CHAPTER 21 Lessons from Italy’s Anti-Corruption Efforts ALESSANDRO MERLI Since it began in 2014, the vast anticorruption investigation underway in Brazil, Operation Lava Jato, or “Car Wash,” and related inquiries have been compared with the Italian inquiry called Mani Pulite, or “Clean Hands,” of the 1990s. One of the main prosecutors in the Brazilian investigation, Sergio Moro, started studying the Italian case as far back as the early 2000s (Moro 2004). Both investigations showed that the extent of corruption in the respective countries reached the highest levels of the political and business establishments. It is useful for Brazil to examine the Italian case of Clean Hands and analyze its results and aftermath, which the first part of this chapter summarizes. On the political front, Mani Pulite decapitated two of the ruling parties of that time, the Christian Democrats and the Socialists, and created a power vacuum, which was filled mainly by a newcomer to politics: the television and real estate tycoon Silvio Berlusconi. As Berlusconi himself became embroiled in several corruption cases, open conflict between the political system and the judiciary began. This situation was partly responsible for a backlash against the investigating magistrates and the adoption of several laws that blunted their powers. On the economic side, although Mani Pulite initially led to a reduction in corruption cases and in the costs of public projects—which had been inflated by kickbacks—many high-profile cases that have emerged over the past few years show that corruption remains widespread in Italy. The second part of the chapter reviews some of the measures that were taken to counter corruption, starting in 2012 and especially during Matteo Renzi’s government in 2014–16. It also offers some lessons for Brazil, including the need for the actions of the magistrates to have the support of public opinion beyond the initial phase of the inquiry and the need for at least part of the political class to take the necessary legislative steps to achieve long-term results against corrup- tion, intervening on its prevention as well as its repression. The author thanks Edmund Amann, Juliano Basile, Carlos A. Primo Braga, Lorenzo Forni, and Erik Jones for their helpful suggestions and comments. 341 ©International Monetary Fund. Not for Redistribution 342 Brazil: Boom, Bust, and the Road to Recovery CORRUPTION IN ITALY AND THE MANI PULITE INVESTIGATION Corruption, according to a definition accepted by both the IMF and the World Bank, is “abuse of public office for private gain” (IMF 2018). The United Nations Convention against Corruption, ratified by 183 countries, identifies a core set of corrupt acts (UNODC 2003). Italy has long been considered one of the most corrupt advanced economies and certainly has a long history of scandals. At the beginning of the 20th century, the economist Vilfredo Pareto (1916) observed, “In Italy we can note that all the newly acquired wealth has its roots in public bids, railway constructions, state-funded companies, and custom protection. As a result, this order appears to experienced politicians as a lottery, which grants prizes, some large and some smaller ones.” According to criminologist Letizia Paoli (2002), however, until the late 1960s, corruption was by and large confined to the country’s ruling elite. From then on, “it became a common and socially accepted behavior, spread across all social strata and involving an even larger number of low- and middle-level politicians and bureaucrats.” The complexity of legal and bureaucratic rules and the inefficiency of the bureaucracy, together with insufficient social capital, are often cited as factors that contribute to the spread of corruption. They are compounded by the pervasive presence of organized crime, especially in Italy’s southern region. It is, in fact, impossible to examine the problems created by corruption for Italy’s economy and society without considering other factors that interact with it. It is no coincidence that in his book on “the seven deadly sins of the Italian economy,” the former director of the fiscal department of the IMF, Carlo Cottarelli (2018), puts corruption at number two; however, no fewer than four of the other capital sins are quite closely linked to it: tax evasion, the excess of bureaucracy, the slowness of justice, and the North/South gap. Some indirect evidence comes from the World Bank’s Doing Business report (2017). In introducing the IMF’s stepped-up engagement on corruption, its managing director, Christine Lagarde (2018), noted a need for a broader focus. The work on corruption undertaken at the IMF “will be embedded in [its] general work that promotes good governance in key areas such as public financial management, financial sector oversight, and anti-money laundering. Governance weakness- es are harmful in their own right, but they also open the door to widespread corruption. To be truly effective, anticorruption strategies must go beyond merely throwing people in jail. They require broader regulatory and institutional reforms.” Italy is one of the countries—together with the other Group of Seven (G7) members, Austria, and the Czech Republic—that have agreed to submit their legal and institutional frameworks to the IMF for an assessment with regard to corrupt practices by private actors on the payment of bribes and the laundering of dirty money. The judges on the Mani Pulite (also known as Tangentopoli, or Bribesville) inquiry advanced many explanations as to why, at the beginning of the 1990s, the system was ripe for attack. The main one is that the system had become ©International Monetary Fund. Not for Redistribution Chapter 21 Lessons from Italy’s Anti-Corruption Efforts 343 increasingly costly, which, together with the difficulties in the economy, made it uneconomical. Because of its very (illegal) nature, corruption is inherently difficult to mea- sure. Vannucci (2009) tries to quantify it using official statistics on the number of cases and persons indicted, which peaked in the mid-1990s, and the number of convictions, which peaked a few years later. In the first years after the 1992 start of Mani Pulite, six former prime ministers, more than 500 members of Parliament, and several thousand public officials, together with the heads of some of the most prominent companies in Italy, were under investigation. Another indicator of the scale of corruption in Italy is the cost of public works as it com- pares with that of other countries. But the image of Italy as a country more cor- rupt than most is based not as much on hard data as on several indices of percep- tions of corruption. The most frequently quoted is Transparency International’s Corruption Perceptions Index, which in 2017 ranked Italy 54th, with a score of 50 out of 100—a distinct improvement over 2012, when the latest wave of anti- corruption efforts started and Italy was in 79th place (with a score of 42 out of 100), but still behind most other European Union countries. Brazil, by way of comparison, is 96th, with a score of 37 out of 100 (Transparency International 2018a). Other measures, such as the World Bank’s Control of Corruption rating in its World Development Indicators and the Eurobarometer surveys, paint a similar picture. Perception matters: It influences confidence and investment decisions, in addi- tion to more generally affecting the behavior of economic agents, including their willingness to trust the judiciary and pay taxes (Cardoso 2006). The Italian anti-corruption authority, Autorità Nazionale Anticorruzione (ANAC), is now trying to develop a new set of corruption risk indicators. These indicators are differentiated by territory, sector, and level of government and ini- tially applied to the areas of waste management, education, social services, and procurement. The objective is to identify anomalies in public contracts that may raise red flags for the anticorruption authorities (ANAC 2017, 55–66). Studies accompanying the IMF’s most recent framework (2018) on gover- nance and anti-corruption show that there is a negative correlation between cor- ruption and long-term per capita income, investment, and tax revenues and a positive correlation with higher inequality. Calculations for Italy made by the economist Luca Paolazzi for Confindustria, the employers’ federation, indicate that, were Italy to reduce corruption (as measured by the World Bank’s Control of Corruption rating) to Spain’s level, economic growth would be 0.6 percent higher. If it managed to lower it to France’s level, per capita income in 2014 would have been 5,000 euros higher (Paolazzi 2014). More generally, Lagarde observes that “sliding down from the 50th to 25th percentile in an index of corruption or governance is associated with a fall in the annual rate of growth of GDP per capita by half a percentage point or more, and a decline in the investment-to-GDP ratio by 1.5 to 2 percentage points. [The IMF’s] results show that corruption and poor governance are associated with higher inequality and lower inclusive growth.” ©International Monetary Fund. Not for Redistribution 344 Brazil: Boom, Bust, and the Road to Recovery Because of the inherent difficulty in measuring bribery, it is unclear whether corruption in Italy has increased or decreased since Mani Pulite. On the economic front, the strongest effect, at least in the short term, was the steep drop in the cost of public projects. Construction costs for the Milan underground went from 300–350 billion lire (L) per kilometer in 1991 to L97 billion per kilometer in 1995. Total costs for the Milan cross-rail dropped from L1,994 billion to L1,452 billion. The budget for the extension of Malpensa Airport was L4,200 bil- lion, while the actual cost was eventually L1,990 billion (Vannucci 2012). A misleading value about the cost of corruption for the Italian economy that pops up from various sources sets the figure at 60 billion euros a year, equivalent to 3.5 percent of GDP.