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March 12, 2009

Make the World Go 'Round

The Sketchy Economics of an International Draft

by Shawn Hoffman

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From the bottom falling out of the economy (and later, the free-agent market), to the dog-chasing-its-own-tail Manny Ramirez negotiations, Yuri Sucart's newfound celebrity, and the masochistic calls for a salary cap-it's been a very odd winter. And you can add to that list the story of 23-year-old Carlos Daniel Alvarez Lugo, who up until recently had been 19-year-old Esmailyn Gonzalez. Lugo is at the center of the scandal that took down Nationals GM Jim Bowden and special assistant Jose Rijo, and is causing a new wave of support for a worldwide draft.

Clearly, there are still abuses to the international free-agent system, but from the teams' perspective, cases like these have actually become few and far between since 9/11 (when MLB set up an office in the Dominican Republic to make sure that these things wouldn't happen anymore). Perhaps refusing to let a crisis go to waste, the teams are beginning to use the Gonzalez case as a political rallying cry. Conventional wisdom says that a worldwide draft would help boost competitive balance, eliminate bidding wars, and lower acquisition costs for the teams. Assuming that these things are actually true, it's no wonder that MLB's Rob Manfred says there is a "much stronger consensus in favor of the worldwide draft than there was five years ago."

But is it all really true? A while back, we interviewed Nationals manager Manny Acta on Squawking Baseball, and asked him what he thought about an international draft:

I'm not a fan of it. People talk about it limiting costs by stopping bidding wars for the top guys. But that's just the top guys. For everybody else, it could actually make things more expensive. There are so many kids down there that are dying to come up and be big-leaguers. The system, as it is, is good for both sides. If you institute a draft, less kids get signed. That's bad for the kids obviously, and bad for the teams, since the more players you sign, the better chances you have of striking gold.

The numbers seem to back him up. In 2008, major league players who were originally signed as foreign amateurs accounted for about 30 percent of all plate appearances and innings pitched. There isn't much hard financial data to go by, but one team executive I talked to estimates that a typical team can sign about 30-40 foreign players on a budget of $1.5 million-and that includes at least one high-end signing, somewhere in the vicinity of $800,000. In last year's draft, teams spent an average of $6.2 million to sign a similar number of players, so even counting foreign infrastructure and maintenance costs, teams are likely spending more than 70 percent of their total amateur budgets on the draft-meaning that the ROI from international players is probably a bit higher.

As for the top-tier foreign players-the subjects of those infamous bidding wars-they too are paid on a much smaller scale. The top ten bonuses paid out in last year's draft were for a combined $42.8 million. According to Baseball America, the top ten bonuses for international amateurs combined for $24.5 million-and that's the top ten of all-time, not just 2008. Michel Ynoa's $4.25 million deal with the A's (easily the largest ever given to a foreign amateur) would have been the sixth-highest bonus in the 2008 draft.

This might seem counter-intuitive, since teams have exclusive rights to sign their draft picks, while they have to bid on foreign players. But in countries like the Dominican, it's simply a case of oversupply; there are thousands of players competing for a relatively fixed amount of dollars, driving down prices across the board. Meanwhile, if a player is drafted in the States, he is that team's only option if they want to add a top-tier amateur to their system that year. If anything, draft bonuses are probably held down by the low-cost nature of foreign signings, since it gives teams a legitimate alternative.

Growing the Game Globally

It's Acta's last point that might be the most important, though. Regardless of the relative costs and ROIs, this might actually be more of a macro issue than a micro issue. If a worldwide draft was put in place, how would it impact baseball's global footprint? If it cuts off the flow of talent from the Dominican and other countries, as Acta suggests, it would end up costing MLB much more in the long run than it could ever save in the short run.

Puerto Rico is a pretty good test case, since it only became subject to MLB's draft in 1990. Up until that point, Puerto Rico was on par with the Dominican Republic and ahead of Venezuela in terms of producing Major League players, but even with international scouting becoming far more ingrained, the number of available roster spots expanding 15 percent, and the money in baseball increasing more than ten-fold, Puerto Rico has produced about as many players in this decade as it did in the '70s and '80s. Meanwhile, the Dominicans and Venezuelans have bolted ahead:

graph

There could be other reasons for this shift (the talent in the DR and Venezuela may simply be better), but it's not hard to see how the incentives are working against Puerto Rico. MLB teams used to have a strong ground presence on the island, building relationships early, and signing the players at the age of 16. But the draft eliminated the need for a team to set up shop there, since the players would have to sign wherever they were drafted (and at age 18, instead of 16). So most teams moved their resources to Venezuela and the Dominican, where cheap talent could still be signed and developed from a very young age-and without having to go through the stringent draft process.

For Puerto Rican teenagers, the carrot became less visible, and the country's talent pool seems to have suffered as a result. Needless to say, this also hurts the Puerto Rican economy, so much so that the local government asked for a ten-year hiatus from the draft. Not wanting to take what would be presumed to be a step back, MLB declined.

While the international free agent system could still use some cleaning up, a worldwide draft is probably a financial negative for all involved. When a 16-year-old from the Dominican signs with a Major League team for only a few thousand dollars, the player gets to vastly improve his standard of living, while the team is able to stockpile low-risk, high-reward talent. It also gives baseball a stronger foothold around the globe, which is an increasingly important task in a world where the only economies that are still growing are emerging markets (it's not a coincidence that the Rays recently expanded into Brazil).

There are also competitive balance concerns here, but these seem to be overstated. Of those top ten foreign signing bonuses, the A's, Reds, Rockies, D-Backs, Giants, and Padres accounted for eight, with the Yankees and Dodgers taking the other two. Note that the Mets, Cubs, and Red Sox are nowhere to be found (though the Red Sox have outspent everyone in Japan). The current system may actually give a leg up to small market teams, who can develop strong player development systems for much less than they can in the US. (Think of the Astros' notorious Venezuelan system, which produced Bobby Abreu, Freddy Garcia, Melvin Mora, and Johan Santana, among others.)

Assuming that the draft itself increases competitive balance (a question for another day), we might actually have the optimal system in place: a draft in the United States, where players tend to be more expensive; and a free-agent system abroad, where players tend to be cheaper. And even more importantly, the current system will allow baseball to grow organically in countries like China, India, and Brazil. That is, unless MLB refuses to leave well enough alone.

Shawn Hoffman is an author of Baseball Prospectus. 
Click here to see Shawn's other articles. You can contact Shawn by clicking here

Related Content:  Draft,  International Draft,  The Who,  Amateur Draft

20 comments have been left for this article. (Click to hide comments)

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lemppi

Thanks for this article. Really great information and very timely....I've been blogging about the idea of the international draft. This puts much in perspective and its interesting to see Manny Acta's opinion.

Mar 12, 2009 09:44 AM
rating: 0
 
JayhawkBill

Shawn, good article. Thank you. I'd been a firm supporter of an International MLB Draft for years. I'll reconsider my position.

I can't help but notice that the two nations with the large recent increases in MLB Debuts, the Dominican Republic and Venezuela, are the very same nations whose young players are most associated with PED use in that same period. Possibly being included in the MLB Draft has reduced Puerto Rican players' opportunity to reach MLB, but perhaps the skyrocketing opportunity enjoyed by Dominican and Venezuelan talent is partly due to factors other than their being free agents.

Mar 12, 2009 09:51 AM
rating: 0
 
patrickc

A couple of questions:

What is the supposed benefit of an international draft viz leveling the playing field and/or eliminating abuses? To take the DR as an example, pro prospects are not coming out of high school or college programs; there are no normalized statistics and teams can't necessarily go see the kid play whenever they'd like. Unless MLB is going to codify slot bonuses, I don't see how a draft changes the scouting landscape. It's still going to be murky and based largely on relationships. And as noted, MLB is already vetting players, particularly, one presumes, those signing for the biggest bonuses.

Assuming an international draft, why couldn't teams sign undrafted players as free-agents? It would depend on the rules of the draft, but I don't think an international draft has to mean less players signing.

I don't know that I have a horse in the race, but it's certainly complex, and my inkling is that an international draft is more likely to produce new gray areas to be exploited than anything else.

Mar 12, 2009 10:04 AM
rating: 0
 
Richie

From the standpoint of an economist, this makes little sense. How does subjecting Ynoa to a draft - thereby reducing his bargaining leverage - prevent a GM from signing however many other additional nondrafted free agents as he wants? Your cited numbers are a red herring, have little to nothing to do with what you're saying they show.

The only way an international draft could help the draftees would be possibly through the media. If you 'drafted' some guy from Uruguay, Squawk Radio Joe might now demand you sign the guy so as to "show you're trying to win!" Where otherwise he'd be paying no attention at all to what international free agents you sign or don't sign. Separate from that, of course an international draft would help the employers at the expense of the would-be employees.

As to Manny Acta, I value his opinion on the economics of draft/free agency as much as he values my opinion on the best way to turn the double play.

Mar 12, 2009 10:32 AM
rating: -2
 
RahulN

Great article Shawn. There is one question i've been wondering about for awhile which I was hoping you could clear up for me.

How come some Cuban players (i.e. Yunel Escobar) had to be drafted by their team, but others, such as Viciedo who the White Sox just got, are able to be signed by any team? Is there some sort of criteria to determine whether a Cuban player goes into the draft or not? Thanks

Mar 12, 2009 10:35 AM
rating: 0
 
BP staff member Shawn Hoffman
BP staff

Rahul -- this depends on where the player lives after he defects. Most guys will go somewhere in the Caribbean, so they can be free agents. Escobar went to Miami, so he was subject to the draft:

http://en.wikipedia.org/wiki/Yunel_Escobar#Cuban_background

Mar 12, 2009 12:38 PM
 
RahulN

Ah, that makes a lot of sense. Thanks for clearing that up!

Mar 12, 2009 13:20 PM
rating: 0
 
ncooke

I believe it has to do with where the player defected to and established residency; if they go to the DR, they're signable as a DR player, while if they defect to Florida, they're a US-based player subject to the draft. Could be wrong, though.

Mar 12, 2009 13:10 PM
rating: 0
 
Alex Canzoneri

Viciedo (or rather his agent) was just sneaky. He had come to the states before the draft, so he was eligible to be selected, but none of the teams knew he was here. Thus he became a non-drafted free agent.

Mar 12, 2009 13:11 PM
rating: 0
 
Korisu

So then to save money MLB should do away with the draft? Also I think the idea the fact that teams can sign non-american players cheaply as 16 year olds is a bit of good old fashion exploitation. I also think it limits opportunites for american players. I do believe that the rules should be one way for all players, not dependent upon country or origin.

Mar 12, 2009 11:35 AM
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patrickc

Is it exploitation or opportunity? I don't think it's so clear. Does anyone know how 16 became the age minimum for international signees? In the U.S. it makes sense to require prospects to finish high school -- we have universal public education. In the DR -- not so much...

Mar 12, 2009 12:01 PM
rating: 1
 
EddietheMVP

'is it exploitation or opportunity?'

Economically, it's MUCH better for a company to seek out the cheapest talent for their investment, like the article says. But who does that serve?

What's the difference between the current system and the idea of outsourcing jobs to countries where wages are far lower and labor laws less stringent? The issue isn't about pure economics (read: the ownership's bottom line), but also one of fairness and ethics of the overall process.

If clubs weren't able to venture to Venezuela without worrying about slotted signing bonuses, *perhaps* there'd be more interest in finding/cultivating the next Dwight Gooden, Eric Davis, and Tim Raines...let alone the Lloyd McClendons or Alan Wiggins'.

Teams would still be able to sign FA's after the draft, so I don't see Acta's argument. Some of the leeches in the cottage industry around ballplayers would suffer though.

Mar 16, 2009 18:00 PM
rating: 0
 
BP staff member Shawn Hoffman
BP staff

Manny Acta signed out of the DR for $5,000. I think I can assure you, he doesn't feel exploited.

Mar 12, 2009 12:34 PM
 
patrickc

Well, Manny Acta has accomplished an awful lot. But take a guy who signs for $5,000 and is out of baseball before he's 20. He's got $5,000, he got a shot, and no one had to give him either. But is it unreasonable to wonder if he's being exploited somehow -- sort of fodder for an industry that is making other people very rich? Not to say that there has to be a first-world/third-world flavor to the exploitation -- American farmhands don't make much money either, and the ones who don't earn big (or relatively big) bonuses may occupy a similar position to the roster filler at a DR academy...free choice, but...or no buts?

Mar 12, 2009 12:49 PM
rating: -2
 
BP staff member Shawn Hoffman
BP staff

Puerto Rico is another good example to throw in here. Their gov't wants out of the draft, b/c it has hurt the baseball-related economy there. If MLB teams were to pull out of the DR the same way they pulled out of Puerto Rico, and less Dominicans became wealthy baseball players, that would certainly be a big negative for the country.

Mar 12, 2009 13:10 PM
 
patrickc

So then, MLB teams operated pro academies in Puerto Rico, then pulled out after Puerto Ricans became eligible in the Rule 4 draft? That's interesting, sensible...

Mar 12, 2009 14:25 PM
rating: -1
 
kbernhard

Shawn,

I have to agree with Richie. Whether you are correct or not, the logic you use seems faulty and poorly supported. The stats you use are straw men and you fail to consider numerous relevant factors.

Your comparison of PR to DR and Venezuela doesn't take into account the level of talent there or maturation of scouting there.

Additionally, the higher bonuses in the U.S. likely have much more to do with the increased level of scouting and information available on the players. Teams are willing to pay more for a college kid they've been able to watch play for 3-7 years against competition they understand than for a 16 year old who has a nice arm.

And what would prevent teams from signing free agents after the draft was done? Or having 250 rounds in the international draft?

As others have pointed out, your analysis seems to indicate that MLB teams should actually be in favor of abolishing the US draft since by your logic that means that players would be cheaper in the US.

Mar 12, 2009 14:06 PM
rating: -3
 
lemppi

Maybe the draft in the US should be dismissed. They didn't have one for a long time. (cue for "Yankees will buy all the talent" wails here)

Mar 12, 2009 14:29 PM
rating: -1
 
leez34

Great, great, great article, Shawn. Sorry I have nothing of substance to add, but I think you do some of the finest work here at BP. I think the economics of baseball are fascinating and you always present points in ways I could never come up with on my own - plus they spark discussion of opposing views. This is why I pay my subscription fees.

Mar 12, 2009 15:18 PM
rating: 1
 
Brian Cartwright

Another thing to consider in the number of Dominicans and Venezuelans is that they have summers leagues which are run as affiliates of the mlb teams. Mexico, Japan, Korea and Taiwan have unaffiliated pro leagues, with restrictions on leaving, and now Puerto Rico is treated as part of the mainland. In the DR and Venezuela, mlb teams can sign the players at 16, and have them play at home for up to 6 years.

The 16 year old minimum came about in the 1980's to avoid teams signing YOUNGER players. The Phillies signed a 12 year old in 1980, and he played 4 or 5 years in the minors. Before the US draft, Bob Feller led the American League in strikeouts as a pitcher, in his 2nd season, between 11th and 12th grades. He was into his 3rd year in the majors before he graduated high school.

Mar 12, 2009 23:33 PM
rating: 1
 
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