Football economics: why it is better to win than host the World Cup

Published 12 June 2014 13:07, Updated 13 June 2014 15:26

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Football economics: why it is better to win than host the World Cup

A Colombian football fan looks at the statue of Christ the Redeemer in Rio de Janeiro as he waits for the 2014 World Cup. Photo: Getty

We are just a day away from kickoff at the FIFA World Cup in Brazil, the most-watched sporting event in the world. Like the Olympics, it happens every four years and this time the event has been controversial because of protests by local Brazilians and allegations of corruption in FIFA’s decision to hand the 2022 World Cup to Qatar.

Most economists are fans and have been analysing the economic impact of the World Cup, especially as they have to justify watching the games on television over the next four weeks or so.

But they needn’t be too sheepish about it. Sport is a big deal in economic terms and the business of the FIFA World Cup has become one of the most scrutinised set of international transactions you’ll ever see.

The so-called “beautiful game” transcends cultures and national borders, has been the subject of economic diplomacy and the odd dispute, and touches millions of people on this planet, for better or for worse. (The game is known as football in most countries but generally soccer in North America, Australia, New Zealand and South Africa and I use both terms.)

By the numbers

It is clearly a big deal for Brazil to host the World Cup again, for the first time since 1950, to much fanfare and riots, but is it good for the host country’s economy?

There’s no doubt that Brazil went for the hosting rights because of the prestige and to boost its claim to be the world’s next economic superpower. Brazil is the world’s fifth-largest economy by population and the seventh-largest (on a purchasing power parity basis) or sixth-largest (on a US dollar basis) country in the world, accounting for between 3 per cent and 3.5 per cent of world output.

As a member of the BRICS grouping (Brazil, Russia, India, China and South Africa), Brazil is playing an important role in international affairs as we have seen in the World Trade Organisation and Group of 20 multilateral fora.

Brazil has undertaken a charm offensive in the developing world under the banner of “South-South” co-operation. Under President Luiz Inacio “Lula” da Silva, Brazil opened up 53 new embassies in Africa and has expanded its sphere of influence across the globe.

Children play soccer on the street in Belo Horizonte, Brazil.Photo: Getty

Some 250 million people play soccer regularly in more than 200 countries, according to Goldman Sachs. Since the first FIFA World Cup was hosted in Uruguay in 1930, more than 70 countries have participated in various qualifying rounds. But, as the Brazilian protesters point out, if resources are allocated away from health and education to build stadiums, or if something went wrong, it could damage Brazil’s prestige just two years ahead of the Rio Olympics in 2016.

If there is an economic gain from hosting the World Cup, how about winning it? In 1950, 200,000 people jam-packed the newly built Maracanã Stadium in Rio de Janeiro, and Brazil just needed to draw to win the cup. But they lost, to their neighbour Uruguay, on a day that shocked the nation and ruined the life of the poor Brazilian goalkeeper who happened to be custodian of the national team on that day.

A Goldman Sachs analysis suggests a World Cup win gives a country a boost on the sharemarket. All the winners since 1974 have outperformed in the month after the final – with the exception of Brazil in 2002, which was going through a financial crisis. On average, the victor outperforms the global market by 3.5 per cent in the first month before tailing off. For the host nation outperformance is 2.7 per cent, but it tails off too and can even underperform in three months.

Apart from the sharemarket, the economic impacts can be positive if the host nation uses the major event, whether the World Cup or the Olympics, to bring forward infrastructure projects (as in the Sydney Olympics in 2000), redevelop a local area (London Olympics in 2012) or to showcase its global engagement to the world (Seoul Olympics in 1988).

In addition, there are networking effects of hosting the games or the cup. For example, Austrade’s famous Business Club Australia model at the Sydney Olympics paved the way to Beijing business for the likes of John Bilman of PTW Architects who built the “Water Cube” at Beijing in 2008.

Brazilian players celebrate a goal in the 2010 World Cup in South Africa.Photo: Getty

Our relationship with Latin America

Brazil has plenty of economic suitors, so Australia will need to do more than just woo the girl from Ipanema if it wants to succeed in Brazil. Areas of potential collaboration include resources and agriculture, transport, better cities, renewable energy, education, arts and popular culture – and of course, sport.

Will the World Cup encourage many Australians to go to Brazil for the first time to support the Socceroos? One interesting fact from the Goldman Sachs report was that Australians bought 41,000 tickets to the World Cup in Brazil, second only to the United States (154,000), and ahead of football-mad England (38,000) and nearby Colombia (33,000).

Whether it is the strength of the Australian dollar, the enthusiasm of Brazilian-based Australians or the perfect reason for a once-in-a-lifetime extended holiday to Brazil is unclear.

For Australia’s relationship with the rest of Latin America, it is business as usual. As I wrote in the recently released book Latin Lessons: Australia and Latin America Face the Asia-Pacific Century, the Andean countries of Chile, Peru and Colombia are happy hunting grounds for Australian exporters and investors, particularly in resources, energy and education.

The World Cup may draw in a bit of extra business, especially as Qantas flies to South America through Santiago, but I expect that business will go on whatever happens in Brazil this month.

Effect on business of sport in Australia

Finally, what will the World Cup mean for the business of sport in Australia? As I have been finding while researching my forthcoming book, Footynomics, on the battle of the football codes in Australia there was a time when the AFL, NRL and Australian Rugby Union officials were sort of hoping for the Socceroos not to qualify for the World Cup. They were afraid it would awaken the sleeping giant and they’d lose their talent – on and off the field – to Australia’s fledgling soccer code.

Now we would expect the rival football codes to want the Socceroos to do well at least out of national pride and professional respect. The big question is whether the latest scandal rocking FIFA in handing the 2022 World Cup to Qatar, with accusations of bribes and breaches of occupational health and safety and actual workplace deaths, might shake things up and bring Australia back into the picture as an alternative host. Then we would see a battle of the football codes – but following a successful Australia 2022, not Brazil 2014.

Tim Harcourt is the JW Nevile Fellow in Economics at the Australian School of Business in Sydney, and author of seven books on the global economy including international business best-seller ‘The Airport Economist’.

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