TCS Daily

How Soccer Doesn't Explain the World

By Martin Krause - July 29, 2005 12:00 AM

When it comes to soccer, Latin Americans know exactly where they want to compete: all eyes are fixed on the final qualifying games for next year's World Cup in Germany. Next on the list of priorities is the America's Cup, and only after these some regional tournaments such as the Mercosur. In other words, Latin Americans, particularly those fans of Brazil and Argentina want to compete at the highest levels and against the best in the world.

Ask for their opinion about their preferences for regional trade integration however, and their focus is completely reversed: first is Mercosur, then the Free Trade Area of the Americas (FTAA), and finally the World Trade Organization. It is my contention that such divergent claims spring from completely different levels of confidence in these fields.

Their high-level focus on soccer is entirely justified. Argentina and Brazil have a long history in the top echelons of the sport with a seemingly endless source of talented players. One only has to look at the performance of their players in the most challenging tournaments in Europe to see that their control is global. In essence, Brazilians and Argentines are able to focus their attention on the highest stage, the World Cup, because they know they are able to compete with the best at the highest level of the game. And they are willing to play by the rules.

When it comes to matters of international trade and finance, however, this confidence is noticeably absent. Both Brazil and Argentina are fearful, preferring a timid approach to compete between them at the Mercosur, before risking moving towards the FTAA, and much less, of course, with the world at large. Unlike with the World Cup their governments do not like to play by the rules.

A recent article by Robert Shapiro in the San Francisco Chronicle highlights this, commenting on the Brazilian government's tactics to strong arm international laboratories into reducing the price of AIDS drugs under the threat of canceling their patent. It also focuses on how the difference in economic performance during the last decades between Latin America and Asia can be attributed to respect for intellectual-property rights and the welcoming of foreign technologies.

This argument is true enough, but the problem is even greater than this, and it concerns a whole set of institutions. By now, economics has become increasingly aware of the important role institutions play in economic growth, as explained many years ago by Nobel prize-winner Friedrich A. von Hayek, and later by Douglass North.

Competitive Institutions

What is a competitive institutional framework? If a general consensus is somewhat difficult to find, a historical perspective shows that those countries deemed to be "developed" have complied with the following: the rule of law, respect for property rights, for contracts, limited regulation, open markets, sound money, and an efficient and independent judiciary system.

There is no one single indicator to measure the quality of institutions, but several show a similar pattern. The Index of Economic Freedom published by The Heritage Foundation and The Wall Street Journal in 2005 considers trade policy, the fiscal burden of government, government intervention in the economy, monetary policy, capital flows and foreign investment, banking regulations, wages and prices control, property rights protection, regulation of business and the black market, as the most important criteria. It ranked Brazil a lowly 90th place out of 155 countries and Argentina 144th.

The Globalization Index by the consulting firm A. T. Kearny together with Foreign Policy Magazine ranked Mexico in 42nd place, Argentina 47th, and Brazil 57th out of 62 countries. A similar pattern appears with Price Waterhouse Coopers Opacity Index, which measures the "lack of clear, accurate, formal, easily discernible, and widely accepted practices in the broad arena where business, finance, and government meet"; or the comparative study on the regulation of business by the Doing Business program of the World Bank.

A weak institutional framework is also open to corruption. Transparency International's 2004 Corruption Perceptions Index (CPI) presents country scores assessed by between 3 and 11 sources. The CPI is a composite index, consisting of sources using different sampling frames and various methodologies which are given the same weight. Those sources are: Freedom House, the Economist Intelligence Unit (EIU);?the Institute for Management Development, Lausanne (IMD);?the International Crime Victim Survey (ICVS),?Political Risk Services (PRS),?the Political and Economic Risk Consultancy, Hong Kong (PERC),?the World Bank and European Bank for Reconstruction and Development (WB),?the World Economic Forum (WEF). Out of 145 countries, Brazil was ranked 59th, Colombia 60th, México 64th, Argentina 108th, Paraguay 140th with Haiti being placed at the bottom.

Only Chile ranks among the world league in several indexes, but only after many years of substantial economic and institutional reforms that have now become entrenched in their political system. The rest of Latin America is clearly not ranked high enough to even be considered for the World Cup. Only 32 teams will be at Germany in 2006, but at the world cup for institutions, Latin America does not even come close to qualifying.

So the real question is: will there come a time when, like in soccer, Latin America will have an institutional framework allowing it to compete with the best? As long as this is not answered, Latin America will never move beyond the early qualifying rounds.

Dr. Martin Krause is the Professor of Economics and Dean of ESEADE Business School in Buenos Aires, Argentina.


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