The effects of corruption

on international trade
theory:
BRAZIL X SWEDEN

Sdertrns hgskola

Bettina DAlessandro

Purpose

Understand the consequences behind corruption on international trade,

specially Brazil versus Sweden. Through the case of Petrobras x
Skanska, understand the real, touchable consequences, of corruption.

What is the case between Skanska

and Petrobras?

World known struggle between the Brazilian oil major, Petrobras and
the giant Skanska, in Sweden. Brazilian construction firms, including
Skanska partners, were and still are being investigated over bribery for
pipelines, besides other projects.

In July 2014, Skanska announce its plans to end operations in Latin

America, one of the main reason being poor profitability, but also,
corruption being a contributing factor for the decision.

Skanska decided to pull out of South America after being involved into the corruption scandal by
major Brazilian oil company, Petrobras. Since the last quarter of 2014, Petrobras has been
investigated regarding millions in bribery, securing lucrative contracts for pipelines and refineries
Skanska was building. Johan Henriksson, president of Skanska Latin America, presented the
environment in South America as full of corruption, therefore finishing all operations in the area.
Skanska has already been part of other scandals in South America including accusations of false
invoices, payments to a ghost company and corruption, in Argentina; corruption, payment of
surcharges and irreparable damage to nature in Peru; fraud, gender discrimination, illegal gas
flaring, in Equator.

What is corruption?

Corruption is a complex phenomenon. Its roots lie deep in bureaucratic

and political institutions, and its effect on development varies with
country conditions. - World Bank

Corruption is known for being presented in various ways, including:

Bribery, Theft, Political and bureaucratic corruption, Isolated and
systemic corruption, Corruption in the private sector.

Corruption Perception Index (2014)

Brazil:

Rank: 69 of 175

Score: 43 of 100

Bribe payers index (2011):

Rank: 14 of 28

Score: 7.7 of 10

OECD anti-bribery convention (2011)

Enforcement: Little

Control of corruption (2010)

Percentile rank: 60%

Score: 0.05611194

Open budget index (2010)

Budget openness: Significant

Score: 71

Corruption perception index (2014)

Sweden:

Rank: 4 of 175

Score: 87 of 100

OECD anti-bribery convention (2011)

Enforcement: Moderate

Control of corruption (2010)

Percentile rank: 99%

Score: 2.250953346

Open budget index (2010)

Budget openness: Extensive

Score: 83

Corruption results worldwide

Corruption increases inequality and reduces efficiency each year it

costs 5% of global GDP (US$ 2.6 trillion, World Economic Forum), which
US$ 1 trillion is paid in bribes.

According to the IMF, corruption reduces investment by approximately

five percent and an increase in 1 point in the corruption index leads to a
reduction of international investment by 8%.

Comparing to the example brought beforehand, Sweden, out of

concerns about corruption, will not invest anymore in Brazil or in that
matter, in South America. The difficulties to find international
companies who will invest in these countries are getting bigger, and
their reputation will be lowered each time corruption is found out.

Other consequences of corruption in

international trade

Increase in business risk and minor creation of jobs

Reduction on economic growth, distorts governmental expenditure

Retard in foreign investment and reduces effectiveness of foreign aid

Petrobras

Talking about Petrobras, corruption has initiated a domino of discoveries of

corruption in the Brazilian oil industry and in the countrys government.

The four giants on the civil construction sector in Brazil Odebrecht, OAS,
Camargo Crrea (Skankas partner) and Andrade Gutierrez Brazilian companies
that made a great international projection, are all corrupt. As an domino effect, it
was possible to find out that the scheme has been going on for at least 15 years,
whereas everybody blames Graa Foster, Petrobras former president and Dilma,
Brazilian president.

The consequences of corruption and overpricing of contracts are and will be for a
long time, catastrophic. Loss of credibility, judicial action on part of the USA, and
until the end of January (2015), there had been a loss of R$ 21 billion in market
value and its papers on Bovespa are falling non-stop, regardless of the
replacement of their president. Many economists and politicians in Brazil believe
the only way out is to privatize Petrobras. It is believed to be a dark future
ahead of this giant.

Skanska

Stockholm-based constructor company, did not have major damages

besides the 6 million dollars, payed in bribery to Petrobras to assure a
contract for a pipeline in the Amazon forest. Besides that, it is believed
the Swedish company is leaving South America and its corruption for
good. Many jobs were lost and wont be created anymore with this
episode, and the development of the Latin America is going to get even
slower. As good examples of systematic and isolated corruption, those
two cannot work together leading to all the consequences mentioned
before.

Conclusion

As to the effects of corruption on International Trade, based on the case

Skanska x Petrobras, symbolizing Brazil and Sweden, it is clear Skanska is
part of an Isolated corruption country as Brazil is a Systematic corruption
type. Although some economists in the nineteenth century believed
corruption could lead to barriers being lifted and a stronger industry, what
was shown here is that corruption only brought consequences, and no
benefits. In those consequences, we have less jobs, bad reputation, law
suits, low foreign investment, loss of confidence by the action owners, loss
of confidence by the Brazilian people, lack of trust in the whole world.

There may be a way out of this black hole, but so far, the situation for the
Brazilian company is getting worst every single day. Regarding Skanska,
although now there is some distrust, as to why it was involved in corruption
in Argentina, Brazil, Peru and Equator, no major consequences surfaced.