Monday, January 27, 2014

Olympics and Economics

From February 7 to 23, 2014, Sochi, a southern Russian resort city, is hosting the 22nd Winter Olympics. Olympics are split in two distinct events: Winter and Summer Olympics. Winter Olympics began in 1924. Its program consists of sports practised on ice or snow, which include Curling, Ice Hockey, Snowboarding, and Speed Skating. As for the Summer Olympic, it began in 1896. Its program comprises various other disciplines such as: Athletics, Baseball, Basketball, Cycling, Swimming, and Tennis. 

Winter and Summer Olympics are held in turn every two years. The last Olympics took place in London, United Kingdom (UK) in Summer 2012. Canada hosted three Olympics: first in Summer 1976 in Montreal, Quebec, then in Winter 1988 in Calgary, Alberta, and lately in Winter 2010 in Vancouver, British Columbia. The United States hosted eight times the Olympics, more than any other country. Since 1988, Olympics are immediately followed by Paralympics, which are Games designed for athletes with physical and intellectual disabilities.

Besides being sporting events, Olympics are also economic events. To host Olympic Games, governments and municipalities invest in infrastructure, what Economists calls public spending. The investment in infrastructure consists in the building of stadia to hold the games, Olympic villages to accommodate the participating athletes, and the extension and upgrade of the public transportation to swiftly connect spectators coming from all over the word to the Olympic venues… 

In the private sector, entrepreneurs discover new business opportunities, what we call innovations. An innovation worth mentioning is the canal boat service provided during the London 2012 Olympics by the company Water Chariot. This service was an alternative to the congested roads of London to reach the Queen Elizabeth Olympic Park. Olympics are also the occasion for entrepreneurs to make profit by designing and merchandizing by-products such as clothing, pins, toys, and other souvenirs differentiated with the Olympic logos and mascots, and the participating nations’ emblems. 
To boost their audience and their advertising revenues, news networks compete for the exclusive right to broadcast the Games in their regions; we call this an auction game.

The cost of Olympics is mainly financed out of sponsorships, the auction of broadcasting rights, and public funding.  As far as public funding is concerned, to host the London 2012 Olympics, the UK government invested about £5.3 billion (about US$ 8.24 billion) in the building of the Queen Elizabeth Olympic Park and infrastructure.  The Canadian taxpayers’ contribution to the construction and the renovation of the Olympic venues during the Vancouver 2010 Winter Olympics was estimated at $ 603 million. The Beijing National Stadium (also known as the Bird’s nest) built to host the Beijing 2008 Summer Olympics cost US$ 428 million. The State of Beijing owns 58 % of this asset.

Economics being about how to efficiently allocate scarce resources to satisfy unlimited wants, questions that often come to mind is why governments should invest that much in a two-week event, why not allocating that money to other causes such as fighting poverty or building schools and hospitals.

All these worries may be well founded in the light of the Greek experience. In 2004, for the second time, modern Olympics were brought back to Athens in Greece, their spiritual home –the ancient Olympics used to take place every four years in the city of Olympia in the Ancient Greece and the first modern Olympics were staged in Athens in 1896.  The Games showed a loss of about US$ 14 billion. Many of the Olympic venues built for the Games were closed after the events and have become what people calls the modern ruins of Greece. The Greek government then went into a debt crisis.
As another example, one can see the contrast between the poverty in the favelas of Rio de Janeiro in Brazil and the financial means that the country is making available to host the 2016 Summer Olympics.

Putting aside these two examples, Olympics have had positive impacts on national economies. They promote the host cities and attract tourists, which is beneficial to local businesses such as: hotels, restaurants, and gift shops. They deliver jobs in various economic industries including the construction and related industries, and transportation. Olympics attract foreign investors and promote trade with the rest of the world. Besides, Olympic parks are legacies that many local economies still benefit from. They host income generating activities such as shows and competitions. They also serve as training centers for local sport clubs.   

According to the estimates of the consulting firm, PricewaterhouseCooper, the 2010 Winter Olympics staged in Vancouver created 45,000 jobs and contributed $ 2.5 billion to the gross domestic product of the province of British Columbia in Canada. According to the UK government, the London Olympics occasioned a lot of deals that would have boosted trade and foreign investment into the country by £ 9.9 billion (about US$ 13.68 billion).