The Economy of the Olympics

The London games mark the 30^th Olympics since their modern inception in 1896. Competition to host the games has become fierce in recent years, and economists have begun to study the economics of the Olympics to examine if claims of profitability for host cities have any merit. Goldman Sachs economist Jose Ursua, who was part of team that published a report on this topic, says research shows some short-term financial gain for host cities, while longer-term gain is harder to quantify. "In general, when all costs are considered, both of running the Olympics and the associated costs of construction and security, it is questionable whether the Olympics ever truly make a profit," he says.

However, the real story may be what the games say about the economic achievement of participants. He notes that countries with strong emerging economies are now leading the medal count, and stresses the strong correlation between economic growth and athletic achievement.

The economic effects of the Olympics are a hotly debated topic, and every contest to become a host city is a fierce one. Can you categorize the different types of economic gains that cities hope to achieve, and how realistic they are?

It depends on how you define an economic gain, which can refer to both quantifiable and non-quantifiable factors, and horizon— short run or long run. The definition of economic gain is not as clear cut as one would think, because in addition to the directly quantifiable effects, like receipts from ticket sales, tourism, or commercial activity, the indirect effects from hosting the games can also have an economic impact. The latter are more difficult to quantify. They include any changes in social or individual behaviors that affect workers’ incentives, the business environment, people’s confidence, and even expectations for the future. In tandem, these can change economic quantities or prices from what they would have been otherwise.

Short-run effects are generally easier to capture in economic activity indicators. For example, the additional expenditure related to the games in London could boost the UK’s third quarter GDP by around 1.2 to 1.6 percent in quarter over quarter in annualized terms. Long-run effects are often related to factors that are harder to quantify, like the promotion of the city, tourist venues, remaining export facilities, and areas for potential investment, like the regeneration of a previously rundown part of London.

In general, when all costs are considered, both of running the Olympics and the associated costs of construction and security, it’s questionable whether the Olympics ever truly make a profit. Some games are considered to have had significant losses [for host cities]: two concrete examples are Munich 1972 and Montreal 1976. Others seem to have made a financial profit, like Los Angeles 1984, Barcelona 1992, and Atlanta 1996.

The legacy of the games and the satisfaction of a typically larger medal attainment for the host country are for many people enough of a reward.

How much do these countries experience in terms of an economic bounce and how long does it last?

The potential for economic benefits from hosting the Olympics is obviously country-specific. A country with a better physical infrastructure [and] organizing security capabilities will likely be in a better position to minimize the costs and maximize the benefits associated with the games. In addition to the short-run boost that a host country [enjoys], our research [shows] that the growth rates of economies that are known to be the upcoming hosts grow faster than there long-run average by slightly more than one percent per year.

In the area of housing, our research shows that hosting the Olympics can also have an effect on local housing prices through the construction of facilities, improving the cities’ prospects for tourism, and the less tangible effects of increased [economic] confidence.

How strong is the connection between a country’s income level and say the number of medals that they obtain during the Olympics?

We put a lot of effort [into] trying to measure precisely that. To do that, we assembled data –[dating] back to the first modern Olympics in Greece in 1896, through to Beijing in 2008. We [then] estimated various models that explain medal attainment by macroeconomic variables, especially GDP per capita, whether a country is a developed economy or not, the degree of democratic advancement, and whether the country was a host in the respective Olympics.

[We found] that per capita income levels are strongly associated with medal attainment. In particular, we found that increasing GDP per capita by one standard deviation tends to be associated with two to five medals more per Olympics. We also found a very strong host effect, by which the number of medals can increase by more than 50 percent for host countries.

Overall, higher levels of income or higher levels of development and a better environment for growth tend to be associated with more Olympic success.

It’s been more than a century since the first modern Olympic Games took place in Greece. What are the most notable changes or trends since then?

So that is quite interesting because we spent a lot of time retrieving data on the Olympics since 1896, we came up with ten big trends. Let me give you a brief [overview] of [some of] the points.

The first one is that the Olympics are truly global now, in the sense that the modern Olympics went back and forth between Europe and the U.S. for almost fifty years, and the first exploration or venture into the "outback world" was the 1956 Olympics in Melbourne, and then Tokyo 1964. But even these games still took place within the confines of developed markets. In fact, the 1968 games in Mexico [City] was a first in an emerging market. Twenty years later, we had Seoul, and twenty [years after that] we had Beijing. So with Rio de Janeiro scheduled for 2016, it is not an [overstatement] to say that the Olympics have globalized for good.

The second trend is that the Olympics now cover all income levels. That is, the number of participating countries has grown almost ten times over the past one hundred years, and the games now bring together a very diverse group of nations. The host countries have also become more diverse in terms of the differences between their GDP per capita and their levels of development.

[Another] trend is that emerging markets now claim half of [all] Olympic medals. They are now claimants of around 50 percent of gold, silver, and bronze medals, which is quite surprising. When emerging markets began participating back in the 1920s and 1930s, the share of medals they won was quite small in the majority of sports, but a few decades later, especially following WWII, this began to change. Nowadays, maybe as a reflection of the improved health, education, and social attitudes toward sports, emerging markets are now leaders in many sports, including boxing, diving, weightlifting, and others.

The regional split of medals [also] is gradually balancing around the world, and slightly more than two hundred countries that are now expected to participate in the Olympics cover literally all continents. So as the world economy has become more globalized, so has the share of medals that accrue to the planet’s different regions. This includes not only the BRICs and other emerging markets, but also the group of countries that we often highlight in our research as a group of up-and-coming countries in terms of their potential for growth.

Could you just give a couple of examples?

Mexico and South Korea, Bangladesh, and Turkey are countries, in addition to the BRICs (Brazil, Russia, India, and China), that have an increased presence in the global sphere and have also taken their place as [formidable] competitors in the Olympics. Most medals used to go to either North American or developed European countries; nowadays, there is a more even split that not only covers all continents, but also several geopolitical groups.

What should we be thinking about in terms of lessons learned for all Olympics going forward, particularly as we look forward to Brazil in 2016?

Well, the London games are currently satisfying very high standards in many areas, and that will certainly pose a challenge to any future Olympic games. But the same dynamics have [played out] before and so Rio, in particular, can of course improve not only on London, but on other recent Olympic games.

[Brazil] will host the 2014 FIFA Soccer World Cup, and in 2016, the 31^st Olympic games. In addition to all this, the host city Rio de Janeiro just became the first city to receive the title of World Heritage Site by UNESCO in the natural landscape category, which is quite an honor. All this combines with the way Brazil has embraced market-friendly macroeconomic policies in recent years, which has allowed the economy to overcome a number of structural imbalances and attract more foreign capital. These changes have led to important economic gains over the past fifteen years that have improved the well-being of large segments of the Brazilian population. As usual, in the case of Brazil in particular, some challenges remain, and certain structural impediments to growth still need to be addressed, including a large infrastructural deficit.

So in this sense, hosting two major world-sporting events of this sort, in particular the Olympics in 2016, will be a great opportunity [for the country] to boost investment and growth into the future. When we look ahead to the next games in Brazil, we’ll hopefully see more world records broken in various sports, but also hopefully witness how Brazil overcame infrastructure challenges, and seized the opportunity of hosting the second-ever games to take place in Latin America.

Do you want to add anything else?

At the 1912 Stockholm Olympics, Pierre de Coubertin, the French founder of the International Olympic Committee, won a gold medal for literature for what is perhaps the most famous of all sports poems, "Ode to Sport." One of the verses in that poem starts with the following lines: "O sport, you are progress. To serve you, a man must improve himself, both physically and spiritually." Our research shows that in fact the reverse can also be true. Progress and improvement in economic growth have historically often equaled progress in a sport.