1. Bureaucratic Corruption and Entrepreneurship in Brazil Bonnie J. Palifka Presented at the 150-mile conference Edinburg, Texas April 22, 2006

2. Outline Entrepreneurship –definition of –and growth –factors contributing to –in Brazil Corruption –definition of –effects of –in Brazil

3. Entrepreneurship Economic development depends on change. North: “the agent of change is the individual entrepreneur responding to the incentives embodied in the institutional framework.” Corruption is an informal institution that influences entrepreneurship.

4. Entrepreneurship An entrepreneur is an economic agent –individual –firm –institution that acts in the allocation of resources –raw materials –intermediate goods –physical, human, and social capital either to increase the efficiency of production of existing commodities, or to create new products.

5. Entrepreneurship Types of entrepreneurship: –adapt technology to local conditions –invent new ways to use local inputs imperfect information Requires foresight

6. Entrepreneurship and growth entrepreneurship higher productivity economic growth

7. Entrepreneurship Factors influencing entrepreneurship: –Psychological –Social –Economic

8. Entrepreneurship Psychological factors influencing entrepreneurship: –innovative personality –creativity –risk-taking

9. Entrepreneurship Social factors influencing entrepreneurship: –social mobility –patent protection –social/cultural legitimacy of entrepreneurial activity vulnerable to corruption

10. Entrepreneurship Economic factors influencing entrepreneurship: –demand for industrial and other products –availability of labor and inputs –inflation –taxes –cost of information –distribution of income –access to resources vulnerable to corruption

11. Entrepreneurship and growth entrepreneurship higher productivity economic growth corruption

12. Entrepreneurship in Brazil Baer: In 1985, “[R & D] expenditures per employee was 2.5 times larger in state than in private enterprises” Privatization, therefore, may actually reduce R & D, a measure of entrepreneurship.

13. Corruption Definition: abuse of one’s position for private gain. Some effects: –absorbs some of the returns to production –(or robs the state of revenue) –contributes to the inefficient allocation of resources –increases uncertainty and risk

14. Corruption Traditional nepotism clientelism cronyism Economic bribes gifts

15. Corruption in Brazil Bezerra, Bases sociais da prática da corrupção no Brasil: –part of the social fabric and government –“favors” more common than bribes –“apadrinhamento” –interceding on behalf of a friend is acceptable; self- benefit is corruption Effects: –entrepreneurship limited to the “connected” –lower incentives to education or effort

16. Source: Transparency International, author’s calculations

17. Source: Transparency International

18. Source: Kroll and Transparencia Brasil

20. Conclusions Corruption discourages entrepreneurship. Corruption is rampant in Brazil and not improving. Firms in Brazil list corruption second only to taxes as an obstacle to enterprise. The most corrupt areas of government bureaucracy that deal with businesses in Brazil: –procurement –technical audits –police –tax audits Addressing corruption in Brazil is one way to encourage entrepreneurship and, therefore, economic growth.

21. Thank you! Your comments are appreciated.