Monday, July 25, 2016

Economic Impact of Hosting the Olympics: Should Rio Have Accepted the Bid?

With the Summer Olympics in Rio de Janeiro starting at the end of next week, ticket sales are still of concern. Between the economic recession, the Zika virus, and crime rates, only 73 percent of tickets have been sold with less than two weeks to go. While these are issues that Brazil needs to contend with, there is still the issue of profitability as a whole. Are Brazil's woes the primary cause of a lack of ticket sales, or is hosting the Olympics generally an unprofitable endeavor?

The argument of the Olympics being profitable is similar to that of stadium subsidies. Essentially, the theory is that that multiplier effect from the Olympics boosts economic growth. Aside from the short-term expenditures from the goods and services related to the Olympics and boosting infrastructure and construction spending, there is also the long-term benefit of being able to better promote a city for foreign investment.

According to the Council on Foreign Affairs' (CFR) recent economic analysis on the Olympics, countries spend much more on Olympics than initially budgeted. Take the 2014 Winter Olympics. Not only did the Sochi 2014 Winter Olympics end up costing 4 times as much as the original bidding cost, but it will cost the Russian taxpayers $1.2 billion a year for the foreseeable future (Müller, 2014). It is not just Sochi. According to Oxford University, the average cost overrun in the past 50 years has been 179 percent (Flyvbjerg and Stewart, 2012). Even for Rio de Janeiro, the cost overrun is expected to be an extra $6 billion on top of the initial estimated $14 billion.

As the CFR mentions, the only city since 1936 to generate a surplus is Los Angeles from the 1984 Olympics, and that's because a) they already had the infrastructure largely in place, and b) Los Angeles did not rely on taxpayer dollars to fund the Olympics. A paper from the National Bureau of Economic Research shows a net positive impact on international trade (Rose and Spiegel, 2009).  However, other research shows no long-term effect on the GDP (Billings and Holladay, 2012; von Rekowsky, 2013). Research shows that aside from such extraordinary circumstances, Olympics are a money-losing proposition for host cities (Baade and Matheson, 2016, p. 202). Two reasons for this lack of economic development are the substitution effect (i.e., much of the hotels and restaurants would have been constructed anyways) and a lot of the construction firms used are usually international firms. None of this brings up the general transience of the employee gains, the lack of positive impact on tourism, the significant infrastructure costs to satisfy International Olympic Committee, or the creation of stadiums that have little to no post-Olympic use.

There are some reforms that can be made, such as changing the bidding process, more flexibility in using already-existing facilities, transparency, or including financial sustainability as part of the bidding process. One thing is for sure: cities that are not fiscally solvent, e.g., Rio de Janeiro, should not be hosting the Olympics.

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