Brazil to Emerge a "Loser" in 2014 World Cup

October 19, 2016

With one month until the World Cup, Brazil is rushing to complete the necessary infrastructure to effectively host the tournament, which begins June 12th when Brazil faces Croatia. The Brazilian Ministry of Tourism has estimated the World Cup could result in up to $11 billion USD in direct, indirect and induced economic growth for the country, a number more than 20 times what host South Africa made in 2010. However, the odds of accruing this large of a return are necessarily impossible due to the unfortunate realities of historical precedent, tournament-specific agreements and tourism macroeconomic multipliers paired with the currently unfitting Brazilian economy.

Last World Cup, South Africa made $513 million, a disappointing amount after predicting nearly double that in revenue. Upon the conclusion of 2010, South Africa had only received 11% of the $4.5 billion invested. Host countries take on the responsibility of holding such an event with hopes for increased income from tourism or investment during the games, but a host country is almost always a net loser. During the competition itself, historically the World Cup and the Olympic Games have similarly had a crowding out effect on tourism during the competition. For example, during the summer games in Athens in 2004, annual tourism fell 10%, similarly in Utah in 2002, winter tourism fell 50%; both falls due to the anticipation of large crowds and overpriced daily expenses incurred by potential first time and annual tourists alike. Still, the Brazilian government argues that by “charming” its tourists during the Cup, they will lure additional tourism and investment in the proceeding years. This argument is commonly well-supported in less frequently traveled nations, such as recent World Cup host country South Korea. However, Brazil is not an unpopular or unfamiliar holiday destination with beautiful beaches, Christ the Redeemer, and incredible natural and urban sites to explore.  Although the Cup may very well showcase Brazil’s beauty and lively culture, the tournament will not be highlighting an unknown travel spot. In 2002, shared-host country Japan saw no growth in its tourism industry. The 2006 host, Germany, only experienced a $60 million increase in tourism exports after the World Cup, a drop in the bucket in the EU member’s $3.2 trillion economy. International sporting events promise increased tourism and investment, but consistently and statistically come up short.

Throughout the games there will be 3.7 million predicted tourists in the capital city, both foreign, approximately 600,000 people, and Brazilians, the remaining 3 million. The Brazilian Ministry of Tourism has predicted that foreigners will spend $2.6 billion, a whopping $4,333 per tourist; Brazilians totaling $7.9 billion, or $2,633 per attendee. These overwhelming statistics are extremely hard to believe when paired with FIFA’s calculation that almost half of the foreign tourists will not purchase tickets to enter a single one of the 12 newly constructed stadiums, but will instead attend free fanfest game viewing sites mandated to be constructed by FIFA regulation. At this point World Cup preparatory spending is exceeding $11 billion, over double what was spent in Johannesburg in 2010.  The Brazilian government is expected to have incurred $3.5 billion in debt by the Cup’s end in July. With these huge expenditures, it is extremely doubtful Brazil will make a profit or even net zero on this financial endeavor.

In addition to the fanfest big screen events that draw spectators away from paying for tickets, FIFA inevitably has the upper hand in profitability and control over Brazil in the 2014 games. Although President Lula originally promised there would be no public spending associated with the games, it is estimated the Brazilian government will be USD 3.5 billion in debt come July. Legally, Brazil has granted FIFA exclusive advertising rights up to two miles surrounding each stadium, automatic entry visas and work permits for whomever they choose, and exemption from federal and payroll taxes as well as import fees creating conflicts of sovereignty. Brazil has surrendered its border control to an international sports organization, ignoring its Constitution and granting complete exclusion from taxation. Also, while FIFA has complained to the Brazilian government that necessary infrastructure is lacking, the organization is not allowing them to collect the public revenue required to fund such critical projects. Another logistical issue results from the location of the stadiums, all built on prime urban real estate. After the conclusion of the games, the stadiums will not be used to their full capability; will not employ any full-time labor, but rather will servie as an inefficient placeholder of what could be a growing business or new, expanding residential district. Excessive spending on high volume, low-quality construction on arenas and travel accommodations has spurred inflation in Brazil without promise of continuing investment returns and job stability. This is a common mistake; after the 2004 Olympic Games in Norway, 40% of the newly constructed hotels built for the incoming crowds went bankrupt by 2008. The World Cup has not been centered on promoting long-term growth in Brazil; enticing middle and lower class Brazilians to complain about unjust public spending while the approaching World Cup provides them with effortless international media attention.

Brazil’s Tourism Ministry is convinced that return on World Cup investments will come by means of attracting new tourism in years to come after the conclusion of the 2014 World Cup and 2016 Summer Olympic Games. They explain the process of this growth using a tourism multiplier effect, which breaks down the growth into three stages: direct, indirect and induced. Direct growth is immediately incurred. Tourists demand transportation by car and by air, hotels, venues for entertainment, restaurants, etc. Indirect growth is stimulated by future activity promoted by tourism: lured investment spending, security services and domestic purchases in the service industry such as fuel, food and cleaning services. Induced spending, the final piece, is supported by the spending of the domestic employees in tourism industries, who put their money back into the Brazilian economy, spurring growth. In addition, these employees are taxed on their new, higher incomes, allowing for government to increase tax revenue, which can be put back into the economy in the form of social programs or public investment. It is also assumed that a positive experience by international tourists on holiday promotes return trips and/or encouraging recommendations to other potential travelers.

Although it seems this model seems to promote boundless growth as it cycles, there are both requirements for its functionality and holes in its process. To maintain the jobs that allow induced growth, there must be a demand to keep businesses open that feed off of the tourism industry such as hotels, resorts and other traveler attractions. The World Cup and Olympic Games demand accommodations for extremely large crowds for only two separate months in the next two years. During the lull between the two events and then the years afterward, who will fill those vacant hotel rooms? There must be a demand to absorb the excess supply.

Economists have also found deficiencies in the tourism multiplier during induced growth, called leakages. As domestic incomes increase, buyers are more likely to purchase imported goods and spend internationally, sending their income out of the country instead of investing and spending in Brazil, stimulating further growth at home. In addition to both continued demand and leakages, the tourism multiplier implies that the tourism industry holds a substantial, influential stake in the economy. Brazil’s tourism industry, however, does not.

Research by the World Tourism and Trade Council in 2014 estimated that tourism directly impacts only 3.5% of Brazil’s GDP, down from 4.3% ten years ago. In terms of real growth, Brazil’s tourism directly contributes 3.0% of growth, reasonably behind the world average of 4.3%. Compared to Latin American countries overall, Brazil ranks fifth in total tourism contribution to GDP and sixth in tourism impact on employment, falling behind Mexico, Costa Rica, Argentina, Cuba and Peru, respectively. Employment in Brazilian tourism has remained stagnant in the past decade around 3.1%, a small amount next to agriculture that has employed over 20% of the Brazilian population steadily throughout the last 15 years.

The issue of lacking return does not come from low growth and employment of tourism, but from the combination of low tourism growth, low industry employment and huge investment spending in tourism. Brazil is the world’s top spender on tourism investment, up 21.8% from the 2013 fiscal year. Brazil is putting a lot of money into an industry that has a low long-run growth prediction of total trade and tourism contribution, 3.6% annually, behind both the Latin American regional and world averages. The statistics stack against Brazil in terms of predicted growth of tourism as a leading Brazilian industry. The World Cup is demanding billions of dollars in investment that will most likely result in insignificant returns on Brazil’s relative economic scale. 

Although the majority of protesting Brazilians may not know it, their complaints have macroeconomic backing. The Brazilian government has justified their immense spending spree with nationalistic promises of tourism expansion and job creation, explained by a tourism multiplier. However, the multiplier combined with Brazil’s economic structures, historical precedent of net losses for host countries and the World Cup 2014 specific-accordances with FIFA, presents a arrangement that will most likely not result in net growth for Brazil, possibly end in a breakeven outcome, but will probably produce huge losses.  The Brazilian government has not combined expanding infrastructure with a plan for sustainable, long run growth with job preservation as well as creation. Therefore, the World Cup will not stimulate the growth promised, but rather cost Brazil billions of public-invested dollars and valuable real estate, leaving behind over half a dozen, beautifully memorable but underused and financially inefficient football stadiums.

 

About Author(s)

Danielle Scalise
Danielle Scalise is a senior undergraduate at the University of Pittsburgh pursuing degrees in Economics and Political Science, with a minor Spanish and certificate in Latin American Studies. She took part in the Pitt in Cuba program in the spring of 2013 and is currently an intern for Panoramas. Danielle is attending Georgetown Law in the fall where she will study international economic law pursuing a career specializing in US/Latin American trade relations.