Sports economists have generally been pessimistic about the longer term economic implications of major events like Olympics. From the day (13 July, 2001) the International Olympic Committee (IOC) accepted Beijing’s bid to hold the Olympics 2008, analysts were ready with their warning or cautionary advice. They based them on the experience gained from the earlier Olympics and the cost benefits attached to the holding of the vent.
As early as 2005, Prof. Jeffrey Owen of Indiana State University summarized thus: “It is commonly assumed that the scale of such an event and the scale of preparation for it will create large and lasting economic benefits to the host city. Economic impact studies confirm these expectations by forecasting economic benefits in the billions of dollars. Unfortunately these studies are filled with misapplications of economic theory that virtually guarantee their projections will be large. Ex-post studies have consistently found no evidence of positive economic benefits from mega-sporting events even remotely approaching the estimates in economic impact studies.” (Estimating the Cost and Benefits of Hosting Olympic Games: What Can Beijing Expect from Its 2008 Games? The Industrial Geographer, Vol. 3, Issue 1, 2005.) The economists and financial analysts were indeed well intentioned while carrying the cautionary message. They were keen to contain the excessive zeal of host governments. They had god reasons. In the past, the Games were deemed purely as cultural and sports events. More recently, it has grown far beyond the notions of athletic excellence and performance. They get commercialized with deeper multinational corporate involvement. America made the Los Angeles Games of 1996 as the first ever money making machine. As three scholars from Shanghai University put it, “They invented the concept of Olympic economy.” (Economic impact studies of Beijing 2008 Olympic Games, China-USA Business Review, May 2008.) The IOC has also come to terms with the corporate world sponsoring events, promoting brand names, etc.
There has been a phenomenal increase in the size and scale of Olympics. There has also been a shift in the nature of financing – a shift away from public funding to private or mix of both as in the case of Beijing.
Beijing Olympics was initially estimated to entail an outlay of $1.6 billion. Due to Yuan appreciation and the extra steps to be taken to tighten security, it was revised to $2 billion. Some recent estimates put it around $6 billion. Athens had an expenditure of $2.4 billion. On the revenue side, Beijing hoped to generate $3 billion through TV rights (709 million), sponsorships (260 million), lotteries (180 million), sale of tickets (140 million) and so on. Coca-Cola alone is said to have committed for $1 billion. Chinese authorities claimed that revenue realization in Beijing would be the largest in history. Thus, on a rough count, the expenditure would be covered by revenues. This takes into account the expenditure in Beijing alone and not the outlay on facilities, infrastructure, etc. These are estimated around $41-43 billion. Any assessment of the economics of Beijing Olympics should take into account the entire expenditure and not that in Beijing alone for holding the Games. Much of the later debate has revolved on these data. There was one school of economists which predicted that after the Olympics China would encounter a downturn or what they termed ‘valley effect’ or ‘V-Low effect.’ This was based on the impact studies of earlier Olympics.
One survey was done by the Bank of China (BOC). It studied 12 Olympic Games covering 60 years and assessed that most economies suffered from a Post-Olympics Effect. The BOC study showed, “In nine of the 12 Olympics, including the 1988 Seoul and 1992 Barcelona, the hosts’ GDP growth in the eight years following the Games was 0.4 to 2.5 percent lower than during the eight years prior to the event.” (http://news.xinhuanet.com/english/20, 18 July 2008). HSBC also did a study of all Summer Olympic Games since the end of World War II and noticed a drop in the GDP growth. South Korea which had an annual growth of 11.3 percent until 1988 Olympics slid to 6.4 in the following year. In Japan, the GDP rate prior to 1964 Games was 11.7 percent and went down to 5.8 percent.
In yet another study of 11 Summer Games done by Stephen Jen of Morgan Stanley saw slump in investment and growth in the year following the Olympics. The only exception was Olympics of Los Angeles of 1996 which was wholly commercialized.
Studies also showed that there was no increase in tourism to Sydney after the 2000 Olympics. Greece is said to have fallen behind regional competitors such as Turkey and Croatia in attracting tourism after 2004 Olympics.
Thus, the post-Games record in most countries is rather depressing and belies conventional optimistic expectations. What happens is that there is sudden bout of investment in creating stadiums, infrastructure, etc. This results in new employment and generates income in the short run. The closure of the Games leaves behind, all of a sudden, a vacuum or ‘black hole’ in the economy.
The facilities and the infrastructure are standalone outfits with no link to the main (or real) economy. Huge investments turn into wasteful (or wasting) assets and also lead to shortage of resources in the post-games period even for their upkeep. This situation was witnessed in the 1960s in many developing countries in the years after their Independence. Huge conference halls were built to hold African, Afro-Asian, Non-aligned, or other Summits. After summit, they fell into disuse. Even in India, after the Asiad, the sports structures were neglected and turned into sad spectacles. Some were used for billeting security personnel or for police interrogation.
Unfortunately, they create budgetary problems for governments in the years following the Summit/Games. This comes about due to diversion of financial resources from the future to the present, i.e. debt creation. This diversion of resources could be of a larger size and longer duration and eat into future programs of the governments. The debt burden creates negative effects.
As Prof. Jeffrey Levine of Tulane University School of Law described, “When the Beijing Olympics commence in August 2008, the cities of Montreal (1976), Barcelona (1992), Sydney (2000) and Athens (2004) will still be paying off their debt stemming from hosting previous Olympic Games. The main reason for these long-lasting debts is that host cities spurge on sports venues that do not have much use after the Games conclude….. After the conclusion of the mega event, these venues or related infrastructure often go underused, and the ultimate burden then falls upon the taxpayer.” (“A Golden Opportunity for Golden Acceptance?” Sports Lawyers Journal, Spring 2008.)
Evidence against post-Olympic fallout is not wholly on the side of angels. There are other studies which suggest that the impact could be positive and depends upon the circumstances of the country and its economy.
The Chinese government seized the opportunity to hold the Games having regard to the tangible positive effect on the overall level of activity as measured by GDP and the level of investment in infrastructure. Its National Bureau of Statistics predicted that over seven years the Olympic effect would add an average 0.3 to 0.4 percent points to GDP.
Academics, economists and government authorities in China resent any criticism presaging doom after the Olympics. Other reputed economists have also disagreed with the doomsayers.
Mr. Khalid Malik, Resident Representative of UNDP in Beijing, felt that China would maintain its strong growth after the Summer Olympics led by expansion in various global events it would be hosting. By and large, economists in China feel that even if there is a slight slow down after the Games, it would not impact the strength of the economy. They also believe firmly that the economy will not be subject to fluctuation in the post-Olympic year. There is a general presumption that the impact would be negligible.
Chen Jian, Executive President of Beijing Economy Research Association, said in a press conference at the Main Press Center after the Beijing Olympic Games that its economy would shape up a development pattern featuring sectors of high technology, finance and culture. He explained, “Some Olympic host cities suffered economic fluctuation in the post-Games period, merely because their investment into infrastructure was excessive compared with the city size. Beijing will try to avoid that situation.”
Mr. Justin Lin Fu, a reputed Chinese economist, who has recently taken over as the Chief Economist of the World Bank put it in perspective. He said, “China will not face recession caused by investment declines after the Games, as the volume of Chinese economy is much larger than some Olympic hosts that experienced Post Games recession.” He referred to the plenty of investment prospects in infrastructure and industrial upgrading and to domestic consumption growth and investment which would be at a high level.
Prof. Andrew Michael Spence, Nobel Laureate 2001, echoes this view. He told CCTV that the post-Olympic effect would not have much fallout in the Chinese economy. In taking this view, he relied on two factors: one is the size of China’s domestic market and the other is China’s importance in global growth.
If we add these threads of reasoning, it becomes necessary to study the fall out in the larger context of China’s development, its rate of growth and the relative size of investment for the Olympics vis-à-vis total investment in national development, both current and planned. It can be argued that the earlier Olympics were stochastic events which spurred sudden and short-term lumping of investment. This had beneficial effect as long as investments lasted and had negative fallout when they ceased.
A report of J.P. Morgan said that China would defy the records of predecessors since big economies are less vulnerable to a post-Olympic recession. It drew attention to Atlantic Olympics which did not adversely impact the U.S. economy as the investment on Olympics was around 2 percent of GDP. Its comparison showed that China’s GDP of $4.5 trillion (2007) is 22 times that of Greece in 2004 and 11 times of Australia in 2000. “As a result, the country has much more resilience to the impact of a post-Olympic slowdown and the fluctuations in the economy.” (BusinessWeek, August 28, 2008.)
Zhang Xiaode, a China National School of Administration professor, described the situation vividly thus: “If the Chinese economy is measured at a scale equal to the sea, the impact of a frog into the sea can almost be ignored.” (Chinese economy where to go post-Olympics, Chinadaily, August 28, 2008.) Fan Gang, Member of the Monetary Policy Committee of the Peoples’ Bank of China, explained that Beijing’s investment to sports and other infrastructure, though worth billions of dollars, accounted for 3 percent of the country’s total investment in fixed assets. Though it may sound exaggerated, many Chinese analysts refer to the relatively lower weight of Beijing in the national economy and how a downturn after the Games would not have significant impact on the overall economy.
One way of looking at Beijing Olympics is that it was not an isolated or stochastic episode spurring large value investment in a short span of time. China’s planning or developmental process has been going on for three decades and Beijing Olympics was fitted into this process for some years. As various data given from Chinese sources establish, the expenditure on Olympics ($41-43 billion) is a small percentage of the total developmental outlay and its decline in the post-Olympic period will not have any significant impact.
There are stronger reasons to dispel pessimism. Prof. Jeffrey Owen had remarked thus in his article referred to in the first part of this piece: “The potential for long term economic benefits from the Beijing Games will depend critically on how well Olympics related investments in venues and infrastructure can be incorporated into the overall economy in the years following the Games.” China seems to have fitted this approach while planning and preparing for the Olympics.
In Part I of this piece, we have narrated in detail the efforts made by Chinese authorities to fit the Games preparation and infrastructure construction with National Plan and the Plan for Beijing region. The Ring Roads, the new railways, bus systems, airport expansion and all the related facilities will continue to enhance the quality of civic life in Beijing. While planning the facilities, they have given thought to the post-Games management and maintenance of the facilities. The most imaginative part is that in improving the existing facilities in campus and leaving them, after the Games, to be managed by Universities or local authorities. It is well known that local authorities in China are zealous in creating and maintaining enterprises and infrastructure. This competitive spirit will ensure their continued management.
Overall, our assessment is that China will not face any adverse fallout in the post-Olympic period. Currently, China faces several threats such as inflation, currency rate fluctuations, hot money flows, fuel/commodity prices, etc. All these flow from abroad. Post-Olympic impact is not one of them. Rather, it may be argued that, as in its development programs and “transition” to a market economy, China has disproved conventional theories and make them stand on their head. It has good reasons to look upon Beijing Olympics as a boon and not a curse.
(The writer, Mr.K.Subramanian, is formerly Joint Secretary in the Ministry of Finance,Government of India. He is also associated with the Chennai Centre for China Studies).