Bureaucratic Corruption and Entrepreneurship in Brazil

1. Bureaucratic Corruption and Entrepreneurship in Brazil Bonnie J. Palifka Presented at the 150-mile conference Edinburg, Texas April 22, 2006

2. Outline • Entrepreneurship • definition of • and growth • factors contributing to • in Brazil • Corruption • definition of • effects of • in Brazil

3. Entrepreneurship • Economic development depends on change. • North: “the agent of change is the individual entrepreneur responding to the incentives embodied in the institutional framework.” • Corruption is an informal institution that influences entrepreneurship.

4. Entrepreneurship • An entrepreneur is an economic agent • individual • firm • institution • that acts in the allocation of resources • raw materials • intermediate goods • physical, human, and social capital • either to increase the efficiency of production of existing commodities, or to create new products.

5. Entrepreneurship • Types of entrepreneurship: • adapt technology to local conditions • invent new ways to use local inputs • imperfect information • Requires foresight

6. Entrepreneurship and growth entrepreneurship higher productivity economic growth

7. Entrepreneurship • Factors influencing entrepreneurship: • Psychological • Social • Economic

8. Entrepreneurship • Psychological factors influencing entrepreneurship: • innovative personality • creativity • risk-taking

9. Entrepreneurship • Social factors influencing entrepreneurship: • social mobility • patent protection • social/cultural legitimacy of entrepreneurial activity vulnerable to corruption

10. Entrepreneurship • Economic factors influencing entrepreneurship: • demand for industrial and other products • availability of labor and inputs • inflation • taxes • cost of information • distribution of income • access to resources vulnerable to corruption

11. Entrepreneurship and growth corruption entrepreneurship higher productivity economic growth

12. Entrepreneurship in Brazil • Baer: In 1985, “[R & D] expenditures per employee was 2.5 times larger in state than in private enterprises” • Privatization, therefore, may actually reduce R & D, a measure of entrepreneurship.

13. Corruption • Definition: abuse of one’s position for private gain. • Some effects: • absorbs some of the returns to production • (or robs the state of revenue) • contributes to the inefficient allocation of resources • increases uncertainty and risk

14. Traditional nepotism clientelism cronyism Economic bribes gifts Corruption

15. Corruption in Brazil • Bezerra, Bases sociais da prática da corrupção no Brasil: • part of the social fabric and government • “favors” more common than bribes • “apadrinhamento” • interceding on behalf of a friend is acceptable; self-benefit is corruption • Effects: • entrepreneurship limited to the “connected” • lower incentives to education or effort

16. Source: Transparency International, author’s calculations

17. Source: Transparency International

18. Source: Kroll and Transparencia Brasil

19. Source: Kroll and Transparencia Brasil

20. Conclusions • Corruption discourages entrepreneurship. • Corruption is rampant in Brazil and not improving. • Firms in Brazil list corruption second only to taxes as an obstacle to enterprise. • The most corrupt areas of government bureaucracy that deal with businesses in Brazil: • procurement • technical audits • police • tax audits • Addressing corruption in Brazil is one way to encourage entrepreneurship and, therefore, economic growth.

21. Thank you! Your comments are appreciated.