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Article “Corruption” By Shleifer and Vishny

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    In the paper define government corruption as ‘the sale by government officials of government property for personal gain’ (1993). This can vary from government officials accepting bribes from private agents in exchange for a permit to prohibiting the entry of competition into the market. As explained by the two authors, corruption can slow down the economic development of a country. Bribery, unlike taxation, is more dear, because the secrecy in a bribing system causes a bigger distortionary effect (Shleifer, Vishny). This paper will analyze what form corruption has taken in Brazil over the past decade. It will also provide the context of a current scandal involving politicians and Petrobras and what this means for Brazil’s economic development. Finally, it will draw connections to class materials and explain examine its importance to economic history.

    In order to fully understand the impact corruption has taken on Brazil, it is essential to analyze how it came about. Brazil has experienced systematic corruptions dating back to its colonial times. This took the form of ‘manipulation of political decisions to favor private economic gains’ as well as ‘illegal appropriation and detour of public funds by politicians…for their own use or for campaign finance’ (Fleischer). The latter strategy is harder to execute since it involves transferring loans from public institutions and bribes to funds designed for other social programs that are never executed. The funds obtained by the politicians then were used to fund their campaigns. In 1964 Brazil’s government went through a military take over that allegedly fought against corruptions. Yet, the contrary happened, and corruption continued to increase.

    After political opening occurred in the year of 1974, people shed a light on the issue through the press. It was discovered that the Chief of the National Information Service, Gen. Medeiros was accepting bribes to allow CAPEMI a military retirement fund to win a contract that they were too inexperienced to undertake. Medeiros was planning to use this money gained from the bribed to fund his Presidential campaign. However, due to the discovery of the scandal, CAPEMI went bankrupt and Medeiros campaigned collapsed (Fleischer). Government corruption did not stop there, soon after in 1991, there was a major scandal that cost the Brazilian people over $27 million. The politicians involved in this scheme were referred to as the ‘seven dwarfs’. They used their power and influence to sway the Budget Committee to allocate funds to certain construction companies. The construction companies formed a cartel and performed rent-seeking activities to ensure their success. The politicians received a ‘5%-20% of the total price of the investment’ (Fernandes da Silva).

    Even though many things can explain why chronic corruption developed in Brazil, Fernandes da Silva points out that one of the biggest influences was the lack of external control of the system. Politicians were professionals that had specialized in crime. As the rise of democracy gave more power to Congress, clientelism increased and created the ultimate environment for corruption to grow. As corruption kept being tolerated in Brazil, the face of it became accepted in the culture. Once corruption becomes part of the culture, it is even harder to extinguish. As observed in class, a simple example can demonstrate this clearly. In this scenario, there is a driver that was speeding and was therefore stopped by the police. The Policeman has two strategies; to solicit a bribe or collect Fine. On the other hand, the driver can either offer a drive or pay the fine. Under nash equilibrium, there are two possible rational outcomes. Either the driver offers a bribe and the policeman solicits the bribe or the driver and policeman both settle with the fine payment.

    Since two Nash equilibrium are present, the decision between the two outcomes depends on the culture of the society. In the post-Communist Russia, it was a common culture to bribe the officer that had pulled the driver over, while in the United States a similar behavior would not be accepted. According to Fernandes da Silva ‘of there is a strong incentive to cheat in the group, the result therefrom will be the disintegration and the systematic disrespect to the rules of the game. The incentives to bribe tend to be very big and corruption will come into being’. This is prevented in Brazil. Since there is a culture of corruption present, private cartels continue to form in order to lobby government officials to favor decisions that increase their profit margins. Since both parties benefit from this transaction, it continues to live on. Even with the CPI (congressional investigating committee) present to investigate these scandals, as soon as one party gets caught someone else will arise to continue to in rent-seeking behavior.

    The most recent case of corruption occurred in Brazil in the years of 2011-2014. This case surrounds government officials like the former President Lula da Silva and the state-owned enterprise, Petrobras. Even though many believed that Petrobras was an exception of the corrupt system, the investigation shed light that companies like these are ‘hens with golden eggs’ for politicians and lead people to realize that bribery practices are ‘ …the norm[s] in business deals in Brazil’. The identification of the biggest scandal that Brazil has seen so far came about as an accident. Investigation in massive money transfers was trying to pin down criminals, however, it turned to be a scheme between engineering cartels, Petrobras and government officials. These contracting companies would set fixed prices and overcharge Petrobras by 10% to 20% on top of their initial costs. Out of the overcharged surplus, about 2 percent went to the Workers’ Party and 1% went to the Progressive Party.

    In addition to this politicians had to pay about 20% of that money to cover costs such as falsification of documents and other transfer costs. Over 11 money changers and offshore accounts were used in order to divert attention away from the company. The remainder of the money was shared between the party and was used to ‘finance the party’s 2010 campaign’. This scandal went beyond any monetary loss, it impacted thousands of people who got laid off their jobs and many supply companies were forced to file for bankruptcy. Many oil plants shut down in Brazil as well as other Latin American countries where ties to this scandal were found. In addition to this, there are ’empty schools, houses, hotels, and restaurants…[that] are now experiencing the cascade effect[s] of a political corruption debacle. Brazil has suffered chronicle corruption, and they continue to worsen as it is integrated into the culture. However, it shatters the lives of thousands of people that are casualties to these transactions.

    The corruption that Brazil is experiencing holds more than a one-time worker lay off negative. This system prevents the country to experience long-run economic growth. With continuous favoring towards the cartel, small companies have higher barriers to entry. And since no real competition exists to the cartel to win the projects there are lower levels of innovation. In a democratic state like Brazil, the common people have the power to elect a common man to represent them. In a society where rent-seeking does not seem out of the ordinary it becomes easy for the citizens to develop a distrust and high criticism towards their representatives. Once trust is lost in the government, and the perception of the inability to change the regime through voting increases, democracy fails itself and a chronicle corruption cycle comes to rise. This only allows for the event to continue to develop for the worse.

    With the liberalization of the press, Brazil’s government has been more transparent with their transaction, which indicated that democracy alone is not sufficient enough to solve this matter, but free press also plays a big role. Brazil has already fallen behind other Latin American countries in ‘adjusting to post-debt crisis ‘. Consequently, there is a loss of trust from foreign investors, prohibiting further Another reason why development is hindered is due to the fact that bribery requires secrecy. As observed, in order for the politicians to falsify documentation and cover up the traces they had to incur additional costs that could have potentially been invested back into innovation or development of projects involving infrastructure. However the case of Petrobras can shed some light in the changes that need to occur, and the impact that a corrupt system can have on a society. The thought of institutional changes becomes vital in order to fight corruption.


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