Impacts on the UK of Holding the Olympic Games in London in 2012 - Assignment Example

The Macroeconomic Business Environment to Assess the Possible Impacts on the UK of Holding the Olympic Games in London in 2012 Part A Q 1) Why do some people believe that not everything can be left to the free market, but that governments also have a role to play in encouraging a positive ‘investment climate’? Explain your reasoning. The concept of government intervention through a planned economy in modern economic theory came into origin following the failure of the classical free market mechanism to restore the global economy to equilibrium during the Great Depression (1930). John Maynard Keynes was the earliest proponent of government intervention and was later supported by the Keynesian and neo Keynesian economists. Government intervention in economic allocation follows from two facts in general. First of all it is obvious that in free market mechanism the economic agents would be more concerned regarding their present level of consumption and production. Future satisfaction or production of capital goods would be largely ignored since they do not reflect any immediate benefit. Hence under free market mechanism, development and future welfare would be lesser than what might be achieved, following allocation of scarce economic resources towards production of capital goods; through government intervention into market operation. Secondly market prices might work as a good indicator for private allocation of scarce resources but falls substantially short of a good indicator for social optimal allocation of resources. Thirdly, for developing and less developed countries there are many projects those are socially profitable but might not hold the same essence from a private point of view and thereby might not be undertaken under free market mechanism. The following illustration shows the interplay of parameters in a free market system. Price Quantity In the above diagram the free market forces will bring the equilibrium point automatically at E with the help of demand – supply interaction (D- Demand curve; S- Supply curve). The price P and quantity Q are reached through automatic adjustment of market mechanism. Now in case through planning, the price is set at PM (maximum price), the equilibrium will be less than optimal. If the quantity produced is Q1 it will fall below the demand and if set at Q2 supply will not be sufficient. Hence the best possible outcome will be reached only at Q and P where supply equals demand and this is brought about by free market mechanism. The positive externalities associated with such projects and associated benefits with them; are largely ignored by the prospective private investors while calculating the expected return of their investment. Again if such investments are undertaken individually then no private investors will comprehend their cumulative benefits and eventually that will add further risk to such uncoordinated social investments. On the other hand under government intervention project coordination would not be any problem, externalities would be considered and so as associated benefits leading to consideration of certain socially desirable investments under government intervention that under market economy would have never been considered. An example of that might be investment on human capital. It does not bear any immediate profit rather is associated with a cost, therefore might not get considered benevolently by any private investor. However such investment has long-term benefit since it prepares human resource pool of a country either in terms of education or technological skill that eventually reinforces the investment climate of the country. Another major disadvantage of market economy in context of backward economies is that demand-supply interaction courting any economic incentive that holds the key for automatic restoration of economic equilibrium under market economy might be absolutely absent or partially responsive in backward economies especially regarding the social goods. In that case embracing market economy instead of planned economy can be suicidal. A stronger government that is occupying the office for long has another advantage in terms of sustainability and stability and considered as a precondition of the positive investment climate. The planned economy focuses on all spheres of the economy irrespective of their respective earning potential and thereby brings a holistic development of the investment climate. (Anderton, n.d.; Thirlwall, 1983, pp.177-79) Q 2) Suggest some actual government policies that might be used in your country (name the country) to improve the ‘investment climate’. Explain your reasoning. China experiences criticisms regarding the investment climate of the country. Actually the Chinese recovery from financial crisis is a joint product of high level of government spending and huge supply of loans. Both for USA and the European countries the pegged value of Yuan is a continuous headache as it leaves both part of the globe at a trade deficit against China. However for both of them deteriorating investment climate of China perhaps is a much bigger issue that might pose greater problem than pegged Yuan in times to come. The indigenous innovation policy of China that favours technology and products developed in China over its foreign counterpart might be regarded as one of the most discriminating policies that are responsible for the ill health of the investment climate. The indigenous innovation policy comprises the lion’s share of the annual procurement of the Chinese government. A recent survey has also revealed that most of the respondents believe that indigenous innovation policy would be detrimental to business and business climate. It is obvious that providing same treatment to the intellectual properties and brands developed in or outside China would be a giant leap forward for boosting the investment climate. Lack of consistency among different regions regarding rules and regulations is another erratic factor that is putting the investors into a dilemma on Chinese land and that should be eradicated with uniform policies at once to welcome a positive investment climate. (Lou and Wang, 2008) Human resource as well is not managed with modern outlook and proper care that is resulting in poor productivity and eventually posing a threat to the prospective yield of the investment. It is apparent that proper care in human resource management would save this cost and pave the way for a better investment climate. High level of red tape affairs among government departments also making it hard for the investors to obtain a patent and the delay incurred in this manner is nothing but an opportunity cost adding to the risk component of the forthcoming investment. This nexus should be abolished through proper government intervention; that should on one hand save cost and on the other embolden the investors regarding the clarity of intention of the government. Protectionism on behalf of the government is creating an unleveled playing field for the foreign investors and mainly for them who fall beyond the indigenous innovation policy. It has been debated for long that protectionism can be detrimental for the indigenous firm and thereby the economy; its gradual abolition would only help the investment climate to flourish in the long run. The European firms operating in China have also raised this claim. They have also mentioned that reduction of monopolies in Chinese market is its utmost need. As a whole a holistic approach towards the improvement of the market access for all, transparency in legal and political system and protection of IPR (Intellectual Property Right) would lead to the improvement of the investment climate of China. (Jin, 2010) Q 3) Why do some people believe that the market system is the best mechanism for allocating scarce resources and thereby encouraging a positive ‘investment climate’? Explain your reasoning. Free market mechanism to ensure optimal resource allocation within an economy was proposed long ago by Adam Smith. Smith called for an absolute abstinence on behalf of the government regarding any sort of interference within the economic resource allocation. (Thirlwall, 1983, p.178) Later on Smith’s proposition was supported and carried on by other classical and neo-classical economists. The proponents of free market mechanism consider planned allocation or allocation of scarce economic resources through government interference as inferior to the laissez fare following certain beliefs and reasoning. Free market mechanism unlike planned economy is bereft of any special dependence on the availability of skilled, arduous and dedicated administrators. It considers the price movement as an indicator of demand and supply shift and hence provides much more clarity and a clear indication to the investing business class. Planned economy owing to its dependence on particular political party and set of individuals (administrators) mostly loyal to them; unlike free market system often priories long and short-term political goals over economic efficiency. Furthermore, often a politician-bureaucratic nexus erodes the potential of an economy when it is run through planned governance. Such level of corruption is never considered as conducive for investment by the business class as it results in added cost in form of bribes. Corruption apart, if the administrative individuals are not skilled enough, planning can easily results in over or lower estimation of the capacity of the economy; in either case economic inefficiency will result in. The decentralization of the thought process associated with free market mechanism and its positive impetus towards economic efficiency and growth is also another reason that free market mechanism is much sought after and enjoys an edge over planned economy regarding economic efficiency. (Anderton, n.d.; Thirlwall, 1983) In a free economy competition among economic agents would be at a much higher level than in a planned economy thereby resulting in better allocation of resources and attainment of optimal equilibrium position through free interaction of the demand and supply forces. This free interaction also ensures to the business class that whatever happens would be solely determined by market forces and the government would not intervene to look after any specific group interest that is very frequent in planned economy. (Anderton, n.d.; Thirlwall, 1983) Owing to competition among firms innovative and good quality goods will also be produced in a free economy since those firms failing to do so would be wiped out from the market. A free market economy is also believed to be more growth oriented than a planned economy at least in terms of rapid growth. What have been discussed so far illustrates the fact that a market economy enjoys substantial advantage over a planned economy in terms of efficient allocation of economic resources. A positive Investment climate is directly related with the level of efficiency of an economy; hence a market economy would be advantageous for a positive investment climate. Part B Use the ideas and theories you have encountered in your study of the macroeconomic business environment to assess the possible impacts on the UK of holding the Olympic Games in London in 2012 Introduction According to experts and critics the opportunity of hosting Olympic Games 2012 will lead to large-scale positive effects on the UK’s economy and business environment. In general hosting of Olympics would have direct positive effect on infrastructure, tourism and hospitality, health sector, employment, government expenditure and investment. (London Olympics 2012, n.d.) The indirect positive effect and the trickle down effect from other sectors would be diversified and multifaceted in nature. In the following paragraphs an attempt has been made to explain the effect of London Olympics 2012 on UK economy and business environment. In order to understand the achievements resulting in the post Olympic period, economic assessment of the associated costs need to be justified. Around ten billion pounds are being spent on the games (Grobel, 2010). The assessment might be made in three phrases – pre games period, during the games period and post Olympic period. Normally the post games period, which is also known as the legacy period, is the main concern while assessing the benefits. While the nations would enjoy increased infrastructure development for the successful implementation of the Olympic and Paralympic Games, this would in turn result in socio-economic progress of the nation. The positive developments in the pre-games and during the games period would result in sustained welfare during the legacy period including a rise in employment. The total disposable GDP of UK will have an optimistic change of £1.9 billion ensuing the hosting of Olympic Games in London while, in future, the change in welfare attributable to the hosting of the games in the year 2012 is approximately £736 million. (Blake, 2005) Blake (2005) of the Christel DeHaan Tourism and Travel Research Institute, Nottingham University Business School has developed a Dynamic CGE model to study the economic impacts of London Olympics on London, UK and sub-national regions. His sensitivity analysis shows that the impact of the 2012 Olympics is likely to give positive effects on the UK as well as London economy – the UK GDP has 84.4% probability to be increasing. The key driver of the economic boost may be the revenue earnings for the organizing committee. Revenues would be earned from within the country through ticket sales, local sponsorship and other sources. While considering local revenues it should be noticed that the domestic expenses comes from the local residents’ budget and therefore reduces their spending on other goods and services. Revenues would also be emanated from outside the country in the way of ticket sales to overseas visitors, sponsorship and/or television revenue. This would necessarily improve the terms of trade of the country. Foreign tourism is an important source of foreign exchange revenue for the UK (£12billion in 2003), so consideration of the impacts of overseas revenues is vital for calculating the economic impact of taxation. (Blake, 2005) Besides analysing the effects of the Games on GDP only, the economic effects are studied in the other sectors too. It is expected that the expenditure on infrastructure development can be raised following an increase in GDP. Blake (2005) suggested that for both UK and London about 11 to 12 percent of GDP would be allocated for infrastructure expenditure. Experience drawn from previous Olympic Games indicates that such international events improves the global profile of the host cities and thus increases the internal outlay. Though London is already a recognized global city and a major destination of internal outlay in Europe, it faces competition from other prominent cities of the world. Therefore, the Olympics would surely promote London to improve its international position as business destination and could attract investments may or may not be related directly to Olympics. The largest prospect is likely to be for East London itself to draw internal outlay projects though the boost it will receive in awareness and infrastructure. (Thornton, 2006) The impact of the Games will vary across different business sectors and across different time periods. Findings by Blake are presented for the twenty-six segments of the economy. Ten of these sectors are specifically included because they have special significance, either for tourism and legacy impacts. These are hotels, other accommodation, visitor attractions, sports impacts (sports facilities), or transport. The other sixteen sectors are the standard industrial classification sections, with the first ten sectors removed. Some sectors in London and the sub-regions, such as East of England and Southwest England will expand significantly as a direct result of the London Olympics. The major of them are construction and tourism sectors. There are huge aggravations in the construction sector as the firms in the East of England expand and there are large activities in the construction in the building up of the Olympic venues. Many venues are to be built at Stratford, Weald Country Park, Essex and Broxbourne and Hertfordshire. Estimates suggest that the positive economic positive impact on the East of England might go beyond £600 million. This region can improve is business and build on its capacity and infrastructure (Thornton, 2006, pp.2, 4-5). Other sectors will experience declines as resources are drained away to the more prospective areas from their sectors. Some of the sectors experience slowdown in their productions as their output has little or no link with the construction sector. If an industry relies heavily on labour and demand is increasing, wages will increase. For example the manufacturing industry slowed down in 2005-2011. This is because resources, particularly the labour force, are drawn away from the manufacturing sector to the construction sector. Both sectors are very similar in terms of the skill needed and labour moves slowly to the area where the opportunities reside. Therefore in the pre-Olympics phase (2005-2011), the greatest positive change is seen in the construction sector, where gross value added (GVA) has been increased by £506 million. The fulltime equivalent (FTE) annual jobs increases by 3,000 employees during the pre-Olympics period ranging for 2006-2011. Above 30,000 new jobs would be created during the period ranging from 2009-12 as declared by the government in 2009. The workforce engaged in construction is expected to rise up to 6,000 despite the economic downfall (British Library, 2009). There are relatively small increases in the gross value added in other sectors like “hotels (£54 million), bars (£37 million), restaurants (£37 million), and air transport (£37 million)” in the pre-Olympic session (Blake, 2005, p.44). But there are legacy effects that made improvements in these sectors and they experience increments in employment. 2554 FTE jobs are produced in hotels, restaurants get 1811jobs and there are 2094 jobs in Bars. It is to be noted that the FTE job variations are not comparative to gross value added adjustments. This is because some sectors are more labour-intensive than the others. Some sectors have hardly any link with the construction sector or the “legacy effect”. Therefore, they experience declines in the period. They used the same production patterns and labour force. Most of the workers, therefore, move to the more flourishing sectors and improving regions for better wages. Manufacturing sector is a major prime example of such movement. A £571 million decline is experienced in its gross value added. About 18,923 FTE jobs have also been lost. Among the other contracting sectors during his period, the sports sector is a noticeable one. It gets a contraction of about £33 million and seeks a decline of 397 jobs. The reason behind that is investment in sports facilities has been overlooked in the pre-Olympics phase by introducing Olympic facilities to the market. (Blake, 2005; Kelso, 2009) Legacy effect would prevail in the post-Games period during 2013-2016. The demand for tourism from overseas would increase. In this period, there would be less pressure on prices compared to the previous period. The consumers would likely to spend more on consumption than savings. During the pre-games period, the returns to capital were higher and therefore the people had an intention to go for more savings and investment. There is a re-adjustment process that would take place after 2012 because the economy would try to return to its stable position. In that period, the investments in construction and sports sectors will decline as they have accomplished large gains till 2013. (Kelso, 2009) After Olympics, due to the legacy effect, there would be large spending from overseas visitors from the legacy effect. The demand from the visitors would increase by 1% before the Games and 1.5% following the Games. (Blake, 2005) The real expenditure would be more than the legacy effects. Because the legacy effect and the supplementary expenditure by the overseas visitors in the previous period would be combined to higher investment in the sectors providing goods and services to the tourists, especially the Olympic tourists. With increment in the level of investment, the capital stocks also increases. This would further expand supply of the country’s products as well as the tourism sector leading to further increase in price. But it is to be mentioned that the demand for tourism in UK will be reduced slowly in the following years. References 1. Anderton, (n.d.), Economics, Pearson Education India. 2. Blake, A, (May 2005), “The Economic impact of the London 2012 Olympics”, Christel DeHaan Tourism and Travel Research Institute, Available at: http://www.nottingham.ac.uk/ttri/discussion/2005_5.pdf (accessed on November 24, 2010) 3. British Library (2009), “SPORT AND SOCIETY The Summer Olympics through the lens of social science”, available at: http://www.bl.uk/sportandsociety/exploresocsci/businesseconomics/economics/articles/economicimpact.pdf (accessed on November 24, 2010) 4. Grobel, W. (2010), “What are the London 2012 Olympics worth?”, Marketing Week, available at: http://www.google.co.in/url?q=http://www.intangiblebusiness.com/Brand-Services/Marketing-services/Press-coverage/What-are-the-London-2012-Olympics-worth~3072.html&sa=U&ei=88PsTNjwGc6HcczJpKsP&ved=0CB4QFjAD&usg=AFQjCNHYADfFSVy5Zgc4fyWMlIJuaSWQmQ (accessed on November 24, 2010) 5. Jin, J. (2010), Intensifying debate about the deteriorating Chinese Investment Climate, Fujitsu, available at: http://jp.fujitsu.com/group/fri/en/column/message/2010/2010-06-07.html (accessed on November 24, 2010) 6. London Olympics 2012 (n.d.), The independent London Olympic Site. Available At: http://www.londonolympics2012.com/ (accessed on November 24, 2010) 7. Lou, S. and J. Wang, (2008), Public Finance in China, World Bank Publications 8. Kelso, P. (October 2009), “London 2012 Olympics will provide economy with £7 bn boost, says Lord Coe”, Telegraph.co.uk. Available At: http://www.telegraph.co.uk/sport/othersports/olympics/london2012/6390540/London-2012-Olympics-will-provide-economy-with-7bn-boost-says-Lord-Coe.html (accessed on January 12, 2010) 9. Thornton, G. (2006), “Economic Impact Study of the London 2012 Olympic Games and Paralympic Games”, East of England Development Agency, available at: http://www.eeda.org.uk/files/OEI_Final_Report.pdf (accessed on November 24, 2010) 10. Thirlwall, A.P. (1983), Growth and Development, Macmillan Education Ltd. Read More