Brazil’s World Cup 2014: Will football be the catalyst for long-term structural change?

Tuesday, 08 July 2014

Sachin MehtaWith the World Cup in full swing, once again, logic did not prevail. Countries such as Italy, Spain, England and Portugal, with tradition and reputation in soccer did not make it to the next round. Will there be any logic when it comes to evaluating the impact of the tournament on Brazil’s economy?

According to experts, it is difficult to estimate the real economic impact of big sporting events, but it is a consensus amongst many that boosts often end up being short-term.

Beverage, Travel, Construction and Broadcast Sectors are seen to be the industries which would see temporary gains. However, lost workdays and less business activity during the Cup will offset job creation and added spending. Economic stimulus is estimated at approximately, $11 billion, a figure pale before Brazil’s $2.2 trillion economy. Having said that, the World Cup is expected to generate a meager 0.4-0.6% of additional GDP.

So where is the benefit? One of the key potential benefits for Brazil is the global media exposure, given that the World Cup is the world’s biggest single-sport event.  According to some leading Brazilian entrepreneurs, this will be a great opportunity for the country to show itself in a positive way to the world.   A well-run tournament will perhaps surprise those who doubt Brazilian efficiency, and improve momentum. Many argue that the biggest impact will be, if the World Cup, by highlighting social unhappiness with Brazil’s economy, triggers lasting structural change.

Policy makers are under pressure to consider a second generation of reforms in areas such as taxation, infrastructure and education to make the country globally competitive.

While Brazil’s investment story is solid, it needs support. While efforts to reduce rates are laudable, many economists and businessmen are calling for more fundamental reforms to improve infrastructure and education, reduce taxation and lift productivity so industry can compete without heavy-handed government protection.

True, they say, the webs of red tape surrounding business are as annoying as ever and Brazil will struggle to grow at the 7.5% rate achieved in 2010. But there are overwhelming strategic positives:

  • There is the range and scale of Brazil’s comparative advantages in natural resources. It is the only one of the so-called BRICS (the group of countries that includes China, India, South Africa and Russia) that is self-sufficient in water, energy and food. Its comparative advantage as a producer of soya and iron ore is the pivot around which its relationship with China, its biggest trading partner, revolves. Its offshore “pre-salt” oil reserves stand out as one of the most attractive frontiers for the oil industry, with reserves conservatively estimated at 50bn barrels.
  • After two decades or more of neglect, the government is finally beginning to invest in infrastructure, developing the roads, ports and airports that should help foster regional integration and reduce business costs.
  • The enthusiasm of Brazilians to consume is turning into a considerable macroeconomic advantage. In some sectors – such as cosmetics or personal care – where, for cultural reasons, Brazilians spend a much higher proportion of income than North Americans or Europeans, the local market is poised to become one of the biggest in the world.

Deep structural reforms could be the real mega event for the Brazilian economy as a result of the World Cup. And if that’s true, it should be good for investors in the long term.

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