Saturday, June 26, 2010

A World Cup of Economics

Guest Blog Post by Ronan Lyons

We all know the 2010 World Cup is on and at this stage we're down to the last sixteen. But what would a World Cup of economics look like? How would the sixteen countries that are left fare, if they were competing on economic factors, not football ones? Below is the Last 16 with a twist... each match is decided by a country's economic defence, midfield and attack.

Defence is getting the basics right, the platform for the rest of the performance. In economic terms, that's inflation. A quick review of economic history will show that in a world with fiat currencies, getting inflation down to a steady 2% or thereabouts is the equivalent of having a world-class defence. Too far above that and you're essentially giving things away for free. Too much below that and you start stifle yourself.

Midfield is the engine and a good economy, like a good football team, needs balance: enough both going forward and getting back. In economics, that means looking at a country's current account balance. This is essentially a measure of how much a country is in balance and living within its means. A large current account deficit is a big warning sign that an economy is unbalanced.

Attack is all about going forward. Economically, going forward means looking at a country's growth prospects. The higher GDP growth, the greater a sense of opportunity and adventure an economy has. To measure the strength of a country's attack, IMF estimates of GDP growth over the period 2008-2015 have been used. For the inflation rate and the current account balance, the same source and time period are used. And with that out of the way, let the games begin...

1. Uruguay vs. South Korea
In defence, this is no contest really. The Uruguayans still suffer from relatively high inflation (averaging 6% over coming years), while the Koreans at 3.2% are much closer to the "dream rate" of 2%. In midfield, While the Uruguayans are quite close to having a balanced account, the South Koreans have a very desirable current account balance, the average balance for 2008-2015 being just over 2%.

It's only up front where the Uruguayans start to shine. From 2000 to 2007, the Koreans grew three times as fast, but out to 2015 the Uruguayan economy is expected to grow by 4.6% on average, compared to a still very respectable 3.5% average growth in Korea.

Result: A strong attack is not enough for Uruguay. 3-1 to Korea.

2. USA vs. Ghana
The Americans have a strong advantage in defence, with Ghana still grappling with double-digit inflation while the US is expected to have the dream rate 2% on average. Neither midfield is up to much, to be honest. Both countries have large current account deficits - an average of 3.6% in the US and 8.8% in Ghana, so the edge goes to the US.

Up front, however, Ghana have by far the best attack in the competition. Average growth in Ghana is expected to top 7% over 2008-2015, compared to less than 2% in the US.

Result: Weak at the back, delightful up front, Ghana go out in style. USA win 3-2.

3. Argentina vs. Mexico
At the back, perhaps it's Mexico's membership of NAFTA but it looks to be in a different league. Inflation rates in Mexico of 4% are far better than the 9% or more predicted for Argentina.

In the middle of the park, Argentina have the edge, though, with a surplus of 2% compared to a small deficit in Mexico. Up front, things are tighter but again Argentina has the slight edge. It is expected to grow by an average of 3.3%, compared to 2.8% for Mexico.

Result: A very tight game, with Argentina's midfield and attack eventually unlocking Mexico's defence. 2-1 after extra time to Argentina.

4. Germany vs. England
Two teams that give practically nothing away at the back. England, with inflation at just 2.2%, are top drawer, but Germany, averaging 1.4%, take it to a different level. With defence like that, it's probably not a surprise that neither sets the world alight with their attack. England have the slight edge, with growth prospects of 1.3%, a little bit above Germany's 0.8%.

Therefore, this is a match that's decided by the midfield battle - and, in the middle of the park, it's not really much of a contest. England have a small deficit, 1.5%, which just can't match Germany's huge surplus of 5%.

Result: Not particular exciting. 0-0, with Germany winning on penalties.

5. Netherlands vs. Slovakia
Netherlands are almost a carbon copy of Germany, with a very tight defence (inflation of just 1.4%), world-beating midfield (surplus of 5.2%) and a relatively dull attack (growth of just 1%).

All this makes it tough for a Slovakian side with a solid defence (2.4%) and great attack (growth of 3.4%) but a soft middle (deficit of 2.8%). Nonetheless, the rate at which Slovakia is improving, plus the paucity of the Dutch going forward, means a shock may just be on the cards.

Result: One for the underdog - 1-1 after 90 minutes, and in extra time the Slovaks sneak a winner.

6. Brazil vs. Chile
Easily the most entertaining for the neutral. Here are two sides with cavalier defences (average inflation of 4.8% and 3.4%) and very potent attacks (both are expecting growth to average 3.9%), meaning lots of goals. This is probably helped in the middle of park by relatively weak midfields, with both countries facing a current account deficit (2.8% for Brazil, 1.6% for Chile).

In each of the three areas, though, Chile has the slight advantage, while add up to prove decisive.

Result: Great fun to watch, and Chile just about have the edge. 4-3 after extra time.

7. Paraguay vs. Japan
Two very different teams again. At the back, Japan are so tight as to be stifling themselves, let alone the opposition (0% inflation). As a result, they don't have much up front (growth of 0.6%), even if they're solid enough in the middle (surplus of 2.4%).

Facing them are Paraguay, a typically Latin American side with weak defence (inflation of 4.1%) but a very strong attack (3.9%) and a midfield that's not too shabby (a 1% deficit).

Result: Against a team happy to pass to themselves at the back for 90 minutes, Paraguay have to take their chances - but once they take their lead, Japan can't recover. 1-0.

8. Portugal vs. Spain
The Iberian clash features two very similar economies. Both with defences that are getting better - inflation of 1.3% and 1.5% respectively - and attacks that are getting worse (growth set to slow to 0.4% and 0.6%). Both also with hopeless midfields, thanks to large current account deficits.

Nonetheless, that said, Spain has the edge in all three departments.

Result: Probably the dullest of the fixtures. 1-0 to Spain.

Which leaves the quarter-final line-up looking like:
Slovakia vs. Chile, the winners of whom play the winners of...
S. Korea vs. USA

Germany vs. Argentina, the winners of whom play the winners of...
Paraguay vs. Spain

Guest Blog Post by Ronan Lyons