Corruption and Liberty in Peru

Transcript from Jorge Luis Hérnandez Chanduví speech at the Liberty International World Conference in Puerto Rico.

I was gladly surprised when I received an invitation from my friend Ken Scholland to participate in this important event. I was surprised because I hadn’t heard from him in a while and I was happy because I am very interested in freedom related topics and I defend freedom and I promote it in every opportunity that life offers me.

As a personal confession, my father was a businessman who despites the government in all its forms, even though sometimes he didn’t clearly understand what exactly he hated. I grow up hearing him say that the government didn’t let him work. In other words, the government didn’t let him generate wealth as a consequence of keeping benefiting others with his work.

I also heard him say many times that commerce is the one activity that will more likely take us out of poverty. This speech and everything that I will say today is no more that the development of my father’s ideas.

Well, let’s get right to the topic that we are supposed to discuss today. What is corruption? Why does it exist? What is the relation between corruption and any given government system?

What is the first thing that comes to your mind, my friends, when you hear the word Peru? Is it Machu Picchu? Is it MVLL? If this were the case, I would be very happy. Although, for those who follow Latin America news, Peru can also means Alberto Fujimori, one of the few south american former presidents incarcerated for crimes that go all the way from embezzlement to kidnapping and homicide. In fact, he was convicted for the murder of nine students and one professor from La Cantuta University in Lima. He was also convicted for the kidnapping of one journalist and one businessman and he was also acussed for the irregular payment of fifteen millions dollars to his former advisor Vladimiro Montesinos.

Unfortunately, he is not the only former Peruvian president with problems with the law: Ollanta Humala and his wife Nadine Heredia are in custody, accused of money laundering charges. The Prosecutor Office accuses them of having received irregular money in the 2006 and 2011 presidential campaigns. In the first case, from Venezuela and in the second, from Brazil through the companies Odebrecht and OAS.

Similarly, the ex-president Alejandro Toledo is in condition of fugitive. He has been given two orders of preventive custody and an international order of capture. The first order of imprisonment is also for the crime of money laundering (created in Costa Rica by a ghost company called Ecoteva) and the other request for prison is related to the case of Brazilian megacorruption called Lava Jato: as in the case of the Humala – Heredia spouses, the Public Prosecutor accused Toledo of having received a bribe of $ 20 million from Odebrecht to grant them public works during his term.

Another former president Alan García Pérez (twice president of my country) is also being investigated, although justice has not yet reached him.

Long story short, at least three out of four of the most recent peruvian presidents have been accused of corruption or are in prison. Nelson Mandela said: “In my country we go to prison first and then become President”. In Peru, the opposite seems to happen: you become President, then you go to prison.

Well, when such reality slaps us in the face, all citizens – and politicians, above all, who tend to take advantage of this situation- raise their voices and promise to strengthen the fight against corruption. In my country, there have been unsuccessful attempts to combat this scourge for decades especially after the fall of Alberto Fujimori’s autocratic regime. But nothing has worked. Everything has failed. To paraphrase an idea in one of Augusto Monterroso’s tales, “when Peruvians wake up, corruption is still there”.

I believe that since everything done so far does not work, we must try other alternatives. “Insanity is doing the same thing over and over and expecting different results,” Albert Einstein used to say, and he was right. But before proposing any solution, we must pause for a moment and analyze the problem.

Let us first try a general and simple definition of corruption. According to Transparencia Internacional, for example, corruption “consists of the abuse of power for its own benefit. It can be classified into large-scale, minor and political corruption, depending on the amount of funds lost and the sector in which it occurs. “

By this definition, anyone holding power can commit corrupt acts. Corruption then presupposes an authority or a decision maker, that is, someone who voluntarily assumes the position of making decisions that affect others. This person, therefore, can be at the head of a company or perform a public function. It is clear that corruption can occur in the private sphere, as well as in the public one.

However, I – and most of the scholars who have tackled the topic of corruption in Latin America – are interested in dealing with the corruption that appears from within the government apparatus, because the consequences of this corruption end up being greater and more damaging than corruption that occurs wthin the private sphere (the so-called “corporate corruption”).

Concerning the first type of corruption mentioned above, those who end up paying the consequences of a bribe of an authority (to get irregularly a contract to build a road or a college, for example) are the taxpayers. Regarding the second type, the consequences of an unfair act (for instance, the principal of a school that charges a commission to a publishing house that had a monopoly on the sale of books to students) are suffered by a smaller universe (parents and students in this school, in the example)

In this line, Spanish professor Lorenzo Bernaldo de Quiroz argues that “To practice corruption is to use directly or indirectly the political or administrative power outside its legitimate sphere to seek advantages in money or in goods, and distribute them among friends, relatives, servers or supporters. Corruption necessarily involves the use of the state apparatus on a discretionary basis to grant benefits to specific individuals or legal entities”.

So if corruption consists of the abuse of (political) power for its own benefit, the most convenient thing to do would be to diminish the power of those who hold it and access it from time to time (five years in the case of my country) through legitimate means or not. And this limitation of power implies establishing a real state of law and a true market economy.

Why do politicians seek to benefit themselves or benefit their friends when they obtain power? It’s simple. Because they act rationally, because they are profit maximizers. The studies on corruption start from a basic methodological error: the idea that human nature undergoes a mutation according to the scope in which individuals develop their activities.

According to this idea, individuals behave one way when they act in the market and another when they wear burocrats costumes. They believe that by magic, when they obtain a public office, they are stripped of all selfish interest and devote themselves to the service of the common good. Nothing further from reality. The individual behaves the same here and there. And the bureaucrat accepts bribes and steals because the system allows it. “If self-interest dominates the majority of men in all commercial enterprises, why not also in their political enterprises,” says Professor Bernaldo de Quiroz.

Now, if we take power from politicians, who do we give it to? Obviously to the source from which this power originates: the individuals. Let us divide the power that politicians now hold in small shares and hand them over to the citizens (let us give it back to them).

That would be, from my perspective, the first step to fight against corruption. But let’s go further. As Enrique Ghersi quotes, “the main error is that we have not understood what corruption is. Generally, we take it as a CAUSE, despite being an EFFECT”.

That’s right, corruption is an effect. The effect of having an intrusive state, a state that approaches its claws to properties that are or should be eminently private. Let us analyze this in detail, again following the ideas already developed by Professor Ghersi.

Corruption is an effect of a intrusive state, in a general way, but in a more specific or particular way it is an effect of the high cost of legality. No law is neutral. It entails costs, but it also brings benefits. What is the cost of the law? The time and information necessary to fulfill it; in other words, whatever I invest on it in order to comply with it or whatever I stop doing in order to do the same.

Then, applying the economic approach, if the law is very expensive, if the costs of it exceed the benefits of complying with it, simply the citizen will not comply. Here it is important to keep in mind that ethical assessments are an additional component of the scale of values ​​through which the individual makes rational decisions.

As Ghersi points out, “This is a pure decision based on individual utility, in which the citizen uses law as a means made available to him to make decisions. If the law requires a lot of time, people do not comply. If the law requires too much information, people do not comply.” It is the so-called economy of law.

Following this discursive line, corruption appears when there is a bad economy of law. Corruption breaks out when the costs of complying with the law exceed its benefits and, therefore, the citizen breaches or, better expressed, gives a bribe in order not to comply and not to be penalized for it.

Thus, the “bribe” or “aceitada” (as it is recently called in my country, which means “oiling”) becomes an insurance policy to work quietly, to protect against the application of an excessively burdensome law.

Consequently, a second measure, a more specific measure to fight corruption is to reduce the cost of the law. And where do laws “cost” less? In what kind of government laws cost less? It is simple. The cost of the law is a reflection of power. The greater power a ruler holds, the greater the number of laws is to be enacted, the greater their legislative haemorrhage will be, as a demonstration of a power that knows no limits.

As there is no counterweight, oversight, the laws dictated by a robust power have the evident purpose of favoring certain interest groups, “their” interest groups, their friends, to the detriment of the majorities that are forced to comply even though they are so absurd and expensive.

Here, it is also worth mentioning Robert Klitgaard’s famous formula (C = M + D-A), according to which “Corruption equals monopoly plus discretion minus accountability”. Therefore, a government regime will further promote state corruption while granting greater monopoly and concentration of public decision, as long as there is less control through the so-called political counterweights and the less obligation the officials have to account for their management. As is evident, these are characteristics of totalitarian governments.

On the other side, when power is limited, laws tend to be less expensive. Certainly, political counterweights and even empowered and organized citizens – clothed with a recovered power – can push back the ruler who tries to pass an expensive law.

The most effective way to fight corruption is not to put the nation in the hands of immaculate beings with a natural predisposition to the common good, but rather preventing the power they have from being misused. It is not just who rules the question we must ask ourselves but also how much power we should give to this ruler. And with all that said, the answer becomes obvious: the least possible so that it can do the least possible damage. The two instruments for restricting the government power are the rule of law and the market economy. Consequently, and returning to the initial question “where do laws cost the least? Well, in a system where the division of powers governs, where laws govern, not men, where the political power is separated from economic activity. In short, in a system where the greatest power resides in the citizens and not in the rulers.

A final reflection: I firmly hope that my country will continue to move forward on the path of development, a road that began in the 1990s with the structural reforms introduced by the now imprisoned former President Fujimori and have continued to this day.

Recently, the Lava Jato scandal – the mega-corruption case coming from Brazil where a group of large companies led by Odebrecht obtained public contracts in exchange for bribes to several Latin American rulers, including two Peruvian former presidents, as I pointed out at the beginning – has hit the peruvian economy as much or even more than “El Niño” Phenomenon.

However, we have hope in what our current President, Pedro Pablo Kuckynski, can do in the next four years (he has just completed a year of government). PPK, as our president is known in America, is a firm believer of the benefits of democracy and free market economy. For some reason he has been an economist at the World Bank and an investment banker.

As the latest Economic Freedom Index reports, “Peru’s economy is relatively open and welcomes most foreign investment, but regulatory delays and lack of predictability in regulations are problematic for foreign investors. Government corruption is a serious problem, and drug trafficking has grown, limiting foreign investor confidence in the economy. State-owned enterprises remain very active in the economy, especially in the petroleum sector. Nevertheless, poverty rates have been reduced, and Peru has benefited from significant foreign investment in mining and manufacturing. Peru has started numerous trade agreements with the U.S. and other countries and is a founding member of the Pacific Alliance. ”

In other words, although we have so much more to improve, Peru shows some signs of being on the right track.

Thank so much.