Okonomos: The 'Olympic effect'

Hosting the Olympics is associated with a permanent and positive rise of 30 per cent in exports.

Election manifestos are in the news yet again but the promises made are hardly taken seriously by a cynical electorate. Urban manifestos generally contain some mandatory items — for instance, ‘proper housing for all in slums’ — but there are some on the agenda that strike a completely different note. Suresh Kalmadi, who is contesting the Lok Sabha elections from Pune, aims to bring the 2020 Olympic Games to Pune. Would it be unsporting to question this as a developmental goal? We all know that staging mega-sports events does wonders for a country’s pride, especially in the case of developing countries who want to join the big league. However, leaving the feasibility issues of financing etc. aside, do such events actually pay off in economic terms?

An NBER paper by Rose and Spiegel1 looks at the motivation behind bidding for mega-sports events and empirically tests for the ‘Olympic effect’. To begin with, they confirm that rigorous cost-benefit studies do not support positive net economic benefits of hosting mega-events. They, therefore, turn to the argument that hosting the Games provides visibility to the country and promotes global demand for its exports. Controlling for all other effects on trade, they find that hosting the Summer Olypmic Games is associated with a permanent, positive impact of a 30 per cent rise in exports. A large and permanent impact on trade also holds true for the FIFA World Cup. Rose and Spiegel admit that they were sceptical of these results, so they did a battery of tests that gave essentially gave them the same results.

Extending the exercise, they contrasted successful and unsuccessful bids for the Olympics and found that simply bidding for the Olympics is associated with a permanent increase in trade. Caution: This is not to be interpreted as a cause-effect relation that bidding for Olympics raises exports. Instead, they model the event of bidding as a signal, a costly strategy, that countries use when they are already in the process of liberalisation.

So bidding for the Olympics is sufficient, but not necessary, to boost trade. Given the large costs involved, this raises the question again: When do countries choose this expensive signal? Rose and Spiegel develop a political economy model to answer this, looking at a small open-economy. Though there are other ways to signal trade liberalisation, this paper does not go into the relative effectiveness of these signals, leaving that issue for future research.

What about the impact at the city level? Vinayak Uppal2, at the Centre for Civil Society, does a similar exercise for the upcoming Commonwealth Games in Delhi. This is not an econometric exercise but is replete with data to support his arguments. Like the NBER paper, he is clear that vested interests are at stake in bringing the games to a city as ex-ante predictions of economic impact are rarely fulfilled. Uppal talks of the ill effects of the games on the environment, on marginalised citizens and on city’s finances. Infrastructure improvements, pushed in the name of the games, are in any case needed by growing cities. He concludes, “The present plan for the Commonwealth Games may be a recipe for an ecological and financial disaster, or they might finally put the city, and the country, on the world map. They may bring in a new era where electricity and water problems, perennial problems in the city, are no longer an issue or they might increase the burden on an already overloaded system. Popular perception tells us that the Asian Games was an unmitigated success. Closer analysis tells us that it was not so simple. The Commonwealth Games, with some smart marketing, may just follow in those footsteps.”

So, while staging of mega-sports events does give a boost to the economy, as Rose and Spiegel write, “Agents that endorse the construction of new sports stadia or the staging of mega-events usually do so out of naivety or self-interest. In practice, these events usually end up imposing large costs on their hosts that are not nearly compensated by either the revenues earned during the event or the legacy of large stadia or obscure facilities (velodromes, aquatic centers, archery ranges, and so forth) that are left behind.” Voters are therefore right to be sceptical about Olympic dreams in their city.

1 “The Olympic Effect”, Andrew K Rose and Mark M Spiegel, NBER Working Paper Series, No. 14854,
http://www.nber.org/papers/w14854.pdf
2 ‘The impact of the Commonwealth Games 2010 on the urban development of Delhi,’ Vinayak Uppal, Centre for Civil Society,
http://um.ase.ro/no10/2.pdf

The author is chief economist at Indicus Analytics

sumita@indicus.net