BRAZIL’S PETROBRAS SCANDAL: A CASE STUDY OF EXTRACTIVE ECONOMICS

By Evan Carlo
Staff Writer

Once hailed as “an extraordinary triumph for Brazil’s achievement,” the Brazilian energy giant Petrobras is now caught in a corruption scandal that could lead to the very top of the country’s political establishment. For months corruption investigators have dug into Petrobras’ records and discovered illegally diverted funds going out of the company and into the pockets of politicians and party activists. Given that the Brazilian government owns 51 percent of the company’s stock, Petrobras essentially operates as a state-owned enterprise. The government uses Petrobras’ revenue and profits to aid in the country’s social development by requiring the company to invest part of its business in local development. Because of this, many Brazilian citizens are angry over the fact that public funds are being used to enrich the political and economic elite.

The scandal kicked off when authorities arrested Paulo Roberto Costa, Petrobras’ chief of refining from 2004 to 2012, in March of last year on money laundering charges. He confessed that construction companies in his division won contracts by diverting over $3.7 billion dollars to slush funds for politicians, making this the largest corruption scandal in Brazil’s history. His testimony led the indiction of over 30 people, many of whom were members of the ruling Worker’s Party. Recently, the scandal reached new heights with the April 14 arrest of the party’s treasurer Joao Vaccari. Authorities charged him with handling $200 million of funds that were obtained from engineering and construction firms that over-charged Petrobras for their services and used their inflated profits to bribe the company and political officials to accept these contracts.

Given President Dilma Rousseff’s status as head of the Worker’s Party and her former role chairing Petrobras’ board of directors during its years under investigation, she has become increasingly connected to the scandal. President Rousseff has repeatedly denied involvement but that has not stopped calls for her impeachment and declines in her approval ratings. Politically this scandal may bring down her presidency and cost the Worker’s Party and its coalition many seats. But a new ruling coalition will unlikely change the political and economic structure that allowed and incentivized corruption.

This is a problem that we see time and time again in developing countries that operate under an extractive economic system. Political economists Daren Acemoglu and James Robinson extensively developed the idea of extractive economies. An economy is extractive when the ruling political elite exploits whatever economic rents they can from their existing economy to maintain their hold on to their power. This contrasts with an inclusive economic system that diversifies the economy and promotes inclusive growth from other sectors. In an inclusive economy, corruption is less widespread since the rule of law and property rights are strongly enforced. Policy examples of extractive economics include: monopolizing industries, excluding entry into the market, using political power to give an advantage to favored industries over new startups, corruption, the alignment of private and public interests, and more. The point of an extractive economic system is to keep political and economic elites in power and extract excess rents from the population. This system is easier to establish in commodity-based economies that focus mainly on extracting and exporting a basic commodity, which is exactly what is happening in the case of Petrobras.

Now it is a little unfair to call Brazil an extractive economy. Brazil, unlike say Russia or Kuwait, does not fully depend on the petroleum industry for its economic survival. Even in the areas of corruption and the rule of law, Brazil ranks higher than many Latin American countries on The World Bank’s Governance Indicators. Since the democratization of Brazil in the 1970s, the Worker’s Party has tried to develop an inclusive political and economic system to reduce inequality and oligarchy. While conditions in Brazil have improved since the 1970s, Brazil problems with income inequality and corruption persist.

The scandal with Petrobras demonstrates that aspects of the Brazilian economy still operate under an extractive system. Petrobras controls enough of the economy and suffers from enough corruption and inefficiencies to pose an economic threat. Economist Samuel Pessoa estimated that Petrobras and its various subcontractors are responsible for a tenth of Brazil’s economic output. Another study by the FGV Business School predicts that the scandal will cause Petrobras and its subcontractors to decrease spending and investment by $30 billion. The world economy is already beginning to slow down due to slower growth in East Asian and European countries. This poses a severe risk to Brazil, which operates mainly as a commodity exports economy. A slowdown in the petroleum industry combined with exogenous shocks can throw Brazil into a recession.

Even when Petrobras and the Worker’s Party try to pursue inclusive policies by using Petrobras to develop impoverished regions, it is executed in a way that makes Petrobras inefficient. Petrobras has a domestic content requirement to contract a certain percent of the goods and services from local businesses. This prevents Petrobras from contracting more experienced and efficient international companies, raising the cost of business. In addition, the government subsidizes fuel consumption through Petrobras by keeping prices artificially low. These two effects keep costs too high and prices too low for Petrobras to remain profitable. Therefore Petrobras is unable to finance its operations and expand its business without going into debt. Petrobras is now one of the most in debt businesses in the world because of how the government crafts their business strategy. The culmination of these policies turned one of the most promising companies in the world to an economic basket case.

The Brazilian government needs to loosen control over Petrobras and allow it to operate more as a private business. The Worker’s Party can create inclusive economic policies through the government and public policy instead of through a state-owned business. These policies not only make Petrobras inefficient but also incentivize corruption. If Petrobras operates more as a private business there will be a disincentive to accept inflated contracts in exchange for bribes since it must make a profit. Having the government divest more from Petrobras will keep the government out of the decision-making process at Petrobras, preventing private and public interests from aligning.

By allowing more competition in the bidding for Petrobras contracts, the Worker’s Party can fight corruption while still developing a more inclusive economic system. If they don’t reform Petrobras, corruption will continue and the emerging economy will suffer for it. The high debt and economic inefficiencies of Petrobras are preventing it from fully exploiting Brazil’s promising off-shore oil reserves that are estimated to hold 50 billion barrels of oil. With the scandal forcing Petrobras to cut back on investment spending, the company is unable to procure the equipment and skilled labor necessary to develop these oil sources. Because Petrobras is a large part of the economy, if it doesn’t recover quickly from the scandal it can weigh down Brazil’s already weak economic growth. Without these reforms, Brazil’s economy will stagnate for the foreseeable years to come.

Image by Agência Brasil

DETRIMENTAL DEVELOPMENT: HOW INTERNATIONAL AID ORGANIZATIONS FAILED POST-EARTHQUAKE HAITI

By Jasmine Minato
Staff Writer

2015 marks the 5th year anniversary of a 7.0 magnitude earthquake, which took over 250,000 lives, including over 18,000 highly skilled professionals and destroyed a majority of homes, schools, hospitals, and government buildings in Haiti’s capital of Port Au Prince (PAP). The monstrous natural disaster was ranked by the U.S. Geological Survey in the top 10 worst natural disturbances in all of human history. A self-proclaimed novice expert of Haitian history, yet confirmed avid researcher on the Caribbean island’s cultural developments and colonial periods, Ivan Evans (who is also the newly appointed Eleanor Roosevelt College provost), hosted a seminar called “Haiti After the Earthquake” on February 18 in the Cross Cultural Center’s Communidad Room at the University of California, San Diego. Guest speakers included Literature department Professor Sarah Johnson, UC Berkeley’s School of Environmental Engineering Professor Mary Cameiro, and Dickinson College American Studies Professor Jerry Philogene. Although Haiti has relatively avoided recent news headlines, commotion regarding international aid has not. The phenomenon of aid organizations flocking to regions struggling with rebuilding post-disaster continues to be a relevant headline. However, the role of international aid organizations in the reconstruction process deserves a second look. In particular, should organizations dictate whether a nation should enforce recovery or development policy post disaster reconstruction? In Haiti’s case, international aid organizations dictated the choice to fund long term public projects during an emergency disaster crippling the nation’s ability to re-build on it’s own. Pipeline projects were promoted as a recovery priority for aid cohorts. Is the fundamental intention of aid changing or was Haiti cheated out of relief aid?

How is Haiti remembered?
Haiti is well known as a poor nation with the “lowest per capita GDP in the Western Hemisphere,” according to Literature Professor Sarah Johnson. However, she continued, within “Haiti’s history contains the highs and lows of human emotion,” from which we can all remember Haiti by if we are willing to dig past a common single narrative strangling the nation’s true exceptional resiliency. Often overlooked is Haiti’s ability to overcome overwhelming circumstances. For example, in 1804 Toussaint L’Ouverture, a free slave and Haitian rebellion leader led a successful populist revolt against French colonial military forces leading to national independence. The logic of Haiti’s resilience lies in an ability of its people and it’s culture to adapt to renewal or as Johnson calls it “building from the ground up.” For most of the 17th century, Haiti was an empirical trade frontier where crops and eventually people were stolen by European colonizers. Haiti was forced to support foreign prosperity at the cost of domestic degradation. Post independence, social order was an anomaly where 60,000 Haitians lived as free people and half a million Haitians were still enslaved as laborers. Johnson asks “how could Haiti rule a society with slaves led by free people?” Her answer is years of extreme violence and bloody revolutions between different classes of people. Colonization caused unnatural violence and social disruption in Haiti. An intervention of foreign powers caused Haiti to become chaotic. Foreign intervention today no longer looks like colonization, but takes form in international aid. International aid organizations are pre-occupied with planning long-term business developments than providing emergency humanitarian relief. In 2010, disaster recovery became an investment opportunity for international aid organizations swarming PAP. Haiti has a spirit of resilience and a unique history of survival in the face of uncertain and tremulous conditions, but in the aftermath of an event of total geological destruction, was Haiti’s spirit of resilience enough to recover? Reliance on outside organizations caused Haiti to fall into an economic chokehold where recovery was possible, but with coercion. An immediate need in the aftermath of destruction would be water, shelter, and search crews, however, for Haiti commercial development as a recovery plan seemed to attract aid organizations.

How did Haiti fall victim of disaster capitalism?
To understand Haiti as a victim of deceitful aid, turn to theories of aid policy. Dr. Dambisa Moyo, who received a doctorate of Economics from Oxford and Master’s in government from Harvard’s Kennedy school, describes why foreign aid innately destroys the longevity of a nation in her 2010 published novel “Dead Aid.” Moyo’s novel can best explain how recovery policy and development policy are completely separate animals. Development policy is a geopolitical hold for advanced nations to dictate poor nations economically and divide physically. Thus, advanced nations embark on economic colonization by forcing business assets abroad. Recovery policy is either free or loaned immediate relief and often descends into a vicious cycle of aid, leaving a receiving nation addicted. Short phases of aid cause a culture of dependency, which ensures underdevelopment as well as economic failure even in the poorest of aid dependent nations. Recovery policy is a tool of international relief, yet used often without empathy for cultural survival. The very nature of aid is changing from fiscal loans between governments to NGOs sending humanitarian cohorts to supply emergency relief. However, considered an outlier is international aid organizations choosing to impose development policy in Haiti. Moyo formulates that development policy is strongest when a nation has equal economic and political leverage with foreign interventionists, but vindictive when a nation relying on aid is dependent on the hand which feeds it to ensure economic survival. Only nations with similar economic power should work multilaterally to mutually enforce development policy, but where a weaker state and powerful state work together, often the latter will be deceitful. The benefits will be asymmetrical and impose an agenda of development favoring the more advanced nation.

How did international aid organizations deceive Haiti?
Mary Cameiro, a world renowned expert on international post-disaster recovery, volunteered as an academic professional to join a recovery plan committee in Haiti in 2010. She says, “Being an academic in a room full of land developers, I felt as if I were in the twilight zone.” She was blindsided when she learned the true intentions of international aid organizations being more concerned with property licensing and land ownership rather than ensuring humanitarian aid to residents suffering from trauma. Camerio recalls that residents refused to remove rubble piles from the street, possibly knowing that land plot once belonged to them; a space where their business once stood. The beginning of territorial expansion processes began. Rubble piles were forcefully removed in order to build infrastructure in the city against the will of the Haiti residents. Camerio also noted that foreign aid development controlled by U.S. AID, IDB, the French Government, and the Clinton Foundation had no sort of common agenda and because of their disjointed goals to begin economic and social recovery. Chosen as one representative to oversee land-transferring committees, Camerio emphasized that fiscal investment in land property just was not normal for organizations that would support recovery in the face of disaster. In small meeting rooms, Camerio was an academic amongst “representatives” from aid organizations who claimed to be in Haiti to support recovery processes, but land developers were on the phone making business deals. She witnessed residents with honest intentions to protect their property, lose everything to a room of developers representing wealthy foreign organizations fighting for land. Who knows how many properties were stolen from residents because of the intervention in foreign aid. What is certain is PAP became a victim of disaster capitalism. Camerio recalls thousands of residents with missing family members and even more residents concerned about what to do next about their destroyed homes. It was perplexing that international aid organizations send land developers and business partners rather than emergency relief cohorts given a frantic outcry of the local residents. Without human security, disaster victims often resort to refugee seeking and migration. In Haiti’s case, many international aid organizations had no empathy of cultural survival, only a hunger to conquer and build.

Camerio says “one of the worst outcomes of the destruction was the loss of government records because land property licenses were completely unknown” and now, land was vulnerable for foreign developers. Haitian families who once owned stores in PAP had to give up that space for a school or new vocational resource center to be built. This type of development is infrastructure for future sustainability not emergency relief, or as Camiero says, “10 steps ahead of what really needed to be addressed as far a recovery policy was concerned. The immediate need was for survival and safety, not buildings and institutions.” While international organizations set up shop to build schools, life in the campsites for residents who had lost their homes was unsafe, unstable, and to the rest of the world, blue tent life looked like a dangerous war zone. Residents were put in danger due to enforced international aid. Crime was high as emergency relief supplies such as medical kits and blankets were stolen daily. “Children were abducted at night, in the middle of the day, and in the early morning in part because UN peacekeeping troops had militarized certain parts of PAP as regional zones and were too busy chasing organized crime” says Camerio. Mothers lost their children with no record of which part of the city their children might have been taken to or which blue tent their child may be in as tent rotation was a common trait of camp life. Even more bizarre, Cameiro explains that the U.S. military taking over Haiti’s national airport only because someone or something had to. “It was difficult to successfully do search and rescue because the streets were damaged and the land was destroyed. I witnessed residents collecting rainwater in puddles along the damaged streets for water. Between cracks there would be puddles for water to be collected in plastic bags and that was how you drank water, out of the spout of a plastic bag. Entire neighborhoods were destroyed. There were no classes for children and in an urban disaster, the effect was that school just ended” says Camerio. 80% of schools and ½ of the hospitals collapsed. Even UN offices were destroyed, killing over 300 employees. 1.3 million residents in Haiti lost their homes. Camerio sighs, “the entire nation was in shock.” Yet, Camerio like Johnson says Haiti’s tradition to rebuild in the aftermath of disaster gave her hope for strengthening the nation.

Where is the empathy for cultural resiliency and what is struggle of its survival?
Carrefour, pronounced “ka-fou” in Haitian Creole, is a large metropolitan, low-income neighborhood in Eastern PAP where disaster recovery has been relatively unsuccessful. Immediately after the quake, it was speculated Carrefour’s residents were suffering from waterborne diseases. Thankfully, staff from Doctors Without Borders identified a need to support Carrefour and within 24 hours upon arrival to Haiti they set up a pop-up hospital to treat over 500 local residents. However, as the only medical clinic available for miles, it was sacked by corrupt criminal activity; stolen medical devices such as thermometers were sold on the streets. There were no schools or resource centers. There was not enough law enforcement. Carrefour remained in need of relief groups, but only received minimal efforts to secure emergency relief. Instead, the focus was development. Regional planning for pipeline projects like recreation centers and transportation systems exist to sustain a strong city. Formally, infrastructure policy should embody these blueprints. For disaster recovery, basic necessities such as search and rescue should have been organized first. Every international organization representative was certainly made aware of the lack of public safety with unacceptable high crime rates and the difficulty of locating displaced people. A need for extensive search and rescue should justify a plan for an immediate relief project since Haiti was in a state of emergency. Developers did not care about who was going to enjoy these facilities. Lacking empathy for the cultural survival of Haiti, emergency relief turned into a business enterprise. From Camerio’s perspective, there was no investment in the primary relief of the Haitian community including the survival of residents. Today, the outcome of funding pipeline projects over encouraging emergency relief has deprived Haiti of a full national recovery.

Changing Aid To Recognize Empathy UCHI: What is the University of California’s connection to recovery in Haiti?
Today, Haiti is swarming with anti-establishment small university charted aid groups including the University of California’s own UC Haiti initiative group. Partnered with the L’Universite d’Etat d’Haïti (UEH), Haiti’s largest public institution for higher education, each of the ten UC campuses has dedicated students to support “Haitian brothers and sisters.” The initiative, which began in 2010 as a response to the earthquake, emphasized the necessity for global collaboration in all sectors to support self-sufficient recovery for residents in Haiti. “International governments often do not prioritize higher education in their plans for reconstruction” says UCHI. However, now cross-cultural alliances between universities can ensure long-term stability. It is possible that UCHI may be the prospect to reversing the voice of aid back to support emergency relief. If smaller groups can increase international education infrastructure, then international organizations would have to respond to emergency relief. Facilitating self-sustainability for the Haitian people is a positive first step towards development rooted in empathy.

Image by United Nations Development Programme

A WEB OF LIES: ARGENTINE PRESIDENT ACCUSED OF COVER-UP

By Michael Roderick
Staff Writer

While politicians across Argentina prepare for presidential elections, embattled President Cristina Fernández de Kirchner has a new set of problems to deal with. Kirchner, who will not be running for reelection because of the country’s term limits for the office, has come under questioning recently in the mysterious death of Argentine prosecutor Alberto Nisman.

Nisman was found dead in his apartment on January 18 with what was originally thought to be a self-inflicted gunshot wound. At the time of his death Nisman had been tirelessly working on the continued investigation of a 1994 bombing at a Jewish community center, which killed 85 individuals and injured hundreds more. Shortly after his death details began to surface, turning what originally seemed like an open and shut suicide case into a political nightmare.

As the lead prosecutor in the AMIA Jewish center bombing, Nisman had worked with Interpol in an attempt to seek out Iranian suspects in the attack. Nisman was also vocal in his accusations that Kirchner and her regime had been protecting officials in Iran who he believed were responsible for this unsolved disaster. Since his death, it has been unearthed that Nisman was on the verge of publicly testifying in front of Congress against Kirchner and that he had drafted a warrant for her arrest and detention in relation to the accusations of attempts to cover up Iran’s role in the bombing.

Kirchner’s Ties to Iran

In documents recently made public by an Argentine judge, Nisman showed intercepted telephone calls between members of Kirchner’s administration and members of the Iranian government, discussing plans for Argentina to secure oil from Iran in return for help with covering up Iran’s involvement in the AMIA bombing twenty years ago. Kirchner’s administration has been struggling to fight “nagging power cuts” as well as political trouble and many other economic shortcomings throughout her time in office; the prolonged conversations between Iranian and Argentine officials were seen by Nisman as a deliberate attempt by Kirchner to use her high position to protect members of a government that could give her country access to important markets and help with energy shortages.

The intercepted phone calls also contend that high ranking Argentine officials had discussed sending food and weapons to the Iranians in return for oil. There were also discussions of attempting to find a scapegoat for the Jewish community center massacre.

Conspiracy on Top of Conspiracy

In the wake of Alberto Nisman’s death, President Kirchner implied that the prosecutor had committed suicide, yet she promptly changed her tune when ballistic reports concluded that there was no gunpowder on Nisman’s hands and there was a hidden entrance that could have allowed access to his apartment. Once Kirchner admitted that she believed that the death of Mr. Nisman was not of his own doing, the spin machine was set in motion. Kirchner’s current position is that the murder and all of the accusations of corruption aimed at her administration are actually the work of individuals within the Argentine Intelligence Secretariat in an attempt to discredit her presidency. The President claimed that “they used him alive, and then they needed him dead, as sad and as terrible as that is.”

The blame, in the President’s eyes, has falls on intelligence agent, Antonio Stiuso, who was instrumental to Nisman over the course of his investigation into the AMIA attack and has been a communications expert specifically in the field of wiretapping for the intelligence agency. Kirchner has used this accusation as a means to ask Congress to help her disband the Intelligence Secretariat entirely. As this situation continues to play out like a script from a Hollywood movie, Antonio “Jaime” Stiuso, who was fired by Kirchner prior to the murder of Nisman, has disappeared and is apparently being sought by the Kirchner government for questioning.

The Tangled Web

As Argentina tries to move forward and deal with the murder of prosecutor Alberto Nisman, they are scrambling for information that will help make sense of a situation that has more twists and turns than a spy novel. If the President is to be believed, and the Intelligence Secretariat used Nisman as a pawn to attack Ms. Kirchner and her presidency, we must ask why they would silence him mere hours before he was going to testify in front of Congress.

Why kill the man before a testimony where he planned to prove the President of actively working to hinder the investigation and obstruct justice in one of the deadliest single attacks in Argentine history? Would it not make more sense to allow Nisman the ability to persuade more people of the guilt of the President? Does the fact that the President immediately ruled the death a suicide seem a strange thing to do before the reports were even filed? Then to accuse the remaining living individuals who had also worked to expose the cover-up may also strike some people as an extremely convenient political tactic.

If we look to popular opinion, Argentine polls in the weeks following the death of Alberto Nisman showed that 82 percent of Argentines surveyed believed that Nisman’s claims against Kirchner were credible. There clearly needs to be a true investigation into the AMIA Jewish community center bombing, as well as into the way that the investigation was handled by current and previous Argentine administrations and the murder of Alberto Nisman. These investigations must be carried out by impartial organizations outside of the control of the Argentine government, as there can be no confidence in a thorough investigation if it is done by the Kirchner administration or her allies in the judiciary. Furthermore, as Argentina prepares to elect a new President this coming fall, something must be done to ensure the citizens they can trust the electoral process and those in the most powerful offices in the country.

Image by jmalievi