The costs of corruption in Brazil

This is Part IV of a five-part series entitled "What now? The trade-offs and budget cuts needed to fix Brazil’s finances." Part IV examines the costs of corruption in Brazil, and what can be done about them.

There is no question that the single driving force behind all of the political upheaval that Brazil is currently experiencing is not political at all. It’s not entirely the economy either, although the recession has certainly intensified the situation. The real culprit behind all of this mess, the 800-pound gorilla in any room where a political discussion is taking place, is corruption. Namely, the multi-billion dollar corruption scandal discovered at the Brazilian state-owned oil company Petrobras: Revelations regarding a sophisticated kick-back scheme run by a cartel of Petrobras contractors along with prominent politicians has been rocking the nation for the past couple of years.

The scandal has ensnared dozens of politicians and business leaders. The brazen nature of the graft, the audacity of its magnitude, has scandalized Brazilians. The scheme’s gutting of the company, a huge contributor to GDP, has devastated the economy and catalyzed political unrest. The aggressiveness with which the investigation has been pursued and the tough sentences issued have the political establishment terrified. Petrobras was supposed to be the country’s cash cow, responsible for a bright future in which wealth from newly discovered oil reserves would finally propel Brazil to fulfill its potential. All the repercussions of the scandal, the practical bankrupting of Petrobras itself and many of its contractors, all the lost jobs resulting from the screeching halt in the energy and construction sectors, are alone thought to have cost the economy at least 1% of GDP. The fact most of the graft happened while Dilma Rousseff was the chair of the Petrobras board of directors, stoked anger and propelled calls for her impeachment after her additional budgetary crimes were revealed.

This is the central theme of everything that has always been wrong with Brazil. For all of its history, corruption has been a cancer that has stunted development. The Petrobras investigations have merely revealed what Brazilians have always intuitively felt: the reason the country can’t seem to rise to its potential is because of corruption and all the distortions that it causes. What is to be done about such a huge problem, one that seems to be an integral part of the Brazilian political system? It is hard to know where to begin. Given the scale of the problem and the seeming involvement of the entire political class, it can be easy to lose hope. Still, there are a few clear starting points.

One place to start is reducing the number of political parties, which could help reduce incentives for corruption. This is because in Brazil’s highly fragmented system, where dozens of parties vie for power, governments can only rule by building coalitions. Since there are so many parties, all with their own disparate interests, leaders often resort to patronage to get anything done. Indeed, that is ultimately what the Petrobras scandal is all about. The previous scandal of the century, the “Mensalão” vote-buying scandal, which rocked Brazil a decade ago, also came down to this. Back then, during the presidency of Luiz Inacio Lula da Silva, investigators discovered a scheme run by his chief-of-staff, José Dirceu, to pay off members of Congress in exchange for their support of the president’s agenda (Dirceu was imprisoned for his role as the scheme’s mastermind, and has since also been sentenced to 23 years in jail in unrelated charges stemming from the corruption at Petrobras.) Reducing the number of parties, then, by decreasing this fragmentation, could help eliminate some incentives for the systemic corruption otherwise needed to grease the wheels of government.

Another source of incentives for corruption is Brazil’s massive government bureaucracy. Like everything else in Brazilian politics, public sector employment, which has grown by 30% in the past decade, has often served as a pretext to dole out patronage and buy loyalty. Indeed, as interim president Temer looks to push through unpalatable reforms to Brazil’s overextended pension system, he has ceded to pressure from public employee groups and unions that might resist this change by allowing them to get a salary increase. This type of politics has long led to the creation of redundancies and outrageously unjustifiable expenses as people in power look not only to forge alliances, but also to provide their friends, relatives, campaign donors, etc., with government-issued salaries. No surprise, then, that this helps to feed the culture of corruption.

Indeed, people have been known to get government jobs even if they already have other jobs, and even if they don’t live in the city where they are supposed to be working. This was discovered in the case of interim Chamber of Deputies president Waldir Maranhao. While living and working in Brasilia as a congressman, he was found to receive the salary of a full-time professor (R$ 16,000 per month) at a state university in his home town of São Luis, while his son, a physician in São Paulo, also received a salary as a full-time employee (R$ 7,500 per month) of a local government tribunal in his home town. Both men received such salaries for jobs they did not do for years, receiving in aggregate hundreds of thousands reais worth of public money. This is merely one egregious example of something that happens, on a smaller scale, all over the country, where such “phantom” employees are an epidemic. Such incidents highlight the need to decrease the size of the government, not only because it is disproportional and inefficient, as explained here, but also because it creates incentives for corruption.

Corruption extends beyond the public sector, however. Indeed, as the Petrobras case highlights, the biggest corruption-related problem Brazil is facing relates to the links between the public and private sectors. Unfortunately, it looks like the inflated contract/kick-back scheme at Petrobras is just one example of systemic corruption around state-owned companies. For example, another state-owned behemoth, the electric company Eletrobras, is in the process of being delisted from the New York Stock Exchange after repeatedly missing deadlines to submit its 2014 financial statements to the US Securities and Exchange Commission. The problem: the company’s auditors can’t to seem figure out how much has been lost to corruption. Such schemes are also being identified in the large construction projects around the 2016 Rio Olympics and 2014 World Cup. Many more are likely to come to light.

Another critical pathway for corruption has been the provision of subsidized loans to companies by the Brazilian Development Bank (BNDES). This type of lending has increased exponentially in recent years, and as a result, by 2014, the Brazilian government had some type of participation in over 700 companies. Given the history of corruption in Brazil, it is hardly surprising that some of these companies receiving preferential subsidized loans from the government turned out to be giving back to the same government in the form of corruption, especially considering that many of the loans did not go to Brazilian small and medium-sized enterprises, as originally intended, but largely benefited huge, powerful companies.

For example, the multi-billion dollar company JBS, which is the largest meat exporter in the world, received the most BNDES largesse and subsequently poured almost 40% of its 2013 profits into the 2014 electoral campaigns of various politicians. Another company that benefited from subsidized loans and made generous donations is Odebrecht, the largest construction company in Latin America. The company’s CEO, Marcelo Odebrecht, has been convicted to 19 years in prison as a result of the Petrobras investigation. He has recently signed a plea agreement, meaning that he has agreed to testify against others involved with corruption in order to lighten his sentence. His revelations, expected to be the greatest bombshells thus far, will surely rock the Brazilian political establishment once again.

The difference between the treatment received by the business people involved in the scandal and the politicians they were colluding with is striking and represents another important front in the fight against corruption in Brazil: the broad immunity enjoyed by politicians. Consequences for corrupt politicians have been notoriously lacking throughout all of Brazilian history, and this tradition of impunity has allowed corruption to become increasingly audacious and brazen, culminating in the Petrobras scandal, the greatest corruption scandal discovered in any democracy, ever.

For politicians, impunity remains the norm, rather than the exception. This is because it is all but written into Brazilian law through the generous legal protections for which they are eligible. The worst of these is known as the “foro privilegiado,” or “privileged forum,” a provision which dictates that politicians of a certain stature can only be tried by the Supreme Court. This almost guarantees immunity as the court is a notoriously overburdened and slow body of just 11 people facing an estimated 100,000 cases every year (the US Supreme Court, which has 9 justices, deals with about 100 cases per year). Indeed, in the two years since the Petrobras investigation started, the court has failed to sentence a single politician. In contrast, Sergio Moro, the judge responsible for the investigation and who has overseen sentencing for defendants not eligible for legal protections, has issued 105 sentences, totaling over 1,000 years in prison. All told, about 20,000 Brazilian public servants are currently protected by the privileged forum. Although there are some justifications for why sitting politicians should receive some legal protections, the scale of the Brazilian case is clearly disproportional. The current system does nothing but embolden politicians to become corrupt, encourage criminals to run for office, and create delays and gridlock that hurt the country.

Sadly, the legal privileges for politicians don’t end with the privileged forum. Another problem is the almost endless scope for appeals, even for Supreme Court decisions, and the myriad possibilities to reduce the severity of initial sentences. For example, even though the Supreme Court did sentence dozens of people in the Mensalão trial (an unprecedented occurrence which, nevertheless, did not take place until seven years after the malfeasance had been discovered), many of the sentences didn’t stick. Now, of the 24 politicians and business people imprisoned in 2012, more than two-thirds have wriggled out of their original sentences. Some have been transferred to house arrest or semi-open regimens (in which they can leave prison each day to go to work) while others have had their prison sentences transferred to community service or have been pardoned by presidential decree.

A proposed new law supported by the Brazilian Public Ministry would implement 10 measures against corruption to address these failures in the Brazilian legal system. Specifically, the law seeks to reduce incentives for corruption, strengthen penalties for it, and ensure the recoverability of stolen funds. With the support of over 2 million signatures, it has reached Brazil’s Congress. And yet, it has been languishing in the Chamber of Deputies for the past two months, needing only the signature of the previously mentioned Chamber president, Waldir Maranhão, to move forward. This situation exemplifies the challenges that Brazil is up against: beyond the illegalities mentioned above, Maranhão is facing three different corruption-related criminal inquiries at the Supreme Court.

Overall, considering all of the insidious ways, big and small, in which corruption permeates the Brazilian political system, it is clear that it ends up being extremely costly. Indeed, a sizable portion of GDP, estimated at between 3 and 5%, is lost to corruption each year, with the Petrobras scandal alone thought to account for a full 1% of GDP (twice the cost of the Bolsa Família social welfare program, which is able to assist some 50 million impoverished Brazilians with a modest budget of 0.5% of GDP).

There is an old joke that says, “Brazil is the country of the future, and it always will be.” Well, as long as corruption and impunity remain the norm, this old adage will remain true. Brazil, a continent-sized country blessed with innumerable natural resources and a large, diverse population, will never fulfill its potential as long as corruption is allowed to continue as part of the routine, without any serious consequences for the establishment as a whole. The current crisis represents a unique opportunity to make reforms to disrupt this destructive system. Let’s hope it isn’t wasted. 

  <<< Part III: Public Sector Spending | Part IV: Corruption | Part V: Lessons Learned >>>