor only have access to sporadic and informal employment,' says Sumaria.

The author of the report goes on to say that the liberalisation of trade and the relocation of multilateral health corporations to developing-country markets have contributed to the privatisation of health. Several US-based managed-care organisations have entered Latin America and Asia, seeking access to public social security funds.

Over the last three decades, finance has grown rapidly in terms of activities, markets, institutions and profits. By the end of 2008, the global insurance industry held $18.7 trillion of funds under management, with global insurance premiums at $4.3 trillion.

'Banks and insurance companies earn interest spreads, fees and commissions directly off worker health insurance and pensions contributions, including from the poorest layers of society,' says the report's author Sumaria.

Case studies

The report examines the role of private financial institutions in the reform process by considering two case studies: private pensions in Chile and private health insurance in Argentina.

In 1981, Chile was the first country to push through private pension reform, serving as a model for other developing countries. However, many private pension fund management companies are in the hands of foreign financial conglomerates.

Chile's largest private pension manager, Provida, with $36.1 billion under management, is owned by Spain's largest financial institution BBVA. Between 1981 and 2006, Chilean workers contributed approximately $50 billion from their salaries towards the private pension schemes. Private pension managers and related insurance companies kept one-third of this amount as commissions and profit.

In Argentina, says the report, the healthcare reforms enacted in the 1990s have also benefited financial corporations, which have extracted large profits and moved capital outside of the health system and the country.

According to professor Celia Iriart from the University of New Mexico, US-owned private health insurer Exxel Group used high levels of debt to evade tax, transferred capital from Argentina to foreign private accounts by paying high interest on the junk bonds it issued, and drained government resources by keeping part of the revenue of public hospitals it was managing.

The report titled 'Social insecurity - The financialisation of healthcare and pensions in developing countries' notes with satisfaction that problems arising from privatised models of health insurance and pensions have not gone completely unnoticed and those who have been adversely affected by such reforms in developing countries have engaged in public campaigns, protests and social movements.

For example, in Egypt, several different civil society organisations and political parties are currently battling to stop the World Bank-supported privatisation of the health insurance system.

In El Salvador, the government's health privatisation reforms came to an end in 2003 after solidarity protests and strikes by health workers, doctors, unions and other civil society groups.

Although the private pension system still exists in Chile, in 2008, the country's then president Michelle Bachelet responded to a public campaign, and acted to restore a modest, tax-financed non-contributory public 'solidarity' pension of $150 a month to those with no pension entitlement. Additionally, she established a supplement to private pensions that were lower than $400 a month, recognising that even private pensions do not deliver to the majority of their customers.

The global financial crisis further served to expose the fragility of the financial system, changing public opinion about the effectiveness of financial actors in delivering long-term benefits. The financial services industry, including many pension funds and health insurers, has seen huge losses, wiping out the gains made in the 'boom' years.

At the onset of the crisis, Argentine president Cristina Kirchner took the radical step of nationalising the pension system, which had been privatised 14 years earlier. The state regained control over accumulated pensions savings, replacing the private administrators who had paid billions to their executives in salaries and bonuses, while at the same time making huge losses during the credit crunch.

As a result of the nationalisation, Argentinians are now entitled to pensions which are over two-thirds of their salaries - representing in most cases, especially those of women, more than double the private pension entitlement.

Caution

Sumaria says: 'Although the financial crisis has stimulated debate on putting controls on finance, the strength and resilience of the financial sector should not be underestimated. The financial industry spent over $3 billion lobbying the US Congress on the US Health Reform Bill, which in the end included several concessions for private insurers.

'These include a provision which permits insurers to more than double charges to employees with high blood pressure, diabetes or other medical conditions. They also allow insurers to continue using marketing techniques to cherry-pick healthier enrolees.'

The report adds: 'Although government-funded Medicaid will be expanded to cover 16 million additional low-income people, for other Americans who are not eligible for Medicare or Medicaid, they will be forced to take out insurance contracts with private health insurers. This represents an injection of billions of dollars to the very insurance industry responsible for the US healthcare crisis, and some of the same private health insurers which entered Latin American and developing country markets to expand profits.'

Turning to developing countries, the report says that by advocating a reduction in the size of the public sector, the governments there are unable to provide decent social protection of their populations as those in the industrialised countries were able to do in the early 20th century.

However, such prescriptions ignore the models of the newly industrialised countries in East Asia, where publicly administered social security schemes have enjoyed higher coverage rates and lower administrative costs than the privatised systems in Latin America.

Research need

Sumaria pleads for more research on the role and impact of private financial institutions in the private pensions and health insurance sectors in developing countries, and argues that with many local private providers in the hands of global financial corporations, much of the capital provided by those covered by private schemes flows to foreign accounts and investments over which savers have no control.

Furthermore, the use of leverage and tax loopholes means that developing countries' governments lose out on a potential source of tax revenue. The lack of regulation and instability of the financial sector mean that members of the private schemes are left vulnerable to the collapse of the firms or fluctuations in investment returns.

The author concludes: 'While much of the agenda of the G20 and other global bodies has turned to financial re-regulation because of the financial crisis, this agenda is ignoring the need of developing countries, especially their poorest  and  most vulnerable citizens.' - IDN-InDepthNews            

*Third World Resurgence No. 238/239, June-July 2010, pp 15-18