Rio 2016: Economists Question Wisdom of Hosting Olympics
Craig Dale | Supervising Producer
“There is not going to be a torch,” shouted demonstrators this week in the Brazilian town of Niteroi, the crowd growing increasingly agitated as riot police starting moving in.
Some protestors carried banners reading “Games of exclusion” as they attempted to block the Olympic torch relay on its way to Rio de Janeiro, just days before the Marvelous City hosts 2016 Summer Games.
“The government takes money from health, education and social programs to guarantee the Olympics,” protestor Pedro Rosa told Associated Press. “But 30 days from now, the big buildings and venues built will be useless.”
Not so, according to Niteroi resident Eunice Das Neves. “I’m against [the protesters] because this is a beautiful thing, Brazil is bringing a beautiful celebration with the Olympic Games that we want to see.”
In the end, the Olympic spirit prevailed, with some help from brute force and a dose of tear gas, and the torch continued on its way to Rio. But the differing opinions in Niteroi highlighted the debate that surrounds this monster sporting event: Do the social benefits outweigh the heavy financial costs?
Road to Rio
Things were very different in Brazil in October 2009, when Rio beat Tokyo, Madrid and Chicago to win the right to host the 2016 Summer Games.
“There was absolutely no flaw in the bid,” then-IOC president Jacques Rogge said at the time.
Brazil made a convincing, emotional case for its right to hold the Games – the world’s premier sporting event had never been held in South America – and its economy showed plenty of promise. The country had emerged from recession and was on its climb back to the 7.5 percent economic growth it recorded in 2010; inflation was below the central bank’s target; and the real was strong, which helped Brazil’s Índice Bovespa become the world’s best performing stock market in 2009, surging a gravity-defying 145 percent in dollar terms.
Flash forward to today and the situation’s almost entirely flipped around: Brazil is suffering its worst recession since the 1930s, inflation is high, and its sovereign rating has been downgraded to junk.
The country is also stuck in a political limbo of sorts, with its suspended president, Dilma Rousseff, facing an impeachment trial. Hopes a new administration could turn the country around have helped the real and equities notch up impressive rallies this year, but the outcome remains cloudy.
“The Rio situation right now is tragic. It’s very depressing. It’s a country that never should have tried to host the Olympics,” sports economist and Smith College professor Andrew Zimbalist told CNBC’s “Street Signs” on Wednesday.
“It doesn’t have sufficient transportation infrastructure, it doesn’t have sufficient sanitation infrastructure, it doesn’t have sufficient sporting infrastructure, it doesn’t have sufficient telecommunications infrastructure. So there has been an enormous amount of investment that has been required of the city of Rio.”
So much investment that in June, the Brazilian government authorized an $850 million loan for Rio to help pay for Olympic infrastructure and security, after the city declared a state of financial emergency.
But the evidence indicates Rio is unlikely to receive a good return on this heavy spending.
Zimbalist, author of the 2015 book “Circus Maximus: The Economic Gamble Behind Hosting the Olympics and the World Cup,” said that independent research showed that host cities did not benefit in either the short- or long-term when it came to metrics including tourism inflows and foreign investment.
“The problem is that you shouldn’t create an economic catastrophe, and massive economic debt, every time you host an Olympics,” he said.
No pain, no gain
The cost of putting on the Games has ballooned since the first modern Olympics were held in Athens in 1896. David Goldblatt, an expert in sports sociology and author of “The Games: A Global History of the Olympics,” wrote in Time magazine in July that by his calculations, the price tag for the event had ballooned 200,000 percent since then.
According to his accounting (all in today’s money), the final bill for the first Athens Games came to about $10 million. The 1936 Berlin Olympics blew the bank, adding up to around $1.7 billion. The post-war 1948 London Olympics (known as the “Austerity Games”) cost $30 million.
From there, though, the budgets continued to grow until the $1.5 billion bill for the 1976 Summer Games nearly bankrupted the Canadian city of Montreal, which spent the next 30 years paying it off. It was lesson learned for officials in Los Angeles, who paid $320 million to host the 1984 Olympics and ended up turning a profit.
But the spending bug came back in subsequent years, according to Goldblatt. Barcelona 1992: $7 billion. Athens 2004: $11 billion. London 2012: $14.8 billion. Sochi 2014: a staggering $51 billion. The 2016 Rio Olympics are expected to cost roughly $12 billion, depending on the exchange rate, though Goldblatt has forecast it could end up costing as much as $20 billion.
Yasuyoshi Chiba | AFP | Getty Images
Protesters hold banners against Rio 2016 Olympic games to demand more education or health care during a demonstration against the Olympic torch relay in Niteroi, on August 2, 2016.
Researchers at the University of Oxford’s Said Business School recently released a study on sports-related cost overruns from 1960 to 2016. They found that no games since 1960 had come in under budget and that the average cost overrun was 156 percent in real terms.
To calculate costs overruns, the report looked at the “bid book” cost forecasts when a city began campaigning for the games, then the “outturn cost,” which was the actual total cost of games-related construction and services .
“The largest cost overrun for Summer Games was found for Montreal 1976 at 720 percent, followed by Barcelona 1992 at 266 percent,” the study authors Bent Flyvbjerg, Allison Stewart and Alexander Budzier wrote.
“For Winter Games, the largest cost overrun was 324 percent for Lake Placid 1980, followed by Sochi 2014 at 289 percent.”
That adds fuel for critics such as Andrew Zimbalist.
“The problem starts with the fact that the Olympics are organized by the International Olympic committee,” he argued. “It’s an international monopoly that is unregulated, has an enormous amount of economic power and what it does every four years is that it invites the cities of the world to compete against each other to prove to the IOC that they are the most worthy hosts of the Games.“
“So the cities enter the competition with each other, each one tries to outdo the other, in terms of the lavishness.”
Zimbalist suggested that there was a better way.
“Corporate sponsors can come together and insist upon a different model for the IOC,” he said. “That won’t be easy, but at least it’s one possible way of reforming the system.”
So is it all doom and gloom for games hosts? Not entirely.
Despite the painful cost overruns, the doping scandals and, in the case of Rio, the Zika virus scare, even Zimbalist admits that the Olympics do offer transient intangible benefits.
“There usually is a sense of pride, there is usually a sense of social cohesion,” he acknowledged. “But that lasts for several weeks, several months, and then it goes away.”
There may also be a more measurable gain, however. Markets gurus have observed a noticeable boost to the host country’s stock market post-games.
Khoon Goh, head of Asia research at ANZ, and his team surveyed the impact from L.A. 1984 to now.
“The equity market returns of the host nation not only posts strong gains (with the exception of Sydney 2000), but also tends to outperform the global benchmark,” they wrote in a recent report. “The average gain is 24.4 percent (20 percent in dollar terms) for the host equity market, compared to 9.2 percent for the MSCI World Index.”
Their conclusion for Brazil?
“If history were to repeat, this suggests that the Bovespa’s strong run so far this year could extend further,” the ANZ team predicted.
So if even if you’re an Olympic-size pessimist when it comes to the Games, you could find your Brazilian returns will be faster, higher, stronger.
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Source: CNBC
