London's Olympic Stadium under construction. (Photo: Matt Dunham/AP)
In the run-up to any Olympics, no shortage of boosters will hype the event's potential for economic stimulus, and the upcoming Summer Games in London are no exception.
British Prime Minister David Cameron has predicted a £13 billion boost to the United Kingdom's economy as a result of the Games. A report from Visa, one of the event's official sponsors, has projected an extra £800 million in consumer spending during the competition. And both London Mayor Boris Johnson and Sebastian Coe, the chairman of the London 2012 organizing committee, have publicly touted their vision of post-Olympic prosperity, job creation and tourism surges.
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The reality is that past Olympics have left behind legacies that are decidedly bleaker than the boosters' rose-tinted projections.
In Montreal, it took 30 years to pay off Olympic debts, and Olympic Stadium continues to hit the pocketbooks of taxpayers. The Summer Games in Athens were victim to hefty budget overruns-enough that some critics lay partial blame on the Olympics for Greece's economic collapse. And in Beijing-where the Games cost an estimated US$40 billion-hotel bookings in August 2008 (the month China hosted) dropped by 39% over the previous year.
In other words, be wary of Olympic boosters. Whether it's a politician, organizer or corporate sponsor, each entity has something at stake and needs to spin the event's benefits for taxpayers, who typically fund the majority of costs. Fortunately, boosters' claims can be easily debunked.
For instance, Olympic backers like selling the spectre of wild surges in foreign visitors and consumer spending. But since the 1992 Summer Games in Barcelona, each host city has experienced a decrease in foreign tourists during the Olympics and in the months before and after, according to the European Tour Operators Association. In Sydney, host of the 2000 Olympics, foreign tourism grew at a slower rate than the rest of the country in the three years following the Games. The situation was more severe in Athens: Organizers hoped for 105,000 visitors per night, but received fewer than 14,000.
It appears the trend will continue in London. VisitBritain, the national tourism agency, is predicting foreign visitor numbers and spending in 2012 to remain unchanged from last year. During the Olympic period, various travel agencies and tour operators are noting a slowdown in hotel bookings, with overall vacancy rates of up to 35%. One culprit is the high price of staying in London; across the board, hotels have hiked up prices, though some are starting to ease rates to fill rooms. Despite the evidence stacked against him, Coe has said the Olympics will bring an additional one million visitors to London.
At the very least, you can count on Britons to spend big, right? Not so fast.
When it comes to consumer spending, boosters typically make a big assumption: that Olympic purchases will supplement-rather than supplant-normal spending. Victor Matheson, an economics professor at the College of the Holy Cross in Massachusetts, says that pre-Olympic studies can be challenged on several grounds, one of which is "the substitution effect."
In his paper "Mega-Events: The effect of the world's biggest sporting events on local, regional, and national economies," he writes: "A local resident who goes to an All-Star Game when it is in town is spending money at the game that likely would have been spent locally elsewhere in the absence of the game. Therefore, the local consumer's spending on a sporting event is not new economic activity, rather a reshuffling of local spending. For this reason, most economists advocate that spending by local residents be excluded from any economic impact estimates."
Then there's the public cost of hosting the Olympics. When London was awarded the Summer Games back in 2005, their bid cited an initial budget of £2.4 billion. It didn't take long for that figure to skyrocket to £9.3 billion. Again, this is nothing out of the ordinary. A recent working paper from the University of Oxford reports that every Olympics in the past 50 years has gone over budget, with an average increase of 179%.
And yet Olympic organizers have recently said the Games will come in "under budget."
As for overall returns, most economists agree that the Olympics make a negligible impact on a host city's economy.
"In terms of an identifiable macroeconomic impact, I think it's hard to think of any good examples where it's shown up in the GDP figures," said Stefan Szymanski, a professor of economics at the University of Michigan, in an article from the Guardian. "As economic events, they're not a big deal. Economics is about more mundane things like producing steel and cars and working in offices - we have Olympics to take our minds off the dull things that make the money."
Cameron's £13 billion projection is slotted to occur over the next four years. But even if he's right-like any of these predictions, it's debatable-that figure would be a minor blip in one of the world's biggest economies, which measured US$2.26 trillion in 2010, according to the World Bank.
Still, some critics believe that any economic impact has already been felt. "Construction work on venues and transport links has been underway for several years already, and is unlikely to provide a significant fillip to the UK economy this year," said Moody's in a May report. Likewise, research by Citigroup says economic growth historically slows in the two quarters following the Games.
It will be a long-shot for Cameron, Johnson, Coe and Visa to make good on all their predictions. Doing so would upend several decades of wisdom. Until that day comes (or doesn't), take anything they say with a grain of salt.