Latin America's Anti-Corruption Fight Can Hurt Economic Growth

(Bloomberg View) -- Latin American corruption-busters have taken down many a tainted bigshot in recent years, but the fall of Peruvian President Pedro Pablo Kuczynski marks a new twist to the hemispheric reckoning.

The former Wall Street executive denied any wrongdoing, claiming he was the victim of a “crisis of governability.” A bum’s rush might be the better description: Kuczynski’s political enemies leveraged his alleged involvement in the suppurating graft scandal surrounding the tentacular Brazilian construction giant, Odebrecht S.A., to push him out on the eve of a likely impeachment vote.

Kuczynski’s fate is now in the hands of Peruvian investigators, who have joined their peers across the hemisphere in truffling for graft and fraud in the highest offices. That avenger’s zeal plays well to a public incensed by scandal, but it will do little to fix Peru’s economic misfortunes -- and if anything, the ensuing turmoil and uncertainty stand to make matters worse.

The angst in Peru has a continental echo: How far can the region’s remarkable anti-corruption drive go without paralyzing nations whose populations are also agitating for a return to economic growth that will depend to a great extent on a functioning government?

Kuczynski himself collided with that conundrum as he sought to contain the damage after the Brazilian contractor admitted to paying bribes over a decade to grab Peruvian contracts.

He initially issued several decrees cutting off shady contractors, but the rigorous crackdown threw scores of public works projects in limbo as the Odebrecht probe spread to some 30 companies. That led to a new more flexible law, published on March 12, which allowed companies under investigation to still operate, so clearing the way for some 252 ongoing projects and $9 billion of scheduled investments, according to the Economist Intelligence Unit.

To many crusaders, the trade-off between fighting graft and growing the economy is a false dilemma. Wiping out the rot at the top is not only vital to cleansing public affairs, they say, but the only way to lock in healthy development. “When you see corruption declining, there’s a positive effect on the business environment, which stabilizes expectations and attracts investment,” said Sergio Lazzarini, an expert on corporate governance at the Sao Paulo business school Insper.

Yet while the mop-up draws widespread support -- and any moves to curb it a righteous outcry -- the mission comes with economic and political costs that the next generation of leaders ignores at its own peril.

Consider Brazil, home to Odebrecht and headquarters for the hemisphere’s biggest anticorruption offensive. In four years, the storied Carwash probe has seen 188 people convicted and triggered the anticipated restoration to official coffers of some $11.7 billion. It also shut down scores of pay-to-play schemes embedded in boardrooms of the largest contractors.

As brand after tainted brand fell under scrutiny, the economy wobbled. Companies caught in the prosecutors’ web have been pushed into bankruptcy and seen their contracts dry up, often touching off an onerous knock-on effect. “There’s a certain amount of paralysis because of Carwash,” General Electric Co. Vice Chairman John Rice told Bloomberg in 2016.

Monica de Bolle, a senior fellow at the Peterson Institute for International Economics, reckoned the fallout from the Carwash case deepened Brazil’s historic recession, shaving as much as 2 percent of gross domestic product in 2015. “The construction sector is stalled, Petrobras is recovering but struggling, and other sectors have taken a hit,” de Bolle told me. “A cleanup is inevitably messy. You have to hope that you clear the slate enough so that the economy can grow again.”

In order to get to growth, countries fighting corruption need mechanisms to parse culpability and rescue companies from the pirates. One way to do that is through leniency deals, in which penitent crooks come clean about corporate crimes in exchange for lighter punishment.

Yet those agreements are still a work in progress. Shifting terms of leniency deals can increase risk for distressed companies -- as J.P. Morgan recently advised in a client note on troubled Odebrecht -- even as botched ones that indulge shady operators can stymie investigations and provoke public backlash. In Brazil, the maximum fine for companies who cop pleas in bribery schemes is a relatively indulgent 20 percent of annual revenues. “That makes it almost worth it to commit the crime,” said Lazzarini.

As corruption probes deepen, even fairer deals that properly assign blame and penalties may do little to lift the legal cloud over future transactions. “I’ve been in a number of conversations with people who see opportunities to buy up assets after scandals, but balk over whether they’ll continue to be liable for bygone crimes,” Joel Velasco, a political consultant for the Albright Stonebridge Group.

 As the scandals keep coming, Velasco worries that Latin America’s prosecutorial zeal turns into a witch hunt. “At some point you have to draw a line and get on with it,” Velasco adds. “I mean you can’t expect task forces to get the last crook standing, any more than you can stop terrorism by staying in Afghanistan forever.”

Peter Hakim of the Inter-American Dialogue likens Latin America’s anti-corruption campaign to Colombia’s peace treaty with Marxist insurgents. “To bring in a peace deal, Colombians had to make certain concessions that not everyone liked,” Hakim told me. “That’s how civil wars often end.”

That may be a stretch, but enterprise can’t be mortgaged to task forces. Big companies may have been captured by freebooters and political opportunists, but they also have the tools, brainpower and technical experience that nations need to develop. “You still need highways and bridges and oil wells, and the Petrobrases and Odebrechts know how to do that,” Velasco said.

Latin Americans are right to cheer on their corruption busters, but stopping graft depends on more than super-sleuths and hanging judges. Ultimately, cleansing government rests on a complex suite of initiatives that include strengthening oversight and independent institutions, and curbing the vested interests that prosper in their absence.

At the same time, making up for lax controls through overregulation can backfire, smothering enterprise and even encouraging bidders to game the rules.

All of this will be on the table next month when regional leaders gather at the Summit of the Americas, under the theme “Democratic Governance Against Corruption.” Fittingly, the parley will be held in Peru.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mac Margolis writes about Latin America for Bloomberg View. He was a reporter for Newsweek and is the author of “The Last New World: The Conquest of the Amazon Frontier.”

For more columns from Bloomberg View, visit http://www.bloomberg.com/view.

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