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Sports and Development: An Economic Perspective

Sports and Development: An Economic Perspective on the Impact of the 2010 World Cup in South Africa Joe Swine and This Abovementioned LOCOS Centre for Institutions and Economic Performance Kathleen Universities Eleven Version 2 February 2008 Introduction The relationship between sports and development can be analyzed from different angles – some of these have received quite a bit of attention in the literature, others less. An important share of the literature focuses on football (soccer), baseball, and basketball because these sports are played most widely and because of the large economic interests.

It is important to first define “development”. Sports obviously affects a person’s physical development, and also his or her social and psychological development, 1 all contributing to the wider “development” of society, a reason why the United Nations organized the International Year of Sport and Physical Education in 2005, and incorporates sports into its programs and policies (UN sport for development and peace, 2006). Another definition of sports development refers to the creation of a sports infrastructure and a sports competition in developing countries.

The basic Renville behind this perspective is the universal right of all people to play and sport. This paper takes a specific view by focusing on

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the relationship between sports and economic development, in particular income growth and poverty alleviation. We focus mainly on the causal effect from sports to development. 2 In Europe and North America, sports are increasingly important to the economy. About 2 million people are employed in the sports economy in the 1 5 member countries of the European Union – that is, 1. 3 per cent of overall EX. employment. And the sports economy is growing.

In Europe, in the early asses, the ratio of overall sport expenditures (for goods and services) to GAP was around 0. 5 per cent. In 1990, the ratio ranged between 1 and 1. 5 per cent of GAP in most European countries (Andre and Simians, 2006). In the I-J, the contribution of the sports economy to GAP is currently estimated at more than 2%. As a comparison: this is three times as high as the current contribution of agriculture to GAP in the I-J. Sports teams have become large commercial – and often multinational – enterprises. For example, the value of Manchester United is estimated at 1. Billion dollars, which equals approximately the total annual output (GAP) of a country like Sierra Leone. The richest US baseball team, the New York Yankees, is valued at more than 1 billion dollars; and the average US Sports and Development: An Economic Perspective on the Impact of the 2010 World Cup in South Africa By Lambda representative data on the economic value of sports are not available, especially for developing countries. In this paper we focus therefore on two specific issues which seem particularly relevant for the impact of football on economic development in the context of the South African World Cup.

The first is the impact of sports/ infrastructure investments on development; the second is about migration of sports players and development. The Impact of Infrastructure Investments Bids placed by candidate cities or countries to host a mega-sports event, such as the World Cup, have tremendously increased over time. This increase in bids is caused by the law of supply and demand. The supply of mega-sports events remains constant while the number of candidate organizing countries and cities increases. One reason for this is that emerging and developing countries are increasingly competing with rich countries for hosting such events.

An important argument that antedate governments put forward for hosting a mega-sports event is the perceived economic benefits that the event creates (Porter, 1999). They typically claim that events, such as the World Cup, give a stimulus to business resulting in economic benefits which are larger than the costs, including public funding, from organizing the event (Noel and Cymbalist, 1997). Governments or sports entrepreneurs often hire consulting agencies to draft an economic impact report Monsoon and Sack, 1996). Irrespective of the mega-sports event, such reports from consulting companies always claim a huge positive economic impact.

However, there is a lot of critique in the academic literature on the validity of these economic impact studies. Matheson (2002; 2006) points out that many (event- sponsored) studies exaggerate the economic impact on local communities and Porter (1999) states that the predicted benefits of public spending never materialize. 4 One problem with many of these impact studies by consultants is that they use input- output analyses, which have been heavily criticized in the academic literature. 5 Such input-output analyses start from the assumption of no capacity constraints, implying infinitely elastic supply curves.

As a consequence, there is no crowding out and an increase in demand will always result in positive indirect effects only. As pointed out by Matheson (2006), exactly this omitted crowding out effect (next to the substitution effect and leakages) is a primary reason why ex ante studies overestimate the economic impact of mega-events. Moreover, the multipliers used by these input- output analyses are doubtful and inaccurate because they are based on the normal production patterns in an economic area. However, the economy may behave very differently when hosting a mega-event, rendering the ‘normal’ multipliers invalid Matheson, 2006).

Another problem is that these studies are always prospective (Coates and Humphreys 2003). Prospective studies need to be compared with retrospective econometric studies to see, in hindsight, whether they were correct. However, retrospective studies are often not executed because governments or bidding organizations have no incentives to order such a study (PricewaterhouseCoopers, 2004). If conducted, most ex-post studies state that the evidence that mega-sports events generate economic benefits is weak, at best. Thus, benefit of mega-sports events. Siegfried and Cymbalist (2000) review several econometric studies and all these studies find no statistically significant evidence that building sports facilities stimulates economic development. Bade and Dye (1990) find evidence that the presence of a new or renovated stadium has an uncertain impact on the level of personal income and even possibly a negative impact on local development relative to the region. Another frequently made comment is that, even if hosting a mega-event creates benefits for the organizing region, the question should be posed whether financing such an event is the most efficient use of public money.

Keenness (1999) argues that for example the World Cup should only receive public funding if there are no alternative projects that yield higher benefits. However, as Keenness (1999) admits, it is impossible to assess all alternatives, although it remains important to calculate opportunity costs. A study which is highly relevant for the present paper is that of Brenner and Wagner (2006) who analyze the economic effects of the World Cup 2006 in Germany. The authors find that expectations that the World Cup would significantly increase spending on employment and growth were overestimated. Additional employment was generated only temporarily.

The infrastructure and promotion costs in hosting the World Cup boosted overall economic performance by approximately 0. 05% (estimates vary between 0. 02 percent and 0. 07 percent). The main beneficiaries of the World Cup were FIFE (187 million Euros) and the German Football Association DB (21 million Euros). Economic Impact Assessments of the World Cup 2010 in South Africa In July 2003, Grant Thornton Kelsey Finest issued the results of their economic impact assessment, ordered by the South African company that submitted the bid to host the football World Cup to FIFE in September 2003.

In their report (Grant Thornton, 2003) they predict that the event will lead to direct expenditure of RI 2. 7 billion; an increase of ROR. 3 billion (1. 2%) in the gross domestic product (GAP) of South Africa; 1 59,000 new employment opportunities (3. 5% of South Africans unemployed active population); and RE. 2 billion additional tax revenue for the South African government. More recently, Grant Thornton estimated that the event will contribute at least ROR. 1 billion (2. 7%) to the country’s GAP because more tickets will be available for sale (Gadded, 2007).

These results have been widely disseminated through the media. In the light of the foregoing literature review, there is reason to be skeptical about these predictions. A closer look into the numbers and the methods provides serious reasons to believe that these results are overestimations. First, Grant Thornton (2003) includes domestic residents’ expenditures at the event as direct benefits. However, this is merely a reallocation of expenditure and does not add to the GAP of a country (see e. G. Bade, 2006; Johnson and Sack, 1996).

Second, according to Bellman (2006), the use of multipliers in the report is questionable and overly optimistic. Third, the report estimated that RI . Billion would have to be spent on upgrades to stasis, and RARE million on infrastructure upgrades. However, a site published for the International Marketing Council of South Africa (2008) reports much higher (five have to be renovated and five have to be built). For example, the Durban stadium and the Cape Town stadium that have to be built cost respectively RE. 6 billion and RE. 85 billion.

The cost of upgrades on the infrastructure, for example, upgrades of airports and improvements of the country’s road and rail network, is estimated now at RE billion. Fourth, there are problems with the interpretation of the announced 59,000 new employment opportunities. The Local Organizing Committee (LOC) plans to recruit volunteers, ordinary people as well as specialists, to work at the World Cup. These volunteers are not paid, which sheds a different light on the interpretation of “employment opportunities”. Moreover, many of the Jobs will only be temporarily.

Because of the troublesome economic situation in Zanzibar, and because of the announcements of the numerous Job vacancies, there is a huge migration flow of skilled and semi-skilled construction workers from Zanzibar to South Africa (Sap – APP, 2007). These migrants may take up a considerable share of this employment. Do Impacts Differ with the Level of Development of the Host Country ? The most obvious point of reference when assessing the likely impact of the South Africa World Cup is to compare it with the most recent World Cup in Germany.

However, important differences in the level of income and development between Germany and South Africa complicate such comparison. Thus we cannot merely transpose the economic impact of the World Cup in Germany to South-Africa (Matheson and Bade 2004). An important difference relates to the costs of infrastructure investments. First, investment requirements in South Africa are larger. While South Africa has to build several new stadiums, Germany had (most of) them already, and investments were limited to upgrading.

Possible even more importantly, the general infrastructure, for example related to transport, requires much more investment in South Africa. Second, regarding the costs, one should look at differences in cost of capital and cost of labor. The aforementioned (opportunity) costs of capital are typically higher in developing countries. Money spent on the event is money not spent in other areas, such as the health system. However, wages are comparatively low in developing countries which can lower the operating and infrastructure costs.

Labor opportunity costs may also be low in developing countries with large unemployment. The post- World Cup use (return) of the investments differs as well. Concerning the stasis, these are well used in Germany with a large attendance in the Bundestag. It is more uncertain what the demand for the football stasis will be in South Africa after the World Cup. In general, one would expect that the demand for these facilities is lower n developing countries, as sport is a luxury good, albeit that South Africa is a very specific country.

There appears strong (and high income) demand for other sports (rugby) while less (and low income) demand for football. The extent of use of the stasis for these different demands will certainly affect the benefits. Low use and high maintenance costs may even lead to a negative ‘legacy of the World Cup. Evidence from the post-World Cup 2002 effects in South Korea and Japan indicates that concerns about the low use and high maintenance costs of the stadiums were justified (Watts, 2002). Regarding general infrastructure investments, one would assume that the potential effects would be large in South Africa.

Its infrastructural the World Cup requirements could provide a major reduction in costs and provide a productivity boost to the economy. Sports Migration Possibly more than in any other economic activity, migration is important in sports. The share of migrants in the main sports leagues in Europe and North America is large by average economic sector standards, in particular for the top leagues. There are cases where teams in first divisions in Europe have played with 100% migrants, once without a single native player. The pattern of migration varies considerably across sports.

For example, in (ice) hockey, the main migration pattern is from Eastern Europe to the US and Canada; in baseball from Central America to the US and Canada; in basketball, some European and Latin American players play in the US NAB; at the same time, many US players who cannot make it in the NAB play in European leagues; and in football (soccer) the main migration is from the rest of the world to Europe, and among countries within Europe. Migration of African football players to Europe has grown exponentially over the past decades. Studies on the impact of these migration patterns can be classified into different groups.

Most of the literature on migration of athletes or sports players emphasizes and focuses on what are claimed to be negative implications. One negative implication could be referred to as the “muscle drain” (analogous to the literature on the “brain drain”): it refers to the negative effects on education and the competitiveness of the local sports system. Related negative effects are argued to be low wages for developing country players, the illegal nature of the migration and transfers, and the lack of transparency surrounding it (e. Andre, 2004; Mange and Sunned, 2002), inducing some to refer to this as a “modern form of slavery’. While there appears to be considerable ad hoc evidence on these effects (including on illegal activities and lack of transparency in international transfers),8 there is in general little representative evidence on these issues. In contrast, an extensive literature on the development and poverty impacts of general migration, which is generally based on much better data and evidence, suggests very different effects of migration.

First, international remittances have in general a positive impact on development (Adams, 2006). Remittances reduce the level, depth and severity of poverty in the developing world, because a large proportion of these income transfers go to poor households, although not necessarily the very poorest (Adams and Page, 2003, 2005). Remittances also have a positive impact on investment in education and in entrepreneurial activities and can help raise the level of human capital in a country as a whole (Edwards and Urethra, 2003; Yang, 2005; McCormick and Whap, 2001; Page, Gauche and Adams, 2008).

While very little is known about the impact of remittances from sports remuneration, there s no ex ante reason to believe that these effects would be very different. Second, migration affects the level of human capital (in a broad interpretation) in the origin country in both positive and negative ways, what is sometimes referred to as the “brain drain” and the “brain gain” (Oozed and Shift, 2005). Recent studies (not focusing on migration in sports) come to the conclusion that, although international migration involves the movement of the educated, international migration does not exporting countries.

Hence the brain drain is generally limited (Adams, 2003). In fact, gyration of the educated from a developing country may increase the incentive to acquire education, resulting in a brain gain. In other words, the dynamic investment effects reverse the static, depletion effects of migration on schooling (Boucher et al, 2005). Hence, in summary, taking into account dynamic incentive effects, the net impact seems to be a “brain gain”. These findings seem to conflict with arguments that the ‘muscle drain’ in sports undermines the sporting capacity of developing countries.

It is said to divert the most talented sportsmen, leaving the developing countries with the costs of their education without the possibility of regaining this investment in human (or athletic) capital. This muscle drain is also argued to erode the capacity of the home country to use its most talented athletes in international competition, explaining the “poor performances of developing countries in world sport events” (Andre, 2004). However, the empirical evidence to support these arguments does not appear to stand up to a rigorous analysis, such as taking into account selection bias.

Moreover, the analyses ignore any dynamic effects which seem to occur in developing country ports sectors where investments in local training facilities have grown with the increased success of developing country players in rich country sports leagues, although there is no systematic evidence on this. Moreover, developing countries seem to have done better, not worse, since the start of substantial migration from their players to rich country competitions. For example, African teams have performed increasingly well in the past three decades in the World Cup.

Third, the creation of sports schools with the explicit objective to prepare local players for playing in rich country sports leagues is the subject of much debate. While some of these schools are quite successful, the models are criticized for an unequal distribution of the gains (with the, often European, owners argued to capture a disproportionate share of the financial benefits), and for leading to a decline in education enrolment, and for creating social problems (Dairy, Skinned and Jerkin, 2007).

Fourth, the search for African players by European football clubs is argued to be an example of wage dumping (Poll, 2006). These arguments are very similar to the issues in the general migration literature with migrants taking over Jobs at lower ages in the host country – an issue well studied in other sectors of the economy. Interestingly, one of the world’s leading experts, George Boras of Harvard University claims that there is no clear evidence either way; and that despite massive immigration from poorer countries in recent decades studies show very little impact on wages in the US (Admire and Boras, 2007).

Finally, while across the globe remittances are a very important source of capital, and particularly so in some developing countries, it is unclear whether remittances of migrated sports players are sufficiently bulky to have a significant impact on the placement of a country or a region. On the one hand, the number of players migrating is very small compared to total employment. However, sports migration has grown rapidly and incomes are generally much higher in Europe or the US than at home, where incomes are considerably lower.

However, there is no substantive Impact of the World Cup Given these potential effects of migration, how is the World Cup likely to affect these? Several changes may occur, some with opposing effects. If the World Cup gives a long-term boost to football in South Africa, either by creating facilities in areas of he countries or for parts of the population where football is popular, or by drawing in new parts of the population (and their incomes) into football, this may increase the demand for players from other African countries; and thus in-migration of players.

Another possible effect is that the World Cup may inspire young South Africans to become international players or may induce much needed investments in youth football and training facilities in South Africa. This could lead to a surge in football academies in South Africa. This is what was observed in Senegal after the exceptional reference of the national team in the 2002 World Cup. This could then result in an increase in out-migration of football players from South Africa to the rest of the world. Concluding comments: Money is not everything. This paper has reviewed several potential economic effects of the World Cup.

The arguments discussed so far seem to suggest that the economic impact of the World Cup in South Africa is likely to be less than argued by the consulting reports, but that there may be substantive benefits from improvements in the general infrastructure that result from the World Cup organization. However, money, of course, is not everything. There is a growing economic literature on the connection between happiness (or subjective well-being) and income. Within a society, studies find that, on average, persons with a higher income are happier than poor people (see e. . Frey and Stutter, 2002; Graham and Petition, 2002) but that after a certain threshold level of income, higher income does not seem to make people happier. Several reports also point out that benefits are not always tangible or cannot be expressed in financial terms, such as the increased confidence and pride of the population of the host country. Simians (2002) argues that organizing the World Cup will not boost economic growth although the government expenditures do improve the overall well being of its citizens because of these intangible effects.

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