Source: Valor Econômico - OPINION - 08/09/2009

The Federal Constitution, in its article 170, establishes that our economic order is “founded on the valorization of human work and on free initiative” with the purpose of “ensuring a dignified existence for all” and that it must observe, among others, the principles of property private and free enterprise.

 

Interpreting this paragraph, in the exegesis of an economist, it remains clear that the constituent opted for the market system based on free enterprise and property rights as the constitutional form of organizing economic activity. And he adds that the adoption of this system aims to “ensure a dignified existence for all”, that is, it seeks an income distribution that is socially just.

 

Thus, we have two elements: the production of wealth and its distribution equally. Regarding the first point, universal historical experience indicates that no form of economic organization capable of producing as much wealth as the free enterprise system, based on decentralized decisions in competitive markets, has yet been invented. More specifically, this experience indicates that competition in free markets is the major driver of growth in the production of goods and services.

 

Regarding the fair distribution of wealth, the historical evidence is not so robust. Despite the fact that the more free and competitive the markets are, the better the distribution of income tends to be, this distribution, resulting from the free play of market forces, is not always socially acceptable.

 

Even taking this limitation into account, there is an enormous importance for achieving the objectives of both economic growth and income distribution for the good functioning of markets and free competition. It is for this reason that the legislation of several countries, including Brazil, adopts rules and procedures for the defense of free competition. In general, these rules are concerned with practices that seek to inhibit competition. Fundamentally, this restriction occurs through the creation of entry barriers for other competitors. It is important to note that it is not simply having, quantitatively, an expressive or dominant position in the market. It means having the power to keep out new competitors and thus being able to set abusive prices.

 

It is in relation to this threat to free competition that competition defense agencies are concerned both in Brazil and in other countries. There is, however, another serious threat that is generally ignored. The free functioning of markets is hindered, or even hindered, by deviations from ethical conduct that give an undue advantage to transgressors.

 

In fact, compliance with legal norms, especially tax, labor, health surveillance and environmental protection, generates costs, often large for companies that value ethical behavior. Failure to comply with these rules through evasion, informality, piracy, adulteration, counterfeiting, smuggling and embezzlement creates an imbalance of competition that unduly benefits transgressors and punishes those companies that respect the law.

 

In addition to the evident injustice for those who respect the law, these deviations from competitive conduct, if not firmly and efficiently combated, can generate social and economic losses that largely supplant the damages that may be suffered by the companies directly affected. This greater repercussion is derived from the message and the incentives that the non-punishment of these crimes generates.

 

The great danger is that there will be a perception that the crime, tax or labor or otherwise, will pay off. That the most effective way to earn money is not to pay taxes, not to comply with labor laws, not to respect copyrights and other “cunning”. The consequence of the proliferation of this perception is the attraction for adventurers and speculators to enter the markets subject to these misconduct and, at the same time, the withdrawal of companies and entrepreneurs that respect the legal norms. This generates serious losses for economic growth.

 

In short, the widespread perception of impunity for crimes against ethical competition, such as tax evasion, illegal trade, informality and other deviations in behavior, stimulates activities of the type “rent seeking” where the search for economic results through investments, technology , qualification of the workforce and managerial efficiency is replaced by tax evasion, counterfeiting, corruption by public officials and other illegal practices.

 

It is evident that the great victim of impunity for tax evasion and other transgressions is not the public sector that loses tax revenues, but the entire economy that loses investments and the whole society that loses dignity.

 

André Franco Montoro Filho, Ph. D in economics from Yale University, is a full professor at FEA / USP and president of the Brazilian Institute of Ethics in Competition - ETCO.