ANALYSIS - Corruption hampers Brazil bid for world clout

SAO PAULO (Reuters) - Despite recent strides, corruption in Brazil remains rampant and could curtail the country's ambitions to become a major world economic player.

Kickbacks and bribes hold back Brazil's efforts to narrow income inequality and speak for a region that is often overlooked in the shadow of the United States.

The discovery of massive Brazilian offshore oil reserves only adds to the issue's urgency. Natural resources are a source of national wealth and potential graft in Latin America's largest economy.

A scandal now unfolding in Brazil's Senate underscores how pervasive a problem corruption remains: Senate chief and former president Jose Sarney is accused of embezzlement, nepotism and more. Sarney has maintained his innocence of all but minor charges, but the case threatens to derail the legislative agenda, stall oil reform and damage the governing coalition.

"The good news is that Brazil does rate in the top half of the world on corruption control," wrote Daniel Kaufmann, a former World Bank Institute director and now senior fellow at the Brookings Institution in Washington, D.C. in an email.

"The bad news is that this is not good enough if Brazil has ambitions to have sustained long term growth, address inequality, and become a major world power."

TRACKING ELUSIVE CRIMES

Corruption is hard to measure anywhere, but Brazil scores poorly in most global tests.

The Switzerland-based IMD's 2009 World Competitiveness Yearbook ranks it 45th of 57 nations for bribing and corruption, worse than Mexico and Chile but above Russia, India and China, Brazil's fellow so-called BRIC emerging economies.

The U.S.-based Heritage Foundation and Wall Street Journal give Brazil a 35 for freedom from corruption in their 2009 index of economic freedom, below the 40.03-point average.

Transparency International's Corruption Perceptions Index gave Brazil 3.5 out of 10 in 2008. India and China score similarly; Russia scores 2.1 points.

"Corruption has causes, objective causes," said Claudio Weber Abramo, executive director of Transparencia Brasil. The unequal distribution of wealth, the lack of robust institutions and poorly-administered laws all contribute, he said.

Anecdotal evidence of corruption abounds. In 2009 alone: executives from builder Camargo Correa were arrested for money laundering; the Senate is probing allegations of tax evasion at state-run energy giant Petrobras; and meatpacker and leather companies have come under investigation for bribery, racketeering and corruption.

President Luiz Inacio Lula da Silva swept into office in 2003 vowing to fight corruption, he faced calls for impeachment in his first term after it emerged that the ruling Workers' Party paid lawmakers to vote for legislation.

Lula was never directly tied to the payoffs and was reelected in 2006, but the Workers' Party's self-promoted reputation as a bastion of ethics has since eroded.

While corruption holds back economic potential the world over, it is of particular concern for a country with some of the widest wealth inequalities in Latin America.

A 2004 World Bank report found public-sector corruption associated with worse infant and child mortality. In 1997, economist Paolo Mauro wrote for the International Monetary Fund that corruption led to lower education spending as a percentage of GDP. A 2000 working paper from IMF economists noted that corruption constrains economic growth.

The World Bank tallied Brazil's economic growth at 3.2 percent to 5.4 percent annually between 2005 and 2007, a robust rate for the country but still short of what is needed to eradicate poverty at a faster pace.

Over that same time China's economy grew 10.4 percent to 13 percent annually, and fellow BRIC Russia saw 6.4 percent to 8.1 percent annual growth, bank numbers show. Latin American nations such as Peru and Chile also outstripped Brazil.

STRIDES, BUT MORE TO GO

Brazil's efforts to fight corruption have drawn praise.

"I have been -- and I say this consciously, it's a strong word -- impressed," said Dimitri Vlassis, chief of the Corruption and Economic Crime Section at the United Nations Office on Drugs and Crime. "Brazil will have a number of lessons to teach the rest of the world."

Those include a government Web site that puts public spending on view. The federal agency tasked with preventing corruption has launched a television campaign to raise awareness of the site.

On the corporate side, the non-profit Brazilian Institute of Corporate Governance started a business ethics code in 1999, with periodic updates. An upcoming revision clarifies gifts and donations in public-private interactions.

Kaufmann sees hope too, yet notes that more work remains.

"If there is political will and priority is given to governance reforms, this improvement in rule of law and corruption control is achievable," Kaufmann said. "There is no reason why Brazil cannot attain such good governance levels, which would further unlock its world power potential."