Corruption in Brazil and how has it affected its economy development?

Corruption defined as ‘the abuse of entrusted power for private gain’ is a global phenomenon

and has been around since the emergence of political and economic power relations. Since

1990’s, corruption has received a tremendous attention from media and academic world,

wherein the World Bank and the Transparency International being the main contributors.

There is a no direct way to measure corruption due to its illegal nature and the various

number of forms it assume. Corruption Perception Index and many other Perceptions indexes

have been used to estimate corruption, but many of the researchers criticize estimation by

these indexes as they may be biased. Therefore, researchers are using several other methods

and indicators for estimation of corruption. Corruption is a key variable to explain weak

states, poor public service delivery and the cause of untold hardship for the world’s

impoverished majority[ CITATION Wor17 \l 1033 ]. It affects development of a state as it links to

low growth, income inequality, poverty and poor service provision [ CITATION Leh18 \l 1033 ]. It

erodes public trust in government and governance in general, weakening a state’s ability to

address poverty and in sustenance of public services, which results in the reduced legitimacy

and authority of governments.

Corruption in Brazil

Corruption in Brazil has deep historical roots. According to Transparency International, the

Corruption Perception Index ranked the country 79th in corruption[ CITATION Tra17 \l 1033 ]. The

World Bank’s Worldwide Governance Indicator for the control of corruption ranges from 0

(lowest control) to 100 (highest control), on which Brazil scored a value of 36.06 percent in
2017[ CITATION Wor171 \l 1033 ]. Since the first concluded assessment in 1996, it was the lowest

indicator of Brazil. Since the end of military dictatorship in 1985 and the state’s return to

democracy, there has not been any president with clean record. It has often quoted in media

for many of its corruption scandals. The majority of Brazilians associate corruption with

government. The corrupt behavior is prevalent all over the federal state, municipal levels and

all forms of government. The upper level corruption involves presidents, ministers and the

member of the congress. Due to the long period of increasing corruption in Brazil, a lot has

known about the corruption in Brazil. The high levels of corruptions are associated with low

long run growth rates. Scandals come and go and the political system with the same players

and institutions remains unaffected in even most accusable situations of wrongdoing.

Since 2014, the Petrobras scandal has been under investigation by Federal Prosecution

Service, which reported evidence of 10 years of corrupt activity prevalent in the state. It is an

extremely complex corruption case, which involved many people including Petrobras

employees, Petrobras directors, and financial intermediaries, presidents of the biggest

construction companies in the country, federal senators, congressional representatives and

even the former president Lula. Three biggest political parties were involved in this scheme

and benefited from share of rents. Their motive was to divert funds from the former state-

owned oil company Petrobras. To win all the big contracts involving Petrobras, they used

tendering fraud scheme. Between 2015 and 2017, the diversion of funds accounted to be

R$12.816 billion until now. This biggest corruption scheme, abuse of international financial

system, drug trafficking and money laundering formed the basis of more than 200 arrests in
October 2018. The Carwash operation also resulted in the arrest of the former President

Michel Temer. After exposing the extent of bribes by the operation, almost half of the state-

owned oil-giant Petrobras’ employees laid off.

One of the biggest cases of corruption in Brazil’s history is the case of Odebrecht. It is not a

brand rather the region’s largest construction conglomerate. It is one of the biggest donors to

politicians in Brazil. The firm caught in corruption in Operation Carwash. In exchange for

contracts with Petrobras, dozens of companies payed bribes to politicians and officials. In

2015, the grandson of founder and the group’s chief executive Marcelo Odebrecht arrested.

In 2016, Brazilian-based group signed world’s largest leniency deal, in which they confessed

to corruption and charged fines of $6.2 billion. They confessed paying bribes not only to the

Brazilian officials but also in various parts of the world[ CITATION Gal19 \l 1033 ].

In March 2017, Operation Weak Flesh launched by Brazilian officials to bring the attention

of public to the world’s largest beef and poultry exporters JBS and BFR, who with the

approval of bribed quality inspectors exported spoiled meat around the world, including U.S.

Since then, U.S. banned JBS and BFR products. Authorities arrested the head of JBS, for

insider trading and lying to authorities, and charged JBS $3.16 billion fine for

bribery[ CITATION 10F19 \l 1033 ].

Another example of corruption in Brazil was Brazil’s Football World Cup held in 2014. Due

to overpricing and overcharging, the cost to build Brazilian stadium tripled and reached

approximately 900 million dollars. The Brazilian citizens protested nationwide on this
misuse of money, which could have used in the sectors of health and Education, which are

far more important than this wastage of money.

Due to corruption, one of the main achievements of the region over the past 30 years i.e.

democracy is coming under threat. In 2009, Bailey pointed out three principal areas of

democracy: (1) interest articulation and aggregation; (2) policy-making; and (3) policy

implementation and adjudication. Examples of corruption in every area are apparent in

Brazil. The first one comprises inputs to the democracy such as voting and party

competition. Examples of this corruption include illicit campaign finance schemes, which

made the basis of many scandals such as the revelations of the Parliamentary Committee of

Inquiry (CPI) gives Corruption and the Collorgate scandal. The policy-making area involve

three corruption schemes: ‘grand corruption’, ‘cash for policy’ and ‘policy for cash’. The

simplest and the most common form of corruption is grand corruption, which is clearly

visible n Judge “Lalau’s” multimillion-dollar heist in the construction of the São Paulo Labor

Court and the bilking of the Amazonian Development Superintendence (SUDAM). Cash for

policy scheme, in order to meet its determined policy objectives offers personal rewards to

legislators to expect support in return. Its best example is mensalão scandal, in which

government expanded its partnership by renting congress members. Policy for cash scheme

reverses the logic of cash for policy, in which the likely rents drive the policy choices, which

benefit the policy makers. Examples include both the budget “dwarves” scandal of 1993– 94

and the bloodsucker scandal, in which decisions about budget allocation were taken with an

eye to private gains. The third arena allows a variety of potential forms of corruption, which
range from the sale of administrative or judicial decisions to the misuse of confidential

information. The rules implement to specific individuals either disciplinary or beneficially

for example, the access to confidential information extended to the influential

businesspeople. Rule adjudication may likewise be one sided as in the case of Operation

Anaconda, which terminated lawyers, detectives and judges who sold judicial decisions. The

last-minute flexibility in the rule implementation involved examples ranging from high

profile scandals to ordinary corruption within administrative bureaucracies such as social

security agency or motor vehicle bureaus[ CITATION Tay11 \l 1033 ].

Determinants of Corruption in Brazil

Researchers studied the effect of corruption and its growing channels influencing growth.

Ades and Di Tella based on their analysis on an empirical model proposed that competition

is an important determinant of corruption[ CITATION Ade99 \l 1033 ]. Increase in corruption

contribute to reduced level of rents and consequently low corruption levels. This shows that

to fight corruption it is fundamental to make markets competitive. Combining this and many

other investigators, Treisman investigated the other determinants of corruption to be legal

system, religion, democracy, freedom of press, economic development, and the wages in

public sector[ CITATION Tre00 \l 1033 ]. Due to the legitimacy of government to ensure property

rights, the researchers believe that the legal system has a great impact on government

quality.

Effect on Economic Development

According to IMF 2016, Brazil has the world’s ninth largest economy but still faces the

challenges to fight the high income-inequality gap. It has extremely problematic health

services, education, sanitation and infrastructure, which is resulting in damaged economic

prospects of the country and deepening the inequality gap.

The management of natural resources is crucial for the economic development of a country.

An economy focused on industry and services is dependent on its natural resources

extraction. However, this expected takeoff does not seem to happen in the state. Corruption

and bureaucratic inefficiency is one of the main hindrance in economic development in

Brazil. It does not only affect growth but also affects income distribution. Corruption affects

growth through trade policy, quality of institutions and political stability. Although costs of

corruption cannot be estimated but recent estimates showed that it ate up 1.35% of the GDP

in 2006 and 5% of the GDP in 2008[ CITATION Tay11 \l 1033 ]. It has a negative and significant

correlation with growth. A 10% increase in corruption decreases growth rate per capita

income by 1.7%. The weight of tax burden per GDP increased from nearly 20% in 1970 to

almost 35% in 2014[ CITATION Tri15 \l 1033 ]. Sachs and Warner indicated resource abundance as

one of the determinant of economic growth [ CITATION Sac95 \l 1033 ]. However, there is a

negative and significant correlation between being resource rich, and having lower growth

rate and higher levels of corruption. Leite, Weidmann and Barbier believe that this negative

correlation can be due to the endogeneity of corruption. Besides this, researchers believe that

different resources have a different impact on corruption. Hence, they divided natural

resources into fuel, ores and metals, agricultural products and food. They accounted for the
different impact of these resources and found out that metal, fuel and ores have a negative

impact on corruption while forestry have a positive impact[ CITATION Mor17 \l 1033 ].

Some serious economic consequences of corruption include the disability of government to

provide public goods. Political corruption severely damaged the macroeconomic stability of

the state. Petrobras’ investments comprised 2% of total Brazil’s GDP. The Petrobras scandal

affected a large sphere of economy by 30% reduction in the volume of investments between

2015 and 2019. Besides this decline in GPD forecast, this scandal leaves the public accounts

almost empty for supporting social projects. Thus, political corruption leads to amplifying

effects on income inequality. There is a colossal gap between upper and lower classes’

income share in the economy, which calls the need for better public goods. Based on the

quality of infrastructure, Brazil ranked 120 th out of 144 countries by the World Economic

Forum in 2015. The development needs of the country are not met as Highways, roads,

airports, railroads and ports are insufficient and poorly distributed. It is the case with other

public services too, such as hospitals, schools, water and public sanitation. This lack of

infrastructure is a hurdle to the Brazil’s growth. The country lost approximately $18 billion

to corruption between the years 2002 and 2008. FIESP, a São Paulo-based industrial

association estimated that the money lost by corruption, between 2007 and 2010 could have

constructed 124 percent more roads and 525 percent more railways. This shows that by

deviation of money, corruption results in the reduced quality of infrastructure

available[ CITATION Per15 \l 1033 ].

Conclusion and Recommendations

After analyzing the country’s background in corruption, the determinants of the prevalent

corruption in the region, its possible causes and hindrance in the economic development, I

came up with few recommendations and conclusion. The complexity of Brazilian laws and

the lack of coordination between accountability institutions allow entrance of corruption in

system. It is very important to understand the quality of legal system and accountability

should be effective to reduce corruption. The reduction in corruption will result in increasing

growth rate per capita income and reducing income inequality. Corruption limits the

government’s ability to provide vital infrastructure to the public, which is a hindrance in the

state’s development. Many things need to be done to vanish this corrupt political system for

the improvement of infrastructure provided. This also requires consistent effort with regard

to education. However, the people’s reaction to the World Cup 2014 Corruption seems a sign

of hope in eradication of corruption. White-collar crimes like bribery and money laundering

are a challenge for law enforcement agencies in the state, where enforcement of law is so

weak on crimes committed by powerful defendants in Brazil. These crimes lead to the

development of systematic corruption in the region. The Brazilian government should focus

to enhance the monitoring efforts and on an increase in the credibility of the punishment

combined with creation of some strict legal consequences. This leads Brazilian government

and economy to greater advancements. While discussion on effectiveness of anti-corruption

policies, investment on monitoring institutes and technologies is more effective for less

developed countries, while for developed countries, increasing penalty is more effective. The

judiciary bill “10 measures against corruption”, if gets approval would facilitate the

investigation and conviction of politicians in power, who nowadays hold legal privileges.
We hope that the systematic corruption in the state will end and it will be possible to make

national economy, the rule of law, and democracy stronger in Brazil.

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