The Olympics: An Economic Cure or Curse?

Traditionally considered a catalyst for regeneration and growth, the Olympic Games certainly bring prestige and media attention to the host country. The conventional argument is that this increased visibility benefits the host nation by attracting additional foreign investment, creating jobs, and boosting tourism. However, preparing to host the Games in the first place is a massive undertaking that first requires considerable capital investment in upgraded infrastructure, athletic facilities, housing, telecommunications, security, and sanitation, as well as covering other operational expenses during the Games themselves.

For London, these expenditures have totaled upwards of $14.5 billion, which well exceed its initial $5 billion estimate. The phenomenon of runaway costs is not atypical for host countries historically, however. For the Olympics in Athens and Beijing, preliminary estimates amounted to $1.6 billion in both cases, but ended up costing $16 billion and $40 billion, respectively. Unfortunately for London, the years leading up to the 2012 Games have been marred by constant upward revisions on cost estimates, of which the Olympic Park’s Aquatics Center is a perfect example. Originally budgeted at $118 million, the facility ended up costing $434 million. Despite this, the London Games actually proved to be a leaner Olympic Games than in years past.

Given the tumultuous economic climate in which England finds itself, it is unsurprising that the London Games lacked much of the extravagance that defined the Games in Beijing. Facing its second recession in four years, faltering consumer and investor confidence, and a seemingly imminent eurozone crisis, England is desperate for an economic boost. Manufacturing has fallen at its fastest rate in more than three years, and the economy has contracted by 0.7% in just a few months, suggesting even greater hardships are still to come.

To make matters worse for England, due to the global economic downturn, private investors largely reneged on their commitments to fund various projects related to the Games. Lacking a sufficient pool of private financing, England’s government was forced to absorb even greater expenditures than it initially anticipated. By contributing to England’s rising budget deficit, such additional expenses have only exacerbated England’s current dismal fiscal situation.

To be fair, funding the Olympic Games always places a strenuous burden on the government budget, irrespective of the current economic conditions. This harsh reality is nowhere more obvious than in Montreal during the 1976 Olympic Games, where severe cost overruns necessitated the introduction of a tobacco tax to help pay off its debt. While London has not yet reached this extreme, the substantial unexpected costs incurred challenges the economic viability of hosting the Games in the first place.

Although the majority of costs incurred by England from hosting the Games consist of direct expenditures, a more subtle but equally important component quantifies what the country is sacrificing in order to host the Games. By funding Olympic endeavors, England’s scarce capital is diverted from potentially more productive uses. As a result, hosting the Olympics can conceivably translate into slower rates of economic growth than what could otherwise be achieved. This opportunity cost, as it is referred to in economics terms, continues even after the Games end, as the projects that would have been undertaken with these public funds still do not receive the proper amounts of resources to be completed.

Over the last two decades, the economic impact of hosting the Games on the host country has been quite mixed. Although Barcelona in 1992 and Atlanta in 1996 enjoyed continuous and meaningful economic growth following the Olympics, the last three host nations—Sydney in 2000, Athens in 2004 and Beijing in 2008—all failed to secure sufficient long-term benefits from the sporting event. In each of the three most recent cases, it became increasingly apparent following the Games that the anticipated future revenues failed to materialize and thus did not justify the large upfront costs.

Having established the source of both the direct and indirect costs of hosting, one can now consider the potential for long-term benefits in order to ultimately decide whether sustaining the costs is justified. The primary factor underlying whether the Olympics will deliver future benefits or become an economic flop is the ability to smoothly transition from the Olympics to normal operations. For host cities like Athens that failed to achieve this, a rather lackluster residual legacy persisted following the Games. The current state of Athens’ athletic facilities is a constant reminder of the lofty expectations that never came to fruition. Because its infrastructure was constructed specifically for the Games without regard for post-Games integration, the overcapacity that has since ensued has led to severe underutilization of 21 of Athens’ 22 once world-class facilities. Most of its stadiums are in a state of disrepair, its Olympic village is a ghost town, and the government cannot afford the 60 million euros per year necessary to operate and maintain its facilities. By contrast, Salt Lake City, Utah, the host of the 2002 Winter Olympic Games, continued to enjoy higher volumes of skiers in future years following the games, because of its ability to find long term public uses for its Olympic venues.

London, now acutely aware of this issue, is determined to learn from Athens’ mistakes in order to ensure long-term feasibility and optimize the economic legacy of the Olympics. In an unprecedented move, the UK established a committee in 2009 to focus exclusively on post-Olympics development. London has designed venues that are more suitable for hosting events long after the Olympic Games have passed, by concentrating on portability and adaptability. For instance, its main stadium, which seats 80,000 people, has an upper tier that will be dismantled after the two-week sporting event. By relying on temporary as opposed to permanent installations, London will likely avoid the problems of excess capacity faced by Sydney, Beijing, and most prominently, Athens. Now with a more manageable capacity of 25,000, the core stadium becomes more usable for hosting smaller sporting events, concerts, and commercial events in the future.

Along similar lines, ensuring that any and all benefits are distributed among the city’s population is an important consideration. The 2012 Olympics has been coined “The Regeneration Games,” because of London’s mission to achieve urban renewal in the previously neglected neighborhoods of East London. Featuring 250 acres of open space, state-of-the-art athletic facilities, and the Athletes’ village, the newly built 500-acre Olympic Park in East London embodies the transformation of the urban landscape. To facilitate the integration of the eastern and western parts of the city, London spent billions of dollars on a new rail line that will connect the traditionally affluent West London with the poorer Eastern half. Additionally, developers have already opened the largest urban shopping center in Europe in East London, as well as various commercial spaces, housing, schools, libraries, and community centers.

Throughout the entire process, though, London must be wary of simply attracting wealthy outsiders. Instead, London should seek to raise the standard of living of East London’s poorer constituents by stressing affordability. For this reason, the city of London also has plans to build over 11,000 affordable homes in the region, in addition to its plans to convert the Athletes’ Village into 2,800 affordable apartments following the Games. For these plans to succeed, the government must actively promote continued regeneration in the region even after the Games are completed and the impetus has weakened, through encouraging job creation, improved health, and steady economic development.

Sustaining meaningful, long-lasting economic growth is also largely contingent upon maintaining increased levels of foreign investment beyond the short-term outlook of the Games. To do so, London has made an effort to attract increasing foreign capital as well as foreign direct investment—both public and private—by targeting companies based in China, India, and the United States. In fact, London has plans to host exhibitions and conferences designated to increase visibility and promote British businesses abroad. Its active promotion has already begun to pay dividends, as foreign companies, including Jaguar, Nissan, and a transportation contractor have recently announced over $8 billion in investment over the near term, including a $7 billion contract to build 92 inner-city trains.