Thursday, October 27, 2011

The Economic Impact of Mega Sporting Events


Bloomberg reported in 2008 that an estimated US$20 billion was spent on that year’s Olympic Games in Beijing. In fact, IMF estimates that about US$ 36 billion was spent on Olympic-related infrastructure in Beijing in the run up to the games. The spending by China on the Olympics was greater than the national GDPs of 83 countries in the world (IMF estimate). The last few decades have seen several billions of dollars being spent by nations across the world in hosting large international sporting events – the so-called ‘mega events’. One wonders if huge expenditures over world-level events like the Olympics, the World Championships and regional-level events like the Asian Games are justified. One of the most compelling arguments supporting cities bidding heavily for these events is the expected economic windfall brought by hostingthem.

World-level events, led by the Olympics, have become increasingly expensive over the years. Host cities see this not only as an opportunity to build new sports infrastructure but also improve urban infrastructure including housing facilities, communication networks and public transport. Such huge expenditures had led to 21 of the first 25 editions being hosted largely in Western Europe, North America and Australia. With growing concerns of potential terror attacks, security costs have also ballooned over the last decade. It is estimated that the security expenditures associated with the 2002 Salt Lake City Winter Games and the 2004 Athens Summer Olympics were over US$ 300 million and US$ 1 billion respectively. Security expenses largely come from the country’s Federal budget and arenot included in the games’ budgets. Further, there are annual maintenance costs of large stadia and associated sports infrastructure. Private sector companies might be hit by long term costs. Hotels might have seen a construction boom but the surplus capacity might create downward pressure on room rents in subsequent years. It is reported that within 5 years of the 1994 Lillehammer (Norway) Winter Games, 40% of the hotels in the region had gone bankrupt. Despite these shortcomings, estimating the cost associated with hosting a mega sporting event is far easier and reliable than estimating the revenues and economic benefits that a city derives from it.

The Sydney Olympic Games (2000) was expected to have a US$ 6.3 billion positive impact in addition to the creation of 100,000 new jobs. The Athens Olympics (2004) is estimated to have boosted economic activity by 1.3% of GDP every year between 1997 and 2005 and reduced unemployment by 1.9% per year. Prediction studies typically derive economic benefit studies from –direct impact (number of days spent by a visitor x number of visitors x average amount spent by a visitor) and indirect impact (effect of infrastructure spending). A key argument against the direct impact figure are that since leisure travellers’ budgets are inflexible, their spending on tickets simply leaves lesser money to spend on other substitute activities in the local economy. This suggests that the direct impact figure is likely to be overestimated. The effect of ‘crowding out’ local population spending is to be incorporated in addition to negative externalities such as congestion. Further, the issue of ‘time-switching’ is ignored: A visitor planning to visit Athens few months later might just have rescheduled his visit to coincide with the games. However, the latter effect is likely to be subdued for mega events like the Olympics.

The Indirect Impact is estimated by applying ‘multipliers’ to direct expenditures towards the event. These economic multipliers are derived from complex mathematical functions that model the relationships between different businesses in the region. However, when a world-level mega sporting event is happening in a region, some of these relationships do not hold. Another problem while estimating the Indirect Impact is the inability to separate the money flowing to international chains, in which case a foreign shareholder might derive greater benefit than the local population. Further, such leakages are aggravated by the entry of external firms that provide goods and services only during the games.  The benefits derived from the huge infrastructure investments presents yet another complication. Several secondary benefits accrue from heavy infrastructure spending surrounding a mega event. Improved connectivity, increased development of available real estate and even project management capability can derived. The property market in the region is buoyant following an event of this scale. Labour market impact and the socio-economic inclusion of a larger set of people is harder to quantify.

There are numerous intangible benefits that a city or nation derives from hosting a mega sporting event. Firstly, the city gets a ‘status-lift’ making its mark at the world level and rising into the echelons of ‘world cities’. Some studies show ‘a restoration of self-confidence’, ‘civic pride’ and ‘dynamism’ among the citizens following a mega event. The 2008 Beijing Olympics made an attempt of showcasing itselfas a democratic, civilized and harmonious country. In some countries, such events are used as a legitimate excuse to get legislative approval for infrastructure and other projects that might otherwise not be possible.

Despite the less-than-accurate estimates of cost and revenues associated with a mega sporting event, hosting the Olympics has remained an elixir of sorts used by governments across the world. Large caveats that come along with the prediction models have not tempered the gigantic bids cities make to host such world-level and inter-continental events. Do the economic, fiscal, political, social and cultural benefits outweigh the public expenditure of gargantuan proportions? Only time will tell. 

8 comments:

  1. It is rightly said that only time will tell. Recently,the common wealth games in India is praised by many countries .There are loopholes in the managing committee which everybody knows. however, the mega event put New Delhi in the global front as the face of India in a positive manner.

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  2. @kislay i am agree with you...There are many loopholes..

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