The FIFA 2010 Bubble

I’ve written about the folly of expecting the FIFA 2010 World Cup to be an economic benefit here and here.  One certainly doesn’t want to flog a dead horse on the issue, especially in fear of being labelled a veritable party pooper.  So, before I get a floggin’ once more, let me get the usual caveats out of the way. 

1. The world cup will be fun and exciting and a great advert for SA
2. I am looking forward to it, especially watching us beat Mexico in the opening game
3. Events like this can create a wonderful sense of unity in a not-so-united country
4. A month-long party is always welcome and will definitely help us through a cold winter
5. We get to welcome hoards of foreigners to our beautiful country
6. We get to watch high class football right in our own back yard 

Ok, with that out of the way, let me just make some comments on what we can expect economically from the world cup event. 

The first and most obvious and unsurprising point that is becoming increasingly clear is the creeping disillusionment enveloping the ANC and its lefty allies, as well as the tardy realisation by the brain-dead mainstream media, that, actually, this whole world cup thingy might not be as much of a boon as we all thought after all. 

Cosatu is now preparing to protest during the event because, shock horror, the making of world cup mascots and official memorabilia has been outsourced to…yip, China.  You gotta love globalisation. 

I also read a headline from one of the online local mainstream news vendors yesterday lamenting that construction workers were being laid off because their employment to build stadiums was temporary.  Is anyone really surprised? 

Then there is the backlash against FIFA for its lock down of local brands and businesses during the tournament which has riled up more than a few pundits, not to mention business owners.  It’s slimy but hey, it is FIFA’s event. 

To put yet another nail into a very tightly shut coffin, it looks like foreign attendance to the tournament is going to be very poor by the usual world cup standards.  A bit of bad luck (global recession) and geography (tip of Africa miles from most participating nations) are conspiring against us here, but again shouldn’t really come as a surprise. 

All of the above are examples of reality not quite matching expectations.  But it’s not the reality that is at fault but, of course, the expectations. 

From day one of the bidding process back in 1999 the public has been sold the lie that hosting a world cup here would be a major fillip to economic growth and development.  When we finally got awarded the event in 2004, our political masters believed they had pulled off a masterstroke in socio-economic progress. 

To make matters worse, the myth was able to be perpetuated since during the 2004-2008 period the world was frittering around in a credit funded consumption orgy that kept local economic growth misleadingly frothy.  But the divergence of perceptions and reality can never last indefinitely, and so we’re all just beginning to realise that Keynesian magic is truly of the illusory kind and not the miraculous.  

And so, sadly, what we’re going to have is an overpriced party rather than an economic saviour.  But it actually goes a bit deeper than that because the world cup is going to be a bit like a small economic bubble that will pop and leave a lot of entrepreneurs ruing their decisions. 

I’ll give just one example to illustrate the broader point.  You own a bed and breakfast in Kempton Park.  Good location right near the O.R. Tambo airport and easy access to Ellis Park and Soccer City.  So you decide to build 2 extra rooms in anticipation of the surge in demand for one month of 2010, for which you know you can charge triple your normal fee because a) accommodation will be scarce during the tournament and b) foreigners can afford it. 

You do great business during the world cup, but then it ends, people go home and the fanfare becomes a distant memory.  Now you’re sitting with 2 rooms you may never need again.  Wasted sunk capital is now sitting dormant and cannot be liquidated.  It is a microcosm of a classic bubble – investment in capital for profit in anticipation of demand that cannot be sustained. 

And so not only have we sunk billions of valuable capital into white-elephant stadiums, forgoing the opportunity to invest that capital into something actually productive, but the event is also going to entice many entrepreneurs in the hospitality and tourism industries to invest in capacity that simply will not last beyond July.  Yes there will be windfall profits for some, but because the spending is fleeting it does not represent genuinely new wealth created in the domestic economic system. 

The “experts” will tell you that the world cup will add 1% to GDP growth in 2010.  This is simply dishonest.  The event, on balance, is a net economic negative for SA, and by wasting scarce capital on unproductive endeavours, we’re putting obstacles in the path of real growth instead of making way for genuine wealth creation.