The effects of corruption on international trade theory:

The effects of corruption on international trade theory:Brazil x swedenBettina DAlessandroSdertrns hgskola

PurposeUnderstand 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 175Score: 43 of 100Bribe payers index (2011):Rank: 14 of 28Score: 7.7 of 10OECD anti-bribery convention (2011)Enforcement: LittleControl of corruption (2010)Percentile rank: 60%Score: 0.05611194Open budget index (2010)Budget openness: SignificantScore: 71

Corruption perception index (2014)Sweden:Rank: 4 of 175Score: 87 of 100OECD anti-bribery convention (2011)Enforcement: ModerateControl of corruption (2010)Percentile rank: 99%Score: 2.250953346Open budget index (2010)Budget openness: ExtensiveScore: 83

Corruption results worldwideCorruption 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 tradeIncrease 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.

SkanskaStockholm-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.

ConclusionAs 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.