Bureaucratic Corruption and Entrepreneurship in Brazil

Bonnie J. Palifka

Presented at the 150-mile conference

Edinburg, Texas

April 22, 2006

Outline

• Entrepreneurship– definition of– and growth – factors contributing to– in Brazil

• Corruption– definition of– effects of– in Brazil

Entrepreneurship

• Economic development depends on change.

• North: “the agent of change is the individual entrepreneur responding to the incentives embodied in the institutional framework.”

• Corruption is an informal institution that influences entrepreneurship.

Entrepreneurship

• An entrepreneur is an economic agent– individual– firm– institution

• that acts in the allocation of resources– raw materials – intermediate goods– physical, human, and social capital

• either to increase the efficiency of production of existing commodities, or to create new products.

Entrepreneurship

• Types of entrepreneurship:– adapt technology to local conditions– invent new ways to use local inputs

• imperfect information

• Requires foresight

Entrepreneurship and growth

entrepreneurshiphigher

productivityeconomic

growth

Entrepreneurship

• Factors influencing entrepreneurship:– Psychological– Social– Economic

Entrepreneurship

• Psychological factors influencing entrepreneurship:– innovative personality– creativity– risk-taking

Entrepreneurship

• Social factors influencing entrepreneurship:– social mobility– patent protection– social/cultural legitimacy of entrepreneurial

activity

vulnerable to corruption

Entrepreneurship

• Economic factors influencing entrepreneurship:– demand for industrial and other products– availability of labor and inputs– inflation– taxes– cost of information– distribution of income– access to resources

vulnerable to corruption

Entrepreneurship and growth

entrepreneurshiphigher

productivityeconomic

growth

corruption

Entrepreneurship in Brazil

• Baer: In 1985, “[R & D] expenditures per employee was 2.5 times larger in state than in private enterprises”

• Privatization, therefore, may actually reduce R & D, a measure of entrepreneurship.

Corruption

• Definition: abuse of one’s position for private gain.

• Some effects:– absorbs some of the returns to production– (or robs the state of revenue)– contributes to the inefficient allocation of

resources– increases uncertainty and risk

Corruption

Traditional• nepotism• clientelism• cronyism

Economic• bribes• gifts

Corruption in Brazil

• Bezerra, Bases sociais da prática da corrupção no Brasil:– part of the social fabric and government– “favors” more common than bribes– “apadrinhamento”– interceding on behalf of a friend is acceptable; self-

benefit is corruption

• Effects:– entrepreneurship limited to the “connected”– lower incentives to education or effort

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

5

Years

CP

I S

core

0 =

ver

y co

rru

pt

10 =

no

t co

rru

pt

0

5

10

15

20

25

30

35

40

Ran

kin

g(h

igh

er =

lo

wer

on

th

e li

st)

Score 4.67 3.51 2.7 2.96 3.56 4 4.1 3.9 4 4 3.9 3.9 3.7

Ranking (of 40) 28 32 37 34 30 30 29 30 30 30 30 30 30

1980-1985

1988-1992

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

ranking

score

Source: Transparency International, author’s calculations

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 1 2 3 4 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?

Source: Transparency International

Obstacles to Business Development in Brazil, 2003

42

32

24

24

18

9

10

13

10

8

10

5

4

3

23

40

32

33

37

46

45

38

40

40

28

29

22

14

3

24

35

41

41

41

45

47

49

51

60

65

74

82

0% 20% 40% 60% 80% 100%

Too many options

Poorly qualif ied professionals

Procurement regulations

Deficient educational system

Crime and violence

Lack of government planning

Inadequate public services and infrastructure

Import/export bureaucracy

Labor law s and regulations

Inadequate tax collection methods

Poor income distribution

Inadequate judicial system

Corruption

High tax burden

Percentage

Not important

Secondary

Important

Very Important

NR

Source: Kroll and Transparencia Brasil

Frequency of Bribes and Nepotism, Brazil, 2003

29

33

12

18

15

15

13

9

56

64

77

79

83

83

86

87

0% 20% 40% 60% 80% 100%

Privatizations

Judiciary

Permits

Foreign trade

Tax audits

Police

Technical audits

Procurement

Low High NRSource: Kroll and Transparencia Brasil

Conclusions

• Corruption discourages entrepreneurship.• Corruption is rampant in Brazil and not improving.• Firms in Brazil list corruption second only to taxes as an

obstacle to enterprise.• The most corrupt areas of government bureaucracy that

deal with businesses in Brazil:– procurement– technical audits– police– tax audits

• Addressing corruption in Brazil is one way to encourage entrepreneurship and, therefore, economic growth.

Thank you!

Your comments are appreciated.