Giving the Game Away: The Economics of Corruption at FIFA

FIFA, the governing body of world football, has been a byword for corruption for decades, stretching back to the presidency of Sepp Blatter’s predecessor, the Brazilian Joao Havelange, when Blatter was number two in the organisation. Under the Havelange presidency millions of dollars went walkabout in murky transactions between FIFA and a company which marketed its TV rights. More recently the World Cup of 2022 was awarded to oil-rich Qatar, to be played in high Summer in temperatures of 40 degrees Centigrade. The Sunday Times has documented wholesale vote-buying on behalf of Qatar. US Attorney General Loretta Lynch has made it clear that the FBI investigations, which have yielded criminal indictments against FIFA officials, cover offences stretching back to 1991.

Sepp Blatter has been a senior FIFA official for forty years and president since 1998. How can his serial re-elections be explained, the most recent two weeks ago after the announcement of FBI action? FIFA is a most unusual organisation and its governance and economic structures make corruption almost inevitable.

Governance: Every national association, in even the tiniest country, has one vote in FIFA elections. Some tiny palm-fringed idyll in the South Pacific, where soccer was unheard of until recently, can form a football association and expect instant recognition from FIFA. It will then have one vote at FIFA congresses, same as Germany and Brazil, the regular world champions. FIFA has 209 members. There are not 209 countries in the world (the United Nations has just 193 members, for example). ‘Countries’ such as Andorra, San Marino, the Faroe Islands and numerous others are FIFA members. The smallest member in population terms is Montserrat, home to 5000 souls. These ‘countries’ are not regarded as eligible for membership in any serious international organisation, since they are not fully-fledged states but remnants of the Dutch, British and French empires. FIFA member Liechtenstein is a remnant of the Holy Roman Empire. It is not difficult, or costly in the overall scheme of things, to re-distribute rents to these minnows to ensure their loyalty. This is the first part of the explanation for Blatter’s repeated majorities.

Economics: The second part is the simple fact that FIFA has had, for the last four decades, quite a lot of rents to dish out. Without economic rent there is no pot of graft. The rent source is a monopoly, the World Cup: it has become, through TV rights and sponsorship, a huge money-spinner. The players, who tend to take the lion’s share of the earnings available in all other major sports, get paid very little for national team appearances. If they wish to play international football at all, they have little bargaining power. Once committed to a national team, usually the country of their birth, they cannot threaten to desert to someone who pays better. If they could, Saudi Arabia would win the World Cup. Most professional football clubs do not make profits: the players, and their industrious agents, make sure that most of the revenues flow through to the performers, which is what happens in every other branch of the entertainment business. In football the World Cup revenues flow to FIFA, an opaque and unaccountable organisation whose leadership is free to perpetuate itself through buying the small national associations around the world. These national bodies in turn have weak, or no, corporate governance. With one brave bound, the money is free.

It is the combination of equal votes for all with billions of unearned revenue dished out behind the curtain which has created the FIFA monster. This is corruption by design.

Hidden Message from the Banking Inquiry: A First-Rate Economist Should Head the Central Bank

Some commentators wrongly claim there is little value in the long and (moderately) expensive banking inquiry. There is much to learn from the inquiry. One important message can be gleaned from the testimony of Central Bank and Financial Regulator executives this past two weeks: the coalition needs to appoint a first-rate economist (like Honohan) as his successor as central bank governor. The coalition should scour the globe and not compromise on analytical firepower.

Brian Lenihan pushed through the appointment of Honohan against the tradition of promoting someone from the senior ranks of the civil service. If the tradition had been followed, the Irish economy might still be wallowing in financial instability. A central bank governor without first-rate economic expertise could have made a total hash of the financial restructuring and recovery programme of the last five years. For example, a former senior civil servant would not have made the phone call to RTE Morning Ireland in November, 2010, getting the Troika programme quickly started. Other painful actions taken in recent years, such as the PCAR and PLAR exercises, and the time-consuming and expensive improvements to the financial sector database, might have never started or been botched. The job requires a highly-competent, well-trained and experienced economist.

Irish Financial Regulation: Guidelines Rather Than Rules

In his testimony this morning, Patrick Neary explained that the mandated bank lending sectoral concentration limits, which were seriously breached by the Irish banks during the credit bubble, could not actually be enforced since they were guidelines rather than rules. This distinction between guidelines and rules has eerie similarities to a classic scene in The Pirates of the Caribbean, where pirate captain Hector Barbossa (Geoffrey Rush) explains to Elizabeth Swann (Keira Knightley) the flexibility of The Pirates Code.

A Finance Minister Fit for a Greek Tragedy?

NYT profile here.

Resolution of the Irish banking crisis: Hard-earned lessons for Europe’

Speech by Lars Frisell here.