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Road to Ruin: The Economic Case for choosing NOT to host the Olympic Games


Edmund Kemsley

By

September 2nd, 2016


“Faster, Higher, Stronger”? Edmund Kemsley explains why hosting the 2016 Summer Olympic Games will not make the local and national economic prospects stronger in Brazil.


Politicians have long claimed that hosting the Olympic Games produces economic benefits for the hosting city and nation. Given that Brazil is currently experiencing its worst recession since 1901[1] on top of a highly disruptive political crisis,[2] Rio Olympic Organizers will be hoping more than ever that these benefits eventuate.

How then, might hosting the Olympics help the Rio and Brazilian economic prospects in the coming years and decades?

First let’s analyse the monetary costs of hosting. When a city makes a bid to host the games, they must produce a financial analysis that estimates the costs as well as a strategy to fund these costs (either from tax payers or private partnerships). This is precisely where the problem begins because none of these estimates even come close to being accurate in the long run. A recent Oxford University study found that for every Summer and Winter Olympic Games since 1960 (excluding Rio) there have been significant cost overruns and 47% of the games were delivered at more than 100% over cost.[3]

Depressingly, that same paper estimated that the total bill for the Rio Games would be USD $4.6 billion, which would have translated into a cost overrun of 51% (not bad by historical standards). However, more recent projections have estimated that that number has blown out to a more-than-modest USD $12 billion.[4]

Huge cost overruns translate into serious debt burdens for struggling economies, which was exactly the case with Athens. Greece’s Olympic-sized bill of USD $11 billion in 2004 helped to push their public debt to GDP ratio to new heights and the next year Greece became the first EU country to be placed under fiscal monitoring by the European Union.[5] Talk about hero to zero.

Similarly, tax revenues have fallen dramatically since recession hit the Brazilian economy and one has to wonder how Rio’s state government and its taxpayers are going to cope. Unfortunately, Rio’s acting governor has already declared a financial emergency to help secure loans to cover costs,

Ok, so the costs are high. But what about the benefits of all that spending?

Consequently, a large percentage of spending in the lead up to the Olympic Games goes to unproductive infrastructure such as stadiums and facilities that will not be used after the tourists and athletes have left. A Monash study of the economic impact of the 2000 Games on NSW’s economy found that the large investment in Olympic Sporting venues contributed to a slight drop in the state’s GDP.[7] This is likely because the venues did not add to the productive capital stock of the state and there was a slight crowding out effect on investment.

Additionally, world-class venues come with world-class operating costs, making them too expensive to use, and mounting maintenance costs turn them into liabilities on government balance sheets. In turn, the facilities end up draining public funds and diverting public money from health and education programs. Brazil is already experiencing this with the stadiums that were built for the 2014 World Cup.[8] Many of the stadiums – which cost USD 3 billion to build in total – are sitting almost completely unused.

Any principled Keynesian will tell you that the jobs and income created from hosting the games will surely have a positive effect on aggregate demand and help to boost the struggling Brazilian economy. However, analysis of the economic impact of the 2000 Games in Sydney and the 2012 Games in London suggests that it isn’t that simple. Subsequently, in Sydney’s experience private consumption quickly fell back to pre-Games levels.[9] In London’s case, positive GDP growth in the quarter in which the Games were held, returned to negative in the next quarter making it difficult to credit the Games for contributing to the UK’s eventual recovery from recession (people do anyway).[10]

However, these experiences make sense if you consider the short-term nature of consumption that results from hosting the Games. For industries such as security and hospitality, the sudden upsurge of jobs and income is most likely counteracted by a matching downturn once the Games have concluded.

You’d be forgiven for thinking that once public officials have seen the numbers play out they would admit that hosting the Olympic Games is essentially the same as throwing a lavish party.  But you’d be wrong, because this is about when they start touting the alleged “social” benefits of hosting the Games. These include claims that legacy projects transform cities, or that immersive nature of the Games encourage future sport participation, or to expect a boost to future tourism. In reality, each one of these claims has proven to be highly dubious.

Rio’s legacy projects were intended to complete sewage clean ups, upgrade the public housing and better public transport but haven’t been a success.[11] This is especially disappointing given that the government disrupted the lives of tens of thousands of low-income citizens to make way for facilities. Furthermore, there has never been any clear evidence that watching elite athletes actually inspires average people to change their long term exercise habits.[12] Besides, there are far cheaper alternatives to get people to play sport, like making sport free.

Lastly, while it seems intuitive to expect that tourists will return and spread the good work about their experiences, there is no evidence that hosting the Games boosts tourism numbers. Data from the Sydney 2002 Games suggests that it might have even had a negative effect on tourist numbers.[13]

We can still hope that the economic costs of hosting the 2016 Olympic Games will turn out to be less than expected, although many economists won’t be holding their breath. Analysis of past Games clearly demonstrates that hosting the Games in their current format harbours no net economic benefit for the local economy. Furthermore, the high costs associated with the Games reveals that hosting is really only financially viable for the most well-off of cities. We can only hope that in future, organizers can learn from the experiences of others and perhaps avoid falling into the same trap.

 

[1] http://www.bloomberg.com/news/articles/2016-01-04/brazil-analysts-ring-in-new-year-with-deeper-recession-forecast

[2] http://www.telegraph.co.uk/news/2016/08/29/brazil-political-crisis-dilma-rousseff-gives-impassioned-defence/

[3] Flyvberg, Stewart, and Budzier. 2016. The Oxford Olympics Study 2016: Cost and Cost Overrun at the Games . Oxford: University of Oxford.

[4] http://www.reuters.com/article/us-olympics-rio-crisis-idUSKCN100146

[5] http://www.bloomberg.com/news/articles/2012-08-02/how-the-2004-olympics-triggered-greeces-decline

[6] http://www.reuters.com/article/us-olympics-rio-crisis-idUSKCN100146

[7] Madden, and Giesecke. 2011. “Modelling the Economic Impacts of the Sydney Olympics in Retrospect – Game Over for the Bonanza Story?” Economic Papers: A journal of applied economics and policy 30 (2): 218-232.

[8] http://www.businessinsider.com.au/brazil-world-cup-stadiums-one-year-later-2015-5?r=US&IR=T

[9] Madden, and Giesecke. “Modelling the Economic Impacts of the Sydney Olympics in Retrospect – Game Over for the Bonanza Story?”

[10] See http://www.tradingeconomics.com/united-kingdom/gdp-growth

[11] Gibbs, Lindsay. 2016. “Don’t Call The Rio Olympics A ‘Success’.” ThinkProgress. Aug. https://thinkprogress.org/rio-olympics-failure-3cdbcb398e19#.yq3zolycw.

[12] Hughes, Kate. 2012. “The legacy fallacy: the Olympics doesn’t increase sport participation.” The Conversation. Aug. https://theconversation.com/the-legacy-fallacy-the-olympics-doesnt-increase-sport-participation-8810.

[13] Madden and Giesecke. “Modelling the Economic Impacts of the Sydney Olympics in Retrospect – Game Over for the Bonanza Story?”

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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