Evidence from Past Olympic Games - Essay Example

Literature Review: Evidence from Past Olympic Games According to Kyle James, analysts divided the Olympics economics into three phases ly pre-game, game and post game. While the city benefits from tourism and construction activity in the first phase, during the second phase revenue can be generated from sale of tickets, sponsorships, generation of Olympic related temporary jobs, revenue to hotel industry, restaurants and local businesses due to arrival of foreign tourists etc., and the third phase as cited by Markus Kurscheidt, a sports scientist is the time when the games are over and problems start. Massive sports arenas often remain either unused or underused and Olympic villages remain vacant and difficult to maintain. Financing the Olympics According to The European Economic Outlook, interest in macroeconomic effects of hosting Olympic Games was evinced after Montreal hosted the 1976 Olympic Games and faced a financial deficit. The Olympics were financed almost entirely by Montreal city's public funds (2004). Figure 1.1 - Number of cities bidding for Olympic Games (Source: Price water House Coopers European Economic Outlook, June 2004) Richard Tibbott stated that the Olympics have a great positive effect and macroeconomic impact on the host country. The macroeconomic impact is assumed to be more than US$ 5 billion (2001). Allan Drury stated in The Journal News (2005) that Montreal city spent huge amounts to build venues and develop infrastructure without assessing the income generation aspect. Allan Drury also stated that the Montreal Olympics were a failure not due to operational reasons but because the mayor borrowed 30-year bonds which are being paid off and will not finish paying the debt of US $ 2 billion in principal and interest till 2006. The European Economic Outlook states that the impact of Montreal Games was such that other cities were not ready take the risk and thus deferred bidding for Olympics for some time as depicted in Figure 1.1 (2004). But Allan Drury stated in The Journal News (2005) quoting Humphreys saying that spending occurs for constructing athletes' venues, housing and other infrastructure and the financial success of the Atlanta games could be attributed to good planning and corporate contributions. Thus unlike in Montreal the taxpayers were not asked to pay huge amounts. According to The European Economic Outlook Los Angeles Olympics of 1984 were almost entirely privately-financed since the citizens voted against public financial support, thus beginning the era of commercialisation of the Games and also developing the global Olympic sponsorship deals. Statistics proved that the games were a financial success, generating budget surplus with little spending for up gradation of city's infrastructure. As shown in the table 1.1 revenues were very high over operational costs leaving relatively good balance excluding investments and also an excellent overall balance when compared to that in the previous Olympics. Table 1.1 - Financial balance of Olympic Games Organising Committees (Source: Price water House Coopers European Economic Outlook, June 2004) The European Economic Outlook further stated that commercial success of Los Angeles Olympics in 1984 followed by Seoul Olympics in 1988 and Barcelona Olympics in 1992 encouraged and attracted many cities to bid for hosting Olympic Games. The Olympics proved useful to a city by improving its infrastructure, transportation, telecommunication facilities, construct new urban centers with housing, retail and other community facilities which could be fully integrated into metropolitan areas and thus the focus was on macroeconomic impact of the games. Understanding the Economic Effect According to Evangelia Kasimati (2003), when a city is awarded Olympic Games the country is expected to experience a major economic effect by way of receiving large amounts of foreign currency and recirculation of this money in local, regional or national economies. The inflow of money would be through the so called tourists i.e., broadcasters, sponsors, Olympic family, athletes and visiting dignitaries. The economic impact is attempted to be explained using the 'multiplier' concept which is "the number of times a unit of currency, once spent within an economy, is re-spent within the borders of that economy." The cumulative effect of new money on local, regional or national economies can be split into three elements: 1. Direct Effect: The first round economic effect of the new money spent by outside visitors is injected in the host economy in industries like accommodation, food, transportation, etc. 2. Indirect Effect: The subsequent rounds of the injected money within the economy, after allowing for leakages. 3. Induced Effect: The proportion of household income then re-spent in other businesses in the economy. Incremental Economic Impact According to Rick Thorpe domestic goods and services such as corporate sponsorships, international broadcast rights or Games souvenirs sold to foreign tourists during Olympics arise uniquely because of games and have a purely incremental impact on the domestic economy. "If the incremental impact on the provincial Treasury created by externally generated spending exceeds the cost of any Treasury spending that would not have occurred in the absence of the Games project, the Games can be said to be self-financed and 'profitable' for the Treasury." Cost-benefit analysis According to Kasimati (2003), economists identify and measure the impact of hosting Olympics on an economy by adopting a modeling approach. Two main approaches are adopted namely input-output (I-O) and the computable general equilibrium (CGE) framework. According to the European Economic Outlook, after the Los Angeles Olympics of 1984 a number of cost-benefit analyses were conducted to measure the economic impact of hosting the Games as seen in Table 1.2. Table 1.2 - Economic impact studies of past Games (Source: Price water House Coopers European Economic Outlook, June 2004) According to Kasimati, studies that adopted I-O analysis to evaluate the total economic impact of hosting a mega sporting event failed to consider economies of scale, production close to full capacity and price adaptations to demand changes thus resulting in a miscalculation of multiplier values. Kasimati stated that studies for the Sydney Olympics used a computable general equilibrium (CGE) framework. "CGE models include sectoral-level production functions and disaggregated demand functions for consumption, imports, investment, etc. They combine input-output structure and behavioural functions." But, the European Economic Outlook stated that it would not be a correct estimation in case of games since it is not possible to take into account all the economic impacts. Economic Impact Assessments - ex-ante and ex-post According to Kasimati ex-ante assessments are carried out to forecast the impacts of Olympics and ex-post analysis according to Baade and Matheson (2002) cited by Kasimati "examines the economic situation of the geographical influence zone before and after the event and manages to isolate the event from other factors that may run at the same time and may contribute to the economic impact." Kasimati stated that all ex-ante economic studies from 1984 to 2012 indicate the role of Olympic Games in the host country's economy. The impact continued much after the event and some of the significant changes were observed in economic growth, increased tourism and additional employment was generated. However, the ex-ante models and forecasts were not confirmed by ex-post analysis. But as rightly pointed out by the European Economic Outlook most of these economic impact studies were carried out before the actual events, thus incorporating a wide margin of error. Now it is clear that though ex-post studies of the Los Angeles and Atlanta games suggested significant employment effects the ex-ante studies depicted lower effects and that rise in activity was only temporary. Similarly only 0.4 m tourists visited Los Angeles during the Olympics as against 0.6 m forecasted. Richard Tibbott stated that most thorough economic analysis was conducted in case of Sydney Olympics in 1993, 1997 and 1999. Depending on the geographic location of the city the actual number of visitors to Olympics range between 400,000 to 800,000. However the previous five Olympics depicted each city recording a net fall of 1% to 5% in the hotel occupancy during the Olympic year. Immediately after Sydney Olympics tourist operators in the neighbouring Queensland reported an 'Olympic drain' and Sydney retailers too reported a fall in sales. In contrast the European Economic Outlook stated that according to a study conducted by PricewaterhouseCoopers for the New South Wales Department of State and Regional Development in 2001 "the Sydney Olympics had generated significant additional business and infrastructure investment in the city/region, increasing tourist inflows, and building up local expertise in managing large public-private projects." Evidence of a post-Olympic slowdown According to the European Economic Outlook, Olympic Games provide a nonrecurring boost to expenditure which in course of time weakens and the economy returns to equilibrium income as the one existed prior to the games, since the demand falls as the multiplier effect works in opposite direction. As depicted in figure 1.2 there was retardation in public consumption and investment as preparations picked up for Barcelona Olympics and finally a contraction in investment expenditure. It is evident that the consumer spending was held up till the third quarter of 1992 and moved back to normal levels in subsequent quarters. Figure 1.2 - Spanish National Accounts (Source: Price water House Coopers European Economic Outlook, June 2004) No conclusions should be drawn from above without accounting for a wider economic situation. It is important to note that the 1992 Olympics clashed with economic downturn allover Europe due to German reunification. A comparative picture (figure 1.3) of GDP growth depicts that Spain followed the European trend along with Catalonia. But this economic slowdown cannot be purely attributed to post-Olympic hangover and may be due to other factors such as different industry structures etc., However, figure 1.4 depicts little fluctuation of growth rate in GDP of Georgia in the years surrounding Atlanta Olympics of 1996. When the trend is observed at the sectoral level a sharp increase is observed in the year of Olympic Games followed a sharp contraction in the following years, similar trends can be observed in construction, transport & utilities sectors also. Figure 1.3 - Spanish and Euro-land growth (Source: Price water House Coopers European Economic Outlook, June 2004) The aggregate GDP appears undisturbed from fluctuations in these sectors as the same is overshadowed by other sectors. The hotels account for less than 1% and construction, transport & utilities sectors account for 15% of the state's GDP, thus a least impact can be observed due to Olympics on overall GDP. Figure 1.4 - Georgia State Accounts (Source: Price water House Coopers European Economic Outlook, June 2004) According to the European Economic Outlook, in comparison to the previous year's strong growth, the New South Wales region of Australia recorded a sharp slow down in investment expenditure, consumer spending and the GDP growth also slowed down following the games (figure 1.5), but the public spending increased. This may be due to many factors such as size of the host city's economy and money spent in the run up to the Games. Figure 1.5 - New South Wales State Accounts Conclusion According to Kyle James many analysts still remain unsatisfied with the conclusions that have been drawn out over the years on the impact that the Olympic Games have had on a country's economy. The new funding strategies and revenue sources will most likely make high deficit days of Montreal Olympics as days of past as it is observed from our discussion from Los Angeles Olympics onwards. Circumstances have changed and the Olympics are considered as a tool to help boost a country's economy. It is to be seen if the boost gained by temporary job creation and intense publicity is long-lasting German officials were disappointed in May 2005 as the German city of Leipzig with a population of 500,000 was not included in the race for hosting 2012 games. While the local and federal level German officials thought that Olympics at Leipzig could help boost the ailing East German economy, the International Olympic Committee differed on the non availability of infrastructure requirements at Leipzig. Kyle James cited Kurscheidt, a sports economist as warning against such an approach. He further stated that "the Olympics' powers of economic rejuvenation aren't exactly Olympian. 'They might have a nice secondary effect on the economy', but they aren't a primary driver." Bibliography Kyle James, Cash Cow or Money Pit Available on < http://www.dw-world.de/popups/popup_printcontent/0,,1315828,00.html> [February 10, 2006]. III - The economic impact of the Olympic Games, Price water house Coopers European Economic Outlook June 2004. Available on < http://www.pwcglobal.com/gx/eng/ins-sol/spec-int/ neweurope/epa/EEOJun04_SectionIII.pdf > [ February 07, 2006]. Richard Tibbott, Olympic economics. Sydney and the destination economy (2001). Available on < http://www.locum-destination.com/pdf/LDR3Olympic_economics.pdf > [February 08, 2006]. Allan Drury, Olympics can be economic boon or bust. The Journal News dated February 21, 2005. Available on < http://www.thejournalnews.com/apps/pbcs.dll/articleAID=/20050221/ NEWS05/502210336/1066/BUSINESS01> [February 09, 2006]. Evangelia Kasimati, Economic Aspects and the Summer Olympics: a Review of Related Research (P 433-444). INTERNATIONAL JOURNAL OF TOURISM RESEARCH (2003). Rick Thorpe,The Economic Impact of the Winter Olympic & Paralympic Games (2002). Available on < http://www.mcaws.gov.bc.ca/2010/ecimpact.pdf> [February 10, 2006]. Read More