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Baade on Olympic Games

New Internationalist cites Professor of Economics Rob Baade as an expert in a recent article on the economics of the Olympic Games.

The dubious honour of hosting the Olympic Games

If their economic benefits are so underwhelming, why do countries jump at the chance to organize the Olympics? Niko Kommenda investigates.

‘I’ve never won a gift. The first gift I ever had, I had to buy. It was an old bicycle with a chain that broke every day, and I had to fix it. And today, people we don’t even know have given me the greatest gift a president could wish for: to host the Olympics in Rio de Janeiro.’ It was with tears in his eyes that Brazilian president Lula da Silva accepted the decision of the International Olympic Committee (IOC) to send the Olympic Games to South America for the first time.

The city, he added, deserved the honour of hosting because it had ‘suffered’ in the past. ‘This victory is a restitution for a people who often appear only in a negative light in the press,’ he said. ‘Those who think Brazil can’t afford to host the Games will be surprised.’

Seven years later, with Lula’s presidency just a memory to most Brazilians, the circus has left town. In many ways the cariocas, the people of Rio, did indeed surprise Western observers and defy expectations, if only because their consensus prior to the Games seemed to be that a catastrophic failure of some kind was not out of the question.

Not a single case of the Zika virus was reported among athletes or visitors during the Games; the organizers delivered an impressive opening ceremony on a minimal budget and, in a last-minute surge, managed to sell a remarkable number of Paralympics tickets. But whether it was a smart investment to have an ailing region like Rio run a multi-billion-dollar entertainment event during the middle of a national financial crisis is an entirely different question.

Hosting the Olympic Games is expensive. It is difficult to say exactly how much it costs, because it requires investing in general infrastructure projects that might not be realized without the Olympics, or turn out very differently otherwise. A recent University of Oxford study helps determine a lower boundary for the total bill, looking at just the sports-related costs of the last 25 events. If host cities didn’t spend this money – on construction expenses for sports venues and the Olympic village, plus the operational cost of staging the Games – they wouldn’t be able to hold any competitions or the opening and closing ceremonies.

Since the 1992 Summer Games in Barcelona, these figures have amounted to at least $2 billion per Olympics, but more recently crawled up to between 2 and 10 times that amount.

What kind of return can countries expect from such an investment? Robert A Baade, professor for economics at Lake Forest College in Illinois, has studied the economics of sporting mega-events for more than a decade. In his newest paper ‘Going for the Gold: The Economics of the Olympics’, co-authored by researcher Victor A Matheson, he gives an overview of the cost and benefits of hosting the Games.

His conclusion is that staging the Olympics typically represents a financial sinkhole and leads to economic net benefits ‘only under very specific and unusual circumstances’.

To find out whether this is accurate, let’s take a look at the revenue side of the Games. As a media mega-spectacle, the Olympics generate considerable proceeds from broadcast rights, sponsoring deals and ticket sales. However, these earnings usually add up to only a fraction of the costs. For example, the impressive $3.3 billion revenue reported by the organizing committee for the 2012 Games in London represented less than a quarter of the sports-related cost alone. Thus, throughout history, politicians eager to host have had to come up with other justifications for the spending spree. They have alleged that the Olympics pay for themselves and far beyond in two steps: first through a windfall of cash pumped into the local economy via the construction and hospitality sectors; then through a long-lasting ‘legacy’ effect built on improved general infrastructure and the city’s newly revitalized global perception.

When touting the supposed benefits of the Olympics in the first step, proponents typically point to one of a few historic cases that seem to support their case. Their poster child in this regard is Barcelona, which nearly doubled its visitor numbers during the decade after the 1992 Olympics, and has steadily grown as a tourist destination ever since, a success story unparalleled in Europe. While academics acknowledge this achievement, they have argued that certain qualities of the city – such as its geography and climate – create a unique environment for such a transformation.

Olympic hosts are also infamous for producing pre-event reports that vastly overestimate its economic gains. The US state of Utah, for instance, claimed that the 2002 Winter Games in Salt Lake City would generate about 35,000 years’ worth of jobs in the area. However, an independent scientific study conducted after the event suggests only 4,000 to 7,000 jobs created, mostly concentrated in the year of the event.

The Salt Lake City Games are also sometimes mentioned in scientific literature as another rare positive example of hosting. But their impact is further called into question by comparing the growth of travel-related expenditures in Utah to that in neighbouring states. While figures in the entire region lie above the national average, revenues did not spike during the year of the Games, nor did the supposed legacy of the event help Utah mitigate the economic decline caused by the global financial crisis of 2008.

Unfortunately, historic disappointments haven’t kept more recent hosts from making bold promises. Ahead of the 2012 Games, then-mayor of London Boris Johnson said the city was looking forward to welcoming ’one million extra visitors a day’ (compared to what baseline, no-one knows) and had Transport for London record a personal message of his to be played on the Underground, warning commuters of crowded carriages. In reality, London saw fewer international visitors during the summer of 2012 than in the summers of 2011 or 2013 – an effect that is not uncommon at mega-events like the Olympics.

And then there is the absolute worst-case scenario of what can happen if you rapidly inflate the hospitality sector of a previously inconspicuous town to accommodate tens of thousands of guests for a 16-day event: the 1994 Winter Olympics in Lillehammer, Norway, where a study claims a whopping 40 per cent of full-service hotels went bankrupt within just five years of the Games.

But perhaps hosting the Olympics is about something bigger than hotel beds and subway rides. It’s a testament to both a people’s collective capability and its leaders’ genius, a sure-fire way to gain a reputation on the world stage. What if, in the long run, it is this grandstanding rather than pleasing tourists that makes up for Olympic returns?

At first glance, the bigger picture does look very different. A 2009 study by Andrew K Rose of the University of California Berkeley and Mark M Spiegel of the Federal Reserve Bank of San Francisco found that countries staging the Games see an increase in exports, an effect that is ‘statistically robust, permanent and large’. However, the researchers went on to note that ‘unsuccessful bids to host the Olympics have a similar positive impact on exports.’ The reason for this phenomenon, they concluded, must be that the act of bidding sends a positive signal to potential business partners around the world – an important first step in opening up an economy.

Baade believes this interpretation confuses cause and effect. ‘There are lots of other things going on in these countries that explain why it is that at the time they bid for the Olympic Games they might experience an increase in economic activity,’ he says. What he is implying is that neither hosting nor bidding to host the Olympics necessarily facilitates growth – countries are simply more likely to join the competition if they’re already expecting a bright future.

Ultimately, Baade says he is not surprised that expanding roadways, building light rail, improving communications or building an airport would lead to an economic boost. The important point is that the most fruitful investments seem to be those that a government could make without having to go through the hassle of hosting the Games. ‘Wouldn’t it be better for a country if it could avoid especially the ruinous expenditures on sports infrastructure,’ he asks, ‘and just develop a plan that would include the kind of infrastructure improvements that we do associate with improved long-term growth?’

Why do cities keep bidding for the Olympics?

If economic benefits from the Games have historically been underwhelming at best, why do cities and entire nations keep getting excited about the opportunity to organize them? There’s a number of possible explanations, some more mundane than others. For one thing, politicians are just humans: they can be swayed by many things, from a personal desire to set themselves a monument of some kind to a wad of cash passed to them by one of the powerful players in those businesses that do profit from the Games.

But Professor Baade also offers a different explanation from the field of auction theory, dubbed the ‘winner’s curse’. The premise is this: if multiple parties bid on an asset of unknown value – like drilling rights in uncharted oil fields – the buyer will be whoever overestimated the value of the asset the most.

Finally, it is important to point out that bidders’ economic and political profiles have become much more varied over the last three decades, so perhaps the assumption that cities or nations ‘keep bidding’ is flawed to begin with.

Comparing bidding countries by their Human Development Index – an admittedly rough indicator of a nation’s economic and social maturity – one can see that the wealthy nations of the Global North have recently started to see competition from numerous developing economies, starting around the time the 2000 Olympics were up for the taking (the Games are usually awarded seven years in advance). Interestingly, the IOC has not displayed any special reservations against these types of bids, selecting, for instance, Beijing, Sochi and Rio de Janeiro over candidates from sometimes significantly higher-ranked nations.

Second, in 2012, the Italian government did what no competing nation had done for two decades – it cancelled Rome’s bid for the 2020 Summer Games. Then-prime minister Mario Monti, an economist by profession, said it would be irresponsible for the country to pursue such a project, considering the poor state of the national economy. Three years later, the IOC was publicly humiliated when the European cities of Oslo, Stockholm, Lviv and Krakow all withdrew their bids for the 2022 Games, citing a lack of support from the public, politics or both. With Oslo having already been selected as one of three candidate cities, the committee was left to decide between Almaty, Kazakhstan and Beijing, metropolises representing the pride of authoritarian regimes.

Finally, three more cities – Hamburg, Boston and Rome again – have already dropped out of the race for the 2024 Games, which are going to be awarded next year. In Hamburg, 52 per cent of voters rejected the proposal to bid in a 2015 referendum, even though all local political parties barring Die Linke (‘the Left’) had supported it. Opposition to the bid was organized in a grassroots campaign, ‘NOlympia Hamburg’, which was frequently stymied by local authorities ‘not acting neutral at all’, according to its media spokesperson Florian Kasiske.

Kasiske believes the public is growing more sceptical of the Games by the day because the IOC is failing to present itself as a reliable partner. Host city contracts such as the one Hamburg would have had to sign, he says, are ‘an unbelievable impudence, leaving all rights to the committee and handing the city all responsibilities.’ Reform plans for the application procedure presented two years ago, dubbed ‘Olympic Agenda 2020’, have been welcomed by experts – ‘[they] provide at least some semblance of solutions,’ Baade says – but have yet to take effect for a full bidding cycle. For the moment, the committee seems to be bothered neither by reports of skyrocketing costs at the 2020 Olympics in Tokyo nor by human rights and environmental concerns in Beijing, which is planning to host part of the 2022 Winter Games on what is essentially a snowless mountain.

Economic experts, activists and Olympic fans all point to the same reason for the Games’ recent popularity issues. No-one opposes the global sporting event itself: it highlights the remarkable performances of athletes from nations and disciplines that are otherwise invisible in the mass media. However, the Olympic bidding process never results in just minimum financial, social and environmental cost. On the one hand, the IOC has shown an inclination towards megalomania rather than sustainability; on the other, host cities have been dishonest about the true cost of these shindigs, promoting the bizarre idea that billions of spending on sports stadiums is a mandatory requirement for urban renewal in wholly unrelated areas.