June 11, 2014 6:27 pm


The football disaster that conquered the world of sport

Fifa has been a stunning success in spite of flaws that have been exposed as never before

Ingram Pinn illustration©Ingram Pinn


Welcome to the World Cup in Brazil, brought to you by Fifa, a corporate governance disaster that is also one of the most successful multinational enterprises on earth.

The contrast between the Fédération Internationale de Football Association’s cronyism, managerial entrenchment and corruption, and its achievement in spreading the British version of football around the world (leaving the US game in the dust), is striking. It demonstrates that Fifa has enormous strengths as well as egregious weaknesses.

The decision to award super-hot Qatar the 2022 World Cup has pushed Fifa’s contradictions to their limits. That choice is now disowned even by Sepp Blatter, its 78-year-old president, who covets a fifth term as “supreme leader” (Fifa’s ayatollah-like job description). If Fifa cannot reform, much will be lost.

The intriguing thing about Fifa is that a Swiss non-governmental organisation, which has operated in an unaccountable way, with a highly conflicted (and in some cases corrupt) relationship between its leaders and the football associations that are its closest equivalent to shareholders, has done so well.

Soccer captured 43 per cent of the worldwide sports event market by value in 2009, compared with 13 per cent for American football and 12 per cent for baseball, according to AT Kearney, the consultancy, and is growing faster. It has even started to penetrate US consciousness thanks to television coverage of European games.

Fifa is fortunate in having a superior product to market: football is a more elegant game than the complex strategy and head-crunching violence of American football, and is easier to play in parks or in schools. The accessibility of the amateur game helps to reinforce the professional sport.

But that is not a sufficient explanation: basketball and baseball are played casually, and Venezuela and other countries have shown that it is possible to ruin even a fail-safe commodity – in that case oil and gas production – through rent-seeking cronyism. Soccer could have been similarly cursed.

Fifa has avoided this fate until now because it has two competitive advantages over US sporting bodies. The first is that football is integrated amateur and professional games are unified through associations

Professional soccer leagues such as Serie A in Italy and Germany’s Bundesliga are powerful and their clubs are wealthy, but they do not control the national game.

This sounds arcane but it makes a huge difference to the incentives: leagues exist to advance their own interests and those of their member clubs, while the central task of the associations is to cultivate the game

The state of baseball is of secondary interest to Major League Baseball; football is Fifa’s raison d'être.

Fifa’s second advantage is that it is truly multinational – it launched a sustained push into emerging markets before US and European multinationals such as Coca-Cola and Adidas, two of the big World Cup sponsors. It adjusted early to the shift in the global economy.

Fifa took resources and put them into Africa and Asia, and that has paid great dividends,” says Stefan Szymanski, professor of sport management at the University of Michigan. US sports have remained American because there has been no money to expand overseas.”

Fifa’s advantages have given football strength in depth and reach, and transformed the World Cup into a global tournament on a par with the Olympic Games (also run by a Swiss-based sports association).

All of this could be undermined by Fifa’s flaws.

Since 1961, when it was reformed in a cack-handed way, it has been managed through a structure that seems ideally designed to encourage cronyism and dysfunction. Fifa is a patronage organisation. The people at the centre disburse financial rewards to those at the periphery responsible for electing them,” says Roger Pielke, a professor at the University of Colorado.

No board of directors oversees its president and executives. Instead, a 24-memberexecutive committee” of national association representatives, which is embroiled in allegations (and some confirmed cases) of corruption, wields patronage in an opaque fashion. Blatter, like Fifa presidents before him, has exploited this to entrench himself.

It should be swept away but it suits too many insiders to keep things as they are. Meanwhile, Fifa is bitterly divided between European countries, particularly the UK, that want Mr Blatter to resign and Fifa to combat corruption, and African and Asian officials who portray this as an attempt by the west to seize control of the game.

Trouble looms. The Sunday Times has accused Mohammed bin Hammam, the Qatari former Fifa vice-president, of paying bribes to African officials to bring the 2022 World Cup to Qatar. Mr bin Hammam stepped down in 2012 after Fifa found that he paid for votes. The newspaper has published emails allegedly showing that bribes were paid from a $5m slush fund.

Sports associations and leagues have proved fragile before and it is easy to imagine a Fifa split. What if the World Cup were removed from Qatar, and it held a tournament for resentful African and Asian nations at the same time? The European leagues, with their €20bn annual revenues, could sever their links with the rebels.

That would be a tragedy, not only because it could be avoided through governance reform, but because it would destroy Fifa’s achievements since 1904. It is a blatantly flawed enterprise but it has achieved great things. Think what it might do if it were run properly.


Copyright The Financial Times Limited 2014.


Leaners of Last Resort

Barry Eichengreen

JUN 11, 2014


OSLO With Jeremy Stein’s return to his academic post at Harvard at the end of May, the US Federal Reserve Board lost its leading proponent of the view that monetary policy should be used to lean against financial excesses.

Stein’s view, expressed in a speech earlier this spring, is that central banks should be less aggressive in their pursuit of full employment in an environment of heightened financial risk. His position is a refutation of former Fed Chairman Alan Greenspan’s doctrine that the central bank should not adjust policy in response to financial-sector excesses, but instead should concentrate on reacting to any problems that subsequently arise.

The question is whether Stein’s new view is justified. In principle, the answer is straightforward. If a central bank has two policy targets, then it needs two instruments: monetary policy to influence aggregate demand, and regulatory policy to limit financial risks.

In practice, however, the answer is more complicated, because the question has several components. What should monetary policymakers do when regulators are prone to falling down on the job? In particular, should they raise interest rates? To what indicators should they look when determining whether regulators have failed to do their part? And is monetary policy a sufficiently subtle instrument to address the resulting risks?

In the wake of the global credit crisis, the answer to the first question is not in doubt. There is a clear victor in the “lean versus clean debate. Central banks cannot concentrate only on cleaning up after crises; the costs of financial instability are too high. Rather, as recent events have amply shown, the monetary authority must lean against excesses as they develop.

That leaves the question of how to detect the existence of excesses, and the question of what, exactly, to do about them. Stein proposes focusing on risk premiums in the bond market. When yields on risky bonds decline toward those on safe assets, it is fair to conclude, he argues, that someone is taking on excessive risk. The problem, then, is how to determine exactly when risk premiums are too low.

Some suggest focusing on rapid increases in the volume of bank and nonbank lending to the non-financial private sector as an indicator that lending is growing riskier. Others recommend monitoring the leverage ratio, particularly the ratio of capital to assets in the banking system, on the grounds that banks are the weak link in the financial chain.

These suggestions are all indicative of central bankers’ instinctual desire to reduce complex decision-making to simple rules. But the disagreement among experts shows that the search for simple rules is futile. Here as elsewhere, central bankers have no alternative but to consider the broader context and rely on their judgment.

Finally, there is the question of whether monetary policy is the right instrument to use in response to the risks arising from financial instability and, if so, how aggressively to use it. Inevitably, the answers are colored by the United States’ experience in 1929, when the Fed tightened policy in response to what it perceived as excesses on Wall Street, only to plunge the economy into the Great Depression.

In fact, exactly the same debate raged then. On one side were Fed governors who argued that the only effective way to rein in financial excesses was to raise interest rates. On the other side were officials, like George Harrison of the Federal Reserve Bank of New York, who worried about the impact on the broader economy and preferred to use other instruments to address financial imbalances. Harrison’s alternative was “direct pressure” – that is, using the Fed’s regulatory powers and moral suasion to persuade member banks to curtail their lending to the stock market.

Of the two views, Harrison’s was the more sophisticated. The problem was that the Fed’s macro-prudential instruments were undeveloped. No sooner did the Federal Reserve System’s member banks limit their provision of credit to purchasers of securities than non-member banks, insurance companies, and trust companies ramped up their lending, allowing the stock market to race ahead.

In the wake of this failed experiment, even Harrison was forced to acknowledge that reining in the market required policymakers to make lending more expensive for the financial sector as a whole. The Fed then raised its policy rates in the summer of 1929 – and the rest, as they say, is history.

The implication is clear: Central banks should focus on developing more effective macro-prudential instruments. They should widen the regulatory perimeterthat is, they should work to bring nonbank financial institutions under their regulatory umbrella. They should use the resulting instruments and powers preemptively. And they should adjust monetary policy to address potential financial risks as a last resort, not as their first line of defense.


Barry Eichengreen is Professor of Economics and Political Science at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His most recent book is Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System.


Heard on the Street

China Finds Softer Landing Pad

By Alex Frangos

June 13, 2014 6:48 a.m. ET


China's economy may be leveling out, but the ailing property market could still cause it to go off course.


Government figures indicate China's slowdown at the start of the year has at least stopped getting much worse. Industrial production grew 8.8% in May compared with a year earlier, slightly faster than April. Retail sales, an imperfect measure of consumer sentiment, rose faster than expected. As economist forecasts of second-quarter growth rate hover near the government's 7.5% full-year target, investors would be forgiven for putting hard-landing fears aside for now.

Other signs are somewhat reassuring. The labor market, which is difficult to gauge because of defects in official government measures, seems to be holding up, if not robust. A quarterly survey of over 4,000 employers by Manpower Group found the hiring outlook eroded slightly, but remains above six-month ago levels

Zhaopin.com, an online recruitment firm, said job listings in May grew 41% from a year earlier.

The leveling off is thanks to a series of government measures. A slight loosening of the lending taps saw credit growth, known as total social financing, rebound in May. There was also accelerated government spending, which grew 25% last month over last year's level, after rising just 10% through the first four months of the year. That fed into increased spending on infrastructure projects. A rebound in exports, supported by the yuan's weakness this year also might be at play.

The crucial property market continues to suffer, though slightly less than before. New-home sales declined 11% in May compared with a 15% decline in April. Property starts dropped 7.9%, less dire than April's 15% drop and March's 22% drop. That said, unsold inventory of apartments rose again last month, and is now a quarter higher than a year ago. Prices have only started to drop in many cities.

For now, a free fall into a serious economic slowdown seems to be on hold. But with the property market so uncertain, investors should be prepared for China's fortunes to change again soon.