August 2016 Newsletter
Olympic Gamble Rarely Pays Off
In This Month’s Issue
With the Summer Olympics slated to kick off in Rio de Janiero, Brazil this month, we discuss the economic impact that the games have had on host countries.
For nearly a full month every two years, the world’s attention is fixated on the Olympic Games, and one city gets to step forward onto the biggest of stages to showcase their unique culture and economic capabilities. Thousands attend and millions watch as the host country carefully choreographs the ceremonies, hoping to present the best version of itself to the world. Proponents of hosting the games will tout the event as a economic windfall for the country in the form of a lasting rise in tourism, modernized infrastructure, improved public health and perhaps most importantly, the perception around the world that the host country is “open for business.: However, studies have consistently shown that the costs outweigh the benefits in almost every instance.
Hosting the Olympics s truly a massive undertaking. It will cost a prospective city anywhere from $50-150 million just to craft and submit the proposal. In recent decades, those proposals have become increasingly grandiose in scale, because despite there being no official requirement that stadiums and facilities be new for the event, the International Olympic Committee (IOC) has regularly selected cities with the most ambitious plans for custom made structures.
It isn’t just stadiums, tracks and athlete housing on the checklist anymore either. New highways, bridges, railways, airports, and hospitals are often included in the plans for Olympic host cities. The IOC also requires that a city have a minimum of 40,000 available hotel rooms, which in the case of Rio, necessitated the building of 15,000 new rooms. Post 9/11, security alone has cost the host city between $1-2 billion and up to a quarter of Beijing’s $45 billion cost in 2008 was spent on environmental cleanup.
The need to undertake so many projects at once on an accelerated time schedule is a major factor in the consistent cost overruns for many Olympic development projects (figure 2). These problems can be exacerbated in countries where government corruption is known to be prevalent, as it is in Brazil and was the case in Sochi, Russia. The country doesn’t stop incurring costs once the games end either, many of these facilities sit vacant for years after the event and cost millions to maintain.
As the costs continue to climb, direct Olympic revenue for the host cities has steadily declined as the IOC has demanded higher shares of the television broadcast revenue in recent Olympics (figure 1). Between 1960 and 1980, the IOC took less than 4% of broadcast money, a share that had ballooned to more than 70% by 2012.
Figure 1 – Distribution of Summer Olympics Broadcast Revenue
Despite total revenue increasing by almost $1B from 2008 to 2012, the host city received about as much as it did in 1992.
The IOC maintains a narrative that the long term benefits of increased tourism and a considerable boost to employment will outweigh the short term cost of hosting the games, a claim that has been refuted as dubious in economic research. According to the New York Times, “a fair comparison requires some estimate of how much would have been spend (in tourist revenue) without the games.” For example, during the 2012 games, Britain received about 5% fewer foreign visitors in August than it did in the same month the previous year. And while it is true that research shows that countries who host the Olympics experience a statistically significant increase in foreign trade, the same is true of the countries that mad the losing bids for the same year’s Olympics. In other words, just the signal that they were economically viable enough to consider hosting the games was enough to gain the trade benefit.
On the second claim of employment, a study of the 2002 Salt Lake City Games by the Massachusetts’s College of the Holy Cross found a short term boost of seven thousand additional jobs – about 1/10 the number promised by officials – and no long term increase in employment.
Figure 2 – Initial vs. Final Olympic Cost (1996-2016)
While there is a wide multi-billion dollar spread between the final cost of hosting the Olympics in different cities, the trend of going far over the initial budget projections is an apparent consistency.
While this article won’t get in to many of the other human rights and environmental issues with hosting the games, the situation in Brazil is providing us with another cautionary example of what can happen when an emerging, less-stable economy drastically changes course between the time that the bid is accepted and the commencement of the event itself.
When the bid was won in 2009, the Brazilian economy was growing rapidly, fueled by oil discoveries and accelerating raw materials exports. It looked like crime and corruption were on downward trajectories and Brazil would soon enter the ranks of the world’s economic elite. However, in a country that is largely dependent on the vagaries of the commodities markets (half of Brazil’s 2015 exports were raw materials), the underlying foundation of that growth will always be in jeopardy.
Fast forward to today and Brazil’s economy is contracting at almost the same pace as it was previously growing (chart of the month), and the country is mired in its worst recession in a century. Where in 2009 the Olympics was to be a symbol of Brazil’s emergent status as a global player, in 2016 it threatens to be a strong economic headwind at best and an embarrassment at worst.
It is apparent that the overwhelming data is beginning to blunt the allure of hosting the games, at least in democratic countries. Twelve different cities bid for the 2004 Olympics, whereas only five applied for the 2020 games. After Oslo, Norway dropped out, only two cities – Beijing and Almaty, Kazakhstan – were candidates to host the 2022 edition.
The legacy of recent Olympics in their respective host cities has been on of civilian displacement, massive debt, abandoned or underused facilities and ultimately, reality falling short of expectations. However, despite all of the economic evidence that it is not in their best interest, surveys routinely find high levels of public support in the host nation before, during, and after the games. As economist Victor Matheson puts it in the New York Times, “People like hosting major sports events. It’s like a wedding; it won’t make you rich, but it may make you happy. The trick is deciding how much that’s worth.”
Chart of the Month
When Brazil bid for the Olympics, they boasted one of the fastest growing economies in the world. As oil and commodity prices collapsed in 2014, so too did the growth in Brazil’s economy. Since the Olympic bidding process occurs 6-8 years before the games are held, a lot can happen to an emerging economy in those years that turns the games from a boon to a burden.
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