Fair Play

Brazil has been known around the world for its carnival. In particular, Rio de Janeiro’s annual parade of “samba schools” competing for the title of carnival’s champion is an impressive display of cooperation and competition, built from the bottom-up through many years, to generate a large scale production with outstanding results. About a week ago, papers reported that the federal police, in investigating illegal gambling activities known in Brazil as the “animal game” (jogo do bicho), recorded conversations that show that the jury of this year’s carnival was bribed and threatened in order to favor the champion school. I was so far under the impression that perhaps there was sufficient balance of power, transparency and exposure in Rio’s carnival championship to favor fair play. Apparently I was wrong.  

In my first post on this blog, I raised the issue of whether unfair competition in product and labor markets in Brazil, as reflected in high rates of informality, had a hampering effect on private investments and productivity growth. In my second post, I returned to the issue of the impact of unfair competition on productivity growth by focusing on Brazil’s public procurement system. Both cases highlight reduced productivity enhancing competition due to violations of the established rules.  

I am hesitant to generalize on a few examples of how competition rules are broken in Brazil. Ultimately, the respect or not for a rule can be understood as depending on the cost-benefit of respecting those rules, and this calculation is particular to the matter in question and the segments of the population facing them. However, if the lack of respect for competition rules becomes pervasive in unrelated aspects of society, this raises the issue of whether there is some a common factor influencing the development and respect for competition rules in a variety of situations.  

There is some theory and evidence that suggest that countries with high levels of inequality may find it harder to establish and enforce fair rules of competition. In an April paper of the Center for Global Development, Nancy Birdsall notes that there is some evidence that high inequality reduces the effectiveness of institutions for growth, whether by reducing support for policies that favor productive investments by the poor (such as public education) or by stimulating rent seeking by the rich. She also notes that there is evidence that inequality harms social capital building, that in turn influence contract enforcement and respect to social commitments. The evidence may still be sparse, but as she notes herself, a comparison between the growth records of East Asia and Latin America in the last four decades at least suggests the issue merits attention.  

The issue of competition is not one of markets versus states. Productivity enhancing competition – and the required cooperation around its rules – seems still to be the best incentive mechanism for using the pursuit of self-interest in the public benefit. If incentives are unable to generate cooperation and competition under rules that are broadly accepted, self-interest leads to violence, rent-seeking, corruption, it becomes destructive, and neither states nor markets are able to fulfill their potential as institutions capable of building prosperity.  

With the growing confidence in Brazil’s macroeconomic stability and the decreasing costs of financing in the country, Brazil seems positioned for sustained growth for many years. A couple of weeks ago, in an article where several economists expressed this opinion, I read a well known and respected macroeconomic analyst warn that we should address reforms such as those of taxation and social security or these would start holding back growth in …10 years! Is that how much time we have? Growth expectations for Brazil seem consistent with recently popularized growth diagnostics that portrayed Brazil as a high return country constrained by poor financing (Hausmann, Rodrik and Velasco). However, even if we agree, how long this growth spurt lasts depends on how fast the returns to investment fall. Should we expect any structural changes in the coming years that will continue pushing such rates of return up?  

I grew up hearing (only half-jokingly) that to win a soccer game unfairly feels even better than winning square: say by 1-0, with a goal scored on the 48th minute of the second half through a penalty kick incorrectly called by the referee. Year after year, Brazil would modify the rules of its national soccer championship under pressure of one or another group of powerful teams. In particular, when a major team finished in the last positions requiring it to play the next year in the second division, high level decisions would inevitably be made to reverse the situation and avoid such an embarrassment. This seems to have improved in recent years. For a few years now, each team in the national championship plays every other team twice, with the team scoring most points receiving the title. The teams placed in the last four places have fallen to the second division (including some of the major teams) and the first placed teams in the second division have risen. The rules seem to be respected.  

There is some indication from the political economy of reform, that reform is more likely in times of crises. I do not know if soccer revenues were down in the 90s, but in thinking of economic reforms in Brazil in the coming years, we may have to rely on other forces rather than crises to bring about change.