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Final sore line: 0–2


Robert Greco

By

October 14th, 2014


In the second of a two-part series, Robert Greco investigates whether the economic criticism of mega-sports event subsidies held true in the FIFA 2014 World Cup.


In Part 1, I outlined the theoretical understanding and some of the evidence that underlie the economic decision to subsidise a mega-sports event. I concluded that, on balance, subsidising a mega-sport event such as the World Cup is ultimately a poor use of taxpayer money in terms of purely measurable economic indicators. The conventional wisdom that such a big public investment leads to “spill-over” benefits within the economy was dispelled, or at least put into serious doubt.

So how do the figures from the 2014 FIFA World Cup in Brazil alter this understanding?

On the whole, it seems plausible that the figures reinforce the idea expounded in Part 1. The first thing to note is that in stark contrast to the conventional wisdom perpetuated by governments around the world, the Brazilian economy faired poorly. Economic activity in Brazil fell sharply in June, with the Brazilian central bank’s index of economic activity falling by 1.5% from May, after seasonal adjustments.[1] In quarterly GDP terms, the Brazilian central bank believes the June quarter declined by 0.6% from the previous quarter. In context, however, the negative growth rate continues a downward trend in economic growth, representing the fifth consecutive monthly decline in Brazilian economic activity.[2] So it would appear that the Brazilian government, like the Brazilian national team, has let its country down.

The second point to note is that all 12 hosting cities had fewer net jobs in the January to May period this year than they did in the same period in 2013.[3] Brazil’s labour ministry reported the “worst job creation in June since 1998”, blaming the World Cup that caused a “drastic drop in consumption” that led to fewer working days and less hiring.[4] Commentators have also pinpointed the completion of projects undertaken for the World Cup as a reason for this decline.[5] However, the broader picture is not so bleak: Brazil’s unemployment rate impressively fell to one of its lowest rates of 4.8% in the heart of the World Cup.[6] This now stands at 5%.[7]

Unsurprisingly, exports rose. Brazil’s tourism ministry estimated the World Cup attracted a million foreign tourists who injected approximately $13.2 billion into the economy.[8] By comparison, total investments in the 2014 World Cup by all tiers of government and private entities amounted to $11.2 billion. Prima facie, therefore, the investment seems to have yielded a $2 billion profit for the economy.

However, a key cause for concern among Brazilians was the $3.6 billion spent on 12 new stadiums built specifically for the World Cup, referring an economist to its favourite domain—opportunity costs. While it is difficult to assert that the $7.6 billion spent on the infrastructure other than stadiums was associated with a high opportunity cost (largely because a government is routinely likely to spend money on such items—e.g. public transportation), it’s certainly doubtful whether the money spent on stadiums that would not have otherwise been constructed failed to minimise their opportunity cost.

Coates and Humphreys argue that government expenditures on stadium and arena subsidies “carry opportunity costs which are never addressed.”[9] Projects (or tax cuts) that are associated with “higher social rates of return” than a stadium are axiomatically forgone and too often ignored in the assessment of the government’s expenditure.[10] In light of the fervent protests that took place in response to cuts to health and education, it follows that such forgone projects were indeed associated with higher social rates of return than those of the newly constructed stadiums.

To assess the stadium subsidies’ long-term economic benefits, a stadium use index (SUI) and fan cost index (FCI) have been deployed. The SUI effectively measures the total number of times during the year a stadium fills to capacity. Figures for the Brazil World Cup have been taken from 2012 (many of the stadiums were built before 2012). For the 12 stadiums constructed, the average SUI is 5.5. To put this into perspective, Brazil’s SUI is among the lowest of the past 6 World Cup host countries, with only South Korea making poorer use of its stadiums. In addition, the FCI measures the construction cost per fan visiting the stadium four years after the initial event. In this regard, Brazil’s data is limited, since only 2 years have elapsed. However, predictions have signalled that Brazil has amassed the highest nominal construction costs of any World Cup host. Combining this with Brazil’s poor stadium usage, this has led to the worst predicted FCI among any World Cup host country in the last 6 tournaments. Sure, these figures have their limitations (principally the fact that Brazil’s stadiums have only been in use for a couple of years), but there’s no denying that such early signs are worrying.[11]

Stadiums aside, the substitution effects at play are particularly interesting and somewhat humorous to a person from a non-football mad country. While Part 1 made mention of common substitution effects such as locals absconding their home town to avoid “the buzz around town” and the congestion that accompanies the event, it has been reported that not only did employers allow local employees to skip work during Brazil’s matches, but Brazil’s 12 host cities declared partial holidays during local matches of any team.[12] This, alongside various other substitution effects, is perhaps one of the reasons explaining why economic activity fell in June.

Brazil is certainly the envy of every country when it comes to football. However, when it comes to making policy decisions regarding sporting events—like any other government desperate to leverage the emotion of sport for political gain—the Brazilian government should be held in lower esteem.  Yet again, the economic theory and its overwhelming evidence were ignored in the decision-making process. And so despite the enormous injections of capital and tourists, the country has entered a recession; the labour market, while boosted at first, has been unable to sustain the benefits of the government’s increased demand; and the country has been left with 12 highly inefficient stadiums with their respective variable costs.

Ultimately, though, a more robust analysis that uses ex-post dynamic input or computable general equilibrium models would offer greater insight, as well as model that takes into account how much of the public investment could be put towards the 2016 Olympics, which will also be hosted in Brazil.

 

References

[1] Megan Clarke, Brazil’s World Cup Hangover: A Shrinking Economy: http://www.ibtimes.com/brazils-world-cup-hangover-shrinking-economy-1659890.

[2] Ibid.

[3] Jeff Flick, Who said FIFA World Cup meant jobs? http://www.forbes.com/sites/jefffick/2014/06/25/who-said-fifa-world-cup-meant-jobs/.

[4] Ibid 1.

[5] Ibid 3.

[6] Trading Economics: http://www.tradingeconomics.com/brazil/indicators

[7] Ibid.

[8] Ibid 1.

[9] D. Coates & B. Humphreys. ‘Do Economists Reach a Conclusion on Subsidies for Sports Franchises, Stadiums, and Mega-Events?’ Econ Journal Watch vol 5, no 3, 299.

[10] Ibid.

[11] Victor Matheson, Were the Billions Brazil Spent on World Cup Stadiums Worth It? http://fivethirtyeight.com/features/were-the-billions-brazil-spent-on-world-cup-stadiums-worth-it/.

[12] Ibid 1.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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