Corruption in Brazil

May 18, 2015

Bloomberg has a great piece on Brazil’s massive corruption scandal [lightly edited for continuity]:

Prosecutors have named 16 companies that allegedly formed a cartel to fix [government-owned oil company] Petrobras contracts between 2006 and 2014. The list includes some of Brazil’s largest construction and engineering firms. [They] say the builders got away with it by paying kickbacks, usually 3 percent, on every contract. Petrobras estimates that the graft added up to at least 6.2 billion reais, much of which, prosecutors say, was funneled to [political] parties.

The authors argue that corruption has hurt Brazil’s economy, which is going through its “worst four-year slump in twenty-five years,” but they trace the system back to the 1960s:

In 1969, at the height of the military dictatorship that took power after a coup in 1964 and ruled Brazil until March 1985, Netto, as finance minister, designed a policy called market reserve. It gave Brazilian builders a lock on government contracts by shutting out most foreign competitors. Tax breaks and subsidized credit followed. The military commanders had plans for huge public works to tie together the vast, uninhabited expanses of Brazil, and a few family-owned builders got the big contracts. “We needed the builders to be strong and completely loyal to Brazil,” says Netto.

Evidently the system continued well after the military regime ended, even under governments headed by leaders (Lula and Rousseff) who had been targets of the military.

The big question: What this system good or bad for economic performance? Netto adds: “I don’t have any regrets for what I did. Those companies built modern Brazil.”

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