Valuing the Olympics – Talk is Cheap

The London 2012 Summer Olympics kick off today, two weeks of international parading and guaranteed non-stop NBC coverage, but will these games create any real value for their host? It’s possible to track and forecast expenditures related to event construction and local tourism, but, as we have consistently seen, the net long-term benefits often differ.

Revenue generated from consumer spending around the Olympic Games will assuredly boost GDP growth in the short-term, but it’s hard to see this continuing beyond the end of the year. British Prime Minister David Cameron forecasts a $20 billion economic boost ($14B est. total cost) over the next four years. Given the current level of global uncertainty as the euro-crisis worsens, predictions like this seem to be overly optimistic. Although a temporary boost to employment should assist the British recovery, the UK’s latest unemployment rate of 8.1% already implies a slight recuperation.

Andrew Zimbalist, an economics professor at Smith College, believes there are three reasons why hosting the Olympics is a losing game: the bidding process is hijacked by private interest, the Games create massive overbuilding, and there is little evidence of meaningful increases in tourism. In a recent Atlantic article, Zimbalist explains that:

There may be a few former hosts that experienced a long-term economic benefit, such as Barcelona, but scholarly research has found that any gains are difficult to identify.

Even in an ideal world where aspiring host cities behaved rationally, the competition to land the games would leave the winner just about breaking even, or maybe with a small windfall. But we don’t live in an ideal world. In practice, host cities tend to be captured by private interests who end up promising much more than the city can afford.

In economic terms, hosting the Games doesn’t appear to be as beneficial as is widely perceived. As the demand to host drives the margin for profit lower, it is easy to see how the cost of the application process, planning at the local/regional/national levels, constructing infrastructure, and the ultimate postmortem recovery prove to outweigh most advantages. The Olympic allure, the enthusiasm that provokes development and supposedly brings long-term increases in tourism, is possibly the greatest value added as it motivates leaders to act.

Because the Olympics are an event where numerous leaders congregate within a short period of time, it should be a major priority of British officials to take advantage of this opportunity to drive foreign investment. These indirect networks are possibly the Games most beneficial side effect. Using the event as a launching platform, leaders should discuss possible opportunities to stimulate growth across many levels of the economy. London is Europe’s most attractive city for investment based on the number of FDI projects (see below). It has been 64 years since the city first hosted the Olympics, but any opportunities created at the upcoming games should be significantly more revealing as to our future economic prosperity.

Goldman Sachs recently published their Olympics and Economics 2012 report, a widely popular tradition that analyzes a wide array of economic influences related to the Games. The team forecasts everything from the number of gold medals each country is predicted to win to the Olympics influence on the stock markets, crafting the discussion around a variety of interviews. Their research on the overall economic benefit gained by the host country shows mixed results, with the 1972 Munich and ’76 Montreal Games loosing money while the 84′ Los Angeles, 92′ Barcelona, and 96′ Atlanta Games remaining profitable (NPR). This data further exhibits the Games inability to generate meaningful revenue across a wide period of time.

The London Olympic Organizing Committee has even gone so far as to drop 500,000 soccer tickets from the schedule, in attempt to manage attendee perception. This is a prime example of the lengths that officials are willing to go to protect the real value (the allure) that is generated. As budgets are slashed and governments aggressively pump money into lagging financial systems, it will be interesting to see what deals (if any) arise from the two-week festivities and if there will be any repercussions noticed at the athlete level.

Madrid 2020 !?!?

Looking forward to the 2020 Olympics, severely indebted Spain has entered a bid to host the games. The government states that most of the infrastructure is already in place so not much funding will be needed. If not much is going to be built, how will this project create any jobs? With tourism revenue proven to be less significant than previously believed, what value will this add to the country beyond nationalistic pride? In it’s current economic state, Spain is in no shape to be considered an Olympic host and should respectfully withdraw its offer.