CORRUPTION IN BRAZIL: Collateral effect of low freedom and invisibility or accompanying blindness

02/09/2018


Corruption is undoubtedly a complex phenomenon, which has always inspired debates inside and outside the school walls. On January 24, 2018, the date on which TRF-4 maintained and even increased the conviction of former President Lula da Silva for involvement in corruption schemes, President Michel Temer addressed the World Economic Forum in Davos. Soon after, the event's creator, economics professor Klaus Schwab asked Temer about Brazil's anti-corruption scandals and what their consequences would be for the 2018 electoral process. In response, the Brazilian president acknowledged that he missed the opportunity to have emphasized the theme in his speech, even because this contributes to give institutional security to foreign investors.


On the same day, the Globonews channel disclosed an exclusive interview with the current president of Transparency International, Delia Ferreira Rubio, who emphasized Brazil's opportunity to end impunity. In this post, our goal is to highlight a complementary interpretation of the traditional economic view on corruption that focuses only on the issue of transparency, probability of being caught and years of punishment. Corruption - abuse of a trusted power (to a political leader by voters or an executive by the stakeholders or shareholders of a company) for the purpose of gain or benefit by itself or a group - is an unintended consequence of an institutional environment with low economic freedom.


In our view, institutional matrices hostile to spontaneous market practices and free enterprise action sooner or later reward the opportunistic behavior of both public and private agents. This is because individuals learn about the high marginal benefits of compadrio relationships to reduce costs of doing business and the increasing opportunities to extract extraordinary profits and privilege rents from political connections. Therefore, it makes sense to suggest that corruption is also a consequence of excessive regulation. In other words, exaggerated public power causes both the abusive behavior of bureaucrats and the morally questionable behavior of private agents.


According to the Heritage Foundation, economic freedom corresponds to "a lack of coercion and regulation in the production, distribution or consumption of goods and services, in addition to the necessary measures to preserve the liberties of citizens" (HERITAGE 2016). Such a concept of economic freedom inspires the construction of an index to measure and order the performance of nations in this regard.


The economic freedom index takes into account the following factors: property rights, government integrity, legal efficiency, tax burden, public spending, fiscal health, business freedom, labor liberty, monetary freedom, freedom of trade, freedom of investment and freedom financial management. These 12 characteristics are scored on the scale of 0 to 100 where more freedom means higher index. The lower the economic freedom of a country, the greater will be the regulation of the market, the higher will be the high taxes, the weaker the property guarantee laws, the more complex the informal economy will be and the greater the corruption will be (EIRAS 2003) .


Unfortunately, Brazil's position has maintained its "mostly unfree" position throughout the capitalism of ties of the 21st century and currently occupies the 140th position in the ranking involving 180 countries. The average points of the free economies is around 85 points. Figure 1 highlights the downward trend in economic freedom in Brazil as of 2012:

 

 Economic Freedom Index for the periods 2011-2015

 

Figure 1 - Trend Chart of Economic Freedom in Brazil 2011-2015


Source: Heritage (2016)


Economic freedom is the ability of an economy to be coordinated by the dynamic forces of the market. Therefore, it is necessary to have autonomy and flexibility for contractual relations to take place in a scenario of legal stability and legal security, capable of protecting individuals' property rights. Otherwise, incentives for private agents to pay bribes to reduce transaction costs (eg, speed up the documentation needed to open a business), thus advancing the opportunities for government officials to benefit (eg a subsidized credit facility). Numerous studies point out that the greater the economic freedom, the lower will be government corruption (CHAFUEN & GUZMAN, 2000, HECKELMAN & POWELL 2010).


As highlighted by the latest Global Corruption Barometer report, there has been an increase in the number of people in Latin America and the Caribbean who have reported paying tip even to have access to basic public health and education services. The various participants in the survey realized that corruption has increased as well as government controls.


Therefore, countries that fight against corruption should reform institutions so that the rule of law (instead of the State of Compadrio), private property, voluntary exchanges and checks and balances for the public administration. A quick look at the data on economic freedom and corruption in 2017 allows us to argue that countries with more economic freedom are less corrupt. New Zealand, Switzerland, Singapore, Canada and England are among the ten freest countries and ten least corrupt countries. The studies relate the detailed aspects of economic freedom seem to suggest that a legal system that defends property, greater autonomy to the financial system and lower barriers to resource allocation, stability in the business environment and legal security. The figure below shows that in the Rule of Law, Brazil's placement in the Index of Economic Freedom is well away from the points of free economies (above 80 points, green in Figure 2:

Figure 2- Brazil's performance (points) in the rule of law of the Index of Economic Freedom and its dimensions property rights, effectiveness of the Judiciary and Integrity of Government


Source: Heritage (2017)


Based on the above information, the thesis that corruption involving government and private agents as a consequence of low economic freedom and associated rent-seeking and crony-bonding activities becomes even more defensible.


Therefore, it is worth thinking if economic freedom promises to be a powerful antidote against the poison of patrimonialism and compadrio that in part explains several failures of our nation. In fact, we have several public and private men who have always been perceived invisible and unbeatable. This reminds us of the famous legend of the ring of Giges reported in the Republic of Plato. In the work, Glauco tells the story of a shepherd named Giges, who found a magic ring that made him invisible and therefore capable of committing all the atrocities and injustices of the world. That's because the pastor could not be seen by anyone and not punished either.


Moral of history: An interesting way to combat corruption is to find ways to heal the blindness we are living as a result of an environment of low economic freedom. To do so, we need to promote new insights that may be useful in reducing incentives associated with a frenetic pursuit of schematic usages similar to that offered by the Giges ring. To paraphrase the president of Transparency International, we urgently need four eyes to see closely and how long to promote a world without corruption. They are: greater information, greater integrity, less impunity and less indifference.


References:


- CHAFUEN, A.A., GUZMANN, E., 2000. Economic freedom and corruption. In: O'Driscoll, G.P., Holmes, K.R., Kirkpatrick, M. (Eds.), Index of Economic Freedom. The Heritage Foundation, Washington, pp. 51-63.


- EIRAS, A.I. "Ethics, Corruption and Economic Freedom, Heritage Lectures no. 813, Center for International Trade and Economics (CITE), 2003.


- HACKELMAN J.C., POWELL B. Corruption and the Institutional Environment for Growth. September 2010, Volume 52, Issue 3, pp 351-378.


- HERITAGE FOUNDATION, Index of Economic Freedom, Brazil, 2016 and 2017. Available at: <http://www.heritage.org/index/country/brazil>. Access on Sept. 8 2017.


- PLATO, The Republic. São Paulo: Editora Martin Claret, 2002