Paper - Toolkit sport for development

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Sports and Development: An Economic Perspective
on the Impact of the 2010 World Cup in South Africa
Jo Swinnen and Thijs Vandemoortele
LICOS Centre for Institutions and Economic Performance
Katholieke Universiteit Leuven
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
principle behind this perspective is the universal right of all people to play and sport.
This paper takes a specific view by focusing on 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 15 member countries of the European
Union – that is, 1.3 per cent of overall EU employment. And the sports economy is growing. In
Europe, in the early 1970s, the ratio of overall sport expenditures (for goods and services) to GDP
1
The impact can be both direct (obvious) and indirect. For example, in the fight against HIV/Aids, football
tournaments can be used to convey information and education about HIV. Another example is when, in conflict areas,
sport programmes provide safe spaces for children to play, and serve as containing contexts to restore a sense of
normalcy in the lives of children affected by conflict or disaster (Vanden Auweele, 2006).
2
For the reverse effects see, for instance, Bernard and Busse (2004),, Jiang and Xu (2005), and
PriceWaterhouseCoopers (2004) who examine the impact of economic development (and other factors) on the
likelihood of Olympic success and sports performance. We also do not discuss the rapidly growing literature on sports
business management and on the determinants of performance of sports organizations (see many papers in the Journal
of Sports Economics and the International Journal of Sport Management and Marketing); and on the impact of rule
changes on performance in sports (see e.g. Banerjee and Swinnen, 2004; Banerjee, Swinnen and Weersink (2007)).
1
was around 0.5 per cent. In 1990, the ratio ranged between 1 and 1.5 per cent of GDP in most
European countries (Andreff and Szymanski, 2006). In the UK, the contribution of the sports
economy to GDP is currently estimated at more than 2%. As a comparison: this is three times as
high as the current contribution of agriculture to GDP in the UK.
Sports teams have become large commercial - and often multinational - enterprises. For
example, the value of Manchester United is estimated at 1.4 billion dollars, which equals
approximately the total annual output (GDP) 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
football team is worth more than 0.5 billion dollars.
However, comparable and 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 candidate 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 (Noll and
Zimbalist, 1997).
Governments or sports entrepreneurs often hire consulting agencies to draft an economic
impact report (Johnson and Sack, 1996). Irrespective of the mega-sports event, such reports from
consulting companies always claim a huge positive economic impact.3
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
3
See e.g. Economic Research Associates (1984) on the Olympic Games in Los Angeles, Humphreys and Plummer
(1992) on the Atlanta Olympics, KPMG Peat Marwick (1993) on the Sydney Olympics, Grant Thornton (2003) on the
World Cup 2010 in South Africa.
2
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 inputoutput 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, these few ex post analyses generally confirm that ex-ante
studies exaggerate the benefit of mega-sports events.6 Siegfried and Zimbalist (2000) review
several econometric studies and all these studies find no statistically significant evidence that
building sports facilities stimulates economic development. Baade 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. Kesenne (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
Kesenne (1999) admits, it is impossible to assess all alternatives, although it remains important to
calculate opportunity costs.
4
See also Lee, 2001; Szymanski, 2002; Bohlmann, 2006; Brenke and Wagner, 2006; Madden, 2006.
5
See Crompton (1995) for an extensive discussion of the problems associated with input-output analysis and Madden
(2006) for an overview of the criticisms in the literature.
6
For an overview of some results publicized by ex-post studies, see Matheson (2006).
3
A study which is highly relevant for the present paper is that of Brenke 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 FIFA (187 million Euros) and the German Football
Association DFB (21 million Euros).
Economic Impact Assessments of the World Cup 2010 in South Africa
In July 2003, Grant Thornton Kessel Feinstein 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 FIFA in September 2003. In their report (Grant Thornton, 2003) they predict that the
event will lead to direct expenditure of R12.7 billion; an increase of R21.3 billion (1.2%) in the
gross domestic product (GDP) of South Africa; 159,000 new employment opportunities (3.5% of
South Africa’s unemployed active population); and R7.2 billion additional tax revenue for the
South African government. More recently, Grant Thornton estimated that the event will contribute
at least R51.1 billion (2.7%) to the country's GDP because more tickets will be available for sale
(Gadebe, 2007). These results have been widely disseminated through the media.
In the light of the foregoing literature review, there is reason to be sceptical 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 GDP of a country (see e.g. Baade, 2006; Johnson and Sack, 1996). Second,
according to Bohlmann (2006), the use of multipliers in the report is questionable and overly
optimistic. Third, the report estimated that R1.8 billion would have to be spent on upgrades to
stadia, and R500 million on infrastructure upgrades. However, a site published for the International
Marketing Council of South Africa (2008) reports much higher investment costs: R8.4 billion for
building and renovating ten World Cup stadiums (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 R2.6 billion and R2.85 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 R9 billion. Fourth, there are problems with the interpretation of the announced
159,000 new employment opportunities. The Local Organising Committee (LOC) plans to recruit
4
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 Zimbabwe, and because of the announcements of the numerous job vacancies, there is
a huge migration flow of skilled and semi-skilled construction workers from Zimbabwe to South
Africa (Sapa – AFP, 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 Baade 2004).
An important difference relates to the costs of infrastructure investments.7 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 stadia,
these are well used in Germany with a large attendance in the Bundesliga. It is more uncertain
what the demand for the football stadia will be in South Africa after the World Cup. In general,
one would expect that the demand for these facilities is lower in 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 stadia 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
7
FIFA imposes the presence of eight to ten stadiums with a capacity of 10,000 to 60,000 spectators.
5
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 deficiencies are often cited as a constraint on
growth, and improving this because of 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, hence 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
NBA; at the same time, many US players who cannot make it in the NBA 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.g. Andreff, 2004; Magee and Sugden, 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
8
This problem is said to be reinforced by the lack of education of many potential sports players, leaving them more
vulnerable to exploitation by fraudulent managers; although these arguments apply more general to migration
mechanisms.
6
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 Ureta, 2003; Yang, 2005; McCormick
and Wahba, 2001; Page, Cuecuecha and Adams, 2008). While very little is known about the
impact of remittances from sports remuneration, there is 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” (Ozden and Schiff, 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 tend to take a very high proportion of the best educated,
aside from a few labor-exporting countries. Hence the brain drain is generally limited (Adams,
2003). In fact, migration 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” (Andreff, 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 sports 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.
7
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 (Darby, Akindes
and Kirwin, 2007).
Fourth, the search for African players by European football clubs is argued to be an example
of wage dumping (Poli, 2006). These arguments are very similar to the issues in the general
migration literature with migrants taking over jobs at lower wages in the host country – an issue
well studied in other sectors of the economy. Interestingly, one of the world’s leading experts,
George Borjas 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 (Aydemir and Borjas, 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 development 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 evidence here; one can only speculate or draw on ad hoc cases.
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 the 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 performance 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.
8
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.g. Frey and
Stutzer, 2002; Graham and Pettinatio, 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.
Szymanski (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. The study of Brenke and Wagner (2006) on the economic effects of the World
Cup 2006 in Germany comes to a similar conclusion, i.e. that the economic effects were minor but
that there was a positive effect on society for other reasons. The World Cup showed a positive
image of the country and, as they say: “it was great fun, nothing more, nothing less.”
One could even hypothesize on the economic implications of this. There is evidence from the
psychology literature that happier people perform better in general and also earn more income.
Graham et al. (2004) find that factors such as self-esteem and optimism that affect happiness also
have positive effects on people’s performance in the labor market. This effect of happiness could
be particularly relevant for the World Cup in South Africa, because the study of Graham et al
(2004) also shows that these factors matter more for the poor. In this view, the extent to which the
World Cup stimulates a positive attitude among poor people in South African society matters
especially. Hence, ensuring poor local people access to the games is important. In this light the
initiative of the FIFA and the local organizers to make tickets more easily and cheaper available
for local residents is a step in the right direction.
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