("The innovators who changed global investing"; Global Custodian Special Report, Fall, 1999)

Otto von Bismarck (1815-1898) was so German, his personality reads like the model for Dr Strangelove. He was comically fat, weighing over 18 stone (252 pounds). Though troubled perpetually by insomnia, toothaches, and stomach troubles, his appetites were bestial. His chief ambition, he declared; was to smoke 100,000 cigars and quaff 5,000 bottles of champagne. Bismarck even had a twitch (though it was facial rather than biceppial). This was the only outward sign of his inner turmoil (“1 am all nerves,” he once confessed, “so much so that self-control has always been the greatest task of my life and still is”).

Otherwise, he was a domineering, vindictive, cunning, and clumsy fellow. Unconstrained by a cipher of a parliament, Imperial Chancellor Bismarck disposed of almost unlimited powers. He guarded them fiercely, signing every document personally, denying any rival access to the Kaiser, and firing everybody who ventured an alternative view.

It was Bismarck’s autocratic reluctance to turn a united Germany into a proper constitutional state-and, in particular, his destruction of nascent German liberalism-which condemned Germany to its Nazi future, and Europe to socialism. All alternative sources of power were divided or extinguished.

The Roman Cathohic church was persecuted. Newspapers sympathetic to liberalism were bribed into silence. Socialist parties were banned, their publications suppressed, and their leaders thrown in jail or forced into exile.

When his anti-socialist laws failed, he tried instead to inoculate the citizenry against socialism with public money. His welfare measures set Europe on the course it still holds today, in which the State controls half the national income, and the productive economy is lumbered with social costs that have raised the rate of unemployment in Germany to 10%, France 11%, and Italy 12%.

The modern German economy bears his hallmark in other ways, too. Bismarck was an early advocate of nationalization, starting the State takeover of the railways as ear1y as 1879. He also presided over the cartelization of industry into the bank-owned price and quota-fixing oligopolies whose successors still dominate the German economy today.

The tariffs he introduced provided the model for the modern European Union: a single internal market surrounded by external barriers to entry. Typically, the motives behind them were chiefly military and political, rather than economic or commercial. The first tariffs, introduced on grain imports in 1877 and 1879, were designed to protect the rye-growing Prussian Junker class from which he came against cheap wheat from America, and to give him a source of finance independent of the Lander to fund his burgeoning welfare state (tariffs also had the pleasing effect of further dividing the German liberals).

But the privilege was soon extended to German industry as well. Refined in 1885, 1887, 1893, and 1902, the tariff regime introduced by Bismarck turned Germany into the most heavily protected economy in Europe by the outbreak of the First World War. Thanks to his welfare reforms and military ambitions, it also had the highest-spending State.


In talking to Jose Piñera, one wishes for some of the unbridled enthusiasm that emanates from this Chilean-born, American-educated economist's work to rub off. Founder and president of the International Center for Pension Reform and co-chair of the Cato Institute's Project on Social Security Privatization, Piñera is one of the leading proponents of privatizing pension systems around the world. As the architect of Chile's social security privatization in 1980, the man knows what he's doing.

Bubbling with joy over the success of Chile's 20-year-old pension privatization, and the growing support behind privatized retirement systems around the world, Piñera has good reason to be excited. On November 4, 1980 - a day Piñera refers to as "the day of revolution in Chile" - Chile replaced its government-run pension system with a privately administered national system which gave control of retirement savings back to the workers. The move has proved highly successful.

For the first six months of 1999, the pension funds in Chile returned to workers an average real rate of return of 11.6%, a figure that has surprised even Piñera. "When I explained the system in 1980, I used a 4% real rate of return as an example of the systems' possible performance. Well, for the past 18 years, the funds have averaged 11% returns above inflation - for every worker in the country! Even the worker who is making the minimum wage has been getting average annual returns of 11%, for 18 years and at a compounded rate of interest."

What most excites Piñera - and many things do -is not simply the strong returns, but the fact that his system benefits all those participating. Under the privatized system, workers can choose to stay in the government-run system or move to the private pension system. If they choose the private system, they are allowed to decide which company manages their money, and are allowed to put as much as 20% of their wages (the mandatory level is 10%) into the system tax free.

Most significantly, workers, with some constraints, can choose when to retire. If a worker can accumulate enough money to fund an annuity equal to 50% of their last wages, they can retire whenever they desire. Thus, the system maintains that, as long as you have the money to live your life with a decent income, retirement age is a personal choice.

In fact, when asked what the main advantage of a privatized pension system is over a government-operated one, Piñera's answer has less to do with numbers than dignity. "The greatest advantage of Chile's system has been to transform every worker into an owner of capital. It not only improves workers prospects for retirement, but it has an important effect on the character of a society. The worker is empowered with a sense of freedom and dignity. He doesn't have to look towards the politicians for a retirement benefit."

Transforming the nation's character is of utmost importance to Piñera, who struggled for years before his vision finally came to fruition. "I spent the first 10 years after the reform like a prophet in the desert, preaching these ideas to countries and governments all over the world. And for 10 years, I was told, 'No, this is too revolutionary, this won't work.' But after 10 years, neighboring countries began to see how the entire Chilean economy was being transformed by this reform."

The system's effect on the economy of Chile has been far reaching. By entrusting workers with control over retirement destinies, it has led to an increase in productivity, a surge in savings, a rise in employment, and helped the Chilean economy "double its growth rate from about 3% to 7% in the last decade," he says.

Known worldwide as "the Chilean model," the system's success as an economic stimulus has created widespread interest from other countries considering an overhaul of their own social security and pension systems. Piñera claims converts of various Latin American countries, including Argentina, Peru, Colombia, Bolivia, El Salvador, and, most recently, Mexico.

In recent years, Piñera has turned his attention to the US. "My big effort these last years have been dedicated to the US, because if it happen there, the whole world would follow. In continental Europe, they have such a history of government intervention that it's harder for the idea to penetrate - but if the US were to move toward privatization in this area, the example set would be so powerful it might save Europe from the huge effects of the bankruptcy of the welfare state that will come in the next decade. I am optimistic about the US because, in the past four years alone, the idea has been debated regularly, and many leading figures in the Democratic and Republican parties, as well as Fed chairman Alan Greenspan, are behind some form of Social Security privatization."

Yet again, Piñera's reasons for wanting the US to privatize its 65 year-old Social Security system have less to do with economics than with the basic rights that form the foundation of the country. "The debate over government-run systems versus private systems is like East Germany versus West Germany," Piñera declares. "The Berlin Wall of Social Security has not yet fallen down in America, and the analogy is a fitting one, considering Social Security is the direct descendent of a 19th-century Prussian idea (see Otto von Bismarck in this issue). I'm proposing dismantling a bad idea the US copied in 1935 and that originated 50 years before that."

Not that economics aren't also a part of the picture. Piñera not only sees the American principles of "self reliance, self responsibility, individual freedom, and private enterprise" mirrored in private pension systems, but believes the economics of the system would reap benefits far outweighing those garnered by the US' unwieldy Social Security behemoth.

In Chile, pension funds and insurance companies manage annuities equal to 50% of the GNP, results that would have a tremendous impact on the US if they could be even modestly duplicated. "We're not talking about changing the peanut farming industry here - we're taking about the democratization of the single largest government program in the US, and, for that matter, the world" proclaims Piñera.

Despite the opposition to such a switch in the US, and skepticism throughout most of continental Europe, Piñera forges ahead, buoyed by the conviction that his work will have a lasting impact on workers and economies worldwide. "I believe God gave me this incredible opportunity to do this at a very early age, and I feel it is my moral duty to travel the globe converting people to this idea."

Given his boundless energy and proven success in Latin America, the world may find it hard to resist Piñera for much longer.



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