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Will the World Cup be half empty or half full for Brazil?
June 06, 2014
Momentum is building towards the opening ceremony of the World Cup. Brazil’s five-time champions, the “Canarinho” (Little Canaries), are raring to go down in history as victors on their home turf.The country is prospering as it has not done since the economic boom of the 1960s. In 2013, it attracted USD 63 billion in FDI (foreign direct investment), the highest in Latin America. GDP growth also continued at a steady 2.5%, in contrast to a decline in many neighboring countries. Brazil also continues to liberalize legislation, facilitating foreign investment, private-public partnerships, and the expansion of national industry and trade. While in other emerging economies, like China, GDP growth outpaces household income, the opposite is true in Brazil. Economists estimate that, in just over a decade, Brazil has lifted over 40 million citizens out of poverty. This high-speed rebalancing of the economy and re-integration of the dispossessed has been accomplished partly on the strength of dedicated government subsidies, at a cost to the existing middle class. As the middle class nearly doubles, the benefits it enjoys have temporarily thinned. Taxes are higher, as are consumer prices. A Financial Times report highlighted the debt carried by the established middle class during this process of wealth redistribution. At least 15 million citizens still live in poverty, 7 million of those in extreme poverty and indigence. So, expensive social programs, including medical care, welfare stipends, and minimum-wage controls, will continue. So will more holistic economic measures, like tax reductions for the small business owners who create the majority of new jobs.Competition has also intensified for places in educational and vocational institutions, which have not been able to accommodate the colossal, new influx of talent. However, Brazil is continuously revising legislation to encourage more startups, innovation, research, and development. This, in turn, is stimulating a deeper wave of economic growth, which will ultimately provide the funding and impetus for more institutions.Infrastructural improvements, healthcare, education, staple supplies, and improved transport all cost money. In short, it takes time to raise, equalize, and stabilize the living standard of 105 million middle-class citizens, plus 15 million more striving to join them. It is a promising, but highly challenging period for Brazil. No wonder citizens are exasperated, as they witness their personal financial sacrifices apparently being funneled into luxury FIFA stadiums and accommodation, some of which may not be fully utilized after the games.Was the government too ambitious in too short a timeframe? Was it wise to build 12 high-tech arenas, instead of the 8 required by FIFA? Was it optimal to commit to the World Cup and the Olympics back to back? There is a loud, highly visible consensus on each of these questions, and even celebrities and politicians are joining it. If protests aren’t obvious enough, polls by Datafolha reveal that citizen endorsement of the World Cup has dropped from 79% in 2008 to 48% this spring. Who knew, back in 2007? It is easy now to declare that the government underestimated cost, time, and design and construction errors for arenas, as well as widespread, infrastructural upgrades. It certainly overestimated the enthusiasm of private investors, and it may have been optimistic about the lasting return on investment in a few stadium cities. But who rallied against all of this in 2007 when Brazil won the FIFA bid? Or at the 2008 celebrations over the Olympic contract?As it turns out, private investment has been scanter than anticipated. Not even the Corinthians—Brazil’s richest sports club, said to enjoy the support of nearly 30 million Brazilians—could convince investors that the new stadium in Sao Paolo would offer sufficient returns, once soccer and Olympic fans departed.As the South Africans pointed out after the 2010 World Cup, the responsibility a nation assumes in hosting these games just cannot be fathomed in advance. With rapidly approaching deadlines, mounting costs, construction delays, an aloof private sector, and taxpayers at their limits, the government was forced to delay some promised infrastructure, while they focused on stadium completion—only just in time, in some cases. Thanks, in part, to sophisticated risk management and insurance coverage, many highly valuable infrastructure projects have been pushed through: airports, terminals, subways, monorails, trains, stadiums, hotels, and roads. What everyone hopes for now is a world-cup windfall to supply funds for the outstanding projects.The breakneck speed of development across the country has condensed a lot of risks into a short span of time. Tragedies and errors have exposed weaknesses in the system. Disconcerting though they are, they have taught Brazilians and foreign investors how to capitalize on Brazil’s strengths, fortify weaker elements, and create a coherent frontier of progress.State-of-the-art infrastructural improvements have been made at a pace which would have been unthinkable without the games. Knowledge has matured in sectors where, otherwise, it would have taken decades. If direct financial returns prove to be marginal, the lessons learned through staging these games will be applied immediately, not only to Olympic preparation, but to the development of the nation. These physical and intellectual advances are now part of Brazil’s capital, and will appreciate over time.Brazil is hardly the first country to wonder if the World Cup is worth it. South Africa has struggled to maintain and repurpose a couple of its 2010 stadiums. It would seem to be a good time for FIFA and bidding host nations to reevaluate terms, conditions, and benefits.However, the World Cup in South Africa also dispelled racial tension, and inspired a new generation of youths to take up sport. Nelson Mandela wrote in his biography that sport was the “key, not only to physical health, but to peace of mind.” Mandela also said: “Sport has the power to change the world. It has the power to inspire. It has the power to unite people in a way that little else does. Sport can create hope, where once there was only despair.”Brazil hosted the World Cup in 1950 and lost. In a few short days, Brazil has the chance to reverse that fate and claim a victory on home soil. Whatever the outcome, these games, and the beautiful stadiums which will stand for years to come, will inspire youths across the country to turn to sport instead of crime. Even the protests are a sign that Brazil is ready for progress beyond the astounding feat of lifting 40 million out of poverty in a decade. This could be the moment when Brazil is on the verge of achieving its two greatest goals: to provide a good life for every citizen, and to integrate into the core of the global economy.
Renato Rodrigues is the Country Manager of XL Group’s insurance operations in Brazil