Bidding for Fool’s Gold? The Uncertain Benefits of Hosting the World Cup

Moments after winning the 2014 World Cup Final, the German national soccer team accepted medals from ten Emirates flight attendants who smiled stiffly behind leaders of Brazil, Germany, and FIFA as the stage was showered with gold confetti. At an event where viewers are accustomed to logos and ads, the fully uniformed flight attendants served as a more salient reminder that the event was made possible by the generous support of corporate sponsors.

While corporations like Emirates pay handsomely to move up FIFA’s sponsorship tiers, countries also vie for a spot on the international stage by competing in a sometimes controversial bidding process to host the mega-event, usually with expectations of significant returns. An economic impact report by Ernst & Young Terco projects that the 2014 World Cup will cause Brazil’s economy to “snowball, increasing by five times the total amount invested directly in event-related activities,” adding R$100 billion (or about $45 billion USD) to the Brazilian economy.

The often confident and optimistic projections of ex ante impact reports contrast with academic research, which tends to grapple more openly with the difficulty of analyzing the quadrennial event. In a recent example, “The Impact of Visibility on Trade: Evidence from the World Cup,” economists Omer Bayar and Georg Schaur use various methods to explore the effects of visibility in the event on exports. While the authors were able to find a modest but significant boost in exports among countries whose teams made it to the quarterfinals stage, choosing appropriate features for a model of hosting the event proved more difficult.

Host countries experience increased international visibility both years before and perhaps several years after the tournament. The authors chose to analyze exports in the four-year period after the tournament relative to other years, but any chosen time frame may have been subject to criticism. Furthermore, hosting the World Cup is not a random event and is likely linked to trade, making it difficult to claim that visibility from hosting the World Cup caused any identified changes in trade.

The authors attempt to account for such confounding factors by making use of FIFA’s host selection policy, which rotates continents from one tournament to the next, along with several controls related to the country and time in question. However, as the authors employed different sets of controls, the results changed significantly, likely due to the small number of host countries in the data set. Ultimately, the authors state that results were inconclusive, though it’s worth noting that many of the models found either no significant change or a 15 to 20 percent decrease in exports for host countries.

The study did find a modest but significant increase in exports for countries whose teams had some success in the tournament. Because it is very difficult to predict which teams will advance to later stages, the authors argue that advancing to the quarterfinals stage can be treated as a random event. Changes in a country’s exports are thus plausibly due to increased visibility rather than to an underlying factor affecting both teams’ success and exports. Across a variety of specifications, the authors find that home countries of quarterfinalists experience a 4 to 7 percent increase in exports over the four-year period after the tournament, which is a modest but significant change.

Countries whose teams do well in the World Cup may experience an increase in exports or even a temporary stock market boost. However, other effects, such as decreases in productivity, as fans remain unproductive for longer when their teams advance, may more than offset the boost to GDP. Hosting the World Cup often does result in a boost for certain industries, such as tourism. However, crowding out and substitution effects that can be difficult to predict may offset predicted gains. For example, boosts to tourism from the 2006 World Cup in Germany were offset by a “skedaddle effect,” when Germans fled the country in atypically large numbers during the tournament. However, economic projections for future World Cup tournaments should not necessarily include a “skedaddle effect” of the magnitude seen in 2006. Traveling from Germany to neighboring countries may be more difficult than traveling, for example, outside of Russia in 2018.

The long-term and indirect effects of such complex and infrequent events as the World Cup are difficult to measure; however, the study’s uncertain but potentially negative results join a chorus of research suggesting that hosting the World Cup might be overhyped—at least from an economic standpoint. Ex ante economic impact studies, often written by consulting companies who some have claimed have ulterior motives, consistently predict multi-billion dollar windfalls in host economies from such developments as improved trade from international visibility. These predictions appear not to align with ex post research, which consistently finds modestly positive to negative impacts on host economies. Dennis Coates, former president of the North American Association of Sports Economists, notes that an impact study before the 1994 World Cup in the US overestimated economic benefits by about $13 billion.

At least for now, mounting evidence of uncertain or lackluster benefits appears not to be deterring countries’ bidding committees from competing to spend lavishly on the event. Despite reports that Brazil’s economy is in a slump and that the US cities that hosted the 1994 World Cup endured significant income losses, Qatar is expected to invest $200 billion in preparations for the 2022 event, and the US continues to eagerly express interest in hosting. Yet protests in Brazil, as its government spent over $14 billion in preparations for the 2014 World Cup, suggest that not everyone is buying the ex ante story. Of course, there may be benefits to hosting the World Cup that are difficult to measure in monetary terms, but if bidding committees begin listening to taxpayers more than consulting companies, they may soon decide that hosting the World Cup isn’t quite as lucrative as it’s peddled to be.

Article Source: Bayar, Omer, and Georg Schaur. “The Impact of Visibility on Trade: Evidence from the World Cup.” Review of International Economics (2014).

Feature Photo: cc/(Ryu Voelkel)