Lula da Silva, a top contender to win next year’s presidential election of Brazil, was convicted on corruption charges on Wednesday and sentenced to 10 years in prison.
The ruling marked a stunning fall for Lula, one of the country’s most popular politicians, and a serious blow to his chances of a political comeback. The former union leader, who won global praise for policies to reduce stinging inequality in Brazil, faces four more corruption trials and will remain free on appeal.
The verdict represented the highest-profile conviction yet in a sweeping corruption investigation that for over three years has rattled Brazil, revealing a sprawling system of graft at top levels of business and government.
Judge Sergio Moro found Lula, 71, guilty of accepting 3.7 million reais ($1.2 million) worth of bribes from engineering firm OAS SA, the amount of money prosecutors said the company spent refurbishing a beach apartment for Lula in return for his help winning contracts with state oil company Petroleo Brasileiro.
Federal prosecutors have accused Lula, Brazil’s first working-class president from 2003 to 2011, of masterminding a long-running corruption scheme that was uncovered in a probe into kickbacks around Petrobras.
Moro wrote in his ruling that he “took no personal satisfaction in this conviction, quite to the contrary.”
“It’s lamentable that a president of the republic is criminally convicted,” Moro said. “No matter how important you are, no one is above the law.”
The largest bribes originate in the military industry. Military procurement is a corrupt business from top to bottom. The process is dominated by advocacy, with few checks and balances. Most people in power love this system of doing business and do not want it changed. War and preparation for war systematically corrupt all parties to the state-private transactions by which the government obtains the bulk of its military products. There is a standard 10% bribe to kleptocrats for military purchases.
Participants in the military industrial complex are routinely blamed for mismanagement, fraud, abuse, bribes, and waste. All of these unsavory actions, however, are typically viewed as aberrations, malfeasances to be covered-up, while retaining the basic system of state-private cooperation in the trade of military goods and services and the flow of bribes. These offenses are in reality expressions of a thoroughgoing, intrinsic rottenness in the entire setup.
In recent years, citizens’ concerns about corruption in the public sector have become more visible and widespread. From São Paulo to Johannesburg, citizens have taken to the streets against graft. In countries like Greece, Pseudo-Macedonia, Romania, Chile, Brazil, Guatemala, India, Iraq, Malaysia and Ukraine, they are sending a clear and loud message to their leaders: Address corruption!
Policymakers are paying attention too. Discussing the “C word” has long been a sensitive topic at inter-governmental organizations. Defining corruption may seem easy. Most people will have the sense that they know it when they see it. For example, a public official takes a bribe in exchange for providing a financial or political gain.
However, experts increasingly consider corruption to be much broader. Rather than merely being a transaction between two parties, corruption can be viewed as the privatization of public policy. Powerful elites in business and politics collude to control public institutions, capture the policy-making process, and monopolize government contracting and procurement. Defined corruption even more broadly is the lack of impartiality in government, where public money and authority are used in ways that impact negatively on human well-being.
The direct economic costs are obvious to most people. Demand for bribes by providers of services affects achievement of social outcomes. The bribe to the taxman that reduces public revenues, and lowers government’s provision of public services. A school that is not built because the allocated funds have been misappropriated. Yet, the indirect costs are likely to be economically far-reaching. Corruption has a negative impact on economic growth through, for example, the over-investment in rent seeking, the underinvestment in productive activities, and the perpetuation of inefficient policies, among other things. The economic costs of corruption, which by the way afflicts countries at all stages of development, are substantial. The global cost of bribery alone is three trillion euros, in the order of four percent of the world’s current GDP. There is a strong correlation between lower levels of corruption and long-term improvements in GDP per capita and in human development indices. In sum, corruption is a tax on growth and investment.
Moreover, the costs are not only economic in nature. Corruption also contributes to the loss of public trust in government, higher levels of inequality in political influence, the deterioration of public values and, ultimately, to the diminution of citizens’ well-being or quality of life. These non-economic costs create a vicious cycle of under-performance of the public sector that is harmful to the economy in the long-term.
Given how broadly corruption and its consequences are now viewed, addressing it also requires a broad and multifaceted approach. Such a holistic approach requires leadership, changing incentives and building values, which are all mutually-reinforcing.
First, leaders must be willing to bring to account powerful vested interests—the big fish rather than the small fish, the tigers rather than the flies. They must also set the example by being above reproach. Lee Kuan Yew of Singapore is a prime example of a leader who successfully fought corruption through his own personal example and the political will that he engendered.
Second, strong incentives. Leadership must be complemented by a strong system of carrots and sticks—positive reinforcement and accountability. There needs to be a clear framework to combat corruption that is enforced. At the same time, governments need to ensure that public officials earn a living wage. Openness of the economy through deregulation and liberalization will also help since overly-regulated economies create strong incentives to maintain corrupt practices. Poland is a good example of quick and effective liberalization measures. Transparency of government operations and transactions is also important as a disincentive.
Three, building values of integrity. Countries need to promote a culture that values clean government. Building such a culture requires education of citizens. Formal training can help, but ultimately values must be learned through the education system, peer pressure and the day-to-day work experiences and practices of institutions. In most cases, corruption starts long before it becomes critical to the economy.
Fiscal transparency – the comprehensiveness, clarity, reliability, timeliness, and relevance of public reporting on the past, present, and future state of public finances – is critical for effective fiscal management and accountability. It helps ensure that governments have an accurate picture of their finances when making economic decisions, including of the costs and benefits of policy changes and potential risks to public finances. It also provides legislatures, markets, and citizens with the information they need to hold governments accountable.
The Fiscal Transparency Code is the international standard for disclosure of information about public finances. The Code comprises a set of principles built around four pillars: (i) fiscal reporting; (ii) fiscal forecasting and budgeting; (iii) fiscal risk analysis and management; and (iv) resource revenue management. For each transparency principle, the Code differentiates between basic, good, and advanced practices to provide countries with clear milestones toward full compliance with the Code and ensure its applicability to the broad range of countries.
Fiscal Transparency Evaluations (FTEs) are the fiscal transparency diagnostic. FTEs provide countries with:
a comprehensive assessment of their fiscal transparency practices against the differentiated standards set by the Code;
rigorous analysis of the scale and sources of fiscal vulnerability based on a set of fiscal transparency indicators;
a visual account of their fiscal transparency strengths and reform priorities through summary heat maps;
a sequenced fiscal transparency action plan to help them address those reform priorities; and
the option of undertaking a modular assessment focused on just one Pillar of the Code.
FTEs are carried out at the request of countries. They also support capacity building, including the prioritization and delivery of technical assistance. A number of FTEs have been conducted to date in countries across a wide range of regions and income levels and additional FTEs are underway.
One way to end the problem of political corruption is to establish a new branch of government that serves as an umpire. Due to the growth of government, systemic political corruption jeopardizes the equity and well-being of the people. Reforms and remedies to deal with corruption that are under consideration would be ineffective and undermine basic constitutional rights.
Democracy is founded on Madisonian principles, which are based on elections and the rivalry among the existing three branches of American government – the legislative, executive and judicial branches. So the solution is to establish a fourth branch of government of umpires. It would be an improvement to rely on disinterested professional umpires to decide which legislative plays are welfare-enhancing and which are not, particularly if the umpires themselves could be insulated from the political processes that lead to corrupt laws and policies.
Nominations for the umpire seats would come from the president, chief justice, and parliament leaders. After confirmation by a two-thirds majority of the parliament, each umpire would serve a term of 15 years.
Presidential vetoes and judicial review do not stem corruption, as they do not reflect the public well-being objective. The Supreme Court also focuses largely on precedent and procedure, overlooking practical effects on the public welfare.
Even elections prove ineffective, given that all political representatives are themselves unreliable to some degree because of self-interest and voters are woefully bad judges of the performance of these officials.
The best way to overturn corrupt laws is to assign a new branch of government – the umpires – who hold the power to assess and veto legislation that fails to embody the goals expressed in the Constitution’s preamble.
The framers asserted in the preamble that the welfare of the people – their capacity to pursue happiness – should be a primary objective of government, no less fundamental than protection of life and liberty. Umpires would chiefly improve aggregate welfare by restricting rent-seeking, or the advancement of elite interests without concern for other interests or for the economy as a whole.
The output of law will not be perfected by welfare-oriented umpires, but at least welfare and equity issues will have a place, and an institutional advocate, in the debate. As for legitimacy, what matters in the end is whether people trust the government to act in their interests. Despite being thoroughly undemocratic, the judiciary is seen as far more trustworthy than parliament.
Corruption prevents the efficient production and distribution of goods and services throughout the economy. For example, this occurs when resources are denied to the poor and redirected to the rich because elites spend billions of dollars lobbying for their interests. Elite interests that succeed through corruption each have narrow objectives, and they each only marginally reduce citizen well-being. But the overall effect is cumulative.
Even though each successful interest increases its share of the pie at the expense of other interests, the political process as a whole may result in every interest, strong and weak alike, ending up worse off in absolute terms. The accompanying distribution of well-being may be one that even the winners find unattractive.
Umpires would be more effective than other suggested reforms of the political process – such as political expenditure limits, constraints on lobbying, and reforms of the administrative process and congressional procedures.
The umpires would be far more protective of the general welfare of the people, while no more difficult to implement than other reforms. This is a logical extension of the already-existing Madisonian competition between branches of government, otherwise known as the system of checks and balances. It would still likely require a constitutional amendment. But at least the remedy would be effective.
Congresspeople in both political parties have substantial holdings in firms their legislative actions affect — and this number has grown substantially in recent years. While roughly 20% of lawmakers owned stock in 2001, that number had more than tripled today. Most Congress owns stock, many with holdings in excess of $200,000 in stocks alone, not to mention mutual funds and other forms of investments. In addition, most lawmakers are millionaires.
These financial ties to firms can be problematic. For example, Reps. Chris Collins (R-N.Y.) and Tom Price (R-Ga.) received private placement offers for discounted stock in Australian biotech firm Innate Immunotherapeutics. Both Collins and Price sit on House committees with potential to advance the firm’s interests and, at the same time, in theory, their own pocketbooks. Similarly, STAT reports conflicts with Rep. Scott Peters (D-CA). Not only did his wife invest between $610,000 and $1.5 million for stock in drug device companies in 2015 alone (the numbers are estimates, which is all that is legally required), but Peters is a three-time winner of the Biotechnology Innovation Organization legislator of the year award, the only lawmaker so honored, and is noted for leading opposition to the Innovation Act, legislation that pharmaceutical companies opposed because it imposed new restrictions on patent-infringement lawsuits.
Many other examples exist, spanning decades. But there’s still a lot we don’t know about what actually happens at a company level when members of Congress own stock. The average S&P 500 firm has about seven members of Congress holding its stock. Some companies have closer to 100 members holding stock, and many firms have 50 or more in a given year. In addition, firms where a greater percentage of lawmakers invest have significantly higher performance in the subsequent year — with each percentage of congressional membership owning stock worth about a 1% improvement in ROA or Tobin’s Q — suggesting that politicians may be privy to nonpublic information about future regulatory or legislative actions that may prove helpful to these companies. Members of Congress use their influence to benefit the firms in which they invest.
Members of the House and Senate generate abnormally higher returns on their investments. This occurs because members of Congress have a variety of tools at their disposal — from pushing or stalling legislation and regulation to awarding contracts, subsidies, and tax abatements — any of which can aid the firms in their investment portfolios. For example, the financial institutions in which key committee members owned stock received favorable bailouts in the Emergency Economic Stabilization Act, in 2008.
Firms are taking note of congressional investments in a couple of ways. It is not surprising that they’re paying close attention to public disclosure laws that require members of Congress to report their stock holdings annually. But they’re also hiring private companies that specialize in a unique business: identifying who owns firms’ stock (among other political intelligence activities). Firms can use information about which members of Congress own their stock to minimize the intensity of their lobbying activity, as in the case of Apple. Three-quarter increase in members of Congress who held Apple stock from 2007 (22 people) to 2008 (38) was followed by a nearly 50% reduction in lobbying intensity the following year (2009).
Why? Because owning stock aligns the interests of the firms with those of their stock-holding lawmakers. Both the firm and the stockholder benefit when politicians act in ways that benefit their investment portfolio. Thus, companies that have congressional stockholders no longer need to spend as much money on lobbying to influence opinion. Instead, they can cut their lobbying expenses while getting the same general benefit through legislative support or disapproval, among other actions. And, once lobbying is cut, they have more resources to allocate elsewhere, including donating to additional election campaigns and hiring individuals with relationships to current lawmakers.
Even when lobbying has been cut, there has been no change in how much firms donate to election and reelection campaigns. Such donations are still largely seen as quid pro quo, where firms supply members of Congress with cash in their campaign war chests to curry favor later. Unlike lobbying, they affect Congresspeople’s personal interests directly. Reducing those donations would end the quid pro quo arrangement and would generate congressional ill will toward those companies.
Congresspersons intersecting with legislation are profiting at the expense of their constituents and society. For example, one industry that has a direct impact on Americans — and gives a lot of money to elected officials — is big pharma. Prices for prescription drugs have skyrocketed, and researchers argue that this partially stems from the actions of lawmakers. The Senate recently voted on proposed legislation that would allow the importing of prescription medication from Canada, to trim costs. Although it would have benefited Americans struggling to pay for medication, the legislation didn’t pass — and those who voted no received significantly more in contributions from big pharma than those who voted yes. This was true on both sides of the aisle.
Such conflicts undermine public trust. Members of Congress don’t get it, but they need to. If there is an appearance of an impropriety, there just might be an impropriety. Members need to bend over backwards to show people they are there for the good of the country, not their own pocketbooks.
Another problem is that it’s extremely difficult to prove conclusively that a congressperson’s actions are guided by their investment portfolio. Bills can be complex, often hundreds of pages in length, and small changes that may not garner much attention can have substantial effects for firms. Holding up a bill in committee or working with others to stall legislation may be difficult to tie to any single person, while other actions can be defended on alternative premises, like coincidence or even that they are based on a stockbroker’s advice.
The latter claim was given in defense of Tom Price and for similar conflicts involving the portfolio, and voting, of Rep. Joseph Kennedy III (D-Mass). In another example, Nancy Pelosi (D-Calif.) did not allow a vote to come up that, if passed, would have materially affected her stock in Visa, not to mention that she and her husband participated in an IPO around the same time the legislation was moving through the House. Given that there are many reasons why a bill might fail — and many people who might be able to prevent it from coming to a vote — it is hard to prove that a particular lawmaker is motivated by their investment holdings. You can’t get into their heads to know what is motivating them. Companies are good at influencing lawmakers, and they are getting more strategic about it. Such conflicts extend to state and local politics. The effects of corporate money in politics are only going to become more pronounced, and more complex.
The Brazilian real BRBY extended gains following the decision and reached its strongest in two months. The benchmark Bovespa stock index .BVSP rose to a session high. Investors fear that another Lula presidency would mean a return to more state-directed and less business friendly economic policies.
Lula would be barred from office if his guilty verdict is upheld by an appeals court, which is expected to take at least eight months to rule.
If he cannot run, political analysts say Brazil’s left would be thrown into disarray, forced to rebuild and somehow find a leader who can emerge from the immense shadow that Lula has cast on Brazilian politics for three decades.
“Lula’s absence opens a gaping hole in the political scene, it creates an enormous power vacuum on the left,” said Claudio Couto, a political scientist at the Getulio Vargas Foundation, a top university. “We have now entered a situation of extreme political tension, even beyond the chaos we have been living for the last year.”
Couto said he expected Lula’s guilty verdict to be upheld by the appeals court. That would leave the 2018 presidential race wide open and raise chances of a victory by a political outsider, given most known contenders are also ensnared in Brazil’s corruption investigations.
Lula’s two-terms were marked by a commodity boom that momentarily made Brazil one of the world’s fastest-growing economies. His ambitious foreign policies, aligning Brazil with other big developing nations, raised the country’s profile on the global stage.
With Lula’s swagger setting the tone, Brazil sought to shrug off northern economic and political hegemony and engage in global problems, like Middle East peace and the standoff over Iran’s nuclear program.
Obama once labeled him the most popular politician on earth. Upon leaving office and managing to get his hand-selected successor Dilma Rousseff elected, Brazil’s economy soured, with the nation just now beginning to emerge from its worst recession on record.
Rousseff was impeached last year for breaking budgetary rules. She and her backers say her ouster was actually a ‘coup’ orchestrated by her vice president and now President Michel Temer, who himself faces corruption charges.