With four months to go till the Winter Olympics in Sochi Russia the characteristics of a planned economy are still prevalent. In the old Russia of the communist-era concerns about corruption, the cost of a project, the effect on the environment and the working conditions of the labour force were brushed aside. However it seems that nothing much has changed, according to The Economist.
When the bid was placed Russia proposed to spend $12 billion. The estimated cost now is $50 billion – most expensive games in history. According to The Economist Olympics tend to have overruns of about 180% – Sochi is now at 500%
The closeness of the Government with the construction companies involved has led to corruption. Olympstroy, which oversees the construction, are run under the informal influence of a rent-seeking group of people for whom extraction of government funds is the main purpose. Furthermore one of Putin’s friends and judo partner has been awarded$7.4billion – more than the budget on the 2010 games in Vancouver. A road contract worth $9 billion went to the Russian Railways which is headed by a former KGB general and friend of Putin.
There has been little concern for the environment with construction waste polluting the Black Sea and protected forests being cut down to make way for facilities.
Low-skilled migrants get paid $500 a month and work 12 hour shifts. There is no protection for them in the form contracts, minimum wage, health and safety, and insurance. Wages are not always paid in full and sometimes not paid at all according to Human Rights Watch.
Former prime minister Yegor Gaidar once wrote about how the Soviet Union had wasted its money on construction projects whose main purpose was to utilise government funds. One wonders has much changed?
What is also quite strange is the fact that Sochi has a sub-tropical climate and is one of the few places in Russia where snow is scarce. This has led organisers to store snow.
This year saw an all German final in the European Champions League with Bayern Munich defeating Borussia Dortmund 2-1 at Wembly Stadium in London. In order to get to the final both teams beat Spanish counterparts – Real Madrid and Barcelona. What is fitting is that in economic terms German is the powerhouse of the European economy whilst in contrast Spain has suffered greatly from the euro crisis and austerity measures that have been imposed on it. If you look at post-war Germany you can see some correlation between the success of the national side and state of the economy.
The Economist looked at this and made the point that German has opened up its borders to not just traditional labour but also football players. Of the two squads on show at the Champions League Final at Wembley last month, 17 were from outside Germany.
Most visibly, Germany opened up. Just as immigrants flock to German jobs (more than 1m net arrivals in 2012), so players join German clubs. Between them Bayern and Dortmund have four Brazilians, three Poles, a Peruvian-Italian, a Serb, a Croat, a Swiss of Kosovar extraction, an Austrian of Filipino/Nigerian stock, a Ukrainian and two Australians—and so on. Of the German players, several have dual citizenship or a “migration background”. If the choice is between a German Europe or a European Germany, as the novelist Thomas Mann once put it, football points to the second.
I have been rather light on blog posts over the last week as I was in Napier for the New Zealand National Premier Schoolboy Hockey Tournament. However externalities did eventuate at the end of the week with King’s College retaining its national title but also the oil spill in Napier which was right beside where we were staying.
Externalities are common in virtually all economic activities. They are defined as third party (or spill over) effects arising from the production and/or consumption of goods and services for which no appropriate compensation is paid.
Externalities can cause market failure if the price mechanism does not take into account the full social costs and social benefits of production and consumption. The study of externalities by economists has become extensive in recent years, not least because of concerns about the link between the economy and the environment.
Remember the graphs for negative externalities of production and positive externalities of consumption:
A hat tip to Matthew Ryan from the University of Auckland for these Sports Economics videos. The six short videos (called Some Sports Economics) are produced by Dr Liam Lenten from La Trobe University in Australia explaining basic economic concepts (such as prisoners’ dilemma, absolute/comparative advantage, complementaries, etc.). Well worth a look and notice the kit change for each video. Click on the link below to go to the playlist. Below is the video on “When scoring an own-goal is the only way to win”.
Patrick Foley, Chief Economist at Lloyds Banking Group, recently wrote in The Daily Telegraph (UK) that the Olympic Games in London will boost the UK economy by £16.5bn. He sees construction, tourism, jobs and the ‘happiness’ effect will leave a lasting legacy.
The development of a neglected area of East London will have a huge impact with higher living standards and business opportunities. There are also huge tourism benefits that follow from the end of the games and this has been prevalent with most host cities in the past. The Games could create and support a total of 354,000 years of employment across the UK. Jobs that are directly associated with the Games themselves and through developing skills of the working population that help raise their prospects of jobs in the future.
There is also the ‘happiness effect’ with hosting one of the biggest sporting events which is likely to inspire consumer spending. A number of economists have looked at the economic impact of hosting significant sporting events and are in broad agreement that aggregate demand does increase. In 1996 when England hosted the European Football Championship it was estimated that the feel-good factor was equivalent to £165 gift for each of the UK population – it can be expected the London Olympics will be significantly higher than this figure.
Having arrived in Spain (Mallorca) last night just before the euro final I could not post something about football – the Spanish know how to celebrate. Spain showed their class and are an exceptional team to have won three major tournaments in the last four years. Some have likened them to the Brazil team of 1970.
In keeping with Spanish football, I came across Simon Kuper, co-author of Soccernomics, on the eZonomics website by ING. One particular part of the site focuses on soccer – Cup-o-nomics – in which current issues in the sport are related to economics. With the Euro 2012 Championship on he has written several articles about players. managers etc.
In July 2007, the Spanish striker Fernando Torres moved from Athletico Madrid to Liverpool. Torres commanded a salary of £90,000 (NZ$175,500) a week at Liverpool, equivalent to £4.6m (NZ$9.1m) a year. Interestingly enough this was a salary cut as at Athletico he was on an annual salary of €8 million (about NZ$10.5 million). However within a year of signing for Liverpool the purchasing power of his income decreased for the following reasons:
1. The pound depreciated against the euro (hard to believe now) by around 20%. Most foreign players tend to send home a lot of their salary and therefore Torres needed to use more pounds to buy euros.
2. After 2008 and the financial crisis the UK experienced over 5% inflation which again would have lessened the purchasing poser of his income. Most soccer players are on a given salary for the duration of their contract and therefore don’t have their income indexed to the CPI or cost of living.
Even all this said, Fernando Torres is probably not too worried about exchange rate fluctuations or inflation rates when you look at his salary and the season he has just had with Chelsea and Spain.
Last week the 21st edition of the Deloitte Annual Review of Football Finance was published. It analyses and comments on notable financial developments within world football for the year 2010/11. Overall the results of the publication indicate that the European Football market continued to go against the trend of the economic conditions that were prevalent in Europe and the global economy.
Some of the key points from the publication:
The Big Five Revenues – EPL, Bundesliga, La Liga, Serie A, Ligue 1
The total revenue in the Big Five grew by 2% to €8.6bn. The English Premier League continued to be the biggest revenue earner with €2.5bn with the Bundesliga some way behind. France’s Ligue 1 was the one of the Big Five to have a drop in revenue with €1,040m. See graph below.
One of the main concerns with the European football market is keeping a lid on the costs. The big five leagues wages increased by over €104m and that exceeded €5.6bn in 2010/11. The English Premier League not surprisingly had the highest wage costs at €1,771m which was €600 higher than the next league.
United v City
Manchester City set a new Premier League record with an £82m loss, whilst their cross town rivals United generated an operating profit greater than £100m for the first time.
Chelsea Highest Wages
For the eighth successive season Chelsea had the highest wage bill – £191m
Manchester City – £174m
Manchester Utd – £153m
There was a strong correlation in the EPL between the level of spending and the final league position. Spend money and you’ll get results.
Chelsea also had the highest wage cost per league point £2.7m (71 points). Champions Manchester Utd had a wage cost of £1.9m per point and Blackpool had the lowest with £0.6m.
The four clubs of the EPL who competed in the Champions Lague in 2010/11 generated almost 60% of the £548m in matchday revenue, demonstrating the high levels of ticket demand they enjoy and the higher ticket prices they can command.
With the disapointment of the 2008 Champions League Final behind them, Chelsea can finally claim to be the best team in Europe. As in 2008 it was decided by another penalty shoot but this time Chelsea were the victors. As always I am particularly interested in the peanlty shoot out and the strategies, if any, that are implemented by both the penalty taker and the goalkeeper.
The situation that kickers face in a penalty kick is a simultaneous-move game where they have three alternative strategies: shooting right, left, or centre. Similarly the goalkeeper also has three alternative strategies: dive to the right, dive to the left or remaining in the centre of the goal. In defining the sides of the goal researchers use the “natural side” of the kicker (which is the goalkeeper’s right, if the kicker is right-footed, and the goalkeeper’s left, if the kicker is left-footed) and the “opposite side”. Labeled like that, the strategies of both kicker and goalkeeper will be to choose the natural side of the kicker (NS), the centre (C) or the opposite side (OS).
From data compiled by Spanish economist Ignacio Palacios-Huerta he calculated the proportion of successful penalty kicks. Below is a table that shows the success rate of penalty takers when they went to their natural side and opposite side when the goalkeeper went his natural side and opposite side. Notice that when the kicker went NS and goalkeeper OS the success rates was 95% – the remaining 5% missed the target. Similarly when the kicker went OS and goalkeeper went NS – 8% missed the target.
Here is data on the peanlty kicks from last Sunday’s Champions League final
Notice that Chelsea keeper Petr Cech went the correct way for all penalties (including the one taken during normal time) – seemingly on the plane over he studied all Bayern penalties since 2007. He said it took nearly 2 hours – did he have a strategy?
Also Chelsea penalty takers favoured the natural side whilst Bayern the opposite side. Below is the shoot out once again.
I did a post last year on game theory and penalty kicks which looked at the 2008 UEFA Champions League final – Chelsea v Manchester Utd.
From the data collected by Basque economist Ignacio Palacios-Huerta he calculated the proportion of successful penalty kicks. He also noticed that the then Man Utd midfielder Cristiano Ronaldo often pauses in his run-up and if he does the ball is kicked towards the right hand side of the keeper. Furthermore, his research showed that when he does pause 85% of the time Ronaldo kicks to the right hand side of the goalkeeper. It is important that the goalkeeper does not move early as Ronaldo seems to be able to change his mind where to put the ball at the very last instant. When a goalkeeper moves early Ronaldo always scores. Ronaldo missed a penalty in the 2008 Champions League Final v Chelsea – see above post for video. He paused in his run-up and Chelsea goalkeeper Petr Cech stayed upright for as long as possible and dived right to save the penalty.
Champions League semi-final second leg – Real Madrid v Bayern Munich
Penalty 1 – Ronaldo runs up very slowly but doesn’t pause. He puts the ball to the Bayern Munich’s goalkeeper Manuel Neuer’s left and scores. Neuer dives right maybe expecting the ball to go right
Penalty 2 (penalty shoot out) – Again Ronaldo runs up quite slowly and puts the ball to the Neuer’s right. Neuer dives right and saves. Did Neuer play the percentages and believe (like the research showed) that 85% of kicks by Ronaldo go the goalkeeper’s right (even though he didn’t actually pause) or was it guess work? One wonders if Neuer had a strategy? He dived right for 3 out of the 4 penalties in the shootout and saved 2.
The Economist looked at this area and I thought that I would delve a little deeper. There is no doubt that if you study the costs and benefits of faking an injury there are certain sports where it is percieved as quite worthwhile – i.e. the benefits outweigh the costs. Cost benefit analysis is part of Unit 3 of the AS Level course. What is cost-benefit analysis (CBA)?
Cost Benefit Analysis (CBA) refers to estimating the private and external benefits of an investment project – airport, rail link, road etc against the private and external costs. Once these costs/benefits are established a decision is made as to whether the project should go ahead.
CBA can be applied to any decision you make and below is a table outlining the cost and benefit of faking a penalty or injury in particular sports. I see the benefit in soccer of diving in the box and being awarded a penalty outweigh the costs by a significant amount. Firstly, if the appeal for a penalty is turned down it is very unlikely that the referee will administer any punishment to the player faking a foul. In too many cases they are happy to let the game play on as they feel under so much pressure anyway for not awarding it. Whilst in ice-hockey a suspension of either 2 or 4 minutes has acted as a deterrent to those caught “embellishing”. I have put some values in the end column which will no doubt encourage a lot of discussion – remember Warren Gatland, the Welsh coach in the Rugby World Cup, considered informing a player to fake an injury so there would be no pushing in the scrums. This was after their captain, Sam Warburton , was sent off early in semi-final against France.
However, with the perceived benefits of diving in soccer it does encourage players to even practice this activity. This reminded me of a great advertisement run by the Guardian Newspaper for the Euro 2004 Soccer Championship – see below
We recently published the first edition of “Marginal Utility” a King’s College student-driven publication that looks at current issues in the world of economics. To view click – marginal_utility.
The contents in this edition are as follows:
p2. THE US DEBT CRISIS
p3. DVD REVIEW “INSIDE JOB”
p4. HAYEK V KEYNES
p5. ECONOMICS BLOGS
p6. BOOK REVIEW – “THE GREAT STAGNATION”
p7. BEHAVIOURAL ECONOMICS
p8-9. GAME THEORY AND PENALTY KICKS
p10. THE NZ DOLLAR
p11-12. KOBE AND TOHOKU QUAKES
P13. BOOK REVIEW “ECONOMIC NATURALIST”
P14-15. AIRLINES – EMIRATES
P16. QUIZ – NAME THE ECONOMIST
Students who have contributed to this issue include: Shan Jun Chang – St John’s; Andrew Grant – Marsden; Rebecca Bullen – Middlemore; Henry Black – Greenbank; Mitchell Baker – Major; Tomo Greer – Middlemore; Georgia Harrison – Taylor; Jordan Darrow – Peart; and Andrew Larkey – St John’s.
The game between Australia and Ireland on Saturday night at Eden Park was the biggest upset so far in this RWC. The RWC in New Zealand generally brings pleasure to a significant part of the population. Some will pay to go to games; others will pay to watch it on SKY TV; some will watch it on free to air on TVONE and Maori TV; others will listen to it on the radio; another group will enjoy reading about it in the newspapers. Irish supporters, including myself, will take great pleasure in talking about such a result – lets face it we don’t have much to cheer about at the moment with the state of the economy. What all this alludes to is the fact that as part of this entertainment comes without the public paying for it, the public benefits from an externality.
Those who have flown over for the RWC to support Ireland and went to the game will have no doubt spent a significant amount especially when you consider the state of the euro. Nevertheless the satisfaction (utility) derived in NZ$ from the game would have been much greater than the price they paid for the ticket. This suggest that there is a lot of consumer surplus present – the difference between the price that a consumer WOULD BE WILLING TO PAY, and the price that he or she actually HAS TO PAY. The RWC has been a great success so far and there have been more positive than negative externalities (transport system). Also it looks as if it will be a Northern Hemisphere v Southern Hemisphere final – a positive externality for the IRB? Go Ireland!!!!!
Thanks to Andrew Larkey for alerting me to this article from the BBC website. A report from Mastercard has come up with some interesting stats regarding the impact of the Rugby World Cup on the New Zealand economy. The overall value to the economy could be as much as NZ$1.45bn
Rugby World Cup 2011
– NZ$272.5m in ticket revenues
– NZ$$247.8m to be spent on accommodation
– NZ$$227.8m to be spent on food and drink
– 7.5 million litres of beer to be poured
– 7.35 million pies and sausages to be eaten
-150,000 litres of sports drinks to be consumed
About 95,000 international fans are expected during the course of the tournament.
“In terms of economic impact, the most important component is international visitors as they contribute money to the economy that would not have otherwise been spent in New Zealand. Such activity could increase to NZ$14.2bn by the end of the decade.” the report said.
Along with its direct economic benefits, the Rugby World Cup is also likely to boost the value of New Zealand as a brand. The America’s Cup sailing in 2000 generated almost NZ$$91.4m in brand value for the country. Lets wait and see – maybe if New Zealand wins there will be even a greater impact on the economy. In all this it would be interesting to try and work out the value of the multiplier. Any ideas? Go Ireland!
Of late, I have been rather light on posts mainly due to being away for all last week in Invercargill (bottom of the South Island) where I was the manager of the King’s College 1st XI Hockey team which won the NZ Secondary Schools Hockey Championship – see photo. Whilst there it was interesting to see what drives the local economy.
As with a lot of the South Island communities agriculture remains an integral part of the Invercargill economy. Although sheep is the most important stock that is farmed there have been increaseing numbers of dairy units as well as beef and deer farming. The main reason for the regrowth in the dairy industry was the increased demand for New Zealand milk, cheese and butter. New dairy factories have opened around Invercargill, as well as more efficient meat processing works and research and development facilities.
Diversification has also led to growth in horticulture, fishing, forestry, tourism and manufacturing. New Zealand’s only aluminium smelter, which is a major contributor to Invercargill’s economy, is at Tiwai Point near Bluff, and is powered by electricity from the vast underground power station at Lake Manapouri.
The Tiwai Point aluminium smelter is owned by New Zealand Aluminium Smelters Limited and was opened in 1971. It is one of the 20 largest aluminium smelters of the world and currently provides NZ$3.65 billion worth of economic benefit to the New Zealand economy. It produces the world’s highest purity primary (i.e. directly refined made from alumina ore) aluminium. The ore is mostly imported from Australia, while the finished product mostly goes to Japan. In 2009, approximately 750 full time personnel were employed, and 120 contractors. Wikipedia.
With the new English Premier League soccer season upon us next weekend it was interesting to read in The Economist and the Finacial Times in London that there seems to a reverse in the trend of Brazilian players taking up high paid contracts overseas. This is partly due to the continuing strength of the Brazilian economy:
- In 2010 the economy grew 7.5%
- Is the world’s 7th largest economy
- Grew fifth fastest of the G20 countries
- Since 2008 the Brazilian Real has appreciated 35% against the Euro and the British Pound. Also this year it hit a 12 year high against the US$. This has helped clubs to bid for players from Europe.
- The Brazilian Terms of Trade has improved by 27%
In 2010 spending on players in Brazil rose 63% compared with a drop of 29% in Europe. Total number exported from Brazil fell 14% in 2009. The stronger finances of Brazilian clubs are also helping them retain younger players.
Rivalling those in the Premiership, La Liga, and the Serie A Santos, the team of Brazilian great Pele, repelled a reported Chelsea bid for Brazilian teenage star Neymar by offering him a sophisticated compensation package that included revenue from image rights. FT London
- Total revenue from the top 5 are up 5% from 2008-09.
- Significantly more braoadcasting revenue in the English League.
- Germany acquired the greatest corporate sponsorhip revenue.
- Spain – Real Madrid and FC Barcelona accounted for over 50% of the revenue.
- Italy – AC Milan, Inter Milan and Juventus accounted for 45% of the revenue
- Spain showed a fall in the ratio of wages to revenue in 2009-10
Just finished reading the book Scorecasting by University of Chicago behavioural economist Tobis Moskowitz and Sports Illustrated writer Jon Werheim. Although predominately based on the main sports in the US it does make for interesting analysis of the behaviour of players and officials during certain periods of a competitive game. They mention the fact that the strike zone in baseball gets smaller when there are two strikes on the batter. The strike zone is smallest when there are two strikes and no balls and largest when there are three balls and no strikes. However there were two areas that were particular interesting:
1. When golfers try to make a birdie they are less successful than when they line up the extact same putt for par.
Researchers found that professional golfers display a more aggressive behaviour on par versus birdie putts. When they missed birdie putts they tended to leave the ball short of the hole. Tiger Woods said that “Anytime you make big par putts., I think it’s more important to make those than birdie putts. You don’t ever want to drop a shot. The psychological difference between dropping a shot and making a birdie, I just think it’s bigger to make a par putt.” Why should golfers behave in this way as it is your final round total that counts and does it matter how you get there? According to the authors it is all about Loss Aversion and when they are threatened with the dropping of a shot they tend to try harder
2. What is driving the home field advantage? – for example from the Spanish Premier League La Liga
Three Spanish economists, all soccer fanatics, studied the behaviour of officials’ conduct during home games. They looked at 750 matches from the premier league in Spain and found that:
* when the home was winning referees shortened the extra time on average by 2 mins
* when the home team was losing referees added to the extra time on average by 4 minutes
* when the score was level the average injury time was correct – around 3 minutes.
* when a team was ahead by 2 goals or more there was no bias at all. Adding additional time to a game that has a clear favourite is unlikely to change the outcome and therefore accrue much benefit, so why risk the potential cost of being told off by superiors for playing too much time.
When 3 points were introduced for a win, injury time increased notably.
The researchers also found the exact same injury time bias, in favour of the home team, exists in the English Premier League (remember the post on Fergie Time), Italian Serie A league, the German Bundesliga, the Scottish league, and even MLS in the US.
Now that the Term has come to a close here in New Zealand below are some books that may take your interest for the holiday period. I am also on holiday and will be out of internet range till Saturday 23rd April – I’ll be back on deck then.
The Spirit Level by Richard Wilkinson and Kate Pickett
The books focuses on how inequality in a country is conducive to unhealthier, unhappier, greater obesity, higher crime rates etc. However critics have said it lacks substantive data – can we say that because New Zealand has a bigger income gap than Greece that it has greater social problems?
Scorecasting: The Hidden Influences Behind How Sports Are Played and Games Are Won by Tobias J. Moskowitz
Tobias J. Moskowitz
Much like the highly successful Freakonomics it looks into some of the preconceptions surrounding sport, using statistics and other empirical evidence to reach some interesting conclusions.
A recently published book entitled “Scorecasting: The Hidden Influences Behind How Sports Are Played And Game Are Won” is, I am informed, an absorbing read on the behavioural economics of sport. Recently reviewed in The Economist, the book uses sport to test economic theories about decision-making. The objectives of those in sport is easily measurable and the results of each game is extremely clear – win, draw, loss. They discuss home advantage and discovered that the home team win:
- 54% of games in Major-league Baseball
- 60% of cricket
- 63% English Premier League
- 69% in American College Basketball
Research shows that referees are more likely to favour the home team with penalties and yellow and red cards. Furthermore, if the home team is winning there is less stoppage time added on but quite the contrary if the home team is losing – that is they add more stoppage time. The added or reduced time at Old Trafford when Man Utd are trailing/drawing or winning is know as Fergie Time – named after Alex Ferguson the manager at Manchester Utd.
But the authors of the book suggest that referees are not biased but they tend to rely on crowdsourcing, picking up the mood of the crowd when making their decision. Economists refer to this as Anchoring which refers to people’s propensity to be exceedingly infuenced by external factors (eg. the crowd). But when a home crowd is taken away there is a different set of results. Becasue of crowd violence 21 games in the Italian League where played to empty stadiums. In these games the home bias declined by:
- 23% on fouls called
- 26% for yellow cards
- 70% for red cards
This was more prevalent in soccer as they are many more decisions to be made by the referee than in other sports.
Loss Aversion and Golf
The authors also look at golf and found that players tend to care more about saving par rather than, a similar-sized gain, making a birdie. This doesn’t make sense as it is the number of strokes over the course of 18 holes is what counts.
Having gone through the penalty shootout at 2008 UEFA Champions League Final I was informed by students that the AC Milan vs Liverpool final in 2005 was another penalty shootout worth looking at. As well as being a tremendous comeback by Liverpool it was interesting to observe how the penalty shootout progressed.
I proceeded to go through each penalty for AC Milan and Liverpool and write on the board the following:
*Kicker – shot NS C OS
*GK – dived NS OS
Like the Man Utd v Chelsea game there were some similarities regarding strategy. Worth a look.