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Is Your World Cup Half Full or Half Empty?

June 14, 2018 by Nasera Kaouss

I’m sure you’ve heard the cliche “it’s too good to be true?” Well, hosting the FIFA World Cup is too good to be true.

Let’s start with the bidding. The countries that enter a bid all want to win so they can showcase their nations to audiences who tune in for one of the largest worldwide sporting events. From the outside, it sounds like a great idea. The host country will attract tourists and build all sorts of additional infrastructure to accommodate the event, which can only be an asset, right? Wrong.

For all the attention on a global stage, there’s more than publicity to consider. So, what should countries consider when deciding if they want to bid for the FIFA World Cup?

Counting the Cost

When analyzing the total monetary value of the revenue of an economic impact, it is imperative to identify the types of potential benefits and costs. Costs can be divided into two different categories: accounting and economic.

Accounting costs are those that can be assigned a monetary value. For example, an accounting cost would be paying for rent or the cost of construction.

Economic costs on the other hand, take into account the accounting cost, plus the intangible effects that may or may not be assigned a monetary value. Think of this as the social and environmental impacts that can in turn alter other facets of the economy.

For a quick example, say it costs a million dollars to build a factory in an area, which is the accounting cost. However, the price of real estate and housing values decline 10% in the 3 mile radius around the factory which, for our purposes, we’ll assign a value of $500,000. So the total economic cost of the project is the $1 million accounting cost of construction, plus the $500,000 of property value decline, totaling $1.5 million.

Newton said it best with his third law of motion—for every action, there is an equal and opposite reaction. Although this refers to physics, it too can be applied to economics. In economics, we usually refer to this concept as an externality. There are both positive and negative externalities, which are defined as impacts that affect others who were not directly involved in making a decision. A positive externality is one that adds an unrelated positive value to others who did not participate in the decision making process. It can positively impact society directly or trigger a chain reaction of positive events. A negative externality is just the opposite. Most of the time, however, externalities are not taken into account simply because it is difficult to quantify them. Impacts that were intended for good could possibly do more harm. Based on the previous example, the intangible cost of the housing decline would also be considered a negative externality because it has an effect on those who had no say in whether the factory was going to be built or not.

Newton also said that “we build too many walls and not enough bridges.” So how exactly can we apply his wisdom to the FIFA World Cup? On the surface, it looks like a great idea to host the world cup because it would create an influx of tourists that would drive revenue. But, what most countries do not take into account when looking at the influx of tourists is the crowding out effect this would cause. There would be crowding out of both the local residents as well as the so called “regular” tourists who just wanted to visit the city. This crowding out would happen because all the tourists coming to watch the games would essentially displace all the other types of people who could have contributed to the revenue, but instead avoided the destination (because, after all, nobody like crowds and long lines).

Opportunity Costs

Opportunity costs can be defined as the alternative(s) to your decision. For example, if I choose to go to work one day, the opportunity cost of making that decision would be that I could have instead stayed home and slept. Being able to identify opportunity costs and their magnitude is essential when making decisions, especially those regarding economic impacts. For most countries, notably the developing ones, the opportunity cost of hosting the FIFA World Cup is very high, which in turn means there might be a more effective way to allocate their resources.

Regardless of the economic cost, having the opportunity to host a respected and famous sporting event is a rare opportunity—a positive externality. By hosting these games, it allows the host country to essentially add the FIFA World Cup to their resume. It becomes part of that country’s legacy. For some countries, it may even put them on the map and increase their allure to tourists. Hosting the World Cup can also stimulate the redevelopment and improvement of underdeveloped or low-income areas. A country might need to upgrade an area to accommodate the influx of tourists as well as teams and officials. However, after the games have concluded, ideally prices would return to a level to which the residents were accustomed.

However, it is extremely difficult to assign a monetary value to these impacts and externalities because most are socially related and contribute more to the national story than to growing the economy.  

All Aboard

For a nation to host the FIFA World Cup, the numbers have to make sense. A projected budget and benefit need to be calculated to ensure that this is a beneficial investment. However, when these numbers are presented they are often presented as a gross number. This means that the revenue that is calculated does not take into account any of the costs, and therefore the net benefit is not properly reported. And, as is typical with construction projects, countries almost never stay within their budget, which only causes more of an economic deficit. If a country decides to invest in such a monetarily burdensome event, it is important that a majority are in favor of their resources being allocated to such an expensive and visible project. Brazil faced anti-government riots and protests because its citizens believed that the money should instead have been invested in health and educational systems.

If a team is going to compete in the World Cup, they are expected to give it their all. Same should go for the host country too, right? For starters, in 2014 Brazil seemed to live by the motto “Go big or go home. Because it's true. What do you have to lose?” FIFA regulations require the host countries to provide either eight, ten, or twelve stadiums. Brazil decided to take this motto literally and chose to build the maximum twelve stadiums. In a perfect world under all of the right conditions, building the maximum number of stadiums does seem like the best option because ideally twelve events could be held simultaneously and the stadiums could all be sold out (which would drive revenue through the roof). However, after the conclusion of the World Cup, Brazil was unable to sell out even a single stadium, let alone all twelve. As a result, they were left with outrageous maintenance and service costs that they were unable to pay. That left Brazil with two options; either to inject more money into these stadiums to maintain them, or leave them unused and watch the investment deteriorate. Neither is ideal because they do not provide a promising long-run benefit.

One last thing to consider is that during the month-long span of the World Cup, local economies experience increases in commodity prices in all industries that are impacted by the increase in tourists (think commemorative merchandise, hotel bookings). But one thing does tend to remain constant: employee pay. Firms often do not compensate their workers for the influx in demand but instead pocket the benefit. It is uncertain how this additional revenue is then spent—whether it is invested back into the economy or held within the company.

So what if a government (or its people) says “no?”

When the International Olympic Committee (IOC) was planning the 1984 games, they had narrowed down the host locations to New York and Los Angeles. At the time, LA had a relatively weak infrastructure and no support from the local government. This forced the city to put together its own committee of businessmen and gather private funding as well as strike deals to gather all the resources they needed. The leader of this whole operation was Peter Ueberroth, who was later awarded Times Man of the Year. Together with his committee members, he decided that the most cost-efficient way to go about hosting these games would be to use all existing infrastructure. By doing this, they only had to upgrade buildings and stadiums which were already in place because LA had previously hosted the 1932 Olympic Games. They also repurposed all of the upgraded infrastructure for later use such as converting the Olympic Village into college dorms. They drove up the bidding wars between the television network companies and were able to secure 225 million dollars from ABC. These games were desirable to so many network stations because this was the first time in history that the games were going to be broadcasted worldwide for a record-breaking 180 hours.

Could Los Angeles repeat these tactics if they hosted the FIFA World Cup? Who knows? But it may be worth brainstorming now in the event LA is chosen to be a host city when the United States (along with Mexico and Canada) host the 2026 FIFA World Cup.

Bringing it Home

So with all of that being said, I hope you were able to “read between the lines,” to help assist your country in deciding whether or not they want to be the next host for the FIFA World Cup. It seems that if you are able to follow the ways of Los Angeles, this just might be a beneficial investment for your nation. And for those of you who are daring enough to try new methods of making the FIFA World Cup economically beneficial, then kudos to you. After all, that’s how LA did it: with no help from their government, only the committee of local businessmen that LA was able to assemble. As for me, you will find me at my local restaurant watching the games and contributing to the restaurant industry. It sure seems a lot more simple than trying to orchestrate an entire worldwide event.

Topics: Events, Economics


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