The Olympic Games: Tracking the Economic Evolution

August 23, 2016
Writer(s): Tin Nguyen, Sabre Konidaris

Before the GFC in 2008, Brazil’s economy was experiencing high levels of growth. It was widely predicted that the 2016 Rio Olympics would flaunt the nation’s newfound economic might, signalling a transition toward a more stable economy with positive international commerce and trade prospects. Brazil was considered to be a core player of the ‘BRICS’ nations (also comprising Russia, India, China and South Africa), with economists expecting future international commerce successes to establish Brazil as a forerunning developing nation. However, contrary to these optimistic predictions, the GFC ushered a period of unprecedented economic decline for the emerging nation state.

Despite a significant 2010 increase in real GDP, decreased investor and consumer confidence both locally and internationally after periods of negative growth in 2008 and 2009 foreshadowed a gradual economic decline throughout the years leading up to the Olympic Games. China’s declining demand for Brazil’s natural resources for example contributed to the nation’s stunted growth. In addition, bouts of social and political unrest on account of the zika virus, the impeachment of former President Russeff, and other significant economic liabilities sparked universal doubts regarding Rio’s ability to successfully host the 2016 summer Olympic Games.

In examining the impact of the Olympic Games on the economy, there was minimal benefit in comparison to the successes of past host countries. Despite the Game’s conclusion without too major a catastrophe, poor athlete accommodation standards and society-wide disillusionment regarding the government’s heinous deprioritisation of social welfare responsibilities stimulated political embarrassment internationally. In Brazil’s unstable political and economic landscape, many economists and Brazilian citizens alike have criticised the Olympics as a poor investment, the opportunity cost being urgent improvements to public goods and service production. Economists currently forecast an approximated 3.7 percent decline in growth. This figure mirrors the arduous economic downturn in 2015, the Olympic Game’s poor execution contributing to nationwide social, political, and economic issues that defy the bold predictions of previous decades.

With regards to economic growth, the impact of the Rio Olympics was too minimal to have a material impact on the $15trillion economy. Currently, the most promising outlook regarding Brazil’s economic future is that the increase in domestic consumer and firm confidence due to the slight stimulus of hosting of the Olympic Games will initiate further spending that stimulates economic recovery.

Closer to home, the 2000 Sydney Olympics had many positive impacts in Australia, ranging from increased tourism to overall boosts to exports, investment, and general GDP levels. Interestingly, there was minimal effect on national employment during the Sydney Olympics, deviating greatly from economic predictions.

Victoria had greater industry growth than Sydney, as evident in total construction expenditure. Victoria had a 37.2% increase in construction GDP, whereas Sydney’s was only 23.6% during the year the Olympic Games were held. Although NSW focused heavily on construction in preparation for the Games, Victoria was able to increase GDP (specifically construction related) to a greater degree, with Sydney struggling to keep apace despite its positive reputation. Financial services’ contribution to GDP is also relevant – an increase of people in a certain area (in this case, a state) generally correlates to increased total investment (since more financing services are required). NSW had an increase of 37.7% growth over 9 years, while the Victoria had 40.0% growth over 9 years, indicating greater contributions of financial services to GDP in Victoria.

However, a desire to increase tourism levels is one of the biggest factors which drove Australia to host the 2000 Olympic Games. The Games has the ability to change how a country is perceived internationally, with increased tourism before and after the Games often contributing to economic growth for host countries. The Tourism Forecasting Council estimated in 1998 that there would be a total 1.6 million international tourists from 1997-2004. This did not occur, with an increase in tourism of 15% in the last quarter of the 2000 and 4% in the first quarter of 2001. Due to the ‘noise’ of other major events, it is difficult to determine whether the 2000 Olympic Games played a key role in increasing tourism. The 2001 9/11 terrorist attack, 2002 Bali bombings, and 2008 financial crisis shortly after all factors which could have influenced Australia’s, and more specifically NSW’s, tourism industry in the long-run, dashing any post-Olympic perceptions of Australia that could have encouraged tourism. The actual number of tourists during the Games was 110,000 Olympic-specific visitors, which one third of them being the Olympian’s family members. This is not immensely significant to total tourism or GDP levels, and thus it is arguable that in the case of the 2000 Sydney Olympics, tourism did not necessarily facilitate a significant increase in economic growth and prosperity.

So what are our economic expectations for the next Olympic Games? Whilst one can never be too sure about predictions regarding Japan’s unique economy, an investigation into the potential impacts of the Toyko 2020 Olympic Games on growth, debt, and others factors should be considered by all those who wish to attend.

Forecasted increases in tourism and investment in construction are predicted to generate significant economic activity. Measured using current exchange rates, the Bank of Japan expects this activity to be approximately USD $300billion, much higher than the original hosting cost estimations of $3.5billion (jap times). Government spending and increased investment involving the building of facilities, hotel refurbishment, urban redevelopment, construction of commercial facilities, and the enhancement of transportation infrastructures will contribute to an increase in the annual GDP growth rate to 1.3% in 2020, up from an average of 0.5% in previous years. Apart from investment associated directly with the Olympics, increased renovations of older buildings and earthquake resistance construction will also have an impact. The table below describes core construction projects that will contribute to economic growth:

Such projects will likely elevate Japan away from risky 0% inflation levels to the 1.7% expected in 2020. Despite initial public uproar over planning and operational choices, such as extreme stadium design costs, the third largest economy is home to innovative firms that will likely employ efficient processes that greatly contribute to economic prosperity.

A critical influence of the Olympic Games is the amount of tourism the event invites. Partially due to the announcement of the Tokyo 2020 Games in 2013 and increase in Chinese tourists, the number of foreign tourists and their expenditure patterns have significantly increased over the past four years:

Furthermore, when we consider data of tourism regarding previous Olympic Games, it is evident that there appears to be a strong correlation between the event and tourism levels prior to, during and even after the event

As demonstrated in the above graphs, and since there are 920,000 spectators to visit Tokyo per day during the Olympic Games period, great benefits of tourism such as supporting Japanese firms and employment, stimulating growth, and combating trade deficits will have a considerable positive impact on the economy. Furthermore, hosting the Olympic Games also signals a medium to long term commitment to international openness, raising growth expectations due to increased exportation prospects. From comparisons to previous Games it is common for a significant boost to real GDP growth about 3 years before the Games starts, and hence Japan will likely be able to soon benefit from increased tourism and investment.

However, despite the possible economic benefits of hosting the Olympic Games, there are also challenges which will have to be overcome to ensure long-term prosperity. Despite significant growth in previous host countries, many were developing (not already developed like Japan) and so the impacts of better social infrastructure and tourism will likely not have as pronounced benefits. The planned budget only accounts for approximately 0.15% of GDP, a smaller figure than the 0.4% average of past host countries. Hence, the degree of impact of the Games on the state of the economy is also likely to be lower. In 2020 and beyond, crowding out of the private sector system due to increased public projects, government expenditure to combat looming concerns of an aging population and other social/economic issues, financial difficulties regarding the government’s ability to pay back its tremendous debt, and expectations of a major property market slump are visible on horizon. The Olympic Games are forecast to contribute to an increase in the government debt to GDP ratio from 235% to 243%, and thus tax increases and public expenditure cuts are set to shake Japanese population. Furthermore, low interest rates mean that government borrowing to finance the Games might be affordable now, but if rates rise there will be a catastrophic drain on government finances due to higher interest. The struggle between growth and debt will no doubt mirror the tenacity of the athletes, as they struggle to get ahead in the most important race of their lives.

The Olympic Games is an interesting phenomenon which has varying degrees on economic growth depending of the nature of the hosting economy. Whether it be minimal impact in Rio due to unyielding conditions of negative growth, or the expected stimulation of the Japanese economy, there is a common feature that prevails in all cases. Worldwide and over the centuries, the Olympic Games has proven to be a core concern for economic forecasting and a major focus and consideration due to the significant economic, social, and political influence. The evolution of this influence over the course of the Game’s expansion can be difficult to measure due to the diverse range of hosting economies, but it is clear that upon investigation into historical economic records, the Olympic Games is a great event that defines both developing and developed nations alike.

Written by Annie Hua, Tin Nguyen, and Sabre Konidaris     22/08/2016





The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

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Tin Nguyen

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