The life of the average Brazilian over the past year or so has been an emotional roller coaster to say the least. Against the background that ranges from ardent protests in response to fiscal policy to complete despondency when the Canarinho (Brazil’s beloved national team) unforgettably bowed out in the semi-finals of their own World Cup after a 7–1 massacre at the hands of the eventual champions, Germany, a crucial economic question has been brought into focus: why do governments subsidise mega-sports events and what type of economic impacts should the economy expect from such a decision?
Before delving into the economics, I intend to answer this question in a two-part series. In this article, I will outline the theoretical analysis of subsidising a mega-sports event and its supporting evidence on both sides. In its sequel, I intend to examine the actual economic impacts that unfolded in Brazil, to the extent that this is so far practicably possible.
And there’s also a disclaimer: I am a huge sport fan and will therefore try my best to provide an objective analysis of the issue. No guarantees.
In a mixed-market economy, an appropriate starting point to justify any government intervention is an answer to the question: are there any market failures? When it comes to a mega-sport’s event, a few could potentially come to mind.
Public good?
A mega-sport’s event may be characterised as a public good because it is non-rivalrous (both you and I can enjoy the ‘atmosphere’ the World Cup has to offer) and non-excludable (the owner of the event cannot deny my utility). Together, these traits may give rise to the free-rider problem where private firms are reluctant to finance special events because they are unable to capture all of the benefits from funding the event. Indeed, private firms can ‘opt out’ of the funding and still capture the benefits of business that the event generates (Burgan and Mules). A problem with this claim, however, is that a private firm could capture most of the benefits in the form of ticket sales and broadcasting rights; the rest of the benefits (the euphoria you experience when Mile Jedinak slots a penalty to put your country 2–1 in front of the Netherlands) are relatively intangible and don’t present financial value anyway. In short, an attempt to draw ‘public good’ similarities between an event like the FIFA World Cup and an undisputed public good such as the police force is fraught with difficulty.
Positive externality?
Like any sporting event, the various positive externalities to emerge from a sporting event can include local unity, fan loyalty, civic pride, satisfaction from living in a city that hosts the event (e.g. Australian Open) and being able to view coverage of the events in the media (Fort 2003). However, accepting this line of reasoning also commits one to the view that when a country performs poorly in a sport’s event, as Brazilians will tell you all too well, the spill over effects should be viewed as negative externalities.
Additionally, it could be argued that subsidising a sport event could improve participation rates in sport, thereby reducing future health care costs and enhancing the health of an economy’s workforce. However, the benefits from encouraging a healthier lifestyle depend upon the malleability of individuals’ preferences, the effectiveness of that particular event in altering preferences, the relative size of the marginal population, the health status of that population and the time preferences of society (Hone and Silvers). Although improving the general health of the population is a worthy goal, the view that subsidising a sport event is necessary to achieve this goal rests on a scant basis because the impact, compared with the alternatives, could be small, indirect and highly uncertain (Hone and Silvers).
Other failures?
Hone and Silvers argue that private investors may have a shorter planning horizon (or higher discount rate) than society as a whole. This may mean that sporting programs that can make a potentially positive contribution to society will not be undertaken without some form of government intervention. Furthermore, the information asymmetry associated with modelling an event that is to take place in 10 years down the track could lead to a socially inefficient level of private investment, either too high or too low. However, there is currently little research on these two issues to inform us accurately.
Multipliers and leakages
Another commonly mooted basis for subsidising a mega-sports event is that the economy will reap the benefits from this public sector investment. Theoretically, by spending taxpayer funds on a mega-sports event, this should boost economic activity, as the event will attract cashed-up tourists who will pour money into, and in turn strengthen, our economy. This conception needs to be analysed in a number of ways.
Firstly, while local GDP could improve, global GDP remains the same. Nothing is invented or made more productive, other than perhaps the quality of a nation’s infrastructure. However, to say that a country can only invest in infrastructure when it hosts a sporting event is absurd and doesn’t shed light on the economic basis for why a country would in the first place commit to hosting a sporting event.
Secondly, it is also argued that through the ‘demonstration’ effect (or the ‘Lara Bingle where the bloody hell are ya’ effect), there is an increase in tourism and business re-location. Although conceptually this makes sense, there is currently no empirical evidence to support this claim (Siegfried and Zimbalist). In support of this, the Sydney 2000 Olympic Games, in terms of purely measurable economic variables, had a negative effect on New South Wales and Australia as a whole (Giesecke and Madden). It was found that the Olympic industry produces output worth $2.86 billion, but requires inputs of $3.46 billion, thereby creating an allocative efficiency loss. What’s particularly interesting is that for the three years immediately after the Games, foreign willingness to pay for NSW tourism grew by an average 2.2 percentage points less than for Australia as a whole. Essentially, NSW taxpayers, at least in part, subsidised the tourism of other Australian states.
Thirdly, the claim that a mega-sport’s event brings in new money full stop fails to consider the various substitution effects at play. Although sport-loving foreigners will inevitably pour their hard-earned savings into an economy, disgruntled locals may abscond to avoid the congestion and noise that ensue. Further, a good share of money spent at sporting events is money that would otherwise be spent elsewhere in the economy (Siegfried and Zimbalist). This view must be tempered by the fact that, to the extent that the visitors stay for longer periods of time and spend higher per diem, mega-events can benefit a local economy. However, again, the tourism dollars generated by an event in one state often come at the expense of expenditures in other states, or more simply, are subsidised by the tax-payer anyway (Siegfried and Zimbalist). Not to mention that this effect is further undermined when foreigners come at the hospitality and expense of local citizens.
A final criticism of the multiplier argument is that it largely presupposes that the money arriving on our shores is reinvested in our economy. Given how open our economy is and our reputation for being a nation of jet setters, the basis for this view is put in serious doubt.
So is it a good or bad call?
There appears to be little, if any, economic support for subsidising a mega-sports event. The decision fails to address any noticeable market failures and it cannot be established whether in fact the economy stands to benefit. Perhaps viewing a government’s commitment of public funds to the event as one born out of game theory and public choice theory afford the only plausible justifications. Alternately, it may be that governments around the world do not make perfectly rational economic decisions and allow their love for sport to cloud their judgement. As a sport fan, this is a problem I encounter every week. But at least by acknowledging that the choice is not one grounded in economics, a degree of accuracy can be restored in the public debate over whether the taxpayer wants to invest in an enjoyable, yet unprofitable, investment.
References
Burgan, B. and Mules, T, “Event analysis – Understanding the divide between cost benefit and economic impact assessment”, in Events Beyond 2000: Setting the Agenda, Proceedings of Conference on Event Evaluation, Research and Education, eds J. Allen, R. Harris, L. K. Jago and A. J. Veal, Australian Centre for Event Management, University of Technology, Sydney (2000).
Fort, R. D, “Sports Economics, Prentice Hall, Upper Saddle River, New Jersey” (2003).
John Siegfried and Andrew Zimbalist, “The Economic Impact of Sports Facilities, Team & Mega-Events.” The University of Melbourne, Melbourne Institute of Applied Economic and Social Research. The Australian Economic Review, vol 39, no 4 (2006).
James A Giesecke and John R Madden, “The Sydney Olympics, Seven Years On: An Ex-Post Dynamic CGE Assessment,” Centre of Policy Studies Monash University (2007).
Phillip Hone and Randy Silvers, “Measuring the Contribution of Sport to the Economy.” The University of Melbourne, Melbourne Institute of Applied Economic and Social Research. The Australian Economic Review, vol 39, no 4 (2006).
Great piece Robert – really enjoyed it! Looking forward to Part 2.