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Why The Olympics Are A Bad Investment, But Also A Good One

Economy
Why The Olympics Are A Bad Investment, But Also A Good One

The winter Olympics are upon us. Even before the opening ceremony, Russia had set a few records, these games notably taking over as the most expensive in history. Coming in over $50 billion, it is the most expensive Olympics ever, more than $5 billion more than the Beijing games of 2008. The ridiculousness of this price tag is largely attributed to the allegedly corrupt nature of the Russian state. Though the original cost estimate was $12 billion, contracts were given to those with ties to the Kremlin, and costs overran. The International Olympic Committee believes over one-third of the $50 billion has been stolen.

But why would a country invest so much to host a sporting event? Is there actually an economic boost that comes from hosting the Games?
Let’s look at some recent cases.

In 2004, Athens hosted the Summer Games. With an initial allocated budget of $6 billion, the final operating costs were over $15 billion. That is one of the nice things about being contracted by the government for an extremely public event: deep pockets. But while the Greek government invested all of this money into hosting the Olympics, did it get anything out of it? Sadly, no. It lost nearly all of the $15 billion. This event is largely cited as a leading cause of the Greek government-debt crisis that kicked of the global economic recession in 2008.

athens-c

A few years later, the Olympics were hosted in Beijing. At this point, the Beijing Olympics were the most expensive in history, coming in at between $42 and $45 billion, widely missing the target price of $16 billion. According to researchers at Oxford University, the costs of the Olympic games “overrun with 100 per cent consistency”.

It seems the best you can hope for economically as an Olympic host is to break even. In 2010, Vancouver hosted the winter Olympics. With an initial budget of $165 million, and final operating costs of $1.7 billion, it too overshot its estimate. Host countries often underestimate the last-minute cost for security and transportation. There were additional costs of over $3 billion for Vancouver’s security and transportation upgrades. But the city came close to breaking even.

At the London 2012 Olympics, costs again were more than twice initial estimates. The estimates pegged the cost at $4 billion. The final cost was over $10 billion.

But all of this pales in comparison to Sochi: the most expensive Games in history, more expensive than all of the previous Winter Games combined. The cost of $50 billion has been broken down in many ways to illustrate its absurdity.

Cost Per Event

A telling example of the enormous cost of the Sochi games is the average amount of money the games cost per event. In Beijing, the cost equated to $132 million per event.  Sochi’s cost breakdown equals $520 million per event. And a comical Bloomberg report compares the $51 billion cost of Sochi to the cost of going to Mars: $2.5 billion.

But the Russian government does not have to worry about these cost overruns because the taxpayers are paying for 96.5% of the tab.

Vladimir Putin

Complicating things further is the way the country is approaching tourism. Normally host cities hope to attract a large tourist population to help recoup the cost, but Russia is actually limiting access. Increased security along the border, and the issuance of special passports will keep the number of visitors limited. So while the costs are enormous, the tourist base will be smaller than normal.

The reason for the exorbitant expenses is graft. The road from the coast to the Krasnaya Polyana ski resort cost $9.4 billion.  This amounts to $200 million per kilometer, making it the most expensive road in the world. Boris Nemtsov, an opposition leader, says “They may as well have paved it in platinum or caviar.”

It is not clear that investment in hosting the Olympics ever have a return. A large investment is made into building extraordinary sporting facilities, but even those soon become eyesores.  In Greece, for example, the Olympic stadiums receive fewer visitors than the Parthenon, and look about as old.

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But in spite of the poor returns, the Olympics continue to grow in cost, largely because they are so popular among the voters who pay for them.

The hope for a spur in tourism also tends to be overly-optimistic.  Even in August 2008, as Beijing hosted the Olympics, hotel bookings were 39% lower than they had been a year earlier.

Hosting the Olympics can also be the cause of protests, as in Brazil. Rio will host the 2016 games, as well as the upcoming World Cup. Meanwhile, the Brazilian economy is struggling with inflation. These large investments to host the Olympics and World Cup have been the key point of criticism by those fighting against government waste.

Obviously, it’s a high-risk investment. But there is more to be gained than just material goods. Beijing, in 2008, used the games as a way to show off China’s ability to organize vast amounts of people, and spend vast amounts of money. London used the opportunity to reinvest capital into poorer parts of the city. In 2020, when Tokyo hosts the games, Japan hopes it will be a way of boosting the economy.

This is also why Putin has invested so much into the Sochi Games. Unfortunately, Mr. Putin’s outpouring has little to do with his love of the sport, or the desire to offer athletes world-class experience. As was seen in the opening ceremony’s rosy, westernized re-enactment of Russian history, it is his way of rebranding Russia.

But the fact that there is no meaningful economic boost might eventually allow the Olympics to get back to why they were created, not as a tool for governments, but as an exposition of talented, ambitious athletes and the human spirit.

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