The Economic Impacts of Major Sporting Events - Essay Example

? The Economic Impacts of Major Sporting Events A Discussion Paper Economists are currently at odds with regard to the actual impact of major sporting events on the local economies of hosting cities, communities, or countries. This disagreement arises from the fact that there is no single, best method to carry out economic impact analysis. There are disagreements as well about the relevant economic factors that should be included in the measurements. This paper presents three extensively criticised, but widely used, models of economic impact analysis, namely, (1) social value, (2) economic multipliers, and (3) input-output paradigm. In order to explain the arguments more clearly the discussion includes research findings or case studies on previous sporting events, such as the World Cup and Olympics. Introduction Several economists observe sizeable economic gains from events occurring from the incentives they confer to businesses. State funding of sporting events, though they are unstable, is usually rationalised by the argument that the events generate economic gains for the areas, where in they are held, but that these gains are not completely supported by the economic feasibility of the event itself (Hall 1994). The financial evaluation of the effect of sporting events on the economy is at the root of contentious disagreements among economists. According to Dwyer and colleagues (2005), arguments put emphasis at the same time on what should be assessed or calculated, and on the best technique for analysing the economic impacts of large-scale sporting events on the community that hosted it. It appears that there is frequently uncertainty between the economic productivity and economic effect of major sporting events. Drawbacks, misconceptions, and inaccuracies of economic impact research are comprehensively discussed in the literature. More often than not, economic impact research produces an exaggeration of the net gains that regions obtain in hosting major sport events (Madden 2006). As stated by Oldenboom (2000), scholars hence advise to adopt other methods to measure the economic advantage and value of sport events, like contingent valuation techniques (CVM), computable general equilibrium (CGE), and cost-benefit analysis (CBA). The Nature and Economy of Sporting Events Sporting event as a sector of the economy is huge. In the United States, sport was one of its biggest industries in 1995. Moreover, in 1996, the sport sector was measured to be around $100 billion annually, and forecasted to be worth $139 billion by 2000. In 1997, soccer was measured to be $10 billion in Europe (Forster & Pope 2004, 1). This appears likely to be a stark miscalculation when very few associations separately yield roughly $100 million yearly. In 1995, the British Sports Council calculated that it comprises 2.5% of global trade. This number comprises intangibles like royalties and revenues and physical commodities like facilities. There are additional statistics, all inherently incongruent (Forster & Pope 2004, 1). Sporting events yield roughly 1% of local ‘value-added’ and around 1 ?% of employment in the UK. The US Tennis Open in 2000 produced $699 million to the economy of New York (Forster & Pope 2004, 2). However, the dilemma is that these statistics merely provide peeks of different components of sport. According to Statistics Canada (Forster & Pope 2004, 2): ... the amount of sport data currently available is insufficient to provide a comprehensive profile of the nature, benefits and value of sport... the data that are available are difficult to compare due to conceptual and definitional differences. Sporting events are a branch of what is termed the ‘weightless economy’. For several grounds that are in conflict material physical production has dropped substantially as GDP percentage across the globe—thus the concept of ‘weightless economy’ (Shin 2010, 105). Alan Greenspan focused on the IT sector but a broad transition from production to service sectors is identified as well. Chiefly a service sector, sport belongs to that trend (Shin 2010). This aspect, besides the scale of the earnings produced, the assets invested and moving, and the unintended economic effects, enables discussion of a sport economy. Sport is mediated by its own group of associations and institutions. These were formed to officialise and promote the objectives of sporting events and culture instead of for-profit ventures. They have continued to be non-profit bodies in a blatantly for-profit operation (Oldenboom 2000). Hence when explored from the point of view of the throng of non-profit organisations with philanthropic or cultural interests, an important distinction becomes evident: the sporting organisations are bodies with the ability to challenge, control, or financially produce vast revenues. However, in spite of the fact that the returns, either within the direct supervision or indirectly within the control of sporting organisations are massive, these associations are mostly disregarded as a group (Oldenboom 2000). Maybe this is exactly due to a basic component in their political economy, their stance as non-profit organisations. Numerous sporting organisations have enormous capacity to produce profits, but their vague ‘possession’ of a sport alongside their non-profit puts a lot of difficulty to the allocation of any surplus. This fact makes sporting events unusually remarkable. Sporting organisations are the product of mechanisms that pave the way for the creation of sport economy. They are part of the major players of that economy but their significance originates from the scale of that economy (Forster & Pope 2004). Both sporting organisations and sport economy depend on the preceding validation of sport. In the absence of such validation sport could not be viewed as a product. Although several earlier empires, Rome, Greece, and China had well structured, for-profit sports, prior to the 18th century sport may be considered as narrow in scope, and more or less completely informal and localised (Forster & Pope 2004). Hence, although sport economy is currently a functional type, it is insignificant in an analysis of sport in the 18th century. Nevertheless, according to Forster and Pope (2004), it was not until the 18th century that large numbers of sports started to be officialised and regulated in ways that would in time enable the recognition of sport products. The presence of a readily recognisable, definite product is integral to the economist’s general applied and theoretical evaluation of markets. Obviously, if these products are not recognised, this does not imply that a market is absent. Instead it suggests the limitation of the current notions of product (Bowdin et al. 2002). Moreover, it is probable that economic patterns will differ from the theoretically accepted standards. Permitting that sport does not generate products that are highly definite, already recognisable or even distinct, there is a clear instance that sport economy will deviate from the hypothetical standards (Bowdin et al. 2002). This is completely in agreement with the argument about reproducibility and official validation—officialised sport will bring about reproducible but not consistently uncomplicated, distinct and recognisable products (Shin 2010). This is in agreement as well with the argument of Rosa and colleagues (1999 as cited in Forster & Pope 2004) who studied the growth of the automobile industry. Most of their discussion can be used related to sporting events and sports economy. According to the authors (Forster & Pope 2004, 3): Starting as unstable, incomplete, and disjointed conceptual systems held by market actors—which is revealed by the cacophony of uses, claims, and product standards that characterise emerging product markets—product markets become coherent as a result of consumers and producers making sense of each others’ behaviours. Within the perspective of political economy, it can be argued that this is not a fair cluster of economic exchanges. Rather, various power structures emerge that can influence the choices of the players in both parties. Economic Impacts of Major Sporting Events Economists frequently oppose economic impact analysis that claim to prove that major events like the World Cup, Olympics, or other sporting events confer vast gains to the hosting cities or countries. These economists often mention the application of wrong multipliers as a main explanation why some impact analyses exaggerate the economic benefits to the host countries (Matheson 2009). The notion of multipliers is highly documented in the discipline of economics, though, and in fact the Nobel Prize in Economics in 1973 was given to Wassily Leontief for his macroeconomic input-output paradigms applied to get multipliers (Matheson 2009, 63). Thus, it is wrong to merely discard, unreasonably, every importance of multipliers in economic impact research without a firm, valid economic basis for doing such. Still, it is vital to more accurately identify the terms economists draw on when talking about multipliers. Primarily, experts of economic impact research are usually very unclear about the differences between increased expenditure, economic gains, and economic effect and normally apply these concepts reciprocally (Oldenboom 2000). Obviously, increased expenditure in a community does not automatically result in enlarged earnings, and an economy may not ‘gain’ in a substantial manner simply because expenditure enlarges. According to Barget and Gouguet (2010), although economists would most probably describe the gains of a major event to a community as being linked to the earnings produced for its population, economic effect statements consistently associate economic effect with expenditure. Economists, as well, employ two incompatible traditions in describing multipliers (Matheson 2009, 63): One method calculates the multiplier as equal to indirect spending divided by direct spending, so that a multiplier of 1 results in total spending being double that of the direct spending. Others, such as Humphreys (1994), report that the multiplier equals indirect spending plus direct spending all divided by direct spending, so that instead a multiplier of 2 implies a doubling of direct spending. The second convention seems more natural and more widespread. Economic impact research is commonly performed by projecting turnout at a major event, assessing a sample of attendees regarding their expenditure related to the convention or game, and afterwards using a multiplier to comprise for cash moving through the economy subsequent to the preliminary set of spending (Barget & Gouguet 2010). For instance, an economic impact study on the 1994 Super Bowl XXVIII, an American football championship game in Atlanta projected 306,680 attendees with an average attendee shelling out $252 daily for an immediate effect of $77.3 million (Matheson 2009, 63). Afterward, 2.148, which is an economic multiplier, is used for an unintended effect of $88.7 million and an overall economic gain of $166 million (ibid, p. 63). One widely applied method in the U.S. is the Bureau of Economic Analysis’ Regional Industrial Multiplier System (RIMS II) that gives ‘final-demand output multipliers for 473 detailed industries’ (Matheson 2009, 63), as well as restaurants, hotels, leisure and entertainment. One frequent argument against the application of multipliers in the study of major sporting events is plainly that the multipliers applied are very high as numerous players reside outside the local vicinity where in they play (Shin 2010). Thus, compensations given to these players are less probable to reflow all over the local economy than compensations given to employees in other sectors resulting in a lesser multiplier impact for sporting events than in other sectors (Shin 2010). According to Oldenboom (2000), although this argument is definitely well-founded, the issue can be resolved merely by making input-output charts at an adequate degree of detail to particularly deal with the irregularities of the sporting event sector. When studying major events, though, the difficulty of overstated multipliers becomes doubly difficult. The multipliers in other multiplier methods are rooted in inter-industry interactions within areas founded on an economic region’s usual production trends. During major events, though, the economy within an area becomes abnormal, and hence, such inter-industry interactions may be invalid (Matheson 2009). According to Porter and Fletcher (2008), because there is no basis to assume that the normal economic multipliers remain unchanged throughout major events, any economic studies founded on such multipliers could be very erroneous (as cited in Matheson 2009). Certainly, there is ample basis to assume that throughout major events, these multipliers are quite exaggerated, and, hence, their application overvalues the actual effect of these major events on the local economy. In the meantime, it is not sufficient to measure just the economic impacts of an event without evaluating their social value for the citizens. In theory, an impact assessment cannot show the social value for an event. It shows simply that the pertinent event produces a particular degree of economic employment and operation; independently, it provides no basis for an assumption as to whether or not the event should be carried out or not (Barget & Gouguet 2010), Two matching measurements have to be performed (Barget & Gouguet 2010, 141): (1) the economic impact is measured to assess whether or not a sporting event on a given territory represents a basic activity. Jobs and economic activity can be created through this type of event. Ideally, of course, those jobs should become permanent ones; otherwise the sporting event may be no more than a short-term operation, which is not a real territorial development objective (2) the social utility is measured by evaluating the benefits in terms of satisfaction created for the inhabitants, and by calculating the net gain (or loss) of the event, by subtracting the costs borne by the community as a whole Slowly but surely, sport economists, and more commonly experts of economic analysis, have arrived at an agreement. They believe that the acceptability of the distribution of public resources to these events cannot be founded entirely on economic impact research (Sadd 2010). Social value produced should also be assessed, and, in the cost-benefit analysis model, to weigh the event’s costs for the area against the gains that citizens obtain from it with regard to social interest (Shin 2010). Simply put, according to Oldenboom (2000), the cost-benefit analysis is a suitable instrument to aid decision makers in judging about the prospect of offering, as the economic impact analysis is not an instrument for making decisions. However, there is an irony with a substantial need for economic impact analyses by public officials, as costs-benefits study is quite unusual. This achievement of economic impact analyses can be clarified in a number of ways: the remarkable outcomes they analytically declare, the simplicity of the objective and the key rules of the computation, the concrete features of gains which make them simpler to measure (Oldenboom 2000). It is completely reasonable to measure the effect of a major event on macro-economic factors, it can aid in appropriately handling the event and capitalising on the effect. The issue is not the economic effect as such, yet it is its oversimplified application to justify the choice of offering (Oldenboom 2000). As shown in such methodological concerns, there is a solid chance that the confusion about the measures had led public officials to improper choices beforehand. It may even be assumed that the economic impact paradigm had been chosen so as to defend a choice that had previously been made on other concerns (Madden 2006). In this case, the choice will merely be suitable if there is a solid positive relationship between the outcomes presented by the cost-benefit analysis and economic impact research (Barget & Gouguet 2010). Within this context, the error will not be severe. However, in the other scenario, if the relationship between the social value and economic impact is shaky, there is a grave chance to host a major event which has no absolute acceptability. It is usual for economic impact research to focus on the impacts of GDP. Arthur Andersen, one of the top accounting firms in the US, calculated the projected effect of the Olympics on GDP within the normal setting as $6.5 billion (Madden 2006, 346). A prominent Australian broadsheet accounted this as a top prize. Nonetheless, $6.5 billion characterises a boost in the economic condition of Australia of merely 0.12% on the whole from 1994 to 2005. The assessed effect of the NSW GSP, which is $5.1 billion, is generally roughly one-fourth of a percent over what was supposed to be the scenario exclusive of the Olympics (Madden 2006, 346). Yet, GDP is a weak indicator of the economic gains of a major event. A significant portion of GDP effect was through enhanced real private spending. Hence majority of the boosts in GDP or GSP brought about by the Olympics were allocated to compensating foreigners for the utilisation of capital facilities and bigger investment (Shin 2010). As stated by Madden (2006), this investment was mostly utilised to enlarge assets that yielded a surplus above operating expenditures only for the major event period. Moreover, although the Olympics included a substantial boost in NSW government spending, there was simultaneously a believed redirection from other investment by the national government for Olympic spending. The current worth of this redirected spending was projected at $685 million (Madden 2006, 347). The lapse of this public spending has to be contrasted with the boost in real private spending. The analytical econometric research of Hotchkiss and colleagues (2003 as cited in Madden 2006, 347) of the Atlanta Olympics substantiated the likelihood of major events affecting a local economy. Undoubtedly, the situations of the Sydney Olympics can significantly vary from those of other major events, as well as the soccer World Cup, and summer Olympics in other nations. Other nations have diverse labour market circumstances. Countries with a strong tourism industry are not prone to have a mostly extensive driven tourism impact. Instead of the host country, the International Federation of Association Football (FIFA) gets the royalties for television privileges for the soccer World Cup (Madden 2006, 347). Each and every one of these aspects can result in decreased economic gains from other major event in comparison to the Sydney Olympics. Obviously, according to Dwyer and colleagues (2006), although a major event reduces real spending, economic benefit should not be lesser. Conclusions As discussed, it is not sufficient to measure just the economic impacts of an event without evaluating their social value for the citizens. In measuring economic effects from major events, economists often employ multipliers founded on the typical condition of the economy although the existence of a major short-term tourist event like the World Cup or the Olympics suggests a deviation from this typical condition. Major events are typified by raised prices for the tourism industry. Spending in sectors controlled by state-owned entities like airlines, hotels, restaurants, rental car businesses, and general merchants could increase considerably because of a major event, but there will be no boost to local earnings. The case of the Sydney Olympics helped to explain several major points. Primarily, major sporting events are not likely to produce extensive economic gains; also, the traditional model of carrying out economic impact analyses prior to a major sporting event, which is the input-output method, is very limited for the job and may be supposed to produce significantly too optimistic outcomes. Lastly, there are several important variables, such as conditions of the labour market, which are prone to be a key indicator of the scale and symptom of the effect. So what is the simple solution to this evident dilemma in analysing the economic impact of major sporting events? It is too simple to assume that one can forecast the impacts of changes in macroeconomic policy founded entirely on past information much as it could be similarly unwise to assume that one can forecast the impacts of major events on the economies of hosting countries applying rigid multipliers founded on standard economic trends. Hence, it is important to find other more accurate and appropriate ways to perform economic impact analysis. References Barget, E. & Gouguet, J. (2010) “Hosting Mega-Sporting Events: Which Decision-making Rule?” International Journal of Sport Finance, 5(2), 141+ Bowdin, G., McDonnell, I., Allen, J., & O’Toole, W. (2002) Events Management. Oxford: Butterworth-Heinemann. Dwyer, L., Forsyth, P., & Spurr, R. (2005) “Estimating the Impacts of Special Events on an Economy” Journal of Travel Research, 43, 351. Dwyer, L., Forsyth, P., & Spurr, R. (2006) “Assessing the Economic Impacts of Events: A Computable General Equilibrium Approach” Journal of Travel Research, 45, 59. Forster, J. & Pope, N. (2004) The Political Economy of Global Sporting Organisations. New York: Routledge. Hall, C.M. (1994) Tourism and Politics: Policy, power and place. Chichester: Wiley. Madden, J. (2006) “Economic and Fiscal Impacts of Mega Sporting Events: A General Equilibrium Assessment” Public Finance and Management, 6(3), 346+ Matheson, V. (2009) “Economic Multipliers and Mega-Event Analysis” International Journal of Sport Finance, 4(1), 63+ Oldenboom, E. (2000) Costs and Benefits of Major Sports Events. Amsterdam, The Netherlands: MeerWaarde Onderzoekadvies. Sadd, D. (2010) “Event Management” Cognizant Comm. Corp, 13, 265-275. Shin, H. (2010) The Economic Impact of Sporting Event. New York: VDM Verlag. Read More