Corruption and Entrepreneurship in Brazil

Bonnie J. Palifka

May 27, 2006

Abstract: Entrepreneurship is essential for economic growth. Psychological, social, and

economic factors contribute to entrepreneurship. Some of these factors are susceptible to corruption. Bureaucratic economic corruption—the use of one’s influence as a public servant for economic gain—changes the incentives to engage in entrepreneurship and requires entrepreneurs to use some of their resources in non-productive activities. This paper examines the role of corruption in entrepreneurship in Brazil. The persistent corruption in many areas of government, including the judiciary, taxes, and procurement, distorts the incentives to entrepreneurship and to other types of investment, such as investment in human capital.

I. Introduction The last several decades have been times of change and adjustment in Brazil:

inflation and devaluations, rapid growth followed by stagnation, shifting foreign policies,

and varying regional dynamics. As Brazil’s leaders have worked to stabilize the national

economy and promote growth, policies on many issues have been examined. One of the

primary determinants of growth is entrepreneurship, the ability of a nation’s citizens, and

of foreign investors, to engage in building new businesses, or in restructuring existing

establishments in order to adjust to changes in the economic and political environment.

Entrepreneurship, in turn, is affected by many factors. Therefore, any government

interested in promoting growth should examine the factors which contribute to or deter

entrepreneurship; among these is corruption, which has been under special scrutiny in

Brazil since the downfall of Collor in 1992. This issue has come to the forefront of

public concern in many countries worldwide: the analysis in this essay might equally

well be over China, Indonesia, most African countries, countries in transition, or almost

any other Latin American country.

Corruption is a perennial problem in Brazil, as in many countries, but it became

the focus of international attention during the scandal that culminated in the resignation

of President Collor in 1992. In the aftermath, sweeping changes were made in an effort

to avoid a repetition of the Collor affair. Corruption has been, at least nominally, a public

concern of the presidency since then, with each successive president vowing to combat

corruption. While the perceived level of corruption has declined since 1992, it remains

high and has not improved at all during the Lula administration. Given the importance of

both the scandal and the reforms, it is surprising that remarkably little has been published

in the economic journals on corruption in Brazil since 1992.

There are many forms of corruption, each affecting entrepreneurship in a distinct

fashion. Since both corruption and entrepreneurship are difficult to quantify and

impossible to measure perfectly, identifying the exact relationship between them is

beyond the scope of this paper. Rather, I attempt to describe the types of corruption most

prevalent in business dealings in Brazil and the influence they are likely to have on

entrepreneurship.

This paper proceeds as follows: Section II defines entrepreneurship, its role in

economic growth, and factors that contribute to or deter entrepreneurship; Section III

examines the various forms of corruption, in general and in Brazil, and includes data

demonstrating the improvement following Collor’s resignation and failure to improve

since 1998; Section IV studies the interaction of corruption and entrepreneurship in

Brazil; Section V examines some necessary steps to combat corruption in Brazil in order

to encourage entrepreneurship; and Section VI offers some conclusions and possible

future extensions.

II. Entrepreneurship

Economic development depends on change: change in productive processes,

change in standards of living, and change in socio-political institutions. According to

Douglass North, “the agent of change is the individual entrepreneur responding to the

incentives embodied in the institutional framework.” (North 1990, 83) Thus the

institutions themselves influence the level and type of entrepreneurship in a given place

and time. Where corruption is a societal phenomenon, it is an informal institution, and as

such it affects entrepreneurship. In a provocative article, William Baumol (1990)

suggests that sometimes institutions discourage enterprise while doing little or nothing to

impede corruption, resulting in entrepreneurs spending at least some of their creative

energy and resources in unproductive or even destructive entrepreneurship.1

An entrepreneur is an economic agent—individual, firm, or institution—that acts

in the allocation of resources—raw materials; intermediate goods; and physical, human,

and social capital—either to increase the efficiency of production of existing

commodities, or to create new products. In most cases, the entrepreneur operates under

conditions of imperfect information about either markets or productive processes.

(Leibenstein 1995, 273) The entrepreneur may import technology and adapt it to local

circumstances, or invent new ways to use local inputs. In either case, creativity and

foresight are required. (Hagen 1962, 30) When the state acts as a monopolistic

1 “If entrepreneurs are defined, simply, to be persons who are ingenious and creative in finding ways that add to their own wealth, power, and prestige, then it is to be expected that not all of them will be overly concerned with whether an activity that achieves these goals adds much or little to the social product or, for that matter, even whether it is an actual impediment to production.” (Baumol 1990, 898)

entrepreneur in an industry, these characteristics may be wanting, especially as time

passes. Entrepreneurship, in general, is lower in monopolistic than in competitive

industries because monopolies can maintain high profits without change.

Role in economic growth

Economic growth is aided by entrepreneurship. Entrepreneurship, in turn, may be

facilitated by economic growth. (Wilkin 1979, 25) This symbiotic relationship makes

separating cause and effect difficult. Nevertheless, economists from Schumpeter to

Rostow (1975) have argued that the innovational part of entrepreneurship is key to

economic development and growth. It is entrepreneurship that leads to higher

productivity, the ability to produce more from the same amount of work: economic

growth.

Entrepreneurship is, unfortunately, “a difficult factor to specify and assess. Its

characteristics do not lend themselves to quantification (hence the economist’s almost

instinctive distaste for the whole subject); and they are so overlaid by other

considerations that it is almost impossible to segregate their influence.” (Landes 1969,

527) One kind of proxy for entrepreneurship is the number of patents, but this figure

captures only entrepreneurship in the innovation of products, not necessarily in

productivity improvements. There is no known way to quantify entrepreneurship in

human and social capital. For this reason, it is impossible to include entrepreneurship

directly as a factor in empirical studies of growth, or to determine definitively the extent

to which entrepreneurship contributes to and gains from economic growth. Typically,

private investment is used as a proxy.

Factors Contributing to Entrepreneurship

If entrepreneurship is important for growth—that is, if entrepreneurship is an

activity to be promoted—then it is necessary to identify ways to encourage

entrepreneurship. These may be divided into three groups: psychological factors, social

factors, and economic factors. We will define each in turn and identify areas that are

vulnerable to corruption.

Psychological factors. Primarily individual characteristics, determined

genetically or in the home, these allow little scope for policy. The main psychological

requirement is an innovational personality, for an individual with imagination is less risk-

averse, and is more likely to undertake investment projects. (Leff 1979, 47) Although it

might be argued that such a personality is determined exogenously by the parents’ genes,

it may also be true that creativity can be encouraged in the school or work environment.

Specific skills common to entrepreneurs include: the ability to set realistic goals and

defer gratification, a willingness to take risks, and the belief in one’s ability to affect his

own world. (Wilken, 17)

Social factors. The supply of entrepreneurs may be affected by a number of

social factors, including social mobility, the degree of social integration, entrepreneurial

and political security (“protection from unnecessary risks”, e.g., the enforcement of

patent laws), and the social/cultural legitimacy of entrepreneurial activity. The

marginalization of some groups, especially the exclusion of educated groups from the

political process, has been identified by Rostow (1975) and others as contributing to

entrepreneurship, but excessive marginalization can be detrimental. (Wilkin, 8-14) A

country’s institutions may influence these social factors; policy can shape these

institutions.

Several of the social factors are vulnerable to corruption. Social mobility, for

example, will be stunted especially by traditional forms of corruption such as nepotism:

only those with close connections will be able to move up. The enforcement of patent

and other laws is an area that offers opportunities for corruption. Thus, corruption may

hinder entrepreneurship via these social factors.

Economic factors. Market incentives determine the demand for entrepreneurs.

This demand will interact with the supply of entrepreneurs to arrive at the level of

entrepreneurship in a given country or region. The most important incentives are the

demand for industrial and other products, the availability of labor and raw inputs, the

level of inflation, taxes, and barriers to the imports of necessary inputs. All of these may

be affected by public policy; all may be subject to corruption.

Further determinants of the demand for entrepreneurs are the cost of attaining

information about markets, the distribution of income, and access to resources. These are

especially important in relation to corruption. High information costs and limited access

to resources may increase the potential gains from corruption, which subsequently limits

access to resources and preserves the disparate distribution of income in a vicious, self-

perpetuating circle.

III. Corruption

Several authors have linked corruption to underdevelopment.2 The existence of

corruption, it is argued, leads to the inefficient allocation of resources, thus making

economic development very difficult, if not impossible. Political corruption may result in

preservation of the status quo, erecting barriers to entry. Bureaucratic economic

corruption—the use of one’s influence as a public servant for economic gain—reduces

the profitability of enterprise, by absorbing some of the returns to production (or else it

robs the state of revenue). This in turn discourages entrepreneurial ventures, which

exacerbates the inefficient allocation of resources. Bureaucratic corruption may also

involve granting monopoly power, which suppresses innovation.

Corruption takes on many forms. The more traditional forms of corruption

include patron-client relationships, involving reciprocity and power-building. This kind

of corruption affects social mobility, an important factor for entrepreneurship, because

generally the same families have access to bureaucratic offices over long periods of time.

Theobald (1990) shows that all pre-modern society was patrimonial. “The emergence of

industrial society, however, leads to the decline of patrimonial forms of administration

and their supercession by rational-legal bureaucracy.” (Theobald 1990, 23) This last is

what Heidenheimer calls “civic culture”, in which there is no need to work through an

influential intermediary. (Theobald 1990, 14) Modern forms of corruption—that is, those

associated with developing and developed economies—are more economic in nature,

involving monetary payment or its equivalent, as the corrupt agent seeks to maximize

income rather than societal obligations to him. This bribery is the equivalent of an

operating cost to the entrepreneur.3

Nathaniel Leff launched inquiry into the possibility that corruption may be a

positive phenomenon under some circumstances. When formal institutions are inefficient

2 See, for example, Paolo Mauro, 1995, “Corruption and Growth,” The Quarterly Journal of Economics 110, 681-712 and M. Beenstock, 1979, “Corruption and Development,” World Development 7, 15-24. 3 Another kind of economic corruption involves stealing from the state, by waiving state-charged fees or taxes in favor of a somewhat smaller personal payment. Schleifer and Vishny call this “corruption with theft”. A. Shleifer and R.W. Vishny, 1993, “Corruption,” Quarterly Journal of Economics 108, 599-617.

(e.g., red tape that strangles investment), corruption which subverts these institutions is

beneficial in terms of economic development. Conversely, where formal institutions are

relatively efficient, corruption is detrimental. What we should bear in mind is that many

developing countries are underdeveloped administratively as well as economically, and it

is this administrative inefficiency which makes corruption socially optimal. Nevertheless,

corruption with inefficient formal institutions is arguably worse than efficient formal

institutions with no corruption. (Rose-Ackerman 1999, 21-22)

It has been argued that corruption is a source of uncertainty. (source?) If this is

so, then it raises the demand for entrepreneurs, perhaps making entrepreneurship too

costly. Within a society, however, corruption may actually reduce uncertainty, and thus

reduce the demand for entrepreneurial ability. In Venezuela, for example, there is a well-

known menu of prices for immigrant visas, ranging from $20 for a tourist visa extension

to $10,000 for a resident visa. Paying the requisite bribe means getting the visa within a

few days, while not paying could mean long delays and/or rejection of the application.4

The same is true of police officers and customs officials. The people living within the

society have a very good sense for what the “right” bribe should be, and officials are

quick to correct them if they are wrong. In this case, bribery is clearly an informal

institution that reduces uncertainty.

Lower uncertainty over all, however, may mean for some the certainty that they

cannot advance economically. Among the characteristics of entrepreneurs listed above is

the belief in one’s ability to change circumstances. Especially when corruption is of the

traditional form, those who do not have friends or relatives inside the bureaucracy

(“palanca” in Spanish America; Bezerra (1994) mentions several terms in Brazilian

Portuguese, including “apadrinhamento”) have little reason to believe that they can affect

their own world in the entrepreneurial sense.

It is for outsiders that corruption is most likely to be a source of uncertainty. The

first-time foreign investor does not know the bribe schedule of the country in which she

wishes to invest, nor does she know how many officials she will need to bribe in the

4 In this example, the officials are clearly the source of the delays, and the rejection of applications is used as part of the extortion mechanism. The point here is that, without the bribe system, an individual would have to pay the government fee, and have no assurance of receiving the visa, if the office were operating legally.

course of her proposed investment. This uncertainty may be a cause for concern, and

might deter foreign investment, which is important for economic growth.

Corruption in Brazil

Geddes and Ribeiro (1999) differentiate between “exchange politics” (use of

power to gain political support) and “corruption in the strict sense” but assert that

“[w]hen reliance on exchange politics increases, so does clearly illegal graft.” (23) The

institutional sources of corruption in Brazil can be traced at least to the military regime,

when increased state intervention created government monopolies over many economic

activities. In the new democratic period, the state intervention continued and corruption

flourished. Added to this, the economic crisis underway when Collor came into office

created new types of state control. At one point, the government froze bank accounts. Businesspeople were forced to negotiate with government officials not only in the

traditional areas of contracts, subsidies, and regulation but for use of their own money to

pay salaries, taxes, and other necessary expenses. The dependence of businesspeople on

government and the number of business-government interactions increased.

Commissions, kickbacks, and the emergence of collusion between businesspeople and

officials were the natural consequences of dependence and monopoly. (Geddes and

Ribeiro 1999, 43)

Although many changes have been made since Collor’s resignation, the business

environment was changed in ways that modified expectations. As demonstrated below,

the post-Collor legal reforms have been insufficient to reduce corruption in many areas

that affect entrepreneurship.

Bezerra (1994) demonstrates that what is denounced as corruption in Brazil is

really no more than the extension of common social practices such as the use of

friendships and blood relations to get access to information, special privileges, and

government funds. The corrupt act may consist of speaking to the governor on behalf of

the individual or firm proposing a project; it may be simply waiving technical

investigations. Payment is not necessarily economic, but rather social: the favor builds

reciprocal ties in the form of future claims. Thus, traditional forms of corruption are

more common than economic forms in Brazil.

To intercede on behalf of a friend is still acceptable: only when such intercession

results in self-benefit is it denounced as corrupt. For example, in the “Valença Case”, it

was only when the firm—Hidrossistemas—owned by the interceding minister was

discovered to have won a bid to work on a municipal project pushed through by the same

minister, that the episode was denounced (Bezerra 1994, 12).

This kind of corruption affects entrepreneurship in a myriad of ways. By limiting

access to government funds and permits, the government agents reduce participation in

some kinds of entrepreneurial activity to their own circle of friends and relatives, or to

people who have access to this circle and can get a representative. In this respect,

personal relations represent a kind of social capital (Bezerra 1994, 5) in scarce supply.

Funds and contracts go not to the best proposals, but to those proposals which have

sponsors within the agency in charge. At the same time, this corruption reduces the

rewards for merit and reinforces the belief that the only roads to success are through luck

or through corruption, and not through education. Thus the returns to education are

perceived to be low, resulting in lower enrollment rates than would be observed in the

absence of corruption.

The waiving of technical audits, however, reduces government expenditures on

gathering information, potentially leaving more funds for entrepreneurial projects. The

risk is that the projects will not be technically or economically viable.

Economic corruption is not nearly as important as social ties,5 and cannot be

separated from them. This corruption is part of a vicious circle: governmental obstacles

make intervention necessary, while the intervention itself guarantees the presence of

obstacles. The author concludes that there is no discontinuity between the practices

which constitute the greater part of daily activities in the Brazilian public domain and

those which often are denounced as corrupt (Bezerra 1994, 32-33). These activities have

become an integral part of the workings of government.6

Measures of corruption in Brazil

Brazil has been included in the Corruption Perception Index (CPI) since

Transparency International (TI) started publishing it in the early 1980s. Using a

collection of surveys, Transparency International creates a weighted index for each

5 Bezerra, 31. 6 In this respect, Brazil is no different from other nations. Political corruption is rampant in the U.S., wiht each politician intervening on behalf of the home state or region, and often form the benefit of a particular firm.

country on a scale from zero (completely corrupt) to ten (completely clean) and then

ranks them from least to most corrupt. The first release covered 1980-1985 and the

second, 1988-1992; the index has been published annually since 1995. The CPI has

benefits and drawbacks; the principal benefit is that, unlike most measures of corruption,

it is available to the public at transparency.org.

Because countries are added to the index each year as surveys become more

universally applied, a country’s ranking may change from one year to another simply

because countries rated as less corrupt were included in the latter year and not in the

former. By the same token, a country’s relative position may improve simply by the

inclusion of countries which score lower. Thus, the ranking provided by TI is an

unreliable measure of a country’s relative standing over time. To correct this problem, I

have ranked only the forty countries that have been included each year since the index’s

inception.

As shown in Graph 1, Brazil’s score and relative position deteriorated during the

1980s and early 1990s; there was some improvement from 1995 to 1998; and the level of

corruption has remained very much the same since 1998. There is an almost

imperceptible decline in the score during Lula’s presidency, but this is so slight that the

ranking is unaffected. Brazil’s score in 2005 was 3.7, just behind Cuba and two tenths

ahead of Mexico.

IV. Corruption and Entrepreneurship

Most empirical studies of the effects of corruption focus on economic growth as

the dependent variable, but some look more specifically at the effects on investment. As

this is the closest we can get to entrepreneurship, I summarize some of the main findings

here.

Mauro finds “that corruption is strongly negatively associated with the investment

rate, regardless of the amount of red tape”, asserting further that “there is evidence that

institutional inefficiency causes low investment.” (Mauro 1995, 695) Everhart and

Sumlinski (2001) find that public investment “crowds out” private investment and that in

more corrupt countries, the crowding out effect is stronger. They argue that when

government projects are tainted by corruption, the quality of infrastructure suffers and

this discourages private investment. Based on surveys of entrepreneurs in four countries

in transition, McMillan and Woodruff (2002, 155) conclude: “Corruption deters

investment.”

Source: Transparency International and author’s calculations.

Corruption and Entrepreneurship in Brazil

Corruption permeates Brazilian society and government. So integral a part is it,

that it is difficult to separate from normal relational functions. Since Collor’s election in

1990, corruption has come under new scrutiny, resulting in his resignation in 1992 and

multiple denouncements of ministers and lower-level officials. The Lula administration

has also been fraught with corruption scandals. Governmental corruption, both political

and bureaucratic, historically has been facilitated by the state monopoly held in several

industries, as well as in the granting of licenses and the allocation of government funds.

This corruption has undermined policies designed to encourage entrepreneurship.7

Graph 1. Corruption Perception Index and Ranking (among 40 countries) of Brazil

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

519

80-1

985

1988

-199

2

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Years

CPI S

core

0 =

very

cor

rupt

10 =

not

cor

rupt

0

5

10

15

20

25

30

35

40

Rank

ing

(hig

her

= lo

wer

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score

7 “Despite an official policy meant to spur private enterprise, and unholy alliance of trade unions, bureaucrats and patronage-loving politicians too often conspired to frustrate the policy.” J. Millman, 1993, “Sick Man’s Relapse,” Forbes 152, 13: 14.

The traditional corruption that is more common in Brazil affects entrepreneurship

in a myriad of ways. By limiting access to government funds and permits, the

government agents reduce participation in some kinds of entrepreneurial activity to their

own circle of friends and relatives, or to people who have access to this circle and can get

a representative. In this respect, personal relations represent a kind of social capital

(Bezerra 1994, 5) in scarce supply. Funds and contracts go not to the best proposals, but

to those proposals which have sponsors within the agency in charge. At the same time,

this corruption reduces the rewards for merit and reinforces the belief that the only roads

to success are through luck or through corruption, and not through education. Thus the

returns to education are perceived to be low, resulting in lower enrollment rates than

would be observed in the absence of corruption.

The waiving of technical audits, however, reduces government expenditures on

gathering information, potentially leaving more funds for entrepreneurial projects. The

risk is that the projects will not be technically or economically viable.

Measuring the effects of corruption on entrepreneurship in Brazil

A more detailed survey, the Global Corruption Barometer, has been applied

periodically in some countries. In Brazil it was last applied in 2004. This survey

attempts to identify the most corrupt areas within a country. As displayed in Graph 2, all

categories included received scores above 2.5, which places them at the corrupt end of

the spectrum, but the most corrupt bodies in Brazil were political parties, the police, the

legislature, tax collection, and the judiciary system. Corruption in these areas represents

a serious obstacle to development in general and entrepreneurship in particular.

Note that the business sector receives an unfavorable score of 3.8. Of course,

with the government, judiciary, and customs all corrupt, how could the business sector

perform without also being corrupt? In the same survey, when asked, “In your view does

corruption affect the business environment?” 61.4% of the 1400 respondents responded

that it does so “to a large extent.” Women, the more educated, and the unemployed saw

corruption as a greater threat than men, the less educated, and the employed or those out

of the labor force.

Source: Transparency International

Legislature/Politics

As in many countries, laws are influenced by the rich and powerful. Large

corporations support politicians in exchange for legislation that favors their business

interests and, sometimes, in order to gain government contracts. This was at the center of

the Collor scandal. The exchange politics described by Geddes and Ribeiro (1999) falls

in this category.

Corruption in this area may create barriers to entry for small enterprises. If

politicians protect big business, they may fight legislation that supports small loans, for

example, designed to help small businesses get started.

Graph 2. Global Corruption Barometer, Brazil, 2004

3

3

3.4

3.6

3.6

3.8

3.8

3.9

3.9

3.9

4.2

4.2

4.3

4.4

4.5

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

NGOs

Religious bodies

Military

Registry and permit services

Media

Utilities

Business/private sector

Customs

Education system

Medical services

Legal system/Judiciary

Tax revenue

Parliament/legislature

Police

Political parties

average (0=not corrupt, 5 = extremely corrupt)

To what extent do you perceive the following sectors in this country to be corrupt?

Procurement

Despite the strict laws regarding government procurement that were introduced in

the wake of Collor’s impeachment, a decade later, 87% of firms indicated that bribes and

nepotism are frequent in government procurement (Abramo 2004). Abramo and Speck

(2001) indicate that these changes resulted in a law that is stricter than the requirements

of many international aid agencies and that corruption is, therefore, less probable in

government works than in works commissioned by such agencies; many of those

expected to apply the law, however, are poorly informed regarding it. A survey applied

in 2003 revealed that of responding firms that had submitted bids for public works, 62%

had been subjected to requests for bribes. (Kroll and Transparencia Brasil, 8) Perhaps the

law has reduced grand corruption on the scale orchestrated by Collor and his cronies, but

left petty corruption among the bureaucracy intact.

Under Collor, the corruption in procurement limited public contracting to seven

firms and involved kickbacks of unprecedented scale. Although current corruption must

be on a smaller scale, it still creates inefficiency in the provision of public works and

probably affects the quality adversely, which, in turn, discourages private investment

(Everhart and Sumlinski 2001).

Taxes

When taxes are high, firms will spend resources trying to get around them. In

Brazil, the main goal of corruption in tax collection is to reduce the total tax assessed.

Thus, the monetary cost to firms of this type of corruption may be lower than the tax

itself. The favors obtained include (in descending order of frequency): relaxing audits

and inspections, desisting from threatening the firm, desisting from reporting identified

tax fraud, advising on legal forms of reducing the tax burden, canceling fines already

assessed, letting slide undeclared values, and turning a blind eye to tax deductions that

should not be granted. (Abramo 2004, 10) The net effect on entrepreneurship is unclear:

on the one hand, lower taxes (even after the payment of bribes) leave more financial

resources available for investment; on the other, this corruption introduces uncertainty,

requires the use of human and social resources (as indicated by Baumol (1990)), and may

limit entrepreneurial activity to those who are willing to engage in corruption. At any

rate, this corruption is potentially as distorting as the taxes themselves.

Judiciary

In the Kroll-Transparency Brazil survey, 64% of responding firms said that

bribery and nepotism were “somewhat frequent” or “very frequent” when dealing with

the judiciary system (Abramo 2004, 6). A corrupt judiciary is especially troubling: as

long as the judicial system is corrupt, efforts to combat corruption in other areas will be

thwarted. According to Abramo and Speck (2001), in addition to being corrupt, the

Judiciary is overburdened, understaffed, and technologically inefficient.8

Police

According to Abramo and Speck (2001, 27): • Police have little familiarity with real investigation.

• Corruption crimes are seldom investigated.

• The police is perceived as widely corrupt.

• There are no special prosecutors to pursue corruption crimes. Nevertheless,

individual prosecutors have been increasingly active in combating corruption.

In the Kroll-Transparency Brazil survey, 83% of responding firms characterized

corruption in the police sector as “somewhat frequent” or “very frequent” (Abramo 2004,

6). It does not suffice to have strict laws: if these laws are not enforced, then the laws

are meaningless. Corruption in the police force is only slightly less problematic than

corruption in the judiciary.

Privatization

On the one hand, the privatization of state enterprises reduces monopolistic

control of those enterprises and removes the state and its bureaucrats from those parts of

the allocation of resources. This may reduce the incidence of corruption. On the other

hand, “in a privatized Brazilian economy where the state assumes the role of a regulator,

a consensus will have to be reached as to the appropriate mechanism to achieve social

objectives” in order to avoid over-regulating and thus stifling the private sector (Baer

1995 , 265-269).

8 For an analysis of urgently needed judicial reform in Latin America, see Ratliff and Buscaglia (1997).

Privatization also affects entrepreneurship adversely, for the private sector has

been less eager than the government to invest in research and development: in 1985,

“research and development expenditures per employee was 2.5 times larger in state than

in private enterprises.” The privatization of these firms thus may lead to a decline in

R&D in the long run (Baer 1995, 267). It is thus difficult to sort out the effects of

corruption on entrepreneurship: if corruption and entrepreneurship decrease

simultaneously, an empirical study might lead us to believe that they are positively

correlated. Sorting out their respective effects on economic growth is also problematic,

for the same reason.

Privatization in Brazil is among the least corrupt areas of business, with “only”

29% of responding firms indicating that corruption here is “somewhat frequent” and 27%,

“very frequent” (Abramo 2004, 6).

V. COMBATING CORRUPTION IN BRAZIL TO ENCOURAGE

ENTREPRENEURSHIP

Asked how corruption might be reduced in the business sector, Not surprisingly, the respondents overwhelmingly identified stricter controls and the

punishment of corrupt officials as necessary measures. However, somewhat surprisingly,

62,1% of the respondents also pointed out the need to punish dishonest entrepreneurs—

perhaps signaling a change of perspective of the private sector’s usually indulgent self-

assessment as to its responsibilities towards corruption. (Abramo 2003, 10)

Approximately half of the firms cited tax reform and government transparency as

solutions, while fewer than one-third recommended public financing for electoral

campaigns, changes in the procurement regulations, and improving the Judiciary’s

understanding of the procurement process. (Abramo 2003, 10)

Where corruption is widespread, it is an informal institution. Short-term anti-

corruption campaigns will reduce corruption while the campaigns are in effect, but

corruption will return to high levels shortly thereafter, unless a fundamental change is

made to the formal institutions. These kinds of changes have occurred throughout history

most frequently when there is cause for a drastic change: for example, in England after

military defeat; and in the United States after the Revolutionary War (Theobald 1990, 35).

In the latter case, a complete break with the past was possible, and a new form of

administration was laid out. This is a rare case. Most countries today, even when

achieving independence, have well-entrenched bureaucrats and systems of administration.

Long-existing patronage is difficult to uproot in the absence of a national emergency,

since both the bureaucrat and the client have come to expect it as a normal part of

business. Such is the case in Brazil.

One window of opportunity opened in the wake of the Collor scandal. The

Brazilian legislature took advantage of this moment by passing legal reforms regarding

procurement, but this move was insufficient to uproot the long-standing traditions of

corruption throughout the bureaucracy; certainly, it could not affect other areas where

corruption was rampant.

To a certain extent, Lula had an opportunity to make sweeping changes at the

beginning of his presidency. As in other Latin American countries in recent years, Brazil

had elected Lula because the populace was hungry for change. Unfortunately, this

president is not interested in combating corruption (Abramo 2005).

The most widely recommended reform to combat bureaucratic corruption is

competition among agents. In many developing countries, each agent has a monopoly on

a given government service. If clients are given a choice of agents from whom to seek

the service, then bribes will be bid down to zero, provided the possibility of collusion

between agents is low. Deregulation and the privatization of state firms in Brazil serve to

reduce the monopoly power held by some bureaucrats and thus helps to reduce the

incidence of corruption.

VI. CONCLUSIONS

Corruption is a part of Brazilian society and business. The corruption that persists

in many areas of government influences entrepreneurship, both the people who become

entrepreneurs and the way that they use their creativity and resources. While

improvements were made in the wake of the Collor scandal, almost no headway has been

made since 1998.

The most corrupt areas that affect entrepreneurship include politics; the law

enforcement system, including both the police and the judicial system; taxes; and

procurement. This corruption creates distortions in the supply of and demand for

entrepreneurial talent, favoring those entrepreneurs who have connections in the public

administration, and creates disincentives to invest in human capital.

The kind of corruption that is prevalent in Brazil is of a type that is particularly

difficult to eliminate, for it has its roots in social practices; indeed, much of what we

classify as corrupt is not so considered within the Brazilian cultural context. There is no

way to determine the precise effect this corruption has on entrepreneurship, nor the

potential benefits that would accrue by eliminating or minimizing it. Furthermore, other

factors, including privatization, may affect both corruption and entrepreneurship, thus

complicating the relationship between them. What has been true, historically, however,

is that economic and political development tend to reduce traditional forms of corruption;

this phenomenon seems to be taking place in Brazil already.

Extensions

As data on corruption, especially regional or micro data, become available in

annual series for extended periods, empirical studies will be more useful in determining

the relationships between corruption and growth or between corruption and investment.

Still, until entrepreneurship per se can be quantified more precisely, it will be impossible

to carry out an econometric study of the effects of corruption on entrepreneurship.

Investment or patents will continue to act as proxies for entrepreneurship. Economic

theory, too, needs to seek new ways to incorporate entrepreneurship, just as human

capital has been included in modern endogenous growth models.

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