Source: Folha de São Paulo, 20/06/2005

By Marcelo Billi

The scandals involving companies and politicians in corruption and tax evasion schemes in recent weeks should not prevent Brazil from growing this year or even in the next.
Corruption does not always drive growth down, economic literature shows. On the other hand, it makes investments more expensive, reduces productivity and causes companies and the government to waste resources that, in the case of developing countries, are already very scarce.
Few economists and experts are dedicated to studying the economic effects of corruption. The first obstacle is the difficulty of measuring, quantifying, or even detecting the existence of corrupt and corrupting countries.
The indices available so far, such as Transparency International, are based on people's perceptions, usually of agents involved in transnational businesses.
“These are surveys of perception. The name says it. They indicate something, but they are not a fact ”, says Claudio Abramo, from Transparência Brasil.
Despite the difficulty of measuring it, it is not impossible to predict the effects of a high level of corruption on an economy, and economists have reached some degree of consensus on this:
1) corruption increases so-called transaction costs. In its existence, therefore, it is more difficult to do business, costs increase and, by table, prices also;
2) the investment becomes less productive, also because the costs to invest increase. Either the investment is less, or a greater volume of investment is needed to generate results that, in the absence of corruption, would require less resources;
3) in some areas, corruption reduces the efficiency of the companies themselves. If bribery pays more than investing in new processes to win public competition, for example, the company will become less efficient, stop investing in innovation and use the money to “buy” the bid;
4) not least, high levels of corruption distort the market, creating artificial advantages for companies or sectors, which, in general, results in a less competitive economy.
Marcos Gonçalves, a researcher at FGV (Fundação Getulio Vargas), also points out that high levels of corruption are also associated with political instability. It may be higher or lower, but one of the possible effects is the increase in uncertainty in relation to the directions and rules of the economy, which, if not prevented, may delay or depress investments.

Uneven growth
It is possible, of course, for a country to have high levels of corruption and to grow at impressive rates. This may be the case in Brazil, until the 80s, and in China, today. How? Economists have not yet reached consensus.
One possible explanation is that, while growth is vigorous, the benefits of investing far outweigh the additional costs and distortions created by corruption. The problems appear and become more evident, then, when the growth rates become lower.
In international indicators, Brazil appears among the group of countries with reasonably high levels of corruption. A survey by Transparência Brasil itself, carried out with companies in São Paulo, shows that 78% responded that corruption is a very important obstacle to development. No less than 70% said they spent up to 3% of their revenue on payment of tuition fees.
Emerson Kapaz, president of Etco (Brazilian Institute of Ethics in Competition), points to the great informality of the Brazilian economy as one of the signs that show the high level of corruption. “How do these companies [in the formal sector] maintain themselves? The problem of informality comes with corruption ”, he says.

Bloated state?
The decision to corrupt, or, for example, between bribing an inspector or paying the tax, can be seen as a very rational economic calculation. It involves the risk of being reported and answerable for the crime and the benefit of not paying tax. Given the high Brazilian tax burden, the slow pace of justice and the feeling of impunity, says Kapaz, it is not very difficult to imagine where the decision is headed.
From this point of view, the root of the problem of corruption is the size of the State, measured by the size of the tax burden, and its own inefficiencies. Vision that not everyone agrees with. Abramo, for example, says that if the levels of corruption were linked to the tax burden, scandals would jump across the European continent, where the countries with some of the highest tax burdens in the world are.
This does not mean that there is no link between tax levels and tax evasion. Economic theory shows that there is a limit to the increase in taxes after which tax collection starts to fall - it is the so-called Tanzi effect.
But from there explaining the origin of the problem starting with the tax burden goes a leap, says Abramo, for whom the origin of the problem lies in the very structure of the State and the Brazilian political system. "The" monthly allowance "scandal has zero to do with the tax burden," he says.