The Benefits of the Olympic Games - Research Paper Example

The Influence of London Olympic Games on Britains Economy The London Olympics was seen as an opportunity to spur the UK economy into recovery. Potential benefits were seen to materialize as a result of urban regeneration, infrastructure development, the creation of jobs, windfall revenues due to ticket sales, sponsorships and broadcast rights, increased tourist spending, and increase in transnational business volumes as a result of enhanced national reputation. At the same time, significant costs were expected in the form of infrastructure and construction expenditures, the costs of mounting the production numbers in the opening and closing ceremonies, the manpower costs that were needed to be defrayed, lodging and subsistence of the athletes and other participants, and the maintenance of the Olympic facilities. The data showed there was a sudden increase in the GDP rate for the latter half of 2012, which appeared to suggest that the Olympics, which took place in the third quarter, and the activities leading to it, indeed brought about the economic growth expected in holding a mega-event of that size. Closer inspection showed, however, that the growth of gross fixed capital formation appeared to have come more from government spending rather than private business, suggesting that unless the private sector picks up the pace in pushing for greater production, the sudden increase in GDP will not be sustainable, and long-term benefits due to the Olympics may not be forthcoming. Introduction Mega-events attract a global audience, and therefore are capable of drawing international attention and spending power. The World’s Fair, the World Cups of the different sports, and the Olympic Games are itinerant events that regularly hold venues at different places, depending upon the outcome of a bidding process (Varrel & Kennedy, 2011). Necessarily, the hosting of mega-events require that the host city incur a huge amount in expenses and investment in infrastructure and facilities. Despite the immense honour of hosting the event, the sheer financial burden would be enough for potential bidders to stay away, unless a greater return is expected. A great part of the allure of hosting such events is the promise of an economic windfall with a substantial urban makeover (Chalkley & Essex, 1998). This is in addition to the prestige derived and the international recognition of the host country as a major player of global importance (Van der Westhuizen & Black, 2004). In the case of the Olympic Games, the benefits are normally in the form of the construction of special structures where the events are to be held. The structures are accorded the status of national landmarks and a source of patriotic pride, for which reason they are conceptualised and executed according to revolutionary architectural designs, such as the Bird’s Nest, the National Stadium of the Beijing Games. Another staple project is the Olympic village which are technically the apartments which would house the athletes who will be living at the venue for the duration of the games. The improvements in infrastructure are undertaken to handle the influx of visitors to the city, which would normally put a strain on the transportation system, the accommodations, and the utilities, beyond what is normally encountered. The city can afford to ignore these aspects only at the cost of extreme international embarrassment. The other opportunities open to the hosting city are the commercial opportunities which the games bring, such as the tourists, the journalists, and the contracts for television coverage. Occupancy in hotels and lodging houses are expected to be fully booked, souvenir shops are expected to sell out, and a host of local businesses are going to expect higher traffic and possibly higher sales volumes. There are clearly economic benefits which may be expected from hosting the Olympics, but the final results could only be determined after an incisive assessment of how the games, the preparations leading up to it, and the subsequent use of the facilities after them, were managed. The goal of this discussion is to assess whether or not the 2012 Olympic Games had indeed provided long-term benefits to the British economy. It intends to achieve this goal by attaining the following objectives: (1) To assess UK’s economic performance in 2012 and the years immediately prior; (2) To identify the benefits and costs of staging the Olympics; (3) To determine the developments during the games, offsetting their favourable and unfavourable impacts; and (4) To assess any net benefits derived from the event. From the findings arrived at in the course of pursuing these objectives, the conclusion shall be drawn in response to the overall research question. Research Methods The research is a descriptive study which adopts the inductive approach for data gathering and analysis. The study is grounded in the pragmatic research philosophy, which makes use of both qualitative and quantitative methods and data that have relevance to the subject of study. Pragmatism is the foundation of mixed methods research, and is particularly suited to the hospitality industry because it yields better outcomes (Pansiri, 2005). Since the hosting of mega-events is a part of the hospitality industry, its discussion here is best addressed by pragmatism, which means that the study shall use the method and data best suited to the problem without dwelling on the philosophical debate concerning the best method for the study. This type of research therefore affords a stronger grounding in the nature and occurrence of the event itself and not be hindered by the lack of a paradigm or statistical analysis. The London Olympics 2012 is a singular event that shall take place only once, therefore the study has a cross-sectional time horizon. Data to be collected shall therefore pertain to the preparations undertaken for the hosting of the Olympics, until the holding of the Paralympics thereafter, and the subsequent Paralympics which is an integral part of the planning for the entire mega-event. The study relies on secondary data which is technically defined as data gathered by somebody else, and the validity and reliability of which is ascertained. Since the Olympic games is an event primarily undertaken by the city of London and, by extension, the government of the UK, pertinent data in publicly accessible form are available in online databases and government reports on the progress and status of the preparations. Data is also available in news publications which are of known and reputable sources, as well as peer-reviewed articles in professional and academic journals. A number of variables and parameters shall provide the bases for discussion in the determination of the existence of net economic benefits, or lack of it, which the London Olympics has realised. Among these are the gross domestic product, or GDP, and its components, the volume of visitors, tourist spending, and official estimates of the expenditures and long-term effects of the economic benefits foreseen by the government policy makers and planners. The meaning and importance of the primary indicator, the GDP, is as follows. The GDP is defined as ‘the market value of all final goods and services produced within a country in a given period of time’ (Mankiw, 2011, p. 294). It is a sophisticated measure of the value of economic activity, and it is the default indicator to describe the expansion or contraction of the economy. A positive GDP mans that there were more goods and services created during the interim period over the previous reporting period, while a negative GDP indicates that there were fewer economic goods and services that were produced in the reporting period compared to the immediately preceding period. There are five components of GDP, namely household consumption, government consumption, investment (herein called gross fixed capital formation, or GFCF), exports and imports. Consumption is the spending, either by the government or by households, on the purchase of goods and services, except for the purchase of new housing which is more in the nature of investments. Goods are comprised of the purchase of durable goods such as automobiles, appliances, furniture, etc., and nondurable goods such as food, clothing, and other items that are eventually used up (Mankiw, 2011, p. 497). Investments or GFCF is the purchase of assets which are used to generate more goods and services. It is the sum of capital equipment, inventories, materials and supplies used for manufacturing and other commercial activities. Distinguishing between consumption and investment is vital, because if more of the GDP is attributable to government spending, then this tends to crowd out investments that are geared towards the production of more goods and services and that fuel growth. If government spending grows faster than GDP, since government revenues used for spending comes primarily from taxes, then the increase in GDP will qualified as evidence of sustainable economic expansion because government spending cannot be sustained in the long run unless tax collections are increased through increase in tax rates, and tax rates cannot be increased indefinitely because it stifles economic activity in the private sector. It is on these indicators that the discussion shall be founded. Discussion Overview In order to determine whether or not the 2012 London Olympic Games on the Economy of Britain, it is important to classify the types of economic benefits and costs that would provide basis for assessing the economic effects of the event upon the community or country that served as the venue. The following table is suggested as the model by which this assessment shall be made, as this has served useful in determining the effects of earlier Olympic games in their respective venues. Table 1: Key economic benefits and costs of the Games Benefits Costs Pre-Games Phase Tourism Construction activity Investment expenditure Preparatory operational costs (including bid costs) Lost benefits from displaced projects Games Phase Tourism Stadium & infrastructure Olympic jobs Revenues from Games (tickets, TV rights, sponsorship, etc.) Operational expenditure associated with Games Congestion Lost benefits from displace projects Post-Games Phase Tourism Stadiums & infrastructure Human capital Urban regeneration International reputation Maintenance of stadiums and infrastructure Lost benefits from displace projects Source: PricewaterhouseCoopers European Economic Outlook June 2004, p. 27 The above model shows the comprehensive nature of the costs and benefits associated with the Olympic Games. Aside from the net cash receipts from the sale of tickets, there are the peripheral gains that should be attained in commercial activity of Olympic tourists, and the spending by both participants and spectators that were to spur local businesses. After the Olympics, further gains are to be had by the benefits of urban regeneration, which is the choice and development of depressed urban areas, making them the site, close to the site, of the Olympic infrastructure, so that after the Games, the newly developed property could be productively used either as new residential housing or new sites for commercial activity, thereby spurring growth. UK’s Economic Performance in 2012 The Gross Domestic Product (GDP) is comprised of household consumption, government spending, investment and net trade (exports less imports). Of all the components of GDP, household consumption is the largest which typically comprises 60% of the economy. Government usually takes up 23%, and investment 15%. The following graphs provide a graphic presentation of how the UK macro-economy performed on a quarterly basis for the past few years. Household consumption and government consumption Source: Economic indicators update, UK Govt The fourth quarter in 2012, the consumption rose by 0.2% in real terms compared to the third quarter 2012. According to the government Economic Outlook, this rate of growth has been the slowest for consumption since the fourth quarter 2011. The graph shows, however, that there is a spike in government consumption for the fourth quarter 2012, which amounts to a 0.6% rise over the previous quarter. During the same time, exports receded by 1.5%, as did imports by 1.2%. The next graph depicts the fluctuation in gross fixed capital formation (GFCF). This refers to the investment in buildings and machinery. The fourth quarter in 2012 saw GFCF fell by 0.4%, which is 1.7% higher than the preceding year. For the same quarter, business investment decreased by 1.2%, which is significant because this indicator (business investment) is a significant component of GFCF. The fact that the rate of decrease in business investment is three times the rate of decrease of GFCF means that capital formation in the UK is not being sustained by the private sector. Gross fixed capital formation Source: Economic indicators update, UK Govt The business sector is seen as the growth driver of the economy. The fact that business investment has fallen faster than public capital investment, is indicative of the likelihood of the reduction in productive capacity of the private sector. This, coupled with the fact that imports and exports have fallen over the same period, suggests that productive activity will most likely tend to shrink rather than expand, since imports primarily are composed of raw materials for manufacture and industry. If net capital assets are not being formed and imported raw materials are dropping in volume, it is likely that a broad-based production led recovery is not yet feasible. The components of GDP are shown in the following table. The data therein support the preceding analysis concerning the contraction in exports, imports, the GFCF, and the overall GDP. Components of GDP % change on previous quarter (real terms) Household consumption Government consumption GFCF Exports Imports GDP 2011 (annual % change) -1.3% -0.1% -2.9% 4.6% 0.5% 0.9% 2012 (annual % change) 1.0% 2.6% 1.4% -0.3% 2.0% 0.2% 2011 Q3 -0.2% 0.1% 0.3% 0.0% 0.1% 0.6% 2011 Q4 0.2% -0.1% -0.4% 2.9% 1.6% -0.3% 2012 Q1 0.5% 3.3% 0.6% -1.5% 0.0% -0.1% 2012 Q2 0.5% -1.6% 2.0% -1.3% 1.3% -0.4% 2012 Q3 0.3% 0.5% -0.6% 1.7% 0.3% 1.0% 2012 Q4 0.2% 0.6% -0.4% -1.5% -1.2% -0.3% Source: ONS series ABJR, NMRY, NPQT, IKBK, KBL, and ABMI Note: (a) gross fixed capital formation From the growth rates of the components of the GDP reflected in the table above, the third and fourth quarters are particularly significant, because the Olympic Games took place in August, the middle of the third quarter. In the three quarter leading to 2012 Q3, the GDP was consistently negative, and contracted fastest in the second quarter, just before the Olympic Games. During the Olympics, however, the GDP rebounded by 1.0% which is primarily attributable to the Olympics, according to the UK Economic Outlook released in November 2012. The 1% jump is a sizeable rate, comparing the GDP rates forwards and backwards, and gave fuel to some hope that the recession was truly over (Flanders, 2012). By the fourth quarter, however, the GDP returned to negative growth rate. The growth rates of exports mirrored the GDP from the first quarter, falling for Q1 through Q2, recovering to positive growth during the Olympics, then returning to negative growth in the fourth quarter. What appears significant, however, is that imports, which had consistently been positive or at least flat prior to the fourth quarter, began contracting after the Olympics. Recalling its connection to raw materials to production, this is a development of great concern. From the table, it appears that what is presently sustaining the GDP is the government consumption, and to a lesser extent household consumption. Drop in volume of visitors During the Olympics, the expected rise in the number of tourists around London has not materialized. Instead, there was an evident lack of visitors among the hospitality and entertainment establishments. Data shows London attracted 590,000 people who visited for the purpose of either participating in or attending a ticketed event at the 2012 Olympic Games. The Office of National Statistics stated that for the entire month of August, more than 3 million overseas residents visited Britain. The statistic is actually lower than the number of visitors for the same month in the previous year, by as much as 5 percent. Contrary to expectations, attendance did not significantly rise in London’s theatres and museums, and the transportation systems (buses and trains) saw no significant rise in passengers. One explanation was that the expected deluge of visitors to Britain as a result of the Olympics caused more of the regular yearly visitors to stay away to for this year, to avoid the visitors as well as avoid having to pay higher for hospitality services because the visitors’ expected strong demand was speculated to push prices higher. According to Howard Archer , economist at investment firm HIS Global insight, another likely cause of the less-than-expected number of visitors is the likelihood that the sluggish economic conditions in those parts of the world discouraged foreign tours in order to save money. He stated that despite weak volumes, there was definitely increased spending by foreign visitors to the UK in August 2012, and the Olympic Games and Paralympics are the direct cause of this (Telegraph, 2012). Jump in tourist spending While number of visitors dropped, they are estimated to have spent an average of ₤1,290 each for the duration of their visit, compared to the ₤650 that the regular visitors normally spend. While the number of visitors dropped by 5 percent, Britain’s earnings rose by 9 percent from the previous year. The earnings figure is based on Olympic and Paralympic tickets that were bought and sold before and during the games (Telegraph, 2012). As the pound recedes in value, analysts have observed that the slump in domestic demand is compensated by the rise in spending by foreign tourists. According to one analyst, Jason Conibear, speaking on behalf of Cambridge Mercantile Corp., a major financial services company, “The pound’s sustained weakness continues to be one of the UK tourist industry’s greatest assets…More foreigners are visiting the UK, and crucially they are spending more. The 5 percent jump in tourist spending over the past year is in stark contrast to timid domestic demand.” (Telegraph, 2012). Economic impacts attributable to the London Olympics Given that there appears to be a positive impact in the form of gross commercial receipts from ticket sales and establishments, the question turns to the other end of the equation, which is the cost that it took to host the Olympics. There were substantial expenditures on ‘facilities, transport infrastructure, safety measures, housing and maintenance’ which eventually totaled ₤9.325 billion. Actual expenditures exceeded the projected budget by ₤5.906 billion at the time the bid was made in November 2004 (Bazlyankova, 2012). The discrepancies are traceable to, among other things, a twelve-fold increase in management costs, and a doubling of the security expenses (UK Parliament, 2012). A quick look at the cost and benefits incurred during the period is shown in the visual presentation in the Appendix. The presentation breaks down the costs expended for the event as follows: Breakdown of expenditures according to purpose Purpose Amount Core Olympic Costs ₤ 3.081 billion Infrastructure and regeneration ₤1.673 billion Contingency ₤500 million Other (Non-ODA) Olympic ₤388 million Policing and wider security ₤600 million Tax ₤836 million Programme Contingency ₤2.247 billion Source: Bazlyankova, 2012 According to the official report on the Olympics (UK Parliament, 2012), the following benefits justify the fact that the end-total expenditures are almost double that which was originally budgeted when the bid was made in 2004. These are: Long-term effects of the economic benefits of the 2012 Olympics Nature of the benefit Amount Total stimulus for the economy ₤ 5.1 billion Increase in economic output per year ₤1.37 billion Additional income for UK residents per year ₤296 million Percent of overall expected growth of the national economy 3.5 % Additional jobs per year 17,900 Source: UK Parliament 2012 While the figures released are official, they are still largely speculative because the long-term effects will not be known until well into the next few years. Summary analysis of findings The analysis suggested that economic benefits and costs are incurred at three distinct stages of the event: the pre-games phase, the games phase, and the post-games phase. Benefits constituted of tourism, construction of facilities and infrastructure, jobs for personnel who will be rendering service during the games, revenues from the games in terms of tickets, TV rights, and sponsorships, human capital, urban regeneration, and a prestigious international reputation. The costs are in the form of investment expenditure and operational costs, opportunity costs in the form of displaced projects, games congestion, maintenance of stadiums and infrastructure, and possible overestimation of ticket sales and other revenues. The quarterly data on the growth of the UK economy for 2012 showed that there was a spike in government spending for the second quarter of 2012 while household consumption remained relatively unchanged. The rate of increase of exports and imports fell, as did the rate of increase for gross fixed capital formation. The data suggests that expenditure for durables (buildings, machinery) has come more from government spending rather than private business, which leads to the conclusion that unless business investments pick up, the source of growth is unsustainable and probably will not consistently create new jobs. During the Olympics, it was observed that the number of visitors were below expectations. This was attributed to the desistance by the regular visitors – those who come on a yearly basis – to visit the country this year, most likely in an attempt to avoid the expected congestion brought about by the Olympics. Conclusion The goal of this research study is to assess whether or not British economy had acquired long-term and sustainable benefits as a result of hosting the 2012 London Olympic Games. It sought to attain this goal by: assessing the UK’s economic performance in 2012 and years prior; identifying the benefits and costs of staging the 2012 Olympics; determining the developments during the games and offsetting the favourable and unfavourable impacts; and assessing if any net benefits were derived from the event. The study adopted the pragmatic philosophy supporting a mixed methods approach, whereby the most relevant quantitative and qualitative tools and data were employed and analysed in order to arrive at the desired conclusion. Secondary data from government reports and databases, articles in professional and academic journals and reputable news sources, and data from the public domain comprised the bases of discussion. The initial figures out for the London Olympics show for a fact that: (1) the final expenditure was nearly double the initial estimate when the bid was made; (2) the expenses were defrayed mainly by the central government, assisted by contributions from the national lottery, the Greater London Authority, and a comparatively small amount, ₤250 million, by the London Development Agency; (3) other than the core Olympic costs, expenses principally went to programme contingency, and infrastructure and regeneration, the latter amounting to ₤1.67 billion; (4) the total number of visitors fell contrary to expectations; and (5) total amount of cash receipts from visitors on account of the Olympics (due to ticket pre-sales and sales) exceeded expectations despite the fewer number of visitors. Tentatively, the government estimates were optimistic that long-term benefits to the economy would be substantial, attributing ₤5.1 billion to total stimulus for the economy that was brought by the Olympics, and an increase in economic output per year of a little over one-fourth of the figure attributed to the stimulus. Long-term growth of the economy as a result of the event was pegged at 3.5%. In retrospect, however, the estimated figures may be highly speculative; just one quarter after the Olympics, figures show a contraction in the economy by one-third of one percent, and across-the-board drops for exports, imports, gross capital formation, except for consumption both government and household. While consumption grew, the rate of growth was largely minimal and may not substantially create meaningful long-term growth. Also, the drop in imports of raw materials and gross capital formation signal an imminent slowdown in production, or flat productivity at best. Finally, the projected 3.5% GDP rise will be highly questionable after the fourth quarter contraction. If followed by another quarterly negative growth rate, the recession would officially be resumed, and the momentum supposedly brought by the Olympics would have been largely debunked. It is therefore concluded that any long-term benefits of the 2012 London Olympics are not evident at this point, but this does not preclude that some sustainable advantages may eventually result given as other economic sectors show stronger signs of recovery. Proposed Bibliography 2012 Olympics pose major logistics challenges for London 2007, CILT World, 15, p. 18, Business Source Complete, EBSCOhost, viewed 26 February2013. Bazlyankova, Z 20 Aug 2012. ‘The Economic Impact of the 2012 Olympic Games.’ Meeting Place for Investors and Entrepreneurs. 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