Mises Wire

In Brazil, Social Democracy Breeds Corruption

Brazilians were told the way to reducing poverty and curbing social inequality was enlarging the government’s role in the economy through the expansion of public services and public works. And the voters believed it. Social democrats were elected with the hope that they would bring a more prosperous and egalitarian society.

But then, things didn’t go as planned.

Operation Car Wash, a major nationwide anti-corruption operation conducted by federal police, uncovered a shocking scheme of illegal payments involving important politicians and big corporate executives. The graft amounted to billions of dollars in bribes paid out over more than a decade.

As it turned out, far away from delivering the promised social-economic progress, the social democratic government had made room for a Leviathan that acted as Robin Hood in reverse: government officials took from the poor and gave to the rich.

Operation Car Wash: A Suprising Outcome

Operation Car Wash was launched in early 2014 and initially concentrated its efforts on black market money dealers who used their businesses — particularly petrol stations and car washes — to launder profits from criminal enterprises. What nobody could have foreseen is that this ordinary investigation into money laundering — which was nothing especially unusual — would come to uncover a vast and intricate web of political and corporate racketeering — indeed, it was the biggest corruption scandal in Brazilian history.

On 14 January 2015, Nestor Cerveró, a former executive of Brazil’s government-owned oil company, Petrobras, was arrested for deliberately overpaying on contracts with various companies for office construction, drilling rigs, refineries and exploration vessels.

Now, Brazilians are used to seeing the rich and powerful easily manage to wriggle out from under the law. A notorious culture of impunity has long prevailed in the country. However, this case would go differently: Cerveró remained in pretrial detention, was tried and found guilty (and given a 12-year sentence).

And soon, many others — men previously considered untouchable — would share the same fate. Operation Car Wash put behind bars (to serve long-term sentences) prominent entrepreneurs and very important politicians. Among these were a senator (Delcídio do Amaral), the president of the Chamber of Deputies (Eduardo Cunha), several ministers (Antonio Palocci, José Dirceu, and Guido Mantega) and (last but not least) the former president Luiz Inácio Lula da Silva.

How the Social Democrats Enable Corruption

To many Brazilians it seemed hardly surprising that some individuals were getting richer and richer through these schemes, even as the country was struggling to deal with poverty. The key-factor here was the collusion between corporations (powerful enough to capture the state) and the social democratic government (whose framework is based on public expending). As the new purveyors of social democracy encouraged ever larger levels of government spending, the wealthiest bureuacrats and business elites were able to skim more and more off the top.

This isn’t surprising. After all, social democrats push for a greater government role providing government services — i.e., health care, education, gas, water, sewage, telephone, transportation, radio and television).  This then raises a question about the government procurement: who will the State hire to deliver all those goods and perform all those services? That is, the state needs to hire someone to build the roads, the government-owned housing and the health care programs.  Theoretically, Brazilian law dictates these government contractors will be chosen through a process in which bidders will compete, and the best (cheapest) price will win.

But that’s not really how it works.

Operation Car Wash exposed a system in which huge firms formed a kind of club a brotherhood that replaced this competitive process. Bids were previously agreed upon in secret meetings where the entrepreneurs decided who would get the contract and what would be the price. The cartel even had established rules for the distribution of public works among its members.

For those who didn’t benefit form this system, however, things went less well. Over the past twenty years, crisis has repeatedly hit the country hard (2001; 2003; 2008-09; 2014-2016) and the Brazilian’s buying power diminished almost U$ 100 billion (2014-2015), plunging the market into recession . According to the IMF, Brazil is ranked 80th in GDP (nominal) per capita (U$ 16,154).

Brazil remains a low-income country. But this is not for lack of trying to eliminate poverty through government programs. Between 2003 and 2015, U$ 59.6 billion was spent through Bolsa Família (Family Allowance), a social program for income redistribution that provides a monthly stipend (up to U$ 62) and benefits around 14 million of families (46 million of people or 21 percent of the population) every year.

Meanwhile, the funds misappropriated from Petrobras (the national oil company) alone may reach as much as 14 billion US dollars, or a sum nearly a quarter of the size of Bolsa Familia during this period.  In other words: $59 billion was shared among 21 percent of the population. But $14 billion (the value may get even bigger) was shared among less than 0.01 percent of the population.

In Brazil, money spent on programs for the poor have been increasing for decades. But the money largely does not go to the poor. In practice, the poor receive just the crumbs from these programs. The real money goes to the consultants and big companies that build state-subsidised housing, public officials, and, especially the members of bureaucracy who operate the whole scheme. Meanwhile, the poor are maliciously and intentionally turned into a perpetual subclass and dependent on government payments. This perpetual poverty allows the wealthy interests to justify ever more government spending, which ultimately lines the pockets of Brazil’s wealthiest.  When the role of the government is enlarged (supposedly to solve social inequalities), the ruling caste that operates the public apparatus (and its friends who no longer want to compete in a fair market) quickly finds a way to profit from it.

Image Source: Getty
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. 

Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Become a Member
Mises Institute