Lessons from Odebrecht

12 Feb Lessons from Odebrecht

It was recently revealed that Odebrecht, the Brazilian construction giant, paid $788 million in bribes to obtain government contracts and/or ensure the passage of friendly legislation in 12 countries. The disclosure is part of a settlement with the authorities of Brazil, the United States, and Switzerland by which Odebrecht will pay $3.5 billion in fines.

Odebrecht partook in the corruption scheme known as “Lava Jato” (Car Wash) involving Petrobras, Brazil’s state-owned energy giant, which colluded with Brazilian corporations to inflate contracts, manipulate or avoid bidding processes, and dish out money to politicians and government bureaucrats to secure business. It’s a colossal case of old-style cronyism that has sent business tycoons and some politicians to jail, and has former president Lula da Silva in serious trouble.

The revelation that Odebrecht paid bribes in 11 other countries, nine in Latin America and two in Africa, has turned the case into an international sensation. While most of the names of the officials who received the bribes are not yet public, enough is known to draw important conclusions.

The first has to do with the connection between corruption and government control of the economy. At the heart of Lava Jato is Brazil’s economic system under the left-wing populism of Lula and his successor, Dilma Rousseff, who was impeached last year. They used BNDES, the state-run development bank, to subsidize investments in infrastructure projects by government cronies at home and abroad. Almost 1,400 subsidized loans were given for a total of $14 billion to corporations such as Odebrecht. Much money was wasted: in the case of Venezuela, many of the airports, ports, hydroelectric plants, and other projects were never finished. Under this system the government did not own or run most corporations, but it exercised a major influence on their decisions. The propaganda maintained that this was the only way to reverse oligarchic rule; economic control turned out to be the epitome of oligarchic rule.

Another conclusion relates to the inadequacy of the prosecutorial and judicial systems. Why was no Latin American country outside of Brazil able to come up with a plea bargain, or leniency deal, of the sort that led to Odebrecht’s confession? There was substantial evidence pointing to this orgy of graft. Only when the United States and Switzerland intervened did the information come to light. The failure of Latin America to act on its own has exposed the institutional fragility of those countries even under democratic rule.

The demythification of left-wing populism is another consequence of these revelations. Apart from the fact that Brazil, run by the Workers’ Party, was at the center of the scheme, other populist governments were involved. Venezuela was the largest beneficiary of BNDES loans to Brazilian corporations doing business overseas—to the tune of some $3 billion. The Dominican Republic and Cuba, the democratic and dictatorial versions of the region’s left, come next. Not to mention Argentina, where Odebrecht was the biggest non-Argentine beneficiary of government contracts under the Kirchners.

This conclusion must extend to the other side of the ideological spectrum. Three of the four counties that comprise the pro-market Alliance of the Pacific—Mexico, Peru, and Colombia—were also part of this scheme. Chile was not, but other Brazilian corporations have yet to confess their international practices, so it could still become enmeshed in the scandal. To be sure, the corruption in the Alliance of the Pacific countries involved those parts of their institutional systems most removed from the competitive, market-friendly, bottom-up arrangements that have allowed them to prosper and sparked the emergence of a significant middle class. But the perception in the eyes of many Latin Americans will be that the market, not economic control, was to blame.

Finally, an optimistic word. Despite the demoralizing effect of Lava Jato, there has been a healthy, if belated, reaction by the justice systems of many countries, led by Brazil. The moral, political, and judicial purgatory in which the institutions of many countries find themselves could be the beginning of a much-needed cleansing process.