23 June 2015

Why the FIFA corruption scandal was never just about football


On the evening after the FIFA showdown in Switzerland at the beginning of this month, when a handful of delegates were arrested at a classy hotel near the lake, I met an elderly gentleman at a bus stop in Zurich. As we waited there together, he began a friendly small-talk, the focus of which was FIFA, of course. He had one big worry: FIFA might leave the country – and that would be a catastrophe. FIFA is a money-making machine. “They have so much money in the bank, they can pack up whenever they want and go anywhere”, he cringed. I wasn’t surprised. This was one of a series of reactions that were to be expected here. Contrary to received wisdom, FIFA does pay taxes, and the overall economic benefit from having the world football organisation in Zurich is important. In terms of reputation, however, the balance has become shaky, to say the least. That the FIFA is shattered with corruption didn’t exactly come as news to the world, and the same has long been suspected for the Olympic Committee in Lausanne and the UEFA in Nyon. After the banking sector, equally under US legal fire, the FIFA now seems to become a reputational burden rather than an asset for Switzerland.

A second typical, if not generalisable reaction was voiced by Christoph Blocher, the “éminence grise” of the right-wing SVP. He has “Angst”, as he confessed in a video. People like him cannot easily stomach that the investigation was launched by the US department of justice once more. The massive US pressure on the banks that had been providing a safe haven for foreign tax-evaders is unforgotten. People are haunted, not without reason, by the perceived loss of Swiss judicial and political sovereignty. As a matter of fact, private corruption is not automatically investigated against under Swiss law. Action is taken only when some concerned party takes the initiative to complain. This is common practice in competition law, and a recent attempt by the Swiss government to change that failed in the second chamber of the Swiss parliament, the “Ständerat”.

The third reaction was: What’s the problem? What’s all the fuss about? Corruption is everywhere, especially in international organizations where the arbitrary rule and cronyism of dictatorships are systematically represented on an equal footing with countries living under the rule of law. But who cares? Isn’t FIFA a private body, where anything goes, as opposed to the public sector? Doesn’t the FIFA do a lot of good things, too, spending large chunks of its revenues on football in the Third World countries? And isn’t this just hysteria, another proof of the untamable European hegemonialism that denies the rest of the world the right to stage the shows? From a moral point of view, the hypocrisy of similar statements – as held, among others, by Roger Köppel, a contrarian journalist and SVP politician – flies in the face. But how about the economic point of view?

At first sight, an economist might indeed think that bribes actually do increase the efficiency of the FIFA decision: the country that will be chosen then obviously draws the highest utility from carrying out the championship. It might overestimate that utility, but that’s its own problem. Well, things are not that simple. The generally damaging effects of corruption have been worked out at length. A whole branch of economic research – the “Economics of Corruption” is devoted to modelling and testing different settings in which bribery may take place: between government and the private sector, for example, or within the public sector, or again within the private sector. One might be tempted to view bribes as a kind of surcharge everyone simply has to count in when doing business, to the effect that they cancel out on the whole and have no distortionary impact at all. But this is not quite the case. A corrupt economy is less productive because bribery creates intransparency and thus, as economists say, considerable “transaction costs”. Both for supply and demand, it becomes more difficult to gauge relative prices and to adapt in line with scarcity. Waste ensues. Entry into a market becomes more difficult; rivals’ costs are higher than they need and should be. As a consequence, competition suffers and artificial monopolies lead an easy life. They extract rents from the consumers. Corruption throws a spanner in the works of the economy and slows it down.

So much for corruption in general. Let’s come back to the FIFA scandal specifically and to corruption in the context of international sport competition. For a country that applies for the “honour” of hosting a tournament, the underlying cost-benefit analysis is a real challenge. Arenas, facilities and infrastructure must be built or expanded, all with taxpayer money (or debt, of course which however is nothing but tomorrow’s taxpayers’ money). The public infrastructure investment boom will at least crowd out public spending for other important purposes. The less developed the country, the more likely it is that the poor will be made worse off, while large private business may benefit from the increased investment and consumption demand before and during the games. Events like these produce a temporarily huge volume of sales and revenues, with amounts somewhere in the billions. However, that boom will be short-lived. On the whole, international games are costly and their return, in terms of an economic or reputational boost, is uncertain.

Given this, who will be ready to pay bribes to FIFA delegates to buy their vote, in order to secure the tournament? A priori, these will be governments that desire either to show off or to divert public attention from their uglier, warmongering or human-rights violating face. If they didn’t draw this kind of surplus utility from the games, they wouldn’t be willing to pay bribes – and this is money they extort, one way or another, from their citizens. London’s mayor Boris Johnson may in fact have been exactly to the point in saying that on this background, it was clear that England couldn’t beat Qatar for the upcoming World Championship in 2018. The problem with this is that a deal between (some delegates of) FIFA and some country’s government systematically leaves out the football fans. The interests of sponsors and TV channels, catering to the public, are thus also underrepresented.

It is not absurd to assume that the fans might favour a location that would not be a burden for the local population. They might prefer the place to be peaceful, politically stable and ethically as clean as possible. If the setting was modelled as a principal-agent problem, with the fans as the principal with a minimum of ethical preferences, and FIFA as the agent whose task it is to organize the events in the interest of the principal, it would be easy to see that FIFA has been working poorly in the past. The future will show how the new rules adopted after the controversial Qatar decision will work out. As a remedy for unsatisfactory outcomes, the economic principal-agent theory usually recommends better incentives. And that’s where it hurts: FIFA is a private, not a public association, just like the national football associations. The fans don’t determine the rules, FIFA does. The football officials are not elected by the fans, and they cannot be dethroned by the fans. From the fans, there is no sanction imaginable – except the ultimate one: a viewing boycott. But staging a boycott would be as still-born a venture as can be. Football is, after all, the most important side-issue of the world.

Karen Horn is an independent author and teaches the History of Economic Thought at various universities. She also serves as the President of the Friedrich A. von Hayek Gesellschaft (Berlin). She is the author of “Roads to Wisdom – Conversations with Ten Nobel Laureates”.