Is the cost of going after corruption really worth it?
Brazil is broke. For the first time since its hyperinflation era, which ended in 1994, its government will next year fail to balance the books even before interest payments are due. It is currently negotiating with Congress about a BRL30 billion hole in next year’s budget (equivalent to a 0.5 percent primary deficit). Including interest payments, the current shortfall is about 8.8 percent of GDP.
Several factors explain this dubious achievement, not least the fact that the economy has slipped into recession. But the government’s ability to put its fiscal house in order is also severely constrained by its record-low popularity – a direct consequence of investigations, carried out at state-owned oil giant Petrobras, that have shed light on large-scale corruption schemes involving senior politicians.
Unsettled by wide-ranging accusations and demands of impeachment, Dilma Rousseff is losing focus, battling for its political survival instead of working on putting the country back on track. The economic fallout from the scandals is also substantial, with investment in key industries suffering from the unstable environment.
This has led the judge in charge of the proceedings to defend the investigation by insisting that corruption, not its prosecution, was the real danger to the economy. “The policeman who discovers a crime is not to blame for the corpse,” he said earlier this week. But a number of emerging observers are still asking themselves a troubling question: is the cost of purging corruption really worth it?
The question matters. First because corruption is endemic across many emerging markets, starting with the BRICs themselves. And while petty graft does damage too, large-scale kickback schemes affect key projects and industries in sectors like infrastructure and energy. Corruption has been found to be a main culprit in why badly designed trains have derailed in China, causing hundreds of deaths. Opaque procurement processes in the run-up to the Sochi Olympics has led Russia to spend billions on buildings and facilities that will never be used again (if they ever were).
Second because the fight against corruption is actually making some progress – and in unlikely places. The extreme case here is Guatemala: the country, more famed for civil war and drug trafficking than the accountability of its leaders, this week saw its Congress strip the president of legal immunity. Otto Pérez Molina, who will now face trial, resigned; presidential elections are due on Sunday.
Moves like these, though welcome by the civil society, are certainly prone to cause short-term political and economic chaos. But they are worth pursuing for their long-term benefits – even if estimating this cost on a global scale is notoriously hard, as instances of corruption are by definition covert. Graft leads to misallocation of capital and diversion of funds to unproductive uses; it is a major hurdle to trade and investment.
Over the long-term, countries that manage to strengthen the rule of law will be far better off: they’ll enjoy stronger credit ratings and greater public support. That will relieve them from having to appease their constituencies through pork barrel spending – making it easier to achieve fiscal balance – and allow them to attract more capital from overseas.
Nations that fail to do that, by contrast, will continue to stagnate. Mexico’s president recently named a friendly lawyer to investigate a housing scandal he was allegedly involved in; the clearance he received from him last month failed to impress his detractors. Going after corruption only seems to be worth it if embraced whole-heartedly.