Economic Impacts of the 2014 FIFA World Cup in Brazil - Research Paper Example

? NEGATIVE ECONOMIC IMPACTS OF THE FIFA WORLD CUP IN BRAZIL NEGATIVE ECONOMIC IMPACTS OF THE 2014 FIFA WORLD CUP IN BRAZIL 1.0 INTRODUCTION The FIFA World Cup has been identified as the world’s biggest single sport event that takes place anywhere (Aslund, 2012). It is hosted quad-annually, meaning once every four years. Once the World Cup bid is up for nomination, several countries put in bid due to a number of reasons. Generally, countries put in their bids looking at the merits that they will derive from socio-economic perspectives. Most available literature has also been limited to the positive aspects of hosting the FIFA World Cup. The argumentative question that this research paper poses however is whether there are no negative economic impacts of hosting the FIFA World Cup. In the opinion of the researcher, there could be some very crucial negative economic impacts that the hostage of the FIFA World Cup comes with, but most of these have been ignored by host countries. In this research paper, Brazil is used as a case study, where the hosting of the 2014 FIFA World Cup is brought under perspective. The research paper shall be delimited to only the negative economic impacts of the 2014 FIFA World Cup and so will not look into other aspects like social effects. The approach to discussing the negative economic impact would be to look at different variables of economic parameters that may be of concern to the country’s economy, before, during and after the World Cup. At the end of the paper an argumentative debate shall be developed with the question given below: 1.1 Research Question Is the 2014 FIFA World Cup an economic imprudence for Brazil? 2.0 Pre-World Cup Effects 2.1 Government spending Government spending is a crucial aspect of the economic determinant of Brazil. This is because already, the government is under much pressure for its inability to live within its annual budget (Bukova, 2013 International Finance Corporation (2009) notes that within the past decade, the Brazilian government has used a supplementary budget in about 7 out of 10 national budgets. The simple reason is that the bid for the World Cup came several years ahead of 2014. For countries to be approved to host the World Cup there are strict requirements laid down by the Federation of International Football Association (FIFA) that must be adhered to. Greater part of these requirements looks at the availability of sports infrastructure, security, transportation, power supply, accommodation, sanitation, among others (Istomina, 2005). In effect, the very moment that the country announced its intention to host the World Cup in 2014, active preparations started going on. Meanwhile, even though there were some level of sports development in Brazil, it was not adequate to get the country the bid. To this end, government had to start spending, in most cases, beyond its budget to get some of the required requirements underway. As an economic effect however, whenever government is forced to spend beyond its budget, there are sectors of the economy that suffers massively. It is not surprising the number of labor unrest that has hit Brazil since the government started spending on the World Cup preparation (Ivanova, 2004). Already, the government has spent R$9.9 billion (USD1.1 billion) on infrastructure alone; made up of the construction and renovation of existing stadia (Karbalevich, 2011). The upgrading of international airports alone in Brazil ahead of the World Cup has cost the government US$2.5 billion with some other budget spending that have come up to a total of S$14 billion (). 2.2 Taxation The effect of the World Cup hostage on taxation in Brazil has been analyzed in various peer reviewed literature and economic forums. It has for example been noted that one of the very first economic policies that the government undertook as a way of raising money to cater for the US$14billion budget it was faced with in hosting the World Cup was to raise taxes in several aspects of the economy. Some of the areas in taxes that were affected were nonresidential income tax, corporate tax, residential income tax, property tax, and value added tax (Enz et al, 2010). From an average of 24% of corporate tax in the year of the last World Cup, which was in 2010 to 2013 alone, the corporate tax for 2013 now stands at a combined rate of 34% (Djankov, et.al, 2012). Several tax holiday policies were also cancelled so as to widen the tax net for revenue generation. Even though the fact that the widening of the tax net led to policies that were generally praised as economically prudent in ensuring no one kept the state money unjustifiably, it will also be important to note that increases in taxes ahead of the World Cup has led to general economic hardship for the ordinary citizen. This is because even though personal income tax did not experience much rise, the rises in corporate tax meant that prices of goods and services were to go up to ensure that producers and manufacturers did not run at deficit (DeCarlo and Lyons, 1979). Economists have also equated the increases in tax to other economic pandemonium such as rise in inflation and higher unemployment rates because companies have to lay off workers so as to ensure that they are not having higher internal deficits in their balance sheet. 3.0 Hosting Effects 3.1 Aggregate Demand Once the World Cup begins in 2014, economists are expecting some more economic impacts on the nation of Brazil. As an emerging market, Brazil has been identified to have several market potential in its local industry. This is because there is an economic history that is rooted in the promotion of local industrialization with particular emphasis on agriculture because agriculture serves as the food basket of the nation. In the estimates of economists however, once the World Cup starts, this economic backing that has been given to the local agriculture and for that matter food industry in Brazil will come to an abrupt end. This is because of the expected level of aggregate demand for food that the country will be faced with. Brazil is making an estimate of over 4,000,000 attendances per match from across the world when the World Cup starts. This number exceeds the normal average that the food industry caters for in Brazil by almost 13% (O’Neill and Viljoen, 2001). What this means is that there will be the need for more supply. Even though local industries can easily be empowered to increase their supply in order to meet demand and make more money, international trade regulations have permitted for the inclusion of external investors in curtailing the supply gaps (Dumas, 2001). However, most of these foreign investors have very strong parent companies with massive asset and income levels that make competition for local markets incomprehensible. The aggregated demand that the World Cup will come with will therefore cripple the local industry in the bid for supplies to be met, but from exotic origins. Interestingly other services and industry sectors such as transportation, clothing, accommodation, tourism, and communication will all be taken over by foreign companies. 3.2 Price Increase and Inflation Most of the other economic factors that have been discussed in this research paper affect inflation directly or indirectly, For example the fact that government spending went up ahead of the World Cup for the preparation activities, leading to increase in taxes means that once the World Cup begins, producers and service providers will use it as an opportune period to make up for the losses that they might have made ahead of the World Cup. To do this, prices of goods and services will go up at a very fast rate, leading to increase in inflation (Asmara, 2009). What is more, regardless of the invitation made to foreign investors to close the demand gap that the hosting of the World Cup would bring, demand forecasting models have been used to predict that there will still be supply gaps because the demand cannot be met squarely (Otunga, 2001). In such a situation where there is higher demand than supply, the most immediate economic influence that is experienced is increase in prices of goods and services, also leading to inflation rises during the World Cup. It has been predicted that in rare cases where the demand exceeds supply by very vast quantum of percentage, the price of goods and services are going to be unstable and most likely to be controlled at the retail level of the supply chain. Indeed, the recurring effect of price control at the retail level of the supply chain is increase in inflation. As the issue of inflation becomes a problem during the World Cup, an important question that economists may want answered is the question of whether or not there will be a proportional increase in the salaries and remuneration of workers to match up the increases in prices. 4.0 Post-World Cup Effects 4.1 GDP The current gross domestic product (GDP) of Brazil stands at US$2.253 trillion (Trading Economics, 213). From the graph below, it would be noted that Brazil has suffered a somewhat unstable GDP growth over the years, even though most of the growth direction is an upward growth course. From the period the World Cup is over till the next World Cup in 4 years, economists have debated that Brazil will suffer some major shocks in its GDP growth rates. The simple reason given to this forecast is the huge deficit that the hosting of the World Cup is expected to leave the economy with. Already, there has been increase in import as against export because of the need to cover up for industrial lapses during the infrastructural expansion period for the World Cup (Krasniqi, 2006). The same need for increases in importation as against exportation was necessitated as a means of meeting demand for products and services during the World Cup. Meanwhile, in an economy where there is increase in import over export, the effect is there is shocks on foreign exchange, leading to increases in exchange rate (Asmara, 1999). As a way of withstanding the shocks, the government may be tempted to raise its import covers but this can also lead to restricted spending by the government after the World Cup. Consequently, there will be very little cash circulation in the economy of Brazil after the World Cup. Meanwhile when there is little cash in the hands of people in an economy, trade activities go down massively, affecting the gross domestic growth of that country (Peng, 2003). Source: Trading Economics (2013) 4.2 investment, - may go down after the government brings his policies to revamp the economy In a peer reviewed literature, Johnson et al, (2009) raised the question of how Brazil will be affected as an emerging market after the World Cup. This is because in his estimation, investment in Brazil will slow down massively after the World Cup because government will introduce new macro and micro economic policies that will be aimed at revamping the economy. Generally, it has been said that because of the growth staleness that the local industry will suffer as a result of the World Cup, the aftermath of the World Cup would be a very opportune time for the government to pay attention to revamping local industries. This way, most of the economic policies will be micro instead of macro (Jovanovic, 1982). When this happens, foreign direct investment will be affected negatively because not much economic interventions will be directed to that aspect. The question for economic argumentation will therefore be posed as whether it will be economically prudent for the government to give another look at local industries as against foreign investment after the World Cup. As a way of answering this question, Johnson et al, (2009) assessed the input of foreign direct investment in the Brazilian economy in the past decade and concluded that Brazil will have close to 4.5% growth retardation in its economic growth on a yearly basis if foreign direct investment is sidelined. 5.0 Conclusion and Recommendations From the discussions so far, there are a number of conclusions that the researcher can made. In accordance to the economic effects that are likely to be experienced at different stages of the World Cup, it can be concluded that the move by the Brazilian government to host the World Cup will not only come with economic advantages but negative impacts as well. Already, there have been series of protests across the country in disapproval of the move made by the government to host the World Cup and other FIFA organized events in 2014. Indeed, these points discussed in the paper justifies the actions of these people to a very large extend. However, the bid has already been approved and so what should be the talk of the day now is how to minimize the negative economic impacts. As part of recommendations for reducing the negative economic impact, it is suggested that the government becomes very cautious with direct spending. By this, it is being suggested that the government embark more on private-public sector partnership in the spending on the World Cup. The basis for this argument is that already the Brazilian government is responsible for a budget deficit due to overspending in areas such as services. As much as the government will continue to be responsible for such expenses in the services sector, it must not impound on itself budget more cost with World Cup host. Rather, it should open itself up for more private partnership through sponsorship and other shared cost programs. Reference List Aslund, A. (2012). Building capitalism. The transformation of the former soviet bloc. Cambridge, U.K.: Cambridge University Press. Asmara, Eritrea: African World Press. Pedersen, P.O., and D. McCormick. 1999. African business systems in a globalizing world. The Journal of Modern African Studies 37: 109–36. Bukova, N. (2013). What do we think about entrepreneurs? [In Russian]. Small and Medium Business I Belarus, Article Compilation 2000–2002, IFC, USAID, Minsk,, 100–109. DeCarlo, J.F., and P.R. Lyons. (1979). A comparison of selected personal characteristics of minority and non-minority female entrepreneurs. Journal of Small Business Management 17: 22–9. Djankov, S., R. La Porta, F. Lepez-de-Silanes, and A. Shleifer. 2012. The regulation of entry. The Quarterly Journal of Economics 117: 1–37. Dumas, C. 2001. Evaluating the outcomes of micro-enterprise training for low income women: A case study. Journal of Developmental Entrepreneurship 6: 97–128. Enz, C.A., M.J. Dollinger, and C.M. Daily. 2010. The value orientations of minority and non-minority small business owners. Entrepreneurship: Theory and Practice 15: 23–35. International Finance Corporation, World Bank Group. (2009). Business environment in Belarus. Report. Available at http://siteresources.worldbank.org/INTBELARUS/Resources/IFCbusinessSMBen.pdf, accessed 28 September 2005. Istomina, L. (2005). The teething problems of the Belarusian private sector. Problems of Economic Transition, 48(1), 44–55. Ivanova, Y.V. (2004). Belarus: Entrepreneurial activities in an unfriendly environment. Journal of East-West Business, 10(4), 29–54. Johnson, S,DKaufmann, JMcMillan andCWoodruff (2009).Why do firms hide?Bribes and unofficial activity after communism. EBRD Working Paper No. 42. Jovanovic, B (1982). Selection and evolution of industry. Econometrica, 50(3), 649–670. Karbalevich, V. (2021). The Brazilian model of transformation: Alaksandr Lukashenka’s regime and the nostalgia for the Soviet past. International Journal of Sociology, 31(4), 7–21. Krasniqi, B (2006). Size, age and firm growth: Econometric evidence from SME sector in Brazil. International Journal of Management and Entrepreneurship, 2(1), 57–68. O’Neill, R.C., and L. Viljoen. 2001. Support for female entrepreneurs in South Africa: Improvement or decline? Journal of Family Ecology and Consumer Sciences 29: 37–44. Otunga, R.N., G. Opata, and F.N. Muyia. 2001. Women entrepreneurs in Eldoret town: Their socio-economic background and business performance. In Negotiating social space: East African micro enterprises, ed. P.O. Alila and P.O. Pedersen, 121 40. Trenton, NJ, and Peng, M.W. 2003. Institutional transitions and strategic choices. Academy of Management Review 28: 275–96. Trading Economics (2013). Brazil GDP Growth Rate. Accessed September 21 http://www.tradingeconomics.com/brazil/gdp-growth Read More