Economics of the World Cup

Posted on Posted in 2014-2015
By Jake Cureg, Robbin Dagle, and Jose Mendoza

Brazil has long been one of the most revered names in international football. With their flowing play style, the likes of former superstars Pele, Ronaldo, and Ronaldinho, as well as the rising star Neymar, plus the Seleção’s (the national football team, literally translated as “the selection”) record five World Cup titles, it’s not hard to see why. It seems appropriate then, that the World Cup returns to the South American nation. Having last hosted the tournament in 1950, Brazil won the bid to host the 2014 World Cup. This followed a lengthy process which saw them declared as the hosts after the sole rival bidder, Colombia, withdrew their bid.

But even before the formal announcement of Brazil’s hosting stint, some have already expressed doubts on the country’s ability to overcome various challenges in time for 2014. Sepp Blatter, president of FIFA – the international governing body of football – questioned Brazil’s infrastructure and security problems. But then-president Luiz Inacio Lula da Silva sought to quell such fears, saying that his country “will now, with great pride, do its homework.” Lula added that in Brazil, soccer is anything but just a sport: “Soccer for us is a passion, a national passion.”

However, in the run-up to this year’s tournament, it was clear that Brazilians were into other passions aside from football. Almost unthinkably, around 2 million people turned up in protests across at least 80 Brazilian cities during last year’s FIFA Confederations Cup, a tournament that served as a dry run for the World Cup. And now that the event is finally here, there is still an undercurrent of dissatisfaction among the populace.

A Not-so-warm Welcome

Initially, the protests were about the rising cost of public transportation fares. But images of police brutality brought more demonstrators to the streets and with them, more demands. Soon afterwards, the populace started to question why they were even hosting the World Cup, especially as the money could have been appropriated for other things. Many disapproved of the lavish spending of public money for a private event – a surprising development considering their rabid love for football.

Indeed, such a level of discontent might be surprising in a country where rapid economic development helped the middle class grow by over 40% in the past decade, the fastest in Latin America according to a World Bank study. Consequently, the nation enjoyed a record low unemployment (5.3% in 2013) and poverty rate lows (15.96% poverty and 5.3% extreme poverty in 2012).

Yet ballooning consumer debt has triggered rising inflation, putting Brazil’s middle class at constant risk. “They see further improvements in their living standards as their right and will fight tooth and nail not to fall back into poverty,” The Economist stressed. The same article also noted that Brazilians “pay the highest taxes of any country outside the developed world (36% of GDP) and get appalling public services in return.” Many believe that funds for the construction or renovation of stadia could instead be used to repair Brazil’s crumbling infrastructure and resolve the country’s high income inequality which ranks fourth in Latin America and 17th in the CIA’s list of 150 countries. Misuse of public funds has long been a problem in Brazil. Annually, corruption costs Brazilians between 1.38% to 2.3% of their GDP, amounting between USD 32 and 53.1 billion in 2013, according to a Forbes estimate.

In the wake of the protests, the Brazilian government has tried to convince its citizens that the World Cup will greatly benefit the country. In a study by the Institute of Economic Research Foundation (FIPE-USP), the month-long tournament will rake in USD 12 billion in revenues. An estimated 710,000 temporary and permanent jobs will be created because of the Cup, according to the government. Brazil’s hosting also means that it will be forced to invest in major infrastructure projects such as airports, seaports, and telecommunications. “The airports, subways and stadiums will not go back with the tourists in their suitcases. They will stay here, benefiting us all,” said President Dilma Rousseff.

“In a way, what we are seeing are investments that otherwise do not take place. The World Cup has been a kind of catalyst for this,” said Paulo Esteves, general supervisor at the Rio de Janeiro-based think-tank called Brazil, Russia, India, China and South India (BRICS) Policy Center in an interview with CNN

Esteves added that the government did not take any money from other projects such as health and transportation. A Washington Post article notes that the amount spent for stadia was only 0.5% of the amount spent for health and education (USD 363 billion) from 2010 to the beginning of 2014.

Brazilians, however, remain unconvinced. In a Pew survey released June 3, nine days before the start of the competition, 61% of Brazilians believe that hosting the World Cup is a “bad thing for Brazil because it takes money away from schools, health care and other public services.” The country’s mood is also uncharacteristically gloomy, with 72% “dissatisfied with things in Brazil today” and 67% describing their nation’s economic situation as “bad.”

Business is Booming

As mired in controversy and social issues Brazil’s economy is, it cannot be denied that elsewhere in the world, business is booming. Sportswear giants Nike and Adidas are locked in a heated battle for ever-important revenues, taking advantage of the opportunity to market their wares to a truly global audience. Adidas leads the football sector with a reported $2.4 billion revenue in 2013, while Nike trails behind with earnings from its football division in 2013 pegged at $1.9 billion, figures which both companies expect to rise during the Cup year. Adidas in particular is targeting $2.7 billion in football revenue for 2014 and is confident it will meet its target, having already reported a 27% growth in sales for the first quarter of the year.

With all things taken into consideration, the real winner in the economic battle seems to be FIFA, the sport’s governing body, which is expected to rake in over $4 billion in revenue from the tournament alone. Subtract the operating expenses, and the profit is projected to come out at $2.61 billion, up from the $2.3 billion earned from the 2010 World Cup held in South Africa. Majority of this comes from the fees paid out by numerous television networks, such as BBC, ITV, ESPN, CBC, and even local sports network Balls, each wanting a slice of the World Cup pie, with some paying extra for the exclusive right to air in their respective regions.

FIFA’s many exclusive sponsorship deals also account for a large chunk of World Cup income. The exclusive agreements are set to help boost the takings of associated companies (and FIFA, too), meaning a good chunk of market share is taken away from their rivals. Adidas, Sony, and Kia, to name a few, have taken advantage of this and shelled out the money in exchange for maximum exposure. However, it is not without its controversies. Rival companies are prohibited from using the FIFA logo or even mentioning the World Cup in any of their advertisements or promotional material. The most-viewed World Cup advertisements – Nike’s The Last Game and Winner Stays – are in fact unofficial promotions. Watch closely and you’ll notice that neither one of them actually mentions “World Cup” and simply implies some sort of international football competition taking place – Adidas is the official sponsor of the tournament, after all. FIFA is keen on this and is quick to punish any infringements, going as far as completely banning players from using Monster’s Beats by Dre headphones inside stadiums in order to keep major sponsor Sony happy and even fining Brazilian superstar Neymar for an inadvertent display of his unsanctioned Speedo underwear. It’s a win-win situation for FIFA: they get to keep their sponsors happy and get to pad their profits some more as well.

Warning signs

With recent surveys portraying Brazilian dissatisfaction with regard to the World Cup, there appears to be some doubt with regard to the World Cup’s potential to become an economic and social stimulus. Frankly, when one looks at how other developing countries have fared after hosting such events, one starts to see why there’s apprehension. Countries such as South Africa and Greece have hosted expensive, sporting events such as the World Cup and the Olympic Games and have faced difficulties once the tourists and athletes have left.

Greece appears to be the poster child of why hosting such an event may lead to some problems. Greece spent around nine billion euros, making the 2004 Olympics the most expensive ever at that point. Once the event finished, Greece soon entered a period of skyrocketing public debt, becoming one of the first countries to experience a recession during the financial meltdown of 2008. Due to a lack of planning, Greece was unable to make the newly-built stadiums profitable. The 2004 Athens Olympics is always cited as being one of the reasons for Greece’s economic collapse. Even until now, Greece has not fully recovered from the debacle.

South Africa has also faced problems with regard to making sure that the stadia built remain sustainable. The 2010 World Cup host was lauded for being the first African country to host such an event. However, like Greece, South Africa also went over its budget, spending around USD 3.8 billion – almost 10 times more than what was predicted. South Africa’s biggest concern is making sure that the stadia built remain profitable – a significant problem especially when one considers that the dozen or so 40000-seater stadia are hard to fill up. The stadiums are possible white elephants, especially as football is not the most popular sport in South Africa. However, even with these problems, many South Africans are proud of their hosting of the event. “Despite all the controversy, most South Africans agree that the World Cup did reinforce social cohesion in a country marked by deep racial discrimination.”

References:

1. http://edition.cnn.com/2007/SPORT/football/10/30/brazil.cup/
2. http://www.theguardian.com/world/2013/jun/21/brazil-protests-president-emergency-meeting
3. http://www.worldbank.org/en/news/feature/2012/11/13/crecimiento-clase-media-america-latina
4. http://www.washingtonpost.com/blogs/monkey-cage/wp/2014/06/10/brazils-protest-paradox/
5. http://online.wsj.com/news/articles/SB10001424052702304795804579097412611960306
6. http://www.economist.com/blogs/americasview/2013/06/protests-brazil
7. http://edition.cnn.com/2014/06/11/sport/football/brazil-world-cup-benefits/
8. http://edition.cnn.com/2014/06/11/sport/football/brazil-world-cup-benefits/
9. http://www.forbes.com/sites/andersonantunes/2013/11/28/the-cost-of-corruption-in-brazil-could-be-up-to-53-billion-just-this-year-alone/
10. http://edition.cnn.com/2014/06/11/sport/football/brazil-world-cup-benefits/
11.
12 ibid
13. http://www.washingtonpost.com/blogs/monkey-cage/wp/2014/06/10/brazils-protest-paradox/
14. http://www.pewglobal.org/2014/06/03/brazilian-discontent-ahead-of-world-cup/
15. http://www.marketplace.org/topics/business/biggest-match-world-cup-nike-vs-adidas
16 http://www.thestreet.com/story/12736727/1/adidas-looks-to-beat-nike-for-soccer-dominance-in-2014-world-cup.html
17 http://www.businessweek.com/articles/2014-05-15/2014-world-cup-nike-adidas-gear-up-for-soccer-duels-next-round#p2
18 http://www.businessinsider.com/fifa-profit-world-cup-2014-6#ixzz35UmKiE4o
19 http://www.tsmplug.com/football/world-cup-total-revenue-4-billion/
20 http://blog.marketo.com/2014/06/the-world-cup-of-marketing-part-1-nike-vs-adidas.html
21 http://www.independent.co.uk/sport/football/worldcup/beat-it-world-cup-players-defy-fifa-over-banned-beats-by-dre-headphones-9552943.html
22 http://www.voanews.com/content/south-africa-struggles-to-sustain-world-cup-legacy/1528895.html

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