By Mariusz Rzepa
Argentine’s economy is struggling with abnormous 70% inflation this year. The government is tied and does not react to the ongoing problem. Surprisingly enough, the recent success of the Argentine national team in World Cup 2022 seems to be able to help to solve the problem. How are those two matters related? Why and how can the World Cup success be used to fight inflation?
The Inflation Problem of Argentina
According to the recent reports released by the Argentine government, in 2022, Argentina’s annual inflation rate exceeded 70%. Inflation achieved its highest level in 3 decades, yet it is still expected to grow. The effects of the issue are already dwindling Central Bank reserves, bloating fiscal deficit, and a looming debt bomb. One may ask, why would not the government impose an inflation-preventing policy i.e. increase in the inflation rate or decrease in the money supply?
The answer is simple- the electorate. According to Sergio Massa, Argentine Economy Minister, if he publicly announces to cut back export tariffs and stop printing more money, he will lose the public confidence in his leadership and exacerbate their financial anxieties, which is most likely to cost him his job. Eduardo Levy Yeyati, chief economist at the Central Bank of Argentina, claims that “Nobody wants to push the red button—it’s like the trolley problem.”
World Cup Success to the Rescue
Argentina’s sensational World Cup win last weekend not only gave the country a long-sought third title but also can be translated into positive expectations for a crisis-prone economy. Football’s world champion tends to enjoy an extra 0.25 percentage point of economic growth in the two quarters following the tournament.
Although 0.25 percent does not seem persuasive a first glance, on the country scale, this amount converges to the increase of almost 1.3 billion US$. That is a result of increased exports due to the “international visibility” that Argentina attained after winning the World Cup. Experts found that the World Cup provides an ideal opportunity to isolate a visibility effect on trade.
As the tournament is watched by hundreds of millions of football fans around the world, the success in the tournament will popularize the country in the eyes of the viewers from all around the world, and is exogenous to trade flows. This offsets the increase in the demand for Argentina’s local businesses and the tourism connected to the country.
According to Bloomberg, the economic World Cup winner growth can be expected to increase on the longer, one-year horizon. Academics state, the GDP of Argentina is forecasted to grow by 2% solely because of the country’s popularization after the football campaign.
Why GDP Growth is Important for Fighting Inflation?
As presented before, in the case of Argentina the main obstacle preventing the country to focus on inflation-fighting is the lack of trust in authorities present among Argentinians. Due to bad past economic performance, the nation became insecure about its future. People stopped trusting the politicians and their decisions, as they believe it is them and their decisions that brought about the crisis in the first place.
To make them earn their trust again, politicians need to reassure the citizens and lift the public spirit. This can be done by showing the economy may prosper in the near future; GDP growth will fit this role perfectly. Some people may call it small propaganda, some a spark of future prosperity; but most importantly, showing the after world-cup GDP indexes to the public may simply work.
World Cup Effect
The World Cup championship brought back the nation together and added confidence in the country. The improvement in economic mood can fight low rates of confidence and add trust to the nation’s representatives, allowing them to take decisive economic steps in the field of monetary and financial policy, without the threat of losing a position.
This can already be seen by, first, the prototypes of the new monetary reforms planned to be announced within the next months, and second, by the IMF approving the latest revision of the country’s $44 billion program. With the first exhibit, it can be seen that the government finally decided to “use some medicine, fighting the inner virus”.
The second proves that Argentina can be trusted as a country from the macroeconomic point of view. As IMF decided to for a loan, it trusts that the country will be able to repay its debt in the long-term future horizon
The Clash of Opinions
Some authors, however, have a more skeptical opinion of the phenomenon stating that economic-growth expectations may be misplaced. Experts agree that mood bumps like this typically don’t have a massive impact on aggregate figures when juxtaposed with the negative effects of local economic governance.
“If there is one country in the last World Cups that did not benefit much from winning the World Cup, this is Spain in 2010, when there was the sovereign debt crisis, says Marco Mello researching the effects of the World Cup on the winner’s country. “This cost-of-living crisis and this potential recession approaching may mask the eventual effects of winning the World Cup.”
Following that, it may be the case that the proposed forecasts from Bloomberg will never see print, as the Argentine economy is already doing too badly to be pushed by the World Cup effect.
Conclusion
Concluding all, there is a big sign of hope for the Argentine economy coming from the area which is Following renowned authors, it might be the case that the saving- movement of the Argentine economy will not be pushed by the local authorities, but non-directly by the country most precious domestic product; football. Is it however going to happen? Is the Argentine economy “good enough” to be influenced by the World Cup effect, following the research of Marco Mello? From my perspective, the public acceptance of the new reforms will be decisive. The World Cup however, brings only a good things to the country’s economy.
Sources: Foreignpolicy.com, Bloomberg, Indiana Express, Marco Mello (2022), Omer Bayar (2014)
Written By Mariusz Rzepa
January 2023