RGE’s Wednesday Note: The Economics of the World Cup

We hope all our readers are enjoying the World Cup! Given the international diversity of our analysts and strategists, the event has certainly been the preeminent topic of water-cooler conversation this week in our New York and London offices. While we are recognizing the limits of our abilities and refraining from forecasting a winner, we noted in a recent Critical Issue, “Can Economists Predict the World Cup Winner?” that many other research firms are, in fact, making such calls.

On a more serious topic, we have also devoted considerable resources to determining what effect the event will have on South Africa’s economy. Kavitha Cherian and Rachel Ziemba examine this topic in a new RGE Analysis, “South Africa: Will the Cup Runneth Over?” This week’s newsletter draws from portions of that analysis, the full version of which is available exclusively for clients.

Our analysis leads us to believe that short-term economic gains from the World Cup have been limited, with the main positive effects seen over the past four years. The most important of these effects was the fact that preparing for the tournament helped boost economic activity in South Africa and muted the effects of the recession in other parts of the world. In aggregate, the preparations for the World Cup helped offset some of the weakness in the South African economy and provided an infrastructure boost that will remain in place long after the event. However, as with many such events, the economic benefit is relatively limited.

Infrastructure received a huge boost in the run up to the World Cup. Domestic public transport was beefed up, roads were repaired and host cities received generous face lifts. Moreover, Africa’s first high-speed rail link, the “Gautrain,” running between Johannesburg’s financial center Sandton and the OR Tambo International Airport, was put in place. Work on the railway was approved even before the World Cup was awarded to South Africa and its construction was brought forward to help the country cope with the hordes of tourists during the month-long event. The train is expected to provide efficient and affordable transport for the general population for many years after the World Cup and help to alleviate road traffic problems.

Preliminary estimates suggest that initial hopes for up to 500,000 tourist arrivals were over-optimistic, with the global economic slowdown contributing to lower ticket sales and travel bookings. The initial phases of ticketing saw a very poor response, but the global football federation, FIFA, expects to sell 98% of the total of 2.88 million purchasable tickets by the end of the final phase. The U.S. tops the number of foreign ticket holders, with 20,000 to 40,000 expected to attend the tournament. However, tickets were prohibitively expensive for potential visitors from neighboring African countries. Additionally, regional demand was adversely affected by Africa’s low Internet usage, with tickets mainly sold through online vendors.

Although the short-term gains from the event are rather limited, should the World Cup go well, and labor strikes and other destabilizing events are avoided, it could provide a chance to showcase South Africa’s institutional development and help cement its longer-term recovery. Yet there are several structural challenges to overcome, such as limited access to services, transportation bottlenecks, worsening demographics and extensive inequality, which could hamper the country’s potential output growth.

As noted in our most recent outlook, South Africa’s weak labor market conditions are one of the main headwinds against domestic demand and overall economic growth. According to official statistics, one in every four South Africans is unemployed; however, taking those who have exited the labor pool into consideration, the number is much higher. The global recession exacerbated the country’s chronically high unemployment rate (which has remained near 20% since Apartheid ended in the early 1990s) and, as a result, the jobs created in the lead up to the World Cup only partly offset the labor market weakness. Most of these jobs were only temporary in nature, and many workers found themselves unable to find new employment, either in the public or private sectors, after construction projects ended.

It is also worth noting that the private sector in South Africa remains weak, and thus is unlikely to invest much in non-residential construction after the World Cup wraps up. Government investment, a part of the fiscal stimulus, will partly offset this gap, however, and the construction of state-owned energy utility Eskom’s solar and wind plants will help assuage issues relating to the abrupt decline in construction projects following the completion of World Cup preparations. Additionally, Finance Minister Pravin Gordhan targeted over US$100 billion in infrastructure spending over the next three years in his 2010 maiden budget, potentially providing a boost to jobs moving forward.

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