Posted by: olymponomics | May 1, 2008

Counting the costs and benefits…

I responded to a questionnaire on the economic impact analysis this week, and thought I might share some of my thoughts on issues related to London 2012 in particular and the usefulness or meaningfulness of economic impact studies that tend to be used with reference to the Olympics.

1) Are there economic benefits of hosting a sporting mega-event such as the Olympics?

Yes, but it’s difficult to know how much. It is clear that there are national prestige and reputational benefits attached to staging the Olympics. There is some kind of ‘halo’ effect associated with staging the Games for the profile of the host city or nation. However, these kinds of benefits are (almost by definition) unquantifiable.

Now, it is plausible that the Olympics generates an economic ‘boost’ through some kind of multiplier effect (the type that would make John Maynard Keynes proud). However, some economists argue (quite convincingly) that these tend to overstate the impact on GDP (see Matheson and Baade, 2002, ‘Bidding for the Olympics: Fool’s Gold?’). The problem of post hoc models of economic impacts is that there is no counter-factual to test against. That is to say, any expansion of London’s economy around the time of the Olympics could be entirely coincidental. So, whilst hosting the Olympics might be associated with an economic upturn, it is not possible to rule out this being a coincidence, or even the possibility that the IOC selects hosts that are on an ‘upward curve’ and therefore sound custodians of the Olympic brand.

2) Could the economic benefits for London outweigh the benefits of investing the funds elsewhere?

Yes, but there are risks of ‘crowding out’ effects. That is, the concentration of government spending in East London might discourage the private sector from investing in the area (the government is the ‘backer of last resort’ for the Games). So, the contribution of private sector finance to the London budget has already dropped from over £700 million in the original bid estimates to under £200 million at present (see the 2007 National Audit Office report). At the same time, the concentrated nature of investment in the Lea Valley is likely to deliver a more tangible result of regeneration than the alternative of dispersing the funding to other projects. Ultimately, however, this is a long-term question and the benefit of the Olympics tends to be disputed long after they have finished.

3) Who benefits from hosting London 2012?

This is a difficult question. The government will benefit insofar as it is able to pursue an ambitious regeneration project that would be impossible to justify without the occasion of the Olympics. At the same time, there are political risks to hosting and organizing the Games, which provide no guarantee that the Labour Government will benefit from the Games (or even will be in power in 2012). Undoubtedly athletes and sports-lovers will benefit from the Games, as will some local businesses (although again it might be that the businesses stimulated in East London are quite different from those that were there before, such that the existing population of East London doesn’t benefit a great deal). And of course there will be a legacy for local communities, though this depends upon the programmes and projects that are put in place, and the extent to which this remains a centralized infrastructure/construction project. This all said, it is difficult to predict this far ahead of time whether the Olympics will deliver an economic boost or legacy, since it is still vulnerable to wider risks, such as related to security. At the same time, other benefits – such as to the community, sport or public health – will play out in the long-term and be difficult to quantify as economists would like.

4) How reliable is economic impact analysis as a tool for predicting the effect of mega-events such as the Olympics?

It is important to be sceptical about the economic impacts of mega-sporting-events, whilst not rejecting them out of hand. As I noted earlier, the absence of a counter-factual prohibits hypothesis falsification that Karl Popper argued was required for scientific inference. Because of that, these are problematic not only as a predictive tool, but even as a retrospective tool. There are parallels, I would argue, with the use of probabilistic cost/risk assessment methodologies for the London 2012 bid, which led organizers to have an over-optimistic trust in the numbers they were quoting, without challenging the underlying assumptions of the estimates.

5) How would you define a successful Olympics?

A successful Olympics requires a defining Olympic image. Something that transcends the event itself. Whatever the operational achievement and positive economic effect of Sydney 2000, Cathy Freeman’s gold in the 400m was arguably what made that Games a success. That might not seem to be an economic impact, but was to the benefit to the Olympic ideal (or one might say brand/reputation) of sporting achievement and achieving a wider cultural meaning that went far beyond sport. As such, there is a powerful but vulnerable intersection between the Olympics as a sporting event and as a venue for construction of cultural, political and social interests and meanings.


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