Lessons For India From Brazil

Brazil and India are developing countries of similar size and complexity. Both are rambunctious democracies that regularly change governments through elections. However, the traditional political rules of the game are falling apart in Brazil due to a massive corruption scandal that threatens much of its political class. India suffers from corruption just as much as Brazil but has so far avoided such a momentous scandal.

The scandal, known as ’lavo jato’ (“car wash” in Portuguese) started with revelations of massive corruption in the state-owned energy giant, Petrobras. Investigators uncovered evidence that large firms, Brazilian and foreign, bribed senior executives of Petrobras to win over-priced contracts. The bribe money was shared by Petrobras executives and politicians inside and outside government, across various political parties.

The investigations subsequently discovered huge illegal election campaign donations made by much of Brazil’s corporate elite, especially construction firms that rely on government contracts. They reveal a thick network of politicians, political fixers, public sector managers, and much of Brazil’s corporate elite generously helping each other while plundering the country with apparent immunity.

The evidence now implicates senior figures in the governing leftist Workers Party (which has held the presidency since 2003), including former president Lula. Prosecutors recently charged Lula with corruption, alleging that he received favors from firms that benefitted from his lobbying with governments around the world on behalf of large Brazilian construction companies. Brazil’s political Left, as much as the Right, has become fully integrated with traditional networks of corruption, enjoying a cozy relationship with the country’s corporate titans.

Many top executives are now in jail. Marcelo Odebrecht, Brazil’s most prominent businessman and head of a massive conglomerate named after his family, was recently sentenced to more than 19 years in prison for bribery. Senior executives of many firms are now negotiating with prosecutors, offering to reveal crimes in return for lenient prison sentences. According to media reports, Odebrecht Infrastructure, a large firm, has provided a list with names of 200 legislators from 18 different political parties who received money from it, either legal or illegal. Other executives are furnishing similar lists.

The scandal has nearly finished beleaguered president Dilma Rousseff, a former leftist guerrilla who succeeded Lula. She is likely to be impeached in the coming months by Congress on various charges, some related to the bribery scandals. Some analysts believe that the Supreme Court may even invalidate the 2014 presidential elections based on evidence of illegal campaign spending (by various political parties), and call new elections.

These dramatic developments reflect recent institutional and social changes in Brazil. Its public prosecutor has independence from the government to pursue investigations. The political class, including the president and powerful members of Congress, has been unable to block or delay the investigations. The judges leading the investigations enjoy enormous public support, as well as the managerial and financial autonomy, to target powerful people.

Prosecutors have recently started to offer American style ‘plea bargain’ deals, whereby defendants reveal all they know and plead guilty in return for more lenient sentences. The courts recently ruled that the police may keep accused people in jail while awaiting trial if a court agrees to it. The decision has overturned the common practice of powerful people avoiding time in jail by delaying their trial through endless appeals and legal maneuvers handled by their highly-paid lawyers.

Brazil will pay an enormous economic cost for this political scandal, which has paralyzed government. The economy has fallen into recession, due largely to the combination of bad policies pursued by President Dilma (to artificially stimulate the economy and reduce the role of market forces) and political inability to correct them in a timely manner. Brazil’s GDP could shrink 10% by the end of 2016, compared with the beginning of 2014.

The scandal could replace much of Brazil’s political elite, and damage many leading private sector firms. On the positive side, Brazil’s rich and powerful people (in the private and public sector) are now subject to the law. The country is likely to emerge in a few years with less corrupt government, more transparency in public policy, and better standards of corporate governance.

Brazil’s experience has interesting implications for India. India has been governed since independence by a resilient elite in politics, business, academia, media, and cultural institutions. Economic liberalization in the 1990s enlarged membership in the elite, and forced some firms out of business, but did not undermine the power and status of the traditional elite. Corruption decreased in some ways with the end of industrial licensing but cronyism survived, and grew, in many sectors of the economy.

However, India is changing rapidly, especially after the 2014 national elections. Its intellectual and cultural elite, carefully screened and nurtured by the Congress and its Leftist allies for generations, is already alarmed at the prospect of competition from others with different visions for the country.

The unease amongst India’s business elite is less transparent. Nevertheless, many firms are uncomfortable with recent steps to curtail cronyism and limit the ability of private firms to unfairly influence the formulation of central government policies. Business leaders complain, in private, that they no longer have easy ‘access’ to Cabinet Ministers and senior bureaucrats. The decision of the Modi government to auction coal mines, following an earlier ruling by the Supreme Court, without ‘compensating’ the former license holders, clearly upset many powerful groups. The government’s reluctance to bail out over-indebted firms causes further consternation in some quarters.

The disquiet amongst parts of India’s traditional business elite is mild compared with the panic inside Brazil’s corporate elite. Moreover, there is no major criminal investigation that threatens India’s political class, as in Brazil.

However, India is no less corrupt than Brazil. India’s elites have not yet faced the challenge facing their counterparts in Brazil. Indian prosecutors lack the power, independence, and the resources available to their Brazilian counterparts to seriously probe the cozy and crony relationships between business, politics, media, and the intelligentsia that thrives on government patronage.

One can imagine what could happen if neither the prime minister nor chief ministers could interfere with criminal investigations. What if some of India’s most prominent business leaders were in jail (as their Brazilian counterparts), facing several decades in prison? If offered the option of reducing their jail sentences by fully revealing all their illegal dealings, what would they disclose? What if prominent businessmen like Subroto Roy and Vijay Mallya provided prosecutors with comprehensive lists of all the politicians, bureaucrats, media personalities and celebrities whom they paid, like Odebrecht has done in Brazil?

The immediate impact of such developments might be negative for India’s economy and political stability. The longer term impact would be to reduce cronyism, strengthen Indian democracy, and capitalism.

Both Brazil and India face the challenge of cleaning up cronyism not just for economic gains but also to boost the legitimacy of the state. Modernization is not just about reducing the role of the government in the economy. It is also about strengthening the integrity of the state, and integrating groups that have been systematically excluded from public life by the traditional elite.