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Berenberg/HWWI study: Brazil and the 2014 World Cup

“No economic upswing in Brazil due to the World Cup”

  • Major sporting events fail to have a lasting impact on an economy
  • Emerging markets in particular run the risk of being left with newly built stadiums as investment ‘white elephants’
  • Nonetheless, the World Cup can be a driving force behind reforms in Brazil

Hamburg/Frankfurt. The football World Cup will get underway in Brazil on 12 June. And while fans all over the world are gearing up to this grand footballing event, the host country is currently grappling with economic problems, with sections of the population protesting loudly about the immense cost of hosting the World Cup. Brazil may be one of the countries that are the most enthusiastic about sport in general and football in particular, but for many Brazilians the World Cup stands for economic mismanagement. In a new study entitled Strategy 2030 – Brazil and the 2014 World Cup, the private bank Berenberg and the Hamburg Institute of International Economics (HWWI) have closely examined Brazil’s economic outlook in relation to the World Cup. “The positive economic effects of hosting a World Cup or the Olympic Games are usually minimal,” says the Berenberg economist Dr Jörn Quitzau. “A major event of this kind can, however, serve as a driving force for a country’s modernisation.”

Brazil facing a decision about its direction

Brazil is a major emerging economy together with Russia, India and China, otherwise known as the BRIC countries. While Brazil has enjoyed some good years of economic growth in the past, a great many unresolved economic and social issues are now coming to the fore. Brazil now ranks among the ‘fragile five’ countries considered to be especially susceptible to global economic ups and downs. While there have been continued development improvements, there have also been large-scale protests against corruption, mismanagement and social inequality. “Brazil failed to modernise during its period of strong economic growth. What’s needed are reforms and investment in the social and traffic infrastructures,” says Quitzau.

Football World Cup in Brazil: bread instead of games?

When it comes to mass appeal, events such as the World Cup are certainly hard to beat, as clearly demonstrated by the sold-out matches, the overcrowded public gatherings, the sense of euphoria on the streets and the record-breaking TV viewing figures. The countries that put themselves forward as host country candidates usually do so in the hope of being rewarded with economic success. The Brazilian Ministry of Finance estimates that the 2014 World Cup will generate income of some USD 5.5 billion through tourism. However, the experience of past World Cup host countries shows that major sporting events have only a minor macroeconomic impact. “The cost-benefit analyses conducted prior to such an event regularly overstate the positive effects,” says HWWI economist Prof. Dr. Henning Vöpel. “Not even emerging markets see any significant contributions made to their economic growth as a result of the tourism expenditures and infrastructure investments triggered by the event.” And then there are the immense sums of money spent on hosting the World Cup (the estimate for Brazil is EUR 10 billion, above all as investments in the transport infrastructure, the stadiums and security), which – in particular in emerging markets – are in competition with other government-run programmes such as investment in education. What’s more, it is emerging markets in particular that run the risk of being left with newly built stadiums as investment ‘white elephants’ as a result of hosting the event. “The welfare improvements due to World Cups and Olympic Games need to be compared with the improvements resulting from alternative measures,” says Quitzau. “In the future, emerging markets above all else should seriously consider whether the World Cup as a prestige project is worth all the expense.”

While the measurable welfare effects tend to be negligible, these major sporting events do give the host country the opportunity to showcase themselves globally. “The intangible and emotional effects are much more significant. In the case of emerging markets in particular, a well-organised World Cup can send out an important signal to potential investors. “And within the country itself, the World Cup can contribute to greater cohesion and pride among the population, at least for a short while,” says Vöpel, adding that South Africa’s experience of hosting the 2010 World Cup can serve as a good point of reference for Brazil. While the direct economic impact of this event is still difficult to gauge four years down the line, the World Cup did, in retrospect, play a part in South Africa’s ‘nation building’. “The impact on the soft location effects is likely to be more decisive in and for Brazil than the direct and only temporary effects on income and employment,” says Quitzau. “Nonetheless, the policymakers should avoid drawing the wrong conclusion that a perfectly organised and staged major event can help to balance out the mistakes made in other political areas.”

Conclusion: 

A country’s economic development is not dependent on mega events of this kind, in spite of the immense status of the football World Cup within society. Brazil’s chances of winning the World Cup are far greater than the likelihood of it finding a quick fix for its far-reaching economic political problems. “The prosperity of a country is increased by means of good economic policy, a well-educated population and the right political direction,” says Quitzau.

However, the World Cup could unite a country, at least for a few months, and serve as the basis for a process of regeneration which is backed by large swathes of society. “In principle, a World Cup can achieve a lot, particularly in a country where investment in health care and education is essential and where society is so divided, as is the case with Brazil. But it’s certainly not a panacea,” says Vöpel in summary. Meanwhile, we will know by 13 July at the latest whether Brazil’s sporting dreams can come true.

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