Funding Government And State Owned Enterprises VIII - Country Comparisons (2)

This series of nine briefs explores whether pension and other funds can and should do more in the way of financing state owned enterprises (SOEs) and government projects.

The series deals with the following topics:

  1. Introductory brief.
  2. Pension funds.
  3. Funds regulated by the Registrar of Pension Funds.
  4. The Government Employees Pension Fund and other public sector funds not regulated by the Registrar of Pension Funds (1)
  5. The Government Employees Pension Fund and other public sector funds not regulated by the Registrar of Pension Funds (2)
  6. Funds other than pension funds which might be required to finance SOE’s
  7. Country comparisons (1).
  8. Country comparisons (2).
  9. Conclusion.


Historically the effects of prescribed assets have been mostly negative, including here in South Africa, and in a significant number of cases, according to the World Bank, it has been “financially catastrophic.”[1]

Used extensively in the 1960s and 1970s, the common thread which caused the policy to be so dangerous internationally is that it allowed governments to sequestrate financial resources, thereby undermining fiscal discipline. The misallocation of scarce finances became more prevalent as prescribed assets were viewed as plentiful.

Major prescribed assets policy failures in other countries

In Zambia, Nigeria, Ghana and Egypt, pension and provident funds were forced to invest in government assets, such as the National Investment Bank in Egypt and government bonds in Zambia. All of the prescribed assets gave negative real returns and the pension and provident funds quickly eroded in value. In Zambia, Nigeria and Ghana the savings institutions subject to the policy went completely bankrupt.

Not only did a large number of pension and provident fund beneficiaries lose their retirement savings, each country’s domestic savings available for vital long-term investments took a major blow, hyper-inflation took hold and negative economic growth rates resulted. The same also occurred in most Latin American countries.

A few East Asian economies and Sweden are sometimes cited as successes. However, the net effect was that it had a detrimental effect on the health of their financial systems.

Japan, Singapore, Malaysia and Sweden

Beginning in the 1960s, Japanese banking institutions became subject to prescribed assets as they were required to buy a fixed percentage of central government debt, and to also allocate credit to major corporations involved in building the export market. Although Japan maintained excellent fiscal discipline throughout the period during which the policy was implemented, eventually the rates of return from the bonds forced upon the banks became substantially lower than those available in the open market, and in the early 1980s Japan’s Ministry of Finance abandoned the prescribed asset policy for government bonds. Overall, the policy had a negative impact on the performance of financial institutions and fortunately the macroeconomic effect was muted by the strong underlying economy and the government’s fiscal discipline.

In Singapore and Malaysia the national provident funds had over 90% of their investments in government assets, and thanks to sound macroeconomic policies they achieved positive real returns. In Singapore the government used a large portion of the prescribed investments to accumulate a substantial pool of foreign exchange reserves.

Sweden’s policy of prescribed assets for pension funds and insurance companies favoured bonds issued by specialised mortgage credit institutions , which ended up yielding returns that were slightly below market rates. The policy was abandoned in the early 1990s.

Lastly, although the rates of return to Singapore, Malaysia and Sweden’s provident and pension funds during their periods of prescribed assets were positive, there was an opportunity cost involved; their returns were much smaller than those enjoyed by private pension funds in countries that enjoyed greater investment freedom.


If one takes the experience apartheid South Africa and other countries have had with prescribed assets, the best possible outcome is below market returns for financial institutions and a muted macroeconomic effect. Importantly, this best-case-scenario is only possible if there is a strong underlying economy and a strong commitment from the government to strict fiscal discipline.

If these two prerequisites for a best-case-scenario muted outcome are not in place, the consequences are most likely to be disastrous, with possible bankruptcy of financial intuitions, hyperinflation, decreased savings and investment rates and a decrease in economic growth.

Charles Collocott
Policy Researcher

[1] Elena Folkerts-Landau, Developing a Domestic Funding Strategyfor South Africa’s Public Sector, The world Bank Southern Africa Department, May 1994, p28.