My hometown hosted the Olympics in 1976. It was absolutely thrilling. Along with all the other young women and girls I knew, Nadia Comaneci stole my heart and imagination. At the time, all I cared about was the excitement, the pageantry, and the competition. Now, while being captivated again by the Olympics, I have other questions.
Along with the pride of hosting the Olympics, politicians are making grand claims about the economic benefits of hosting the games. But does hosting the Olympics really help create jobs, particularly once the games are over, and if so, at what cost? Is there a longer-term employment benefit to being a host? And if the games really bolster revenues and provide needed infrastructure investments that spur longer-run growth and employment, should more developing countries step up to the bidding plate?
Montreal Olympics Left a Big Debt
The Montreal Olympics provide a cautionary lesson. It took 30 years, or until 2006, to pay off all of the debts; the stadium is known as The Big O (aka The Big "Owe"). In addition, early news coming from East London, where the Games' venues were erected, isn't too reassuring. In the year before the Games, unemployment reportedly increased – even though the construction was supposed to create jobs. Granted, the promise of construction opportunities may well have attracted more people to come and search for work, raising the unemployment rate at the same time as the level of employment rose. And there are skeptics that the Olympics will raise tourism, rather than merely work to substitute different types of tourists to come now versus at another time, given London's popularity already.
So the question of whether hosting the Olympics is worth it economically is a serious one. But it's striking how rarely it's an academic question among economists. And that voice of impartiality is needed given that, as Andrew Zimbalist says, "much of the existing evidence has been developed by the host cities or regions - which have a vested interest in justifying the large expenditures on such events - and suffer from a number of flaws" ("Is it Worth It?", Finance & Development, March 2010).
Those studies that do exist point to a deep skepticism among economists that building sports-related infrastructure provides many spillovers or the basis for higher growth (for example, see Jeffrey Owen 2005 or Holger Preuss' 2004 book (Economics of Staging the Olympics"). However, using existing venues and adding or upgrading transportation infrastructure seem more likely to have wider benefits - or, more likely, lower the costs - than specialized facilities that will have limited future use or an excess of hotel facilities.
Chasing the Gold
On the plus side, two recent studies point to some potential economic gains. Andrew Rose and Mark Spiegel find that hosting the Olympics goes hand-in-hand with a more than 20 percent permanent increase in international trade (The Olympic Effect", The Economic Journal, 2011). In fact, they find the effect holds even among countries that make an unsuccessful bid to host the Olympics. The way the system works, a first round set of selected countries prepare bids about 9-10 years ahead of the event and find out if they’re successful about 7 years ahead. What seems to matter is the signaling effect, letting the world know that they want to become bigger international players, and trade liberalization is seen as an important part of it.
But left unanswered is why open countries should even place a bid and why some countries bid more than once? A recent study by Markus Brückner and Evi Pappa argues that just announcing the Olympics has a large effect, because expectations of higher future expenditures encourage higher investment and consumption (For an Olive Wreath? Olympic Games and Anticipation Effects in Macroeconomics," 2011). These effects peak 3-5 years before the games themselves, but there is less evidence of benefits once the games are over. They also find some effect of simply bidding, but the effect is transitory.
These potential benefits from signally could embolden more developing countries to bid to host the event. But there are still questions of the uncertainty of achieving benefits in any individual case as well as whether the enormous resources needed could have a greater development impact if spent differently. Keep in mind that Beijing's opening ceremonies were reported to cost more than $100 million, in a country where more than 100 million people live on a dollar a day, and Brazil's bid is expected to cost the equivalent of $2,000 for every resident of Rio de Janiero.
With the Olympics in full swing, I'm again thrilled by the athletic feats. But I'll also be paying close attention to the costs and whether the hoped for benefits for London, especially the East End, do in fact materialize (see Olympics 2012: Could London Lose Money from the Games" for a cost/revenue tally under way). Now that would be an achievement of Olympic proportions.
This post was first published on the Jobs Knowledge Platform.