Latin America has achieved great things over the last decade: improved income distribution, less poverty, more home ownership, higher literacy, and a more robust democracy, among them. Corruption, on the other hand, has worsened. Comparing 2011 Transparency International Corruption index metrics with those of a decade earlier reveals a startling trend of increased corruption across much of Latin America, including IN markets that MIGHT surprise readers.
Revenue hides all manner of sins
Anyone who has managed a P&L knows that rapid revenue growth can lead to apathetic cost controls. In many Latin American countries, surging resource prices and economic expansion have stuffed tax coffers. Mining royalties in Peru, Argentine agriculture export taxes, Pdvsa, Pemex and Codelco profits are all examples of how governments are taxing the resource boom. From 2004 to 2011, Latin American government spending grew on average more than 25 percent per year, measured in U.S. dollars. The extra cash has helped fuel a much needed expansion of infrastructure investment, but too often has included woefully corrupt projects.
Periodistas Frente a la Corrupción (PFC) publishes a report every year highlighting literally dozens of cases of corruption that have actually been indicted. A still unfinished highway in Ecuador cost taxpayers $106 million when the winning quoted $36 million; in Guatemala, the Ministry of Communications awarded $27 million to fictitious suppliers linked to government officials; and in Venezuela, the massive public housing program paid close to $800 million to phantom companies as well as builders who never broke ground. These are just a handful of indicted cases, a drop in the veritable bucket of actual corruption, estimated by some to be anywhere from 5 to 10 percent of overall government spending and 10 to 30 percent of infrastructure spending in Latin America.
The greatest weapon against corruption, therefore, is austerity. Latin America became a more transparent region in the 1990s (versus the 70’s and 80’s) because low resource prices and aggressive debt servicing obligated governments to manage costs. By privatizing government-owned resources, infrastructure, and manufacturing firms, many of the vehicles of corruption were taken away from their puppet masters. After a decade of prosperity¸ some Latin American leaders have deluded themselves into thinking that they can manage energy companies, mining operations, steel production, electricity distribution, ports, and highway tolls. The reversal of Latin America’s privatization trend is worrying on two fronts– it threatens the region’s competitive standing and provides new channels for government corruption.
The Criminal Element
Organized crime is another important pillar of corruption. While the Colombian, Peruvian, and even Bolivian governments managed to pulverize the power of cocaine cartels, those managing distribution channels for the drug have become the enemies of the state in other countries. In Central America, Mexico, Venezuela, Trinidad and Tobago, Jamaica, Bahamas, the Dominican Republic, Paraguay, Argentina, and Brazil, organized crime has grown and become more consolidated, fueled by the incredible profits of drug trafficking and distribution. Per capita cocaine consumption in Buenos Aires is now believed to exceed that of most U.S. cities. In Jamaica, the two leading political parties are both accused of taking contributions from rival street gangs who control the nation’s drug trade. Venezuela’s military leaders are accused by some of colluding with Colombian drug producers. In the DR, the Russian mob is rumored to be involved in trans-shipment of cocaine to Europe.
Across the region, organized crime operates with varying degrees of impunity. Underpaid government employees who supervise immigration, policing, transportation, utilities, and other functions are all vulnerable to the ‘plata o plomo’ tactics used by cartels. In the region’s smallest and poorest countries, like Guatemala¸ criminal tentacles are thought to have reached into the highest echelons of previous governments.
But while drugs provide the source of profit for organized crime, the source of their legitimacy is the gap in government services that they fill. In countless rural communities it is often drug cartels that fund road building, schools and medical clinics as well as employ the fatherless young. It is no wonder, therefore, that governments struggle to uproot organized crime.
For investors, Latin America represents a perplexing dichotomy. On the one hand, strong resource prices, an expanding middle class, and rising discretionary consumption present tantalizing opportunities to global companies. But fortune-hunting businesses must contend with increasing corruption, and not just when trying to sell goods and services to governments. Wherever government oversight is needed– to obtain a permit, import a component, inspect a facility, or police a district– the specter of corruption is near.
John Price is the managing director
of Americas Market Intelligence and
a 20-year veteran of Latin American
competitive intelligence and strategy consulting.
About the Author: John Price is the managing director of Americas Market Intelligence and a 20-year veteran of Latin American competitive intelligence and strategy consulting. email@example.com.