Economics Of The 2014 World Cup

June 9, 2014

By: Jon Roberts, Principal & Managing Director, TIP Strategies

"Outubro, 2012" by copagov via Flickr (CC BY 2.0) [Arena Amazonia, Manaus]

There will be those who say the only thing more boring than soccer is the economics of soccer. I am not one of them. I do, however, have friends and acquaintances who are very much of that opinion. To disabuse them of their benighted view, I’d like to tie Brazil’s current political crisis to more general questions of economic development. What does it mean to spend many billions (yes, billions) of dollars supporting the construction of stadiums? What does it mean to provide subsidies to private corporations or to international governing bodies to host large sporting events? These questions are also ours here in the US. We publicly subsidize everything from the Super Bowl to minor league ball parks to NASCAR tracks. We do this in the belief that there will be a return on investment. Are we justified in this view?
If economic development issues are not complicated enough, I have also indulged my desire to weigh in on the World Cup itself, who will win, and why. Fans of the game can add one more voice to the countless prognosticators and pundits who think they know who will win the World Cup by reading my post on the matter here.
Beyond the spotlight a single World Cup provides lies the larger public policy question of whether massive subsidies for sports are necessary—or even desirable. This post uses the World Cup stage as an opportunity to talk about the economics of sports and the peculiarities of soccer generally.
Brazilians ask: Why did we decide to host this event?
The World Cup begins this week. Thirty-two nations are participating, and a total of sixty-four games will be played in 12 stadiums. Some of these facilities are brand new and purpose-built. All have been constructed or improved through public financing of the Brazilian government. The most remarkable of these is in Manaus, a city at the edge of the Amazon rain forest. There are no viable roads in. Construction materials were sent by barge. Visitors to the four matches will fly in, though there is a river boat option as well. Yes, four matches at a stadium designed for 42,000 fans. And after the matches are played? No one knows. There is no local team that can justify a stadium of this scale. More broadly, the cost is well over $3 billion for all of the stadiums.The entire budget deficit of the country could have been offset by that spending. And there is no discernible ROI for the stadium development. What’s more, soccer’s international governing body (FIFA) will take all of the gate receipts and broadcast rights—one hundred percent.
So with no direct ROI, what justifies that spending? The most common answer, one familiar to cities who have vied for the Olympics (or sports venues or events generally), is that they generate welcome publicity for the host community. Never mind that no credible study supports the perceived benefits. Wh, then, you may ask, do communities continue down that path? There are two answers to that question, neither of which is very encouraging. The first is that officials are corrupt. We have ample evidence of that. FIFA itself is rife with kick-backs and bribery. Sepp Blatter, the head of FIFA, is deeply complicit in “selling” the Cup to the highest bidder. The 2022 Cup is scheduled to be held in Qatar, which would force players into matches where the temperature can reach 140 degrees. Moving the Cup from the summer to the winter would disrupt the professional league matches, so that’s not a good idea. And did I mention that the next World Cup will be held in Russia?
There’s corruption, and then there’s a simple case of being misguided. In 2007, the former Minister of Sport, Orlando Silva, said that no public money would be required for the construction (and improvement) of stadiums for the 2014 World Cup. More recently, Silva’s replacement, Aldo Rebelo, dismissed the notion that the new stadiums would become white elephants. In fact, there is every reason to think that neither the new construction nor the improvements to existing stadiums will ever justify the expenditures. The experience after the World Cup in South Africa strongly suggests that not only is there no ROI, but that the host nation is saddled with additional debt. This was Greece’s experience after the Olympics, and almost certainly played a part in that nation’s debt crisis.
Brazil was the only nation to bid on the 2014 World Cup. Since then, support for the Cup among Brazilians has steadily declined—from over 70% to under 30%. It may sink even further. Brazil’s president, Dilma Rousseff, is a vocal defender of the Cup, but she is struggling with the strikes and protests that have engulfed the nation. Even high profile former soccer stars are questioning the expense. Street protests made the news early this year and can be expected to play to the international news media for the next several weeks. The complaint is that money spent on stadiums should have gone to the country’s “Third World” infrastructure. It’s an argument that deserves more than passing consideration.
It is entirely possible the relationship between major governing bodies (FIFA, the IOC, and even the NFL, with its non-profit status) and host cities and nations will have to change. If countries and cities quit bidding on events, or subsidizing stadiums, sports won’t go away. TV coverage won’t stop, and there will still be breath-taking moments for fans across the country and around the world.
Why the US should care about the Cup
Around the globe, nations are waiting for the first game between Brazil and Croatia with bated breath. But Americans will, as they always do, wonder what all the fuss is about. There are obvious reasons for this: we already have a game called football and it’s, well…different. Beyond that, we have a national team that rarely wins and pretty much struggles against all opponents.
Soccer is a game we don’t understand and we play poorly, but there are other reasons to be skeptical of the hoopla. In addition to the massive capital outlay to host the event, this World Cup carries a load of scandals that rival the Lance Armstrong era in cycling. Are the stadiums actually prepared for the tens of thousands of fans who will occupy them? Are the police ready for the tens of thousands of citizens who will occupy the streets? And that’s not all. Accusations of match-fixing associated with illegal international betting are hitting the presses, just as teams are leaving for Brazil. Then there is the systemic corruption of the sport’s governing body, FIFA.
How, you may wonder, can we be enthusiastic about a quadrennial event the host nation no longer cares to have, is tainted by match fixing, and is overseen by an organization that no fan of the game will defend? And oh yes, an underperforming national team, sub-par officiating, and players that may fall over and writhe in agony when an opponent so much as breathes on them?
Despite all this, soccer’s influence in the US continues to grow. Close to a million Americans may now watch a high-profile English Premiership match. Hundreds of thousands more carefully track the fortune of national teams from Germany, Italy, Nigeria, and, of course, Mexico. Soccer is rapidly becoming our “fourth” sport, ahead of hockey, and it is beginning to rival baseball in popularity. It’s no great stretch to imagine soccer joining basketball and football as one of the big three by the time of the 2022 World Cup in Qatar (or the US, if the scandal that accompanied the selection of Qatar results in a change of venue). In short, soccer is big in this country, and the World Cup will command attention for three glorious weeks. Despite the riots in the streets of Rio and Sao Paulo, despite the bad officiating and the prima donna antics of some players, despite all this, the tournament will captivate a global audience of which the US, for better and worse, will be a part.
What soccer has, and what constitutes a huge part of its appeal, is the flow of the game. In the US, one could argue that sports have lost that beauty. Our major sports are so over-managed that actual playing time is an absurdly small percentage of the coverage. I timed the fourth quarter of the recent Super Bowl from when the ball was snapped to when the play was blown dead. There were less than eight minutes of action in a quarter of play that seemed to go for an eternity. Basketball has begun to follow a similar pattern, with an increasing number of mind-numbing time outs. And baseball, well let’s not even go there. In American sports, players don’t so much play the game as follow the instructions of the coaches. In soccer, there are no time outs. You play for 45 minutes, then you take a break, then you play for another 45 minutes. There are only a total of three substitutions allowed. If you required more than that, due to injury, you would have to play a man down. All this and the players run an average of six miles during the match, often at sprint speeds. Flow is everything—or the ability to disrupt the flow. (Watch Italy.) But in any case, decisions are made and executed by the players rather than managed by the front office’s or television’s demands.
The US can learn to love soccer because it is a beautiful game. People can love it even if their interest in sports isn’t all that great in the first place. Why? Because the passion that drives the 32 nations who participate is unlike that of any other sport, or any other event. While we do watch the Olympics, the intensity has never equaled that of soccer. US sports certainly generate enthusiasm, but soccer more closely resembles collegiate athletics than it does our professional sports. There is also the separate question of how insular our big sports are. Yes, baseball is international, but we continue to host the “World” series even though we won’t allow other countries to participate (excepting Canada). American football is little more than a curiosity outside of North America. Basketball is the notable exception, but it pales in comparison with soccer.
Soccer is wonderful for the non-sports enthusiast, if for no other reason than it provides an alternative to Ambrose Bierce’s chillingly funny adage: “War is God’s way of teaching Americans geography.” Soccer, it turns out, can also teach Americans about geography. We can learn to appreciate that Bosnia and Herzegovina is a single small country in what was the former Yugoslavia (and the former Austro-Hungarian Empire), that many great Belgian players have more than a passing affinity for the Congo, and that England is, well, just England and that Scotland and Wales and Northern Ireland all have their own soccer teams (none of which qualified for this Cup).
What does this all mean for economic development?
There are lessons to be learned from Brazil’s misadventures with the World Cup. Yes, we want the Cup to be a success, but if we fail to understand the consequences of bad decisions, we will certainly repeat them ourselves:

  • Do not assume that public subsidies for facilities will yield measurable benefits.
  • Question assumptions about the promotional value of sports generally.
  • Acknowledge that governing organizations (such as FIFA and the NFL) are profit driven even if they are “non-profit.” Their profits are simply allocated differently
  • When working with private developers, ensure that the stadiums are integrated into the fabric of the community (Portland’s Providence Park soccer stadium).
  • Promote and support sports that the community can participate in, not just as spectators but as participants and investors (youth organizations, for example).
  • Stand firm in the face of pressure from professional teams who will claim to “put you on the map.” You are already on the map. Your economic development success will not be the result of sports franchises. Here in Austin we have no professional sports teams (and did I mention that we lead the nation in job growth)?

The World Cup is a unique event. Its viewership (and the passion it generates) is second to none. Being the host nation, however, is not a reason to cave to the demands of an overreaching governing body, and to ignore the greater needs of the country. If we think our sport is so great, we’ll find a way to support it without bankrupting a country.

  • Rollie Cole

    Jon: I think the “microeconomics” of soccer in the US, as in the rest of the world, explains why it can be so popular. First, it requires much less capital investment in the field than almost any other sport — a cage at each end and boundary lines and you have a playable space. You add a mid-line and a line for the goalie’s protected space in most cases, but I have seen fields in Mexico and the Caribbean without them. It requires much less specialized equipment — usually t-shirts, shorts, and sneakers work, along with a single ball, although of course one can spend more on specialized versions of all three. Unlike golf and tennis, you usually do not lose the ball, and they tend to last longer than either tennis or golf balls. It can be fun at many levels of play — something like tennis is just chasing the ball until you get fairly proficient. It has multiple players on a side, with only one really specialized role (I am revealing my ignorance here, ignoring all the differences other than between the goalie and the rest of the players.) The only widely-played sport than comes close is volleyball (low capital equipment, small space, one ball, multiple players), and it, to my mind, (having played in several [very amateur] volleyball leagues) may require a higher minimum of skill to start having fun, although volleyball is fairly tolerant of both low and varying levels of skill as well.

    Rollie Cole, PhD, JD
    Founder, Fertile Ground for Startups, Small Firms, and Nonprofits
    “Think Small to Grow Big”
    Author of WHOLESALE ECONOMIC DEVELOPMENT http://preview.tinyurl.com/wholesaleeconomics

  • Robert Reynolds, P.E.

    Soccer is the greatest game to play and the worst game to watch. When the U.S. hosted the World Cup in 1994, the Coca Cola Company was over-impressed by the millions of children that play soccer in this country and was underwhelmed by the number of attendees and viewers. Coca Cola did not know the difference between playing and watching.

  • Michael Ndolo

    Jon,

    I love this post on many levels: Ambrose Bierce quote, fluid dynamics discussion, economics, politics, etc. The insanity of the Brazilian experience can only be compared to the exotic extremes of Carnival in a heavily (nominally) Catholic country.

    My two cents on the economics question is just to say that it often has little or nothing to do with economics at the end of the day. It is pure politics masquerading under the cloak of economics. There are, however, rare instances where the economics do make sense for subsidizing stadiums (“stadia”?). We did a gig for the Islanders franchise in Nassau County. The different there was that the County had a real economic interest – the Islanders had a legitimate and real option, namely moving to some other part of the NYC metro. Nassau County would loose all that sales tax, hotel tax, property tax and fee revenue (they had a cut of receipts). The voters declined it and the County lost the team to nearby New Jersey. They will keep their fan base but the County will lose the tax revenue. However, in most cases, there is not this dynamic. My home town of St. Paul/Minneapolis Minnesota threw a ton of money at the Vikings. What was the alternative for the Vikings? Pick up and leave? Yes, but their fan base would dissipate to a large extent and Minnesota would be no worse for the wear. The NHL team (North Stars) moved to Texas (Lone Stars) way back and the effect was negligible.