Brazilian President Lula da Silva's once larger-than-life reputation has been reduced to tatters by a seemingly endless corruption scandal.

Brazil’s President Lula da Silva is immersed in a seemingly endless corruption scandal; his once larger-than-life reputation has been reduced to tatters. The significance of this is not negligible: Lula has become an emblem of the post-Cold War left with his combination of conservative fiscal and monetary policies and big social programs targeting the poor.

A breathtaking sequence of revelations involving the government and Lula’s Workers’ Party — beginning with the confession by opposition legislator Roberto Jefferson that he had received bribes for his vote in Congress — has brought to the surface a vast scheme of bribes to legislators and irregular methods of party financing.

The conventional wisdom was that, despite his radical Marxist roots and occasional concessions to his political base, Lula represented a healthy move away from the old left and toward the emergence of a new model for underdeveloped nations similar to Europe’s social democracy. Many thought this model would have a moderating effect on the left across the continent and hold Hugo Chávez in check.

However, Lula’s capacity to reinvent the left always hinged on something more than keeping interest rates high to stem inflation, maintaining a strong currency, riding on the high prices of certain commodities, and giving cash to poor families. He could either opt for simply managing the perpetual crisis or he could try to overhaul a labyrinthine political system that benefited certain pockets of industrial and agricultural production but keeps millions of people out of the realm of opportunity. He chose the former path.

While technocrats talk about a three percent rate of economic growth for Brazil this year and an export boom that has translated into a trade “surplus” of $40 billion, Lula’s voters are indignant at the corruption scandal. But the real point is that corruption has developed naturally in an environment of limited opportunities due to asphyxiating government interference. And the absence of adequate limits on the power of the political bureaucracy is in turn an incentive for corruption at the top level. The corruption of Lula’s government, therefore, should be seen more as a symptom than a cause. Ranting about corruption without removing the causes will only generate further frustration. Brazilians impeached President Collor de Mello in the 1990s but failed to change a system that ensured a party like Lula’s would fall into the same trap years later.

Brazil has often been a bellwether of Latin American political currents. It exemplified French-style authoritarian positivism in the early 20th century, centrally planned industrialization in the 1960s and 1970s, and democracy in the 1980s. (It was not, however, one of the leading nations in the so-called free market reform wave of the 1990s). Lula’s demise is now strengthening the more radical left, which has been quick to blame what is happening on the President’s “betrayal” of his Marxist origins. The rest of the Latin American left is watching.

Widespread corruption in underdeveloped countries is a symptom of the cost of the law and the weakness of the legal framework. If laws are burdensome and costly to follow, and there is no reliable system for enforcing contracts, corruption becomes a sort of insurance policy. As legal scholar Richard Posner has written, “nepotism, clientelism, and bribery become substitutes for contract when the enforcement of contract is undependable.” Over an extended period of time, corruption becomes a culture.

The latest “Doing Business” report by the World Bank shows that an average domestic company with fewer than 100 employees in Brazil would have to pay 148 percent of its annual profits in order to comply with all its taxes. A medium-sized company must spend 2,600 hours just in order to pay them.

It is not surprising that regulations and taxes have taken on a life of their own in Brazil, where the structure of government includes more than 5,500 autonomous municipalities, 10 million civil servants and a multitude of supposedly decentralized but really overlapping layers of bureaucracy competing for a piece of the action. Although this labyrinth has one positive aspect — it makes centralized decisions difficult to implement — it is totally impractical for reform-minded people.

Lula thought that as long as he kept macroeconomic stability and continued with his “Bolsa Familia” program — a conditional cash transfer that gives 50 dollars to each of 7 million families in exchange for making sure their children go to school — “social justice” would flow. Judging by the lack of investment at all levels of the economy, most Brazilians clearly did not agree. Prosperity requires a massive de-politicization of the prevailing system so that entrepreneurship can flourish. In the absence of that, it is not hard to see why Lula’s government became so corrupt.

Olavo de Carvalho, a Brazilian writer, recently remarked at a conference in Washington DC that “corruption is deeply rooted in the Worker’s Party not as a vulgar way for personal moneymaking but as a technical instrument to erode the moral basis of the capitalistic society and fund the revolutionary strategy.” How ironic that the man who was to save Latin America from old-style socialism is helping revive it.