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NAFTA, grafter…

30 March 2015 By Martin Langfield

Some countries in Latin America are having a degree of success dealing with corruption. The impetus is coming from both home and abroad, as Brazilian investigations at Petrobras and the finance ministry as well as a boardroom dispute in Chile show. Of the top three regional economies, Mexico faces perhaps the hardest task in kicking graft, despite reform efforts under President Enrique Peña Nieto.

Overcoming corruption, which depletes state coffers and hurts the poor most, is one of the region’s biggest challenges. Estimates of the cost of corruption are patchy and vary widely. Graft amounts to 200 billion reais, or about $62 billion, a year in Brazil, or two-and-a-half times the education budget, according to a United Nations Development Program estimate cited by Reuters. Francisco Barrio, a former anti-corruption czar in Mexico, similarly estimated graft some years ago at twice the country’s education budget, or some 9 percent of GDP.

Corruption affects how involved in a country foreign investors are willing to be, too, which has a knock-on effect on economic prospects. It’s hard to quantify, but a study last year of 19 Latin American countries between 1995 and 2011 by Michael Penfold of CAF Development Bank of Latin America found that regulatory quality, government effectiveness, rule of law, accountability and corruption were key domestic factors that impacted foreign direct investment.

The Brazilian probe into multibillion-dollar kickbacks at state oil giant Petrobras, dubbed “Operation Car Wash,” highlights nevertheless that headway can be made, even when powerful interests are involved. The company allegedly overpaid on contracts so money could be diverted to political parties, and all but one of the 47 politicians implicated are members of President Dilma Rousseff’s ruling coalition.

Prosecutors are, crucially, independent and are now seeking greater powers and stiffer punishment for graft. Their work has even prompted Rousseff, blamed by many Brazilians for the Petrobras mess, to propose her own new measures. They have their work cut out for them, though. A tax fraud scheme at the finance ministry exposed last week may also have cost taxpayers billions of dollars.

A high-level spat at Chilean fertilizer group SQM, meanwhile, shows what role foreigners can play. A clash over cooperating with authorities in a political funding probe led three representatives of Canada’s Potash Corp to resign from the board. They complained their fellow directors would not authorize “a review which meets the standards we expect.” SQM shares fell sharply. Such actions are unlikely to drive change alone, but along with pressure from shareholders and regulators – like the U.S. Securities and Exchange Commission, which has subpoenaed Petrobras – these can bolster sometimes highly effective home-grown reformers.

Argentina has feisty prosecutors unafraid to probe corruption at the highest levels of government. A recent scandal involving espionage agencies, a dead prosecutor and allegations of wrongdoing by President Cristina Fernandez, all denied, have led many Argentines to question, though, whether the truth will ever come out in cases affecting the country’s most powerful.

Mexico, the region’s second-biggest economy after Brazil and ahead of Argentina, for its part should perhaps be streets ahead, thanks to almost two decades of trading standards and rules introduced by the North American Free Trade Agreement. But it faces a tough struggle. Its one-party history is a big part of the problem. The Institutional Revolutionary Party (PRI) ran the country for seven decades, acting as a clearinghouse for enrichment opportunities and political favors. When it lost power in 2000, it left weak institutions in place.

It’s what commentator Luis Rubio calls “a deficit of government.” NAFTA limited some cronyism, he argues in his recent book “A Mexican Utopia,” but the country needs a broader agreement among domestic politicians to boost the rule of law. New initiatives such as a journalist-backed anti-corruption website for whistleblowers, called Mexicoleaks, may help. But the pervasive power of illegal drug money will also blunt the effectiveness of anti-corruption laws Peña Nieto’s government is trying to get through Congress.

The president, the modern face of a PRI now back in power that claims to have shed its corrupt past, has achieved significant reforms in energy and telecommunications. But he faces conflict-of-interest questions himself over real-estate dealings that have helped tank his approval ratings. Without major changes to rich-world drug habits, as well as deeper reform at home, he and his successors face a task for the generations.


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