The Brazilian House of Cards

By Bruna Porto, Class of 2017 and Giuliana Reis, Class of 2016

By Bruna Porto, Class of 2017 and Giuliana Reis, Class of 2016

At Booth, some of the most common questions people ask when they have just met you are “what did you do before the MBA?”, “where are you going for your internship / full-time?” and “do you already have Summer travel plans?”. That is not necessarily true for some of us, though. Many times, when we say we are from Brazil, people ask us variations of the very same question: “What the hell is going on in Brazil?”. So that’s how this article was born. We were given the super-human task to explain the unexplainable: our country’s politics.

Brazil is the 5th largest country both in terms of area and population (around 200 million people), and the 7th largest in terms of GDP. Most importantly, of course, Booth has around 40 of us walking around at any one time – with 20 students per year, it is one of the largest international groups on campus. Even though the country has a great reputation for its natural beauty, parties, diversity and tolerance (just to mention a few clichés), it has stolen international media headlines for its political chaos and corruption scandals. When 60% of Congress is facing criminal investigations, we know that there must be something very, very wrong.

Brazil, as it is known today, is a young country. Its capital city, Brasilia, was built in 1956. Its democracy only started in 1989, with the country’s first direct elections ever, ending a 25-year dictatorship era. And we still feel the burden of its young institutions and lack of political leadership – leading now to its worst recession since the 1930s.

The country has never been a model of efficiency – on the contrary, it is a great example of having governments which believed in the growth of the state. Nonetheless, it is not for our lack of management competency that we have been getting so much attention, but for the embezzlement scandal at the state oil company Petrobras. This and other scandals, through many operations (the most famous being called “Operation Car-Wash”), involve the highest rankings of politicians and some of Brazil’s most influential businessmen. In fact, many directors from the biggest Brazilian government contractors were implicated in the process. It is as if Lockheed Martin’s and Boeing’s CEOs were both in jail right now.

Luiz Inacio Lula da Silva was a very popular president, leading the country from 2003 to 2010. His government benefited from great macroeconomic tailwinds, which led to him being able to elect Dilma Rousseff, his former Chief of Staff, as his successor. Nevertheless, she wasn’t able to incite the same levels of popularity as Lula did, leading to a decay of the party in power.

And then comes Petrobras. In this case, large construction firms organized an illegal cartel with the aim of earning overpriced contracts from the oil company. To maintain the cartel and guarantee that only members could win Petrobras’ contracts, the companies bribed Petrobras’ employees, who were mostly selected by politicians. Hence, much of the extra revenue was allegedly funneled to political parties in order to fund campaigns. Investigators have uncovered over $1.8bn in bribes paid and total losses to the state estimated at between $8.3bn and $12.0bn. They have charged approximately 180 people with criminal offenses and secured 93 convictions, including the C-suite executives of the construction companies that composed the cartel. Dilma has not been accused of any crime regarding Petrobras, even though she was a Board member between 2003 and 2010, when much of the corruption allegedly took place.

José Dirceu, former chief of staff, arrested by the Federal Police. Photo: Rodolfo Buhrer/Reuters

José Dirceu, former chief of staff, arrested by the Federal Police. Photo: Rodolfo Buhrer/Reuters

In parallel, the opposition started to articulate the impeachment proposal under the allegations that Dilma used accounting trickery to disguise the size of the country’s budget deficit. But how did we get into so much debt? Well, her “New Economic Matrix” with progressive values of #1 generating deficits to #2 create growth absolutely destroyed the economy. She accomplished #1 brilliantly.

The petition to start an impeachment trial was approved last December by the then-president of the Lower House, Eduardo Cunha, who has recently been removed from office due to involvement in the Operation Car-Wash. As the impeachment process evolved and the probability of being removed from office became more concrete, Dilma progressively lost her ally base. Temer, Dilma’s vice-president, even published a letter, criticizing Dilma for the way she had been conducting her political decisions, signaling the rupture between the two and further fueling the process. One plausible reason for Temer’s party to turn against Dilma is that she was unable to stop Operation Car-Wash – and when many high-profile politicians who were close to her got caught, Temer’s party jumped ship. After a series of appeals in April, the impeachment process was voted and approved by the members of the Lower House of Congress.

With the motion to forward these charges to the Senate approved, Dilma’s remaining political supporters made a final attempt to stop the process, with the current President of the House petitioning the annulment of the impeachment process, adding another dramatic turn to the whole process. However, the request fell through and, on May 11th, with 55 votes against 22, the Senate decided to install the impeachment process and remove Dilma from office for up to 180 days - until the trial (headed by the Brazilian Supreme Court chief of justice) is over. Then, the Senate votes again, needing 54 out of 81 votes for Dilma to be impeached. If that is the case, Temer will likely serve as acting president until the end of the term, in 2018.

Even as a young democracy, Brazil has faced an impeachment process before. In theory, Dilma is being judged for accounting trickery - but in practice, most of the Brazilian population wants her out because of the Petrobras scandal and her lack of competency in managing the country’s economy. The problem now is that her successor Temer and his party members have also been involved in many corruption scandals. And so has the president of the Lower House. And the president of the Upper House. And many of the Ministers, outgoing and incoming. And their wives, and children, and old friends. To get rid of everyone, we would need at least a few hundred impeachment trials. Yes, Brazilian politics make House of Cards look like child’s play. We told you it was unexplainable.

Bruna is a worried Brazilian. Giuliana is an angry one.

Trillion-dollar challenge: Ending corruption

By Alex Aksakov  Class of 2017

By Alex Aksakov
Class of 2017

According to the World Bank’s president Jim Yong Kim, corruption is the public enemy number one of the developing countries. It is hard to argue with this statement since corruption negatively affects the quality of life of billions of people, results in ineffective public governance, further increases income inequality and leads to considerable loss of GDP in many of these countries. The question remains; what leads to corruption and how to reduce it? Surprisingly, there is little information and even less research on the subject. Bo Rothstein, professor at the University of Oxford and head of Quality of Government Institute in Sweden, visited Booth last week and provided some insights into how Scandinavian countries managed to eradicate corruption.

So, what is corruption? Corruption occurs whenever those entrusted to manage public goods turn them into private ones for their own benefit. In the early 19th century, Sweden and Denmark were a case study of fraudulence; absence of meritocracy, buying and selling of civil and military positions, aristocratic privileges, no clear division between public and private money. Seldom did the Justice enforce the laws. Rather, they were viewed as merely a starting point for negotiations. Direct bribery, however, was quite unusual. One would have expected this state of decadence to persist but, surprisingly, corruption in Denmark and Sweden essentially vanished by 1850 and 1875, respectively. In Sweden alone, 30 major institutional changes were implemented in a 25-year time. An avalanche of reforms led to an overhaul of the entire political system that went from particularism and personal rule to universalism and impartiality. But why did this happen? And why did it not happen elsewhere?

A strongly and commonly held belief is that democracy is the sine qua non condition to get rid of corruption. Surprisingly, data show that it is hardly the case. The relationship ‘democracy-corruption’ is U-shaped and doesn’t display any clear correlation either way. While countries that have the highest levels of democracy clearly fight corruption more effectively than average, the correlation breaks down when we look at countries in the middle and low end of a the democracy spectrum.

Graph shows relationship between democracy and corruption.

Graph shows relationship between democracy and corruption.

According to Mr. Rothstein, a high quality of government and healthy audited public institutions are the necessary conditions to have a non-corrupt country. The problem is that these changes have to come from the inside and cannot be imposed from the outside. For instance, in the late 1980s, The World Bank embarked on a crusade to implement good governance in developing countries, with disappointing results by any measure. There was not a single case where the intervention of The World Bank resulted in any sustainable improvement.

One thing becomes clear when we look at corruption from a principal-agent perspective: Having one honest principal (leader and inner circle) changing the incentives for agents (whole political system) is no way to solve the problem.. If that was the case, more countries would have fixed the problem a while ago. Corruption leads to redistribution of wealth from the bottom to the top, so it is dangerously naive to expect the principals to change the incentives.

Bo Rothstein is a Professor at Oxford and and head of Quality of Government Institute in Sweden. Source:

Bo Rothstein is a Professor at Oxford and and head of Quality of Government Institute in Sweden. Source:

Mr. Rothstein comes forward with an alternative framework – collective action approach theory. In this framwork, agents’ strategies are based not on rational utility maximization but on reciprocity. In other words, how agents act depends on what they believe most other agents will do. Corruption in this case will be a self-reinforcing equilibrium: people accept bribes since everyone else does (e.g. it’s not safe to be the only honest policeman”). In order to change the equilibrium, perceptions about the expectations of others must change and this requires a ‘big bang.’

Let us go back to Denmark and Sweden. The level of corruption in these countries was so high at the time that there was a credible threat to their survival. Sweden even lost a significant fraction of its territory (Finland) to the Russian empire. Once they reached that point, a consensus emerged amongst the general public and elites as everyone agreed that something had to change to sustain sovereignty. This led to a massive U-turn in public policy towards more meritocracy and rule of law with the outcome that we all know.

Even though we do not understand all the dynamics involved in corruption, here are a few safe conclusions: high levels of corruption exist in countries with poor governance, democratization is not an answer to the problem of corruption, rational agents are not likely to generate the institutions required to fight corruption, a ‘big bang’ is needed to fuel the change towards non-corrupt governments and societies. In the current context, a valid question remains: could the current protracted oil crisis be such ‘big bang’ for some resource-dependent countries? Only the future will tell us.

Alex is a first year from Russia, whose interests span from finance and international politics to DJ-ing and extreme sports.