As we approach the one year anniversary of the London 2012 Olympics (sorry, Londinium MMXII), the debate starts to rage about the legacy of the Olympics. UK government claims that the Olympics boosted the British economy by nearly £10 billions. Proponents and participants of all parts are quick to claim that the Olympics created a lot of business opportunities, and created jobs for firms that would have otherwise gone under.
But for any person willing to address the question rigorously and without passion, nothing is so sure. Anyone who listend to last edition of BBC Business Daily will have noticed the economist there was the only one being cautious and explaining again and again the concept of opportunity cost: the billions in cost could have been spent in a very different way that may have yielded better results.
As Stephanie Flanders’ excellent and unusually opiniated editorial points out, two critical arguments keep coming back and still haven’t, to my knowledge, been addressed properly:
- Figures are inflated by biased assumptions about extra expenditures.
- It is hard to know the counterfactual.
- The concept of opportunity cost does not seem to be understood by the parties involved.
To which I’ll add:
- The revenues generated have all been concentrated in London and in certain sectors.
- There was no citizen debate about London’s application.
Although it is rather easy to compute the costs, because they are clearly logged, it is much harder to computer the revenues and opportunities created by the London Olympics. To do one has to get ballpark figures by making some assumptions. And it seems that whenever assumptions were needed, the authors of the report have consistenly erred on the side of bigger figures.
For instance, one needs to assess how much more extra expenditures was created by overseas visitors depending on whether the Olympics is the reason they came to the UK. And depending on their answer, weigh their expenditure accordingly. But the report uses an odd weighing, I’ll let you judge:
Yes – definitely – 1.00
Yes – probably – 0.75
No – probably not – 0
No – definitely not – 0
One seriously has to wonder why every pound spend by the visitors counts as 75p extra expenditure if they answered “Yes probably” but 0p if they answered “No, probably not”.
Or the fact that expenditure by domestic visitors is counted in the benefits whereas, as report briefly mentions “some of the domestic visitor spending will be displaced spending from elsewhere”. But nevermind, let’s just add it all.
The unsound methodology is also apparent in the report’s blurry definition of the assumptions used to compute baseline versus upper range figure. (Upper range basically assumes that most of the benefits will accrue in 2012-2020, as opposed to 2004-2012.) Strange is also the fact that one sector that apparently is doing well “Professional, scientific and technical”. I’m curious to know what is included in there. Because if scientific research is accounted as benefitting from the Olympics, there clearly is a flaw in the estimation procedure.
By now, it is fair to say that so many of these tiny points accumulate to give the distinctive impression that whenever assumptions were needed, the authors erred on the side of inflating the benefits. Considering that the costs are said to be £8.7 billions (exceeding the initial budget of course), it is oddly convenient that the final benefits figures reaches £9.9 billions.
How much investment would have happened otherwise?
This is the hardest question: disregarding the errors in the numbers, how much of those numbers can be causally attributed to the Olympics? The main example is investments. Some investments were clearly linked to the Olympics: the Olympic Park, the Olympic village, the Media Centre etc.
Some other investments, such as improvement of transport infrastructures, are a bit harder to attribute clearly. Think about the renovation of some tube stations, or the improvement of the M4 motorway. Such investments did happen in the preparation phase of the Olympics, but some of those investments would probably have happened anyway, just at a later date.
The Olympics act as a catalyst so that a lot of investment happen at the same time, which might indeed improve coordination and reduce overall costs. But to attribute all of those to the Olympics is fallacious.
The opportunity cost of the Olympics budget
If you listened to the last edition of BBC Business Daily, you’ll understand that none of the guests except one understands the concept of opportunity cost. That guest was Prof. Andrew Zimbalist, who recently co-authored International Handbook on the Economics of Mega Sporting Events (Edward Elgar, 2012). He was luckily of fresh rational dispassionate and methodologically-sound thinking about the event. The other guests, all very enthusiastic about the Olympics kept hammering him with different arguments in favour of the vent: the jobs created, the companies saved or the fact that people practise sports more frequently now, or anecdotes about people feeling part of something.
Prof Zimbalist’s answer to all those arguments could hold in one paraphrased sentence: No one denies those benefits, but one has to wonder how the £10 billions could have been spent otherwise and probably achieve even greater effects.
The idea is that if you are looking for economic benefits, organizing such an event is definitely not the most efficient way to spend money. But one always forget about all the things that could have been done with such big spending. For instance, if one wants to encourage people to practise more sports, it might be much much cheaper to organize a campaign for that, or change curriculum at school. If one wants to renovate East London, there must surely be more efficient ways than building an Olympic park.
Somewhat defeated guests finally had to resort to the their last argument: the feel-good effect generated by the events. The professor’s reply? No proof of long-term effect. And it might be not be worth the money for the short-term feel-good.
It seems that most scholarly studies on the benefits of such events cast a huge doubt on the long-term benefits of mega-events such as the Olympics or the Football World Cups.
The London Olympics induced some hidden redistribution towards London, and certain sports related professions
If you asked people in the North of England whether they would like to give money to London, I am confident most of them would reply that the capital already enjoys a disporportionate amount of the national budget. Yet this is exactly what happened with the Olympics.
The one-year anniversary report makes very explicit that most of the benefits are concentrated in the London area, and in specific sectors (tourism obviously, but some stranger, like “Professional, scientific and technical”–maybe it includes sportsmen?).
But the burden of public spending was borne by tax payers across the whole country and across all sectors. This amounts to a giant redistribution scheme, where farmers from the North effectively paid money for the building of an Olympic park and the renovation of tube lines in London. While there are very good reasons to have redistribution in a country, it should be made explicit so that citizens know what they are in for.
Bottom-line: it is times that people stop waiving economic benefits as an argument in favour of such events. Instead, one should ask their citizens if they are willing to spend that extra money just for the event itself and if they are willing to bear some of the redistribution burden.
As studies start to accumulate that de-emphasize the benefits of such big events, it is time governments stop assuming that they should apply to host such events, and ask their citizens if all this is worth it after all.