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Donald Markwardt
Senior Research Analyst, International Finance and Macroeconomics Research
Capital Flows and Systemic Risk
Donald Markwardt is a senior research analyst in international finance and macroeconomics at the Milken Institute. He studies topics relating to systemic risk, capital flows and investment. Concentrating on systemic risk assessment in the financial system, his recent work focuses on liquidity and financial stability in the asset management industry.
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World Cup 2014: Bane or Boon for Brazilian Growth?

By: Donald Markwardt
July 10, 2014
   
   

“If Brazil wins, a lot of what was said – about overspending on stadiums and other things – will be forgotten,” a Brazilian business owner told the Wall Street Journal, “If they lose, it’s another story.”

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That spells trouble for Brazilian president Dilma Rousseff. With re-election looming in October, her public approval ratings appear tied to Brazil’s successful hosting of the World Cup. Mass protests against public spending on stadiums in the lead-up to the tournament had given way to increased public approval and national pride as Brazil advanced further through the tournament. But by the end of the first half against Germany, as the home team trailed 5-0, Brazilians in the crowd began jeering Rousseff with profanity-laced chants. All bets are off after this embarrassing defeat, and the legacy of this year’s World Cup will likely be remembered by Brazilians as a disappointment, having lost in more ways than one. 

Hosting the tournament was supposed to further raise Brazil’s profile, spur much-needed infrastructure development and increase tourism. In reality, a lot of the more than $11 billion the country has spent on the event was squandered on relatively fruitless investments in new or upgraded stadiums. The $270 million stadium in the remote Amazon city of Manaus, for instance, will likely never be used at capacity again and will be costly to maintain. Construction projects in general have been mired in stories of corruption, delays, cost overruns and worker deaths. The tragic collapse of an overpass in Belo Horizonte just last week shows the country’s infrastructure is literally crumbling, and efforts to upgrade it for the Cup have not been as successful as was hoped.

Public outlays for these underwhelming projects have come at a bad time, since Brazil isn’t sporting the same roaring-growth economy that it did in 2007, when it bid to host the tournament. The economy has entered “stagflation” territory, sputtering along at sub-two percent growth with inflation well above the central bank’s target. The government’s budget deficit has exploded, due in large part to the World Cup, making it harder to tackle these problems without disrupting the economy.

On the bright side, perhaps, failing to advance to the finals means many Brazilians may return to work. Cup-related work holidays have contributed to lost output that is estimated by the Sao Paulo Federation of Commerce to exceed $10 billion, more than the projected revenue from extra tourists the event draws. Indeed, reports from the ground suggest that a lot of business outside FIFA’s exclusive tax-free zones “is no better than usual,” and Brazilians aren’t actually reaping much of the frenzied spending going on at the tournament.

Previous emerging markets hosting the World Cup have experienced similar fates. South Korea (co-host) and South Africa attracted fewer tourists than anticipated, in part because traditional tourists avoid visiting around the World Cup due to the craziness. Like Brazil, both countries were also left with so-called “white elephants” in the form of unnecessarily giant stadiums.

A spokesperson from South Africa’s tax board conceded “the concessions we had to give to FIFA are simply too demanding and overwhelming for us” for the country to profit from hosting the event. Studies attempting to quantify the impact of hosting the World Cup or other mega-events like the Olympics find negligible or even negative effects. Greece’s 2004 Olympics bid is often blamed for deteriorating the country’s finances leading to its debt crisis.

Then why do countries campaign so feverishly to host these things, volunteering billions of dollars in public spending to erect remote jungle stadiums or grand velodromes if they’re unable to recoup the cost in revenues from the event? Interestingly, one study finds countries that host a mega-event get significant boosts in their exports that could make it all worthwhile. More interestingly, however, the authors also find the same results for countries that bid to host but are not actually awarded the event. They argue that the value in these events is not hosting them – it’s in bidding to host them as a costly signal that the country intends to liberalize its economy and be more open investment and trade from around the world.

Knowing that comes too late for Brazil, though, which may be feeling buyer’s remorse after winning bids for both the 2014 World Cup and 2016 Summer Olympics. Combined public spending on the two events will exceed $25 billion, with not a great deal to show for it.

One can’t help but feel there are less costly and more productive ways for Brazil to signal to the world it intends to liberalize its economy. For instance: the country could simply advance policies that liberalize its economy. Eliminating red tape, un-complicating its tax code and removing prohibitive tariffs could go a long way toward boosting trade and won’t cost $25 billion.

The winner of October’s election will have to make tough decisions on how to cut spending and get the country’s fiscal house in order without nose-diving growth or cutting essential education programs. Brazil’s developing a more educated, skilled workforce will play a key role in its transitioning away from an economy overly dependent on commodity exports toward becoming a more productive participant in the world economy.