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:

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. 
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