The economic impact of the 2010 World Cup in South Africa

The empirical lack of economic impact of mega sports events is reasonably well established. Andrew Zimbalist has a whole book on the topic, titled Circus Maximus: The Economic Gamble behind Hosting the Olympics and the World Cup (which I reviewed here; see also this 2016 post). So, I was interested to read a new study on the 2010 FIFA World Cup in South Africa that purported to find significant impacts.

This new article, by Gregor Pfeifer, Fabian Wahl, and Martyna Marczak (all University of Hohenheim, in Germany) was published in the Journal of Regional Science (ungated earlier version here). World-Cup-related infrastructure spending in South Africa between 2004 (when their hosting rights were announced) and 2010 was:

...estimated to have totaled about $14 billion (roughly 3.7% of South Africa’s GDP in 2010) out of which $11.4 billion have been spent on transportation...

Unsurprisingly, the spending was concentrated in particular cities, which were to host the football matches. To measure economic impact, Pfeifer et al. use night lights as a proxy. They explain that:

...[d]ata on night lights are collected by satellites and are available for the whole globe at a high level of geographical precision. The economic literature using high‐precision satellite data, also on other outcomes than night lights, is growing... The usefulness of high‐precision night light data as an economic proxy is of particular relevance in the case of developing countries, where administrative data on GDP or other economic indicators are often of bad quality, not given for a longer time span, and/or not provided at a desired subnational level.

They find that:

Based on the average World Cup venue on municipality level, we find a significant and positive short‐run impact between 2004 and 2009, that is equivalent to a 1.3 percentage points decrease in the unemployment rate or an increase of around $335 GDP per capita. Taking the costs of the investments into account, we derive a net benefit of $217 GDP per capita. Starting in 2010, the average effect becomes insignificant...

That is pretty well demonstrated in the following figure. Notice that the bold line (the treated municipalities) sits above the dashed line (the synthetic control, see below) only from 2004 up to 2010, where they come back together.

They also find that:

...the average picture obscures heterogeneity related to the sources of economic activity and the locations within the treated municipalities. More specifically, we demonstrate that around and after 2010, there has been a positive, longer‐run economic effect stemming from new and upgraded transport infrastructure. These positive gains are particularly evident for smaller towns, which can be explained with a regional catch‐up towards bigger cities... Contrarily, the effect of stadiums is generally less significant and no longer‐lasting economic benefits are attributed to the construction or upgrade of the football arenas. Those are merely evident throughout the pre‐2010 period. Taken together, our findings underline the importance of investments in transport infrastructure, particularly in rural areas, for longer‐run economic prosperity and regional catch‐up processes.

In other words, the core expenditure on the tournament itself, such as stadiums, had no economic impact after construction ended (which is consistent with the broader literature), while the expenditure on transport infrastructure did. South Africa would have gotten the same effect by simply building the transport infrastructure without the stadiums.

There were a couple of elements of the study that troubled me. They used a synthetic control method. You want to compare the 'treated' municipalities (i.e. those where new transport infrastructure or stadiums were built) with 'control' municipalities (where no infrastructure was built, but which are otherwise identical to the treatment municipalities). The problem is that control municipalities that are identical to the treatment municipalities is all-but-impossible. So, instead you construct a 'synthetic control' as a weighted average of several other municipalities, so that the weighted synthetic control looks very similar to the treated municipality. This is an approach that is increasingly being used in economics.

However, in this case basically all of the large cities in South Africa were treated in some way. So, the synthetic control is made up of much smaller municipalities. In fact, the synthetic control is 80.8% weighted to uMhlathuze municipality (which is essentially the town of Richards Bay, northeast of Durban). So, effectively they were comparing the change in night lights in areas with infrastructure development with the change in night lights for Richards Bay (and the surrounding municipality).

Second, they drill down to look at the impacts of individual projects, and find that some of the projects have significant positive effects that last beyond 2010 (unlike the overall analysis, which finds nothing after 2010). Given the overall null effect after 2010, that suggests that there must be some other projects that had negative economic impacts after 2010. Those negative projects are never identified.

The economic non-impact of mega sports events is not under threat from this study. The best you could say is that hosting the FIFA World Cup induced South Africa to invest in transport infrastructure that might not have otherwise happened. Of course, we will never know.