The Economic Impact of the Olympics

Economic impact studies attempt to measure the costs and benefits of hosting the games; however they use complicated modelling systems and do not account for the impact of the Internatio

The Economic Impact of the Olympics

be positive, and large relative to the investment in the bidding process, although littleevidence shows a positive economic impact for the years following the event

Key Words- Olympic Games, Economic Impact

Introduction

The Olympic Games began in 1896 as a

small tradition fusing athletic feats and

international unity Over time, the Games

have evolved into a display of wealth and

economic development The myths of

economic prosperity and development

(Humpreys and Plummer, 1996) have

become prominent only after the 1984 Los

Angeles Olympics, the only time in which

a city did not face competition from other

bidders Economic impact studies attempt

to measure the costs and benefits of

hosting the games; however they use

complicated modelling systems and do not

account for the impact of the

International Olympic Committee to

potentially induce cost coverage and

distort incentives, which may lead the

studies to incorrectly model the economic

costs and benefits of the Olympics The

IOC solicits bids, and as Giesecke and

Madden (2011) show, it appears host

cities bid away all or almost all future

benefit because the IOC “can induce host

cities and governments to underwrite

most of the costs while keeping for itself a

large part of the revenues”

Given the IOC’s actions it seems that

becoming an Olympic host city diminishes

the positive economic effects originally

anticipated at the beginning of and

accepted bribes, further distorting theincentives to host (Szymanski,2009).However despite the IOC‘S biddingprocess and overestimated benefits, someeconomists believe hosting the Olympicsstill has significant benefits (Humpreys andPlummer, 1995) Evaluating thesebenefits, has its own set of challenges.First, the economic effect and benefitneed to be defined to include costs andrevenues, otherwise known as benefits,which exist because of the Olympics Forexample, in order to host the Olympicsthere is often a large amount ofconstruction completed solely for theGames This is a cost of the Olympics Aswith any structure, ones used for theOlympics will then be occupied, which canthen generate revenue One way theOlympics benefits are measured isthrough consumer spending, otherwiseknown as expenditures People who come

to the host city for the Olympics willspend money on activities such as hotels,the Games, eating and shopping, all ofwhich generates revenue Additionally,because of the Olympics, people may latervisit the host city/ or firms that may movethere, leading to more constructionactivity that can be seen as a benefit ofthe Olympics Thus the economic effects

of the Olympics for this study are created.

by changes in the growth and

development of Construction, Tourism,

Labour Market and the impact on stockmarkets

However as will be discussed; calculating

the benefit of hosting the Olympics goes

beyond the initial costs, such as the cost

of construction, and revenues, such as the

visitor spend in the host country There

are complicated pitfalls that can lead to

overestimated benefits that we will

discuss further in this essay

A number of authors have created

post-Olympic studies using different methods

and variables to show the inaccuracies in

Economic impact studies and provide abetter picture of the relative economiccosts and benefits that host cities receive.Giesecke and Madden (2011) use a moreaccurate Computable General Equilibriummodelling A CGE model is one of the mostrigorous, cutting-edge quantitativemethods to evaluate the impact ofeconomic and policy shocks -particularlypolicy reforms- in the economy as awhole Because of its nature, this tool issignificantly useful for policy design

Literature Review

Giesecke and Madden (2011) use

Computable General Equilibrium (CGE) for

a post- Olympic study, which makes it

more accurate than predictive studies,

however still requires complicated

mathematical calculations, and will likely

produce some inaccuracies within the

model The paper examines whether

predicted economic benefit existed for the

2000 Sydney Olympic Games by examining

Australia and New South Wales state

through CGE modelling, the same type of

modelling typically used to conduct

economic impact studies Their study ismost comparable to pre-Olympicevaluations because it uses the samemodelling methodology to best evaluatepredicted and actual benefits, althoughthey have two scenarios: Sydney hostingthe Olympics and Sydney not hosting theOlympics The comparison of the Olympicmodel to the non-Olympic model allowsthe authors to compute relative costs andbenefits by providing outcomes for allpossible scenarios By using the same type

of modelling post-Olympics, the authors

are able to correct for modelling errors

such as visitor spending methodology that

cause inaccuracy in the CGE models used

for the final bid The study also derives

data from multiple authors, who might

have different data collection and

measurement methods, which makes the

data and variable interactions overall less

viable With such a complicated model

there are many ways data can be

contaminated and lead to less accurate

results While Giesecke and Madden

(2011) provide a comparison to most

economic impact studies by using more

accurate post-Olympic CGE modelling

their study still requires measuring for thesubstitution effect, although beneficial tosome (i.e discount retailers), in general,the substitution effect is very negative innature, as it limits choice This is true notonly for products, but also for services.Examples of the substitution effect inaction can sometimes be observed overthe winter holiday season, where, in leaneconomic times, discount retailers often

http://www.econmodel.com/classic/terms/substitution_effect.htm, accessed08/03/13)

Giesecke and Madden’s (2011) model

uses variables that show the economic

impact of the Olympics at both city and

countrywide level The variables are ones

that “encompasses the four key economic

financing; (iii) spending by interstate

visitors to the Games in the Olympic year;

and (iv) spending by foreign visitors in the

Games Year.” (Giesecke and Madden,

2011) By examining the four major

economic dimensions allows the authors

to test important costs and benefits that

will evaluate overall economic effectsfrom a variety of viewpoints All of thevariables measure the real level of costsand benefits from the Olympics on the cityand country in a financial sense However,given that almost every study is composeddifferently, there could be some level ofbias among the variables that could hinderthe outcomes

Rose and Spiegel (2011) use a country

to country comparison methodologyinstead of CGE modelling to provide amore relative evaluation for the economiceffects of hosting the Olympics Bycomparing the country of a host city tothe country of a candidate city, the

authors are able to see whether the

benefits of hosting the Olympics are

negligible if the candidate country

receives similar benefits Rose and Spiegel

(2011) examine the effects of the

Olympics through increasing exports by

quantifying the differences in trade

openness between finalist and host

countries for 1956-2006 Rose and Spiegel

(2011) show while trade benefits do exist

for the country in which the Olympics

takes place, they similarly exist in

countries with a finalist host city Because

of this, the cost of the Olympics becomes

more apparent as well as the amount of

benefit received by the host country

attributable to the Olympics However

Rose and Spiegel’s model is based oncountry data Because of this, it is verypossible that the Olympic or candidatecity has little overall effect on the results,because the country has other big citiesand the Olympics is such a smallpercentage of the city, let alone countryrevenue that may not be visible Whilethis model creates a relative comparison

to a candidate country, it thereforebypasses more complicated mathematicalmodelling required for CGE, comparingtrade openness at a countrywide levelmay cover up any effect from host andcandidate cities that could be seenthrough a city level comparison

For greater accuracy, Billings and

Holladay (2011) use city level comparisons

to illustrate the relative economic effects

of hosting the Olympics for specific

variables The authors compare host and

candidate cities to test whether the host

city gains long term economic growth

attributable to the Olympics Their use of

city level comparison provides the most

direct picture of real economic costs and

benefits relative to a control city, becauseregional and country confounders, whichare an unseen variable that is alsocorrelated with two other variables, arenot included in the data, which could hide

or dilute the effect of the host and controlcities One issue comparing host cities tofinalist cities is potential confoundingeffects, such as countrywide events thateffect one country and the costs orbenefits outcome, but not the other.Confounding effects make the Olympic orfinalist city data seem more significantcompared to the other While the authors

may need abetter account for use of city level comparison provides the most

specific relative comparison model

potential confounders in their model to

produce the most accurate results their

The variables used by all the authors

previously mentioned take slightly

different approaches in an attempt to

form a full picture and understanding ofthe relative cost and benefits of theOlympics at a city level with populationmeasures, and at a country level with realGDP per capita and trade openness

Methodology

This paper will quantify the economic

value by examining Construction, Tourism,

Labour Market and the impact on the

stock markets, to determine if there exists

an economic payoff by comparing Olympic

host cities While the study planned on

providing greater specificity in order to

produce a more precise evaluation of the

London Olympic Games economic effects

through same-country sister city analysis,

the methods of record keeping does not

provide the necessary data for city level

comparisons This study will still use

comparative analysis instead of CGEmodelling for greater precision, becausethere is less chance of an error occurringand a greater economic overview ofhosting the games can be provided.Comparing the hosted city of London tothe previously hosted games dating back

to Los Angeles in 1984, offers a somewhatprecise picture of economic effectsattributable to the Olympics, becausethese effects are held constant which mayoffer a more precise model than Billingsand Holladay (2011)

Methodological Considerations

Economic impact studies are predictive

and have inherent bias because they are

created in favour of hosting the Games,

misrepresenting and overestimating many

benefits through theoretical and

mathematical errors Olympic impact

studies used to be computed by simplistic

Input-Output models (Kasimati, 2003), but

more recently economists have been

using CGE models, which are relatively

more accurate, but still have a large

number of deficiencies (Lofgen, Harris and

Robinson, 2002) Matheson’s (2006) work

“Mega-events: The Effect of the World’s

Biggest Sporting Events on Local, Regional,

and National Economies,” examines the

main effects that the modelling used in

impact studies Modelling typically ignores

or overstates the substitution effect,(Matheson, 2006) understates or ignoresthe “crowding-out” effect (Blanchard,2008), especially in already popular touristdestinations, and incorrectly calculates theeffect of expenditures by overestimatingthe mathematical money multiplier(Kasimati, 2003) Aside from theintangibles such as tourism or personalutilities, the majority of cities describetheir reason to host based on urbaneconomic development, or the potential

to increase on International awareness.However, given modelling inaccuraciesand the IOC’s role in bidding, cities willoften not obtain their desired outcome(Matheson, 2006)

Matheson (2006) noted that after the

nine-year period, the Olympic effect

eventually becomes ambiguous after the

games conclude Therefore when coming

to analyse data post London 2012, therewill not be four years’ worth of data asthis study is being undertaken a year afterthe event

Ethical Considerations

Certain research designs often raise

important ethical questions that need to

be addressed; this should be considered

before commencing any form of data

collection (Gratton and Jones, 2004) The

best approach to take is that of informed

consent Each participant, Michael Evans

the vice chairman of The Goldman Sachs

Group and Matthew Syed of The Times

have been informed as to the nature of

the study, and the use of the datasupplied Consent is obtained via anethical consent form (see appendix) Thesubjects were given the right to withdrawfrom the study at any given time.Informing the participants of the nature ofthe study, could invalidate the results insome way (Gratton and Jones, 2004),therefore the participants were informedafter the data collection

Data Collection

While this paper aims to examine the

monetary impact of London 2012, through

the potential increase in Construction,

Tourism, Labour Market, GDP and the

Stock Market at a comparative city level,

any changes attributable to the Olympics

may be too small to see As all of the host

cities have large economies, factors

beyond the games can also drive growth

In construction for instance, at the same

time Olympic development takes place,hundreds of other buildings and projectsare happening at the same time If gamesrelated construction is a small part of thecity’s construction GDP, change will beeven harder to establish Overall, for allthe industries studied in this paper, theOlympics are only a small proportion ofthat industry’s GDP relative to otherfactors and the overall economy

However the main factors that drive

Construction, Tourism, Labour Market,

GDP and the Stock Market are in a sense

held almost constant because they will

similarly impact the industries before andafter the Olympics Most people willsimilarly visit and move to host citiescompletely independent of the Olympics,

as they did before the games wereannounced

This report will use qualitative data as

a source for collecting primary data This

will be in the form of two interviews, one

from an economist from Goldman Sachs

and the other source being provided by a

columnist from The Times Gratton and

Jones (2004) state that interviews can

collect data concerned with concepts that

are difficult to measure, and tend to

provide much richer data than for

example, a questionnaire survey There

are many different types of interview,

however for this project, a

semi-structured interview will be used, this

approach uses a standard set of questions

(see appendix) However, a flexible

approach to data collection, and can alter

the sequence of questions or probe for

more information with subsidiary

questions (Gratton and Jones, 2004) This

is applicable to this project due to certain

levels of knowledge that both

interviewee’s contain, so a level of probing

was undertaken to acquire the relevant

information The interview method has a

number of advantages that make it

appropriate in certain situations As Yin(1994, P.80) notes, the interview providesperceived casual inferences from theparticipants rather than the researcherspoint of view This allows the respondent

to become more of an informant,providing data from their ownperspective, which is often desirable Aswell as this interviews allow unexpecteddata to emerge Semi-structuredinterviews allow the emergence ofimportant themes that may not emergefrom a more structured format, thusenabling the subjects to reveal insightsinto their attitudes and behaviour thatmay not be readily apparent Analysis ofthe data may be difficult to interpretcompared to the questionnaire As Frey(1998, p.47) suggests that the spokenword always has a residue of ambiguity,

no matter how carefully the questions areworded Thus the strengths of theinterview need to be consolidated and theweaknesses eradicated as much aspossible

For secondary sources of data

quantitative research will be undertaken

Therefore identifying evidence of cause

and effect relationships, describecharacteristics that may form due tohosting the Olympics, a consensus on aparticular issue and finally be used tomake further recommendations

Some academics suggest that

combining the two forms are incompatible

as they rely on differing epistemological

assumptions (Creswell, 1994) However

Nau (1995, p.1) suggests that blending

qualitative and quantitative methods of

research can produce a final product

which can highlight significant

contributions of both This is called

Triangulation of data which uses multipleforms of data collection to explore a singlehypothesis These two types of data willcomplement each other, as thequantitative data will describe my dataand the qualitative data will help gain agreater understanding of the quantitativedata

Economic Results

In terms of the economic impact of

hosting an Olympics, there are short-term

benefits that derive from the additional

expenditure in and around the Games

itself and long-term benefits that are less

tangible (such as the promotion of the UK

as a tourist venue and a potential locationfor investment) The less tangible benefitsare, by their nature, more difficult toestimate but this doesn’t mean they areless important to quantify

Accordingly, even though a local

Organising Committee for the Olympic

Games (OCOG)may break even or have a

small surplus, the greatest likelihood is

that the host city itself experiences a fiscal

deficit from the Games ( not all OCOGs

broke even: the Albertville OCOG lost $57

million: Burton, 2003, p.3) On the other

hand, the only tax revenue would accrue

to host governmental bodies would be

from incremental sales and income

resulting from hosting the Olympic Games(Ahlfedt and Maennig, 2009) Carlin(2007), which finds a positive impact ofsports facilities on real estate valueswithin two miles of a new facility Theevidence is not encouraging On the otherhand, hosting governmental bodies,together with any private support, mustpay for facility construction, upgrade andinfrastructural improvements necessitated

by the Games

The initial publicised budgets of the

OCOGs invariably understate both the

ultimate cost to the OCOG and, to a much

greater degree, the total cost of stagingthe Games The former escalates forseveral reasons

The Economic Impact from Construction of the 2012 Games

To calculate the contribution to the

Gross Domestic Product (GDP) and

employment created by the construction

activity undertaken to host the 2012

Games and its legacy impacts it is

necessary to estimate the building costs

The Olympic Delivery Authority (ODA)

publishes information on theirexpenditure on the Olympic Park projectsthat have been scheduled to becompleted prior to the 2012 Games, such

as the Athlete’s Village (ODA, 2005 to2011)

The expenditure undertaken so far has

benefited firms in all the UK’s nations and

regions The ODA awarded contracts to

just over 800 firms Firms in seven out of

the UK’s twelve nations and regionsreceived at least 5% of the contracts(Turner and Townsend, 2012)

Chart 1.1: ODA contracts awarded to each of the UK’s nations and regions.

Source: Olympic Delivery Authority, (2005 to 2011), ‘Annual report and accounts’.

Analysis of the multiplier effects from

the construction work suggests a GDP

contribution of £5.8billion (legacy Now,

2012) from the procurement of inputs of

goods and services from the construction

firms’ supply chains It is estimated that

staff employed on Games related

construction projects and in their direct

supply chain will support a further £3.3billion contribution to GDP through theirspending In total therefore, theconstruction activity for London 2012 andits legacy will support and estimated £13.5billion (2012, prices) contribution to GDP.This is shown from the chart below

Chart 1.2: Direct, Indirect, and induced contribution to GDP by Games related construction projects.

Another way this information can be

presented is to show the total GDP

supported by each part of the

construction work for the 2012 Games

and its legacy (Chart 1.3) The conversion

of the Athletes Village into residential

space, other commitments to build retail,

office and residential space, andalterations to Stratford station toaccommodate Crossrail is expected tocontribute an additional £4 billion inlegacy construction impacts (Legacy Now,2012)

Chart 1.3: Direct, Indirect, and induced contribution to GDP by 2012 Games-related construction projects

London 2012 related construction

activity will also support jobs, including

within the construction sector itself, in the

construction sector’s supply chain, and inthe wider UK economy (See Appendix,5.2)

In terms of direct impacts, it is

estimated that the 2012 Games-related

build will support the equivalent of 78,000

years of employment (Annual Business

Survey, 2011) within the construction

sector itself 54,000 of which are expected

to arise in the 2005-2012 period The

Annual Business Survey (2011) indicated

that at the peak, in April 2011, 12,300

people were employed building the

Olympic Park and Olympic Village Theequivalent of 115,000 years ofemployment are estimated to besupported by the construction sectorspurchases from its supply chain, whilespending of employee wages will help tosupport the equivalent of an additional74,000 years of employment across all UKsectors (Oxford Economics, 2012)

Determining whether private sector

retail (Westfield shopping centre), hotel,

and office space would have been built

around the Olympic Park in the absence of

the London 2012 Games requires a

subjective judgement One possibility is

that investors in such projects would have

proceeded in any event, however thisoutcome is a low probability A secondpossibility is that because the investors insuch projects tend to be international inscope, the business case for these projectscould have been made for anotherlocation had London not won the Games

Tourism Impacts

London Business Network (2012) and

LOCOG estimate that there will be 16,500

athletes, 4,000 technical officials, 4,000

Olympic movement officials and 21,000

members of the accredited mediaattending the Games Over 95% of theseare estimated to be visiting from abroad

The 2012 Games is attracting spectators

from within the UK and abroad The

distinction is important as foreign

residents bring additional expenditure

into the UK with over 680,000 foreign

visitors during the Games (National Officefor Statistics, 2012), whilst domesticresidents expenditure may be additional,

or may just redistribute existingexpenditure

Chart 2.1: Ticket Revenues (current £)

Games Tickets Sold (millions) % Capacity Revenue to OCOG

Among the direct economic benefits

generated by the Games, tourist spending

is probably the most prominent From

table 3.1, an average of 5.1 million tickets

were sold for the past 6 summer

Olympics, including almost 6 million

tickets at the 1984 games in Los Angeles

Since the games are often spread over

more than two weeks, these visitors mayspend a significant amount of time in thehost area, thus generating substantialspending in hotel, food and beveragesector These ticket sales provide the basisfor estimating the gross number of visitsand their duration to the UK’s nations andregions (Blake, 2010)

Chart (2.2) below shows the increase in GDP as a result of the London 2012 Olympic tourism effect

In total, the additional tourism the 2012

Games attracted a contribution of £2

billion to the UK’s GDP Of this

approximately 17% occurred in the lead

up to London 2012, 35% during theGames and 48% in the post- Game period

Chart (2.3) is GDP due to tourism impacts of the Games by Industrial sector.

Source: Oxford Economics 2013, p.20.

The extra expenditure will have a

disparate impact on different industries

output levels The largest beneficiary is

the hotels and restaurants sector which

contributed almost a quarter of the

tourism related GDP Given this impact is

concentrated in London, the stimulus

associated with the Games benefited22,000 small to medium sized enterprises

in London in the services sector The otherindustries directly receiving visitorspending (retail, transport and otherservices) are also expected to increasetheir GDP contribution

Labour Market