Brazil will soon host the world's two biggest sporting events: the World Cup of football (or soccer) starting next week, and the summer Olympic Games in 2016.
| || ||Glen Hodgson |
Senior Vice-President and Chief Economist
Forecasting and Analysis
Originally Published in the Globe and Mail June 4, 2014
Brazil will soon host the world’s two biggest sporting events: the World Cup of football (or soccer) starting next week, and the summer Olympic Games in 2016. Brazil might feel a moment of joy if the home football team emerges triumphant, as often happens at the World Cup. But Brazilians already expect to be net economic losers from the “privilege” of playing global sporting host—not just once, but twice.
Make no mistake—major sporting events like the World Cup can bring economic benefits to their hosting communities and countries, Brazil included. But they also inevitably bring economic costs. Global games that are well-designed, organized and managed, like the Vancouver and Calgary Winter Olympics, produce the largest possible net economic impact, or at least help to minimize the cost. Brazil does not appear to be managing either event to maximize the benefits and minimize the costs.
On the positive side, playing host to the World Cup or the Olympics can help to build a country's brand or profile, potentially attracting new foreign investment, tourism and economic activity. The games may also provide political “cover” for building large and needed public infrastructure like metro systems (as happens whenever a Canadian city plays host). On balance, however, the longer-term benefits are unlikely to offset the significant opportunity costs of playing host. Rich countries like Canada can afford to host major sporting events; emerging countries like Brazil, not so much.
To understand the economic impact of the World Cup for Brazil, let’s examine it in three stages. Stage one is the pre-games construction and preparation period; stage two is the games themselves; and stage three is the longer-term impact. Stage one involves investment in the renewal and development of playing facilities, and in related transportation and accommodation infrastructure. New investment injects large amounts of cash into the local economy, often with high domestic content (or a low reliance on imports) and strong (if short-term) employment growth.
The boost to investment is good for Brazil's short-term growth. However, stage one also depends on strong long-term planning and project management skills to get maximum benefits. Brazil appears to lack those skills and runs the risk of seeing many of the potential economic benefits evaporate. Cost over-runs and delays in construction erode the potential benefits, and, of course, lots of money has to be borrowed to fund the construction.
Stage two is the event itself. The World Cup will attract significant tourism earnings to Brazil and will therefore provide a positive short-term spike in economic activity, likely followed by a post-games slowdown or even recession. This up-and-down growth pattern occurs because the tourism revenues are a one-time boost to local spending. In addition, local fans shift forward their consumption patterns by buying expensive tickets and related services, then reducing their consumption in the following months to pay for their soccer splurge.
Stage three is the longer term impact. Scarce public investment dollars are being spent on sports facilities, but not on things that create long-term wealth, like public education, health care and trade infrastructure. Brazil will be paying interest on much higher levels of public debt for a generation or more, further crowding out investment in long-term growth potential. Many of the facilities will be under-utilized and will need on-going maintenance to remain useful (The 2004 Olympic facilities in Athens are crumbling due to neglect).
Members of the Brazilian public seem to understand very well that they are getting the short end of the stick, but it’s too late now. Both FIFA, soccer’s governing body, and the International Olympic Committee should, frankly, be embarrassed. They created the conditions for such a serious resource misallocation in a country that is still developing—but both appear to be beyond embarrassment.
The bottom line? Brazil should expect a short-term growth boost from the World Cup and Olympics due to public investment in facilities and related infrastructure (if it all actually gets built) and higher tourism revenues during the events. However, Brazil can also anticipate a slow-growth hangover once all the fun and games are over. Hosting the Olympics shortly after the World Cup may delay the day of reckoning, but it is bound to come. The growth potential of an emerging economy like Brazil will be impaired by spending scarce public dollars on sports facilities, not on things that create long-term wealth like public education. So enjoy the samba party while it lasts, because it won’t last long.