Olympic Economics

A Professor's Perspective On Current Events

Image of Professor Timothy Taylor, M.Econ.
By Professor Timothy Taylor, M.Econ.

Professor Timothy Taylor discusses the Olympic Economics of this year’s winter Olympics in South Korea.

This article originally premiered on Conversable Economics

Before settling into my sofa for a couple of weeks of watching the athletes slip and slide through Winter Olympics from PyeongChang, I need to confess that the Games are a highly questionable economic proposition. One vivid illustration is that the $100 million new stadium in which the opening ceremonies will be held is going to be used four times in total–opening and closing of the Winter Olympics, opening and closing the Paralympics next month–and then it will torn down. Andrew Zimbalist goes through the issues in more detail in “Tarnished Gold: Popping the Olympics Bubble,” which appears in the Milken Institute Review (First Quarter 2018).

Building new facilities (or dramatically refurbishing older ones) is a major cost for the Games. Zimbalist notes that the previous Winter Games in 2014, “the IOC embraced an ostentatious bid from Sochi for the 2014 Winter Olympics where almost none of the required venues or infrastructure were in place. It became the most expensive Olympics in history, with Russia ponying up between $50 billion and $67 billion — though how much of that actually went into construction and operations is unclear.”

As it has become abundantly clear that that direct revenues that a host city receives from the Olympics–for example, revenues related to tickets and television rights–typically cover only about one-third of the costs of hosting, fewer cities are bidding  to host the Games.  The 2022 Winter Games came down to two bidders, Beijing in China and Almaty in Kazakhstan. Beijing “won,” as Zimbalist describes:

“The Beijing organizing committee pitched its bid to the IOC by noting that it would use some venues left over from the 2008 summer Olympics. But China went along with the IOC’s penchant for creative accounting by excluding the cost of the high-speed railroad that will link Beijing to the downhill and cross-country ski areas (54 miles and 118 miles from the capital, respectively). That project will run to about $5 billion and have little value to the region after the Games are over.

“Also excluded from the Beijing budget will be the substantial expense of new water diversion and desalination programs necessary for hosting Winter Games in China’s water- (and snow-) starved northern cities. North China has only 25 percent of the country’s water resources to supply nearly 50 percent of the population. Accordingly, China launched an $80 billion water-diversion program from the south before the 2008 summer Olympics.

“But the north’s water availability still remains below what the United Nations deems to be the critical level for health – let alone for an Olympics extravaganza. Zhangjiakou, the site of the Nordic skiing competition, gets fewer than eight inches of snow per year. Yanqing, the site of the Alpine skiing events, gets less than 15 inches of precipitation annually.

“Both areas will thus require copious water for artificial snowmaking. But even if China manages to complete the necessary infrastructure for water diversion, it will amount to robbing Peter to pay Paul: Beijing, Zhangjiakou and Yanqing lie in one of China’s most important agricultural regions, producing sorghum, corn, winter wheat, vegetables and cotton.

“The government, moreover, is apparently counting on lasting value from the construction of the Winter Games, creating permanent ski resorts in the mountains bordering Inner Mongolia and the Gobi Desert. If the ski resorts survive, only China’s richest residents will be able to afford them, while food supplies – and the incomes of the growers – will suffer.

“Another strike against Beijing 2022 is that winter is one of the worst times for air pollution in this horribly polluted city. Deforestation of the northern mountains needed for Games infrastructure will only compound the problem.

“One might wonder why, in light of the daunting complications of hosting the Winter Games in northern China, Beijing got the nod in the first place. The answer is simple: thanks to the prospect of big deficits, the only other city bidding was Almaty, capital of oildrenched Kazakhstan, which has been ruled with an iron fist by the kleptocrat Nursultan Nazarbayev since independence in 1991.”

Zimbalist doesn’t offer parallel estimates for the PyeongChang games. The standard estimate floating round seems to be that South Korea will spend about $13 billion on facilities for the Winter Games, but such estimates turn out to be too low. Also, this amount doesn’t include infrastructure like a high-speed rail line over the 80 miles between Seoul and PyeongChang. A few years ago, analysts from the Hyundai Research Institute pegged these additional infrastructure costs at $43.8 billion.

The economic case for hosting the Olympics thus needs to rely on indirect benefits: short-term construction jobs before the Games, tourist spending during the Games, infrastructure and recognition that could last after the Games. Looking at past Olympics, such benefits are quite uncertain. The best-case economic scenario for the  PyeongChang Games may be the Salt Lake City Winter Games of 2002. The underlying reason is that this area was an attractive and reachable destination for winter sports, but somewhat underappreciated before the Games. It’s visibility and tourism seemed to get a long-term boost from the Games. Indeed, Salt Lake City has just announced that it would be interested in hosting the Games again in 2026 or 2030.

However, other homes for the Winter Games in recent decades have not succeeded in the same way: either the destination was already fairly popular for winter activities, and thus didn’t receive a long-term tourism boost, or the area just didn’t get a long-term boost. Here’s the roll call of locations for the last 10 Winter Games: Sochi (2014), Vancouver (2010), Turin (2006), Salt Lake City (2002), Nagano (1998), Lillehammer (1994), Albertville (1992), Calgary (1988), Sarajevo (1984), Lake Placid (1980).

For the PyeongChang Games, ticket sales have not been brisk. Television ratings seem likely to be fine, but with the big time difference and people who access their media in other ways, they may not be great. Spending on facilities seems to have been kept under control, although this may also mean that the details of cost overruns haven’t yet filtered out. Even the International Olympic Committee, not known for encouraging parsimony, has warned publicly that many of the new venues may become useless after the Games.

This article is part of our Professor’s Perspective series—a place for experts to share their views and opinions on current events.

The ultimate economic payoff is likely to depend on whether PyeongChang becomes a considerably more prominent destination for winter tourist activities in the years after the Games. On the downside, PyeongChang at present has a small population (about 44,000), and it’s night life,  restaurants, and hotels are correspondingly limited. It also about 40 miles from the demilitarized zone separating South and North Korea, which might make potential tourists uncertain about plunking down money for reservations. On the upside, income levels have been growing rapidly in east Asia, especially in China. The demand for tourist destinations is rising. There are a number of successful South Korean ski resorts already. PyeongChang will almost have economic costs far exceeding the benefits. But it has a reasonable chance of less red ink than other recent Winter Games, and seems likely to do far better on a cost-benefit calculation than either its predecessor in Sochi or its successor in Beijing.

For more on economics and the Olympics, here’s a discussion from Zimbalist of why Boston opted out of even trying to host the 2024 Summer Games, and here’s a discussion of an n article Robert A. Baade and Victor A. Matheson that appeared in the Spring 2016 issue of the Journal of Economic Perspectives, “Going for the Gold: The Economics ofthe Olympics,”

For more with Professor Taylor, check out “Unexpected Economics” or “America and the New Global Economy” on The Great Courses Plus!

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