Pentagate Corruption Scandal Rocks Chile

According to Transparency International´s Corruption Perceptions Index Chile ranks as one of the least corrupt countries in the world, ahead of the likes of Austria and France and similar to the United States and Ireland. The World Bank’s governance indicators suggest corruption in 2013 was under better control in Chile than in the U.S. and neared that of the United Kingdom and Canada. Note that we are talking about a country in Latin-America, a continent whose governments are not exactly known for their incorruptible politicians. Consistent free-market policies have made Chile the rare exception.

However, a major political scandal that broke last week is threatening that status. Known as Pentagate the campaign finance scandal currently making headlines in Chile allegedly involved dozens of politicians from across the political spectrum, although the majority are said to be members of the Independent Palacio-de-JusticiaDemocratic Union (UDI) party. Some of the more prominent individuals being investigated include former Finance Minister Andrés Velasco, who served one term under current president Michelle Bachelet during her first four years in office, officials of the previous Sebastián Piñera administration, as well as several former presidential candidates.

It was the privatization of state corporations after the fall of the Pinochet military dictatorship in 1989 that gave birth to the Penta Group. Formerly known as the Instituto de Seguros del Estado the insurance company was bought by two investors – Carlos Alberto Délano y Carlos Eugenio Lavín – who incidentally both used to work for the government during the regime. The former is known as a big political donor and a friend of former president Piñera, while the latter tends to keep a lower profile. Last August their holding company came under investigation by Chilean authorities for tax fraud, which besides several arrests lead to the laying off of the Group’s director. And while many a libertarian may not raise any moral objections to these sorts of practices, it now seems the increased scrutiny of the Carlos duo has brought other, more reprehensible facts to light.

While the revelations may have shocked some Chileans, for proponents of the free market there is arguably a very bright side to the story. After all, what better libertarian arrows could one possibly wish to have in his quiver than the sort of widespread political scandal that reads like a novel? Besides, if this is what is happening in a country whose government is regarded across the continent as the most effective and efficient, just imagine what is going on in all those other countries!

Admittedly some on the left will seize the opportunity to espouse the supposed virtues of government-run enterprise as compared to the greedy capitalists only out to make a buck. Yet this argument is easily refuted; since few people are in favor of a completely centralized economy all they need to be convinced of is that interventionism invariably leads an economy down that very path – two prominent and current examples being Venezuela and Argentina.

The better alternative, then, is to start from the premise that a government big enough to “regulate” an industry is a government big enough to award the well-connected within that industry special favors. It should be concluded that privatizing some industries is not sufficient to achieve a free society. So long as government is allowed to drive the economic bus, it will always determine who gets to sit in the front and who is relegated to the back – before ultimately driving over a cliff.

[N.B. Some of you may have noticed I (unexpectedly) took a bit of a hiatus at the end of last year. If you missed seeing regular articles on here rest assured things are back up and running, so be sure to look for those weekly posts again in 2015!]


Private Security in Brazil

Walking down the street here in Brazil one can spot many signs on homes and businesses warning criminals that the property is protected by company X. For a free market proponent like myself this was a particularly interesting observation which prompted me to do some research.

One problem many Brazilians complain about is corruption. Transparency International’s Corruption Perceptions Index has Brazil consistently hovering around 70th place in the world in recent years. Considering that any score below 50 indicates a serious corruption problem, Brazil’s public sector corruption level is given the thumbs down with a score of 42.

It should be no surprise, therefore, that over 60 percent of Brazilians distrust the police. The problem is particularly serious in the state of Rio de Janeiro, where extortion by police is the most common. While a 2012 crackdown resulted in the arrests of 63 Rio police officers, the Mensalão (Big Monthly Payment) scandal exemplifies the pervasiveness of corruption in many if not all layers of government. In 2010 an industry trade association in the state of São Paolo estimated the average annual cost of corruption as roughly between $32 billion and $53 billion.

While the Mensalão scandal had a big impact on then-president Lula’s administration, for most Brazilians corrupt police comes at a much greater cost. According to Human Rights Watch “police officers in Rio de Janeiro and São Paolo routinely resort to lethal force”, killing more than a thousand people every year in those two cities alone. Since 2003 more than 11,000 residents of Brazil’s two major cities have lost their lives at the hands of police. Though police reports often claim the victim(s) resisted arrest, Human Rights Watch reports that forensic evidence contradicted the official version of events in many cases.

Such abuse of power is pervasive and in many cases practiced with impunity, as those in the judicial system who seek to hold the police accountable face threats of violence. Police officers are rarely even suspended for a killing, even if in (highly) questionable circumstances. The two policemen charged last March with the murder of a 38-year-old mother of four had reportedly been responsible for dozens of on-duty killings since 2000. All layers of the Brazilian police force have been fraught with accusations of human rights abuses, torture, and summary executions.

Brazil Private SecurityThe corrupt and violent nature and subsequent distrust of the police, among other reasons, have led to a thriving private security industry. Starting out as neighborhood watches the industry is now composed of thousands of firms, the vast majority of them being small businesses. Many a police officer is known to work for these businesses in his spare time. Ironically, while the Ministry of Justice is said to be doing a poor job of ensuring only licensed private firms are allowed to compete with the police, a large chunk of the demand for these firms’ services actually stems from the public sector. Banks are the second largest customer, followed by other private companies and industries.

Despite a drop in homicides, Brazil remains one of the most crime-ridden countries in the world with the fourth largest prison population, leaving little to brag about. Though it is impossible to dissect how the presence of private security firms impacts these statistics, there are some positive indicators. Government statistics reveal that cases of security firms losing their licenses are almost unheard of. Given the pervasiveness of corruption in Brazilian government this does not necessarily indicate an entirely clean track record, but the fact remains private industry has a much better reputation than the police itself.

Although the current system is far from perfect, especially since it is almost impossible for any Brazilian government worker to lose his job, there is at least some semblance of competition. Compared to the situation in my native country of The Netherlands, where even value transport vans drive around unarmed and virtually unprotected, that is a major step forward. The case of Brazil shows that just like with so many products and services, private enterprise when given the chance will fill any void left by government incompetence.

Big Government and Big Business: Two Wings of the Same Bird

“If government has nothing to sell, bribery is useless.”
Ron Paul

Common sense dictates that whenever two or more parties can reach an agreement that benefits all parties involved, the deal will be made, barring any moral or ethical objections – though those objections affect different people’s decision-making differently. In our daily lives we constantly barter and trade goods and services voluntarily based on their perceived (subjective) value; you show up at work in the morning because your employer pays what you perceive to be a fair price for your labor, some of the income you receive as a result is exchanged for food at the grocery store, another part goes to pay for rent, electricity and other things to sustain you.

Big Govt, Big Business Two Wings of the Same BirdThe above, of course, is not rocket science given that these are all win-win situations where all parties benefit from the transaction. After all, people voluntarily forego the perceived benefits of, say, having a lot of savings for the greater benefit of being well-fed, clothed and having a roof over their heads. As long as this is the case, there is no reason why a transaction should not or would not take place. If circumstances do change consumer behavior will respond accordingly, perhaps opting to drive less to save money on gas or to buy a cheaper tablet instead of an iPad after a price hike – as some in Japan might currently consider doing. In other words, human beings continually seek to reach agreements that they personally expect to benefit from; otherwise there is no reason to give up (part of) his or her material possessions, time or effort.

It can be argued that this applies even to charitable donations, as people select certain charities according to what is important to them. Some might give money to help feed malnourished children in the developing world while others donate to a local homeless shelter. These charities may be church-affiliated, NGOs, supported by businesses or taxpayer-funded. Whatever the case, donations are made based on people’s personal beliefs and values to causes they believe in and therefore want to support. In that sense the donation fulfills the psychological or moral wish to do good, thereby providing a benefit to the giver as well as the receiver: again a win-win situation.

Yet, an exception to this rule seems to exist in the minds of many. The exception is called “government officials”: from politicians to judges to police officers to paper pushers working for a government agency. Even though practically anyone can run for office and work for this institution “of the people, by the people and for the people”, somehow government workers are believed to be special, in that they respond differently, if at all, to the very same incentives us common folk are exposed to. When given the chance to accept money or some other benefit from a corporation, special interest group or other organization in return for a (political) favor – a win-win situation for both parties – government workers are relied upon to kindly reject the offer in furtherance of justice and the common good. Though rarely bluntly stated in these words, this is the underlying, implicit assumption regarding corruption and misconduct in government.

Upon further examination, though, the absurdity of this assumption is hard to miss. As far as I can tell, the people that work in government buildings are regular human beings. Just like in general society they are of both genders and of all colors, races and creeds; they look the same. They have families and friends. Sometimes they feel happy, sometimes they feel sad. They drive cars, play sports, go to the movies, eat out in restaurants, use the bathroom, sleep at night and breathe in and out just like the rest of us.

In fact, chances are you wouldn’t recognize one if you saw one. In short, they are just regular people with their own vices and virtues, not mythical creatures or angels that selflessly sacrifice their knowledge and skills for the betterment of society. They are not uniquely equipped to resist temptation or make the right decisions despite perverse incentives. The only difference is that they are more frequently exposed to such temptations and perverse incentives and are far more likely to be able to successfully evade the consequences of their actions at the expense of others.

Given that chance many find it hard to let morality guide them and rather easy to rationalize an ethically objectionable course of action. Just consider the cases of U.S. government researchers knowingly infecting unwitting Guatemalan subjects with STDs, the Food and Drug Administration’s ties to the pharmaceutical industry, insider trading scandals, the cover-up of a NATO-led clandestine operation in Europe killing hundreds of innocent people including children, government-sponsored coup d’états against elected foreign governments, “regulators” reluctance to prosecute major banks dealing with drug traffickers and terrorists, Japanese authorities covering up the true extent of the radiation spewing from the Fukushima Daiichi nuclear plant, the secret deal Obama made with the pharmaceutical company lobbyists, or the NSA spying program, to name but a few.

Scandal upon scandal shows that Big Government and Big Business are bed fellows. Just piling on more regulations to “solve” the problem has been an utter failure for the simple reason that human beings respond to incentives. This is basic human psychology and should surprise no one.

Realistically, the only solution is to eliminate the government’s ability to dole out benefits to corporations and let the market separate the wheat from the chaff.