Source: http://worldcityweb.com/home/MIA/publications/magazine/26/648/

Kick start

by Mary Dempsey

Economists say there may be a link between a World Cup victory and economic good times. Will a Latin American team prove that true?

While billions of people follow the World Cup on television, via mobile phone messages, on the radio or even up close in stadiums there is no doubt that the games bring temporary economic hits. In Brazil, the stock market closes early during the playoffs so the market becomes volatile. In most soccer-loving nations, workplace productivity falls.

On the flip side, for the global marketing machine behind soccer, there is a short-term spike in advertising and consumer spending. This year’s host country, Germany, is expected to add 0.2 percentage points to GDP growth because of the games.

But the more complicated and intriguing question is whether there is a longer-term relationship between the economy and victory on the pitch.

“Soccer does appear to suffer when the economy is weak and to benefit from a rising economic tide,” according to research by European investment bank ABN AMRO, which also concluded that a World Cup victory would add 0.7 percent to the winning country’s economic growth.

A portion of the debate is, obviously, economists having some fun. However, there is a serious side to the soccernomics theories, and that is relevant to companies that do business in Latin America including many of the 1,300 multinationals with a presence in South Florida.

“On the whole, Latin America has had a long run of success on the soccer pitch,” according to ABN AMRO. “The economy, too, has been moving in the right direction in the past years.”

Among the 32 teams entering the three-week tournament, six were from Latin America. They included the region’s three largest economies: Brazil, Argentina and Mexico.

Brazil, seeing its economy surge thanks in great part to commodity exports to insatiable China, has won the World Cup five times, more than any other country. In 1982, Italy beat Brazil and the South American country soon after entered a debt crisis and a decade of hyperinflation. In 1994, hyperinflation came to an end, and Brazil won the World Cup in the United States.

“Was this just a coincidence or was it a sign of some positive underlying force propelling Brazil forward?” Arminio Fraga, the founder of Brazilian investment firm Gavea Investimentos and former president of Brazil’s Central Bank, wrote in a Goldman Sachs research paper on the 2006 World Cup. “Obviously, it is hard to push this analogy too far, but the Brazilian economy had a good run after the win in Pasadena and struggled after losing in the finals of the 1998 World Cup in Paris to a fine French squadron.”

In 2002, Brazil won the World Cup, Luiz Ignaio Lula da Silva was elected president and the Brazilian economy despite Wall Street’s doomsday predictions did well. Some Brazilians predict a 2006 World Cup victory will translate into re-election for Lula’s government.

In Argentina, meanwhile, an economic tailspin in 2001 was followed by a poor performance at the 2002 World Cup. But ABN AMRO research on the two-time World Cup winner found that it’s not just the World Cup. Argentina lost the Copa Americana in 1987 on home turf after Argentina’s economy went downhill. Two years later, the economic tide started to turn and, within a year, the home team’s performance improved. In 1991, the Argentine government curbed inflation by pegging the peso to the U.S. dollar. Shortly afterwards, Argentina beat Brazil in the final of the Copa Americana.

After its dark days just four years ago, the Argentine economy has sprung back with surprising speed. GDP growth rates for 2006 have been adjusted upward, government treasuries are flush with cash and investment is on the rise. When WORLDCITY went to press, Argentina remained one of the top contenders for the 2006 cup.

Mexico has never won a World Cup so the economic impact of a victory was more difficult to predict. Less murky was the impact on the June 28 presidential elections. The World Cup was expected to draw attention away from Mexico’s election campaigns and perhaps even cut into voting, especially if the Mexican team made it to the semifinals just days before the election.

Smaller countries in the Americas also seem to be fitting the soccernomics models or, at least, moving in that direction. Trinidad and Tobago, which with a population of 1.3 million became the smallest country to ever play in the games, made its World Cup debut this year. Trinidad leads the Caribbean’s GDP growth thanks to development of its liquid natural gas industry. And when it went up against England, it held its own until late in the game.

England won 2-0, but only after victor scored two goals in the last 10 minutes of the match.

A country with an economy performing under expectation is Ecuador, which has not capitalized on the oil boom as it could or should, according to many analysts. Elections in the politically volatile country are scheduled for October. The overall result is uncertainty and that’s just the adjective linked to Ecuador as it entered World Cup play.

It is just in recent years that the link between soccer’s ultimate victory and economics has been explored seriously. In 2000, the Inter-American Development Bank hosted its first-ever sports and development conference with soccer as the focus. The stars of the event were an otherwise unlikely pair: Henry Kissinger and Brazilian soccer great Pel.

Even corporations are taking the soccer factor into account. In Miami in June, UPS released the results of its first Latin America Business Monitor, a survey of hundreds of small and medium-sized businesses in Latin America. While most questions focused on trade, economics and politics, the World Cup got some serious attention. Management executives in the survey were asked about at work policies on viewing the games. More than 80 percent of the respondents said they had taken measures linked to World Cup action.

Some 61 percent of the respondents said they had televisions available in the workplace. One in 10 respondents said they would allow employees to skip work during the matches.

In the same UPS survey, more than half the respondents predicted that Brazil would repeat the championship. If they’re right, they’re in agreement with Goldman Sachs’ predictions. The investment firm took FIFA rankings and bookmakers’ odds and combined them in a probability model that gave Brazil the final victory.