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The University of New Haven Department of Economics Special studies series no. 1601 Macroeconomic uncertainty and the Olympics Henry Adegunle May, 2016 Department Special Studies Series are preliminary materials circulated to stimulate discussion and critical comment. The analyses and conclusions set forth are those of the authors and do not necessarily reflect the views of other members of the Department, the College of Business, the University of New Haven or its Board of Governors. Upon request, single copies of the paper will be provided. References in publications to Department Special Studies Series should be cleared with the Individual author to protect the tentative character of these papers. MACROECONOMIC UNCERTAINTY AND THE OLYMPICS Henry Adegunle* Department of Economics University of New Haven Abstract The economic effects of the Olympics are a hotly debated topic especially leading up to the bidding and to the event itself. In fact, much has been written about the economic effects of the Olympics – ranging from the impact of the games on national output, investment, consumption, government spending, inflation, exchange rates, and unemployment, to list but a few. I assess the impact of the Olympics on macroeconomic policy uncertainty of the nation or region hosting the Olympics, a proposition advanced by Bruckner & Pappa (2011). DRAFT April, 2015 * Email: [email protected] “Americans are apt to be unduly interested in discovering what average opinion believes average opinion to be.” Keynes (1937) Introduction The Olympic Games originally started as a series of competitions between representatives from cities in Ancient Greece. The events were mainly athletic, but also included combat and chariot racing. In this early era the Olympics were of fundamental religious importance to the Greeks. The events were held in parallel with rituals to honor Zeus and Pelops, mythical kings of Olympia- the location of the original Olympic ‘stadium’. (Edds, 2012) The Olympics were held every four years and this period, known as the Olympiad, was used by the ancient Greeks as a way of time measurement. Winning an event at the Olympic Games was of great value and recognition to the individual athlete. The winners of the individual games were idolized by the Greeks on a national level. The winners were also immortalized through the writing of poems and construction of statues. Many winners are documented in ancient Greek myths and legends, their stories still being told to this day. The Greeks also are important for the contribution to sports. We compete in "gymnasiums" and "stadiums" today--names that both Page 2 of 17 come from Greek. There are lots of other echoes of the Greeks in our sports tradition of today. Some of our track and field events (e.g., the javelin and the discus) come out of Greek tradition. Events like the Marathon and the Decathlon have Greek names, though they weren't specific Greek events. Perhaps the best example of Greek influence on our sports tradition: the Olympic Games. (Greek Achievements, 2009) Political symbolism In Olympics The Munich massacre was an attack during the 1972 Summer Olympics in Munich, West Germany, on eleven Israeli Olympic team members, who were taken hostage and eventually killed, along with a German police officer, by the Palestinian group Black September. (Wikipedia, 2015) The 1979 Soviet invasion of Afghanistan spurred Jimmy Carter to issue an ultimatum on January 20, 1980 that the United States would boycott the Moscow Olympics if Soviet troops did not withdraw from Afghanistan within one month. (Smothers, 1996). The Soviet Union led the Warsaw Pact and other Communist and Socialist countries on a boycott of the 1984 Summer Olympics, in retaliation for the U.S.-led boycott of the 1980 Summer Olympics in Moscow over the Soviet Union's invasion of Afghanistan in 1979. (olympic.org, 1984). When the 2004 Summer Olympics returned to Athens for the first time in more than a century, nearly 11,000 athletes from a record 201 countries competed. In a gesture that joined both ancient and modern Page 3 of 17 Olympic traditions, the shot put competition that year was held at the site of the classical Games in Olympia. The Olympic Games truly took off as an international sporting event after 1924, when the VIII Games were held in Paris. Some 3,000 athletes (with more than 100 women among them) from 44 nations competed that year. Paris was the first time the Games featured a closing ceremony. There are seemingly vast economic benefits for different industries and sectors derived from hosting an event of such magnitude as the Olympics, from increasing tourism rates to job creation to investment. Yet, by their very nature however, the Olympic Games engender considerable opposition and criticism. Critics contend that they divert funds from more socially-worthy projects, that they foster corruption and cronyism. There is considerable interest in documenting both cost and benefits to establish the net effect of hosting the Games (Owen, 2005). Official economic impact studies attempt to measure the costs and benefits of hosting the Games (Rose & Spiegel, 2011). However, setting aside the often obscure and complicated modeling, published official studies often fail to adjust for the self-interest of those conducting the studies and which may lead to self-serving characterization of costs and benefits casting doubt on the exercise itself. Tellingly, the economic benefits of hosting the Games are dubious for most Page 4 of 17 academics who have conducted independent research on the issue. It fact, it has only been recently, using trade models, has it been possible to show that hosting the Olympics has a positive impact on national exports which is statistically robust, permanent, and large. Still, the lack of tangible benefits derived from the games is no shortcoming to some. The appeal of such an event is its ability to cover individual participants – and their countries in honor. In fact, whether the organization of the modern Olympic Games is a matter of honor or a matter of money has been a recurring debate for many years with no clear answer. Indeed, the debate may well be as old as the Olympics itself. According to Herodotus, in ancient Greek times when the Olympics were on, Xerxes and Mardonius asked a group of Greek deserters what prize the Olympic winners should get. The answer was “and olive-wreath.” Tigranes, one of Xerxes generals, uttered: “Good heavens! Mardonious, what manner of men are these against whom you have brought us to fight – men who contend with one another, not for money but for honour!1 (Bruckner & Pappa, For an Olive Wreath? Olympic Games and Anticipation Effects in Macroeconomics, 2011) In this paper, I intend to examine the hypothesis that hosting the Games raises positive expectations of future national output and related variables. In effect, if the Olympics is considered a positive experience it will result in an environment of reduced policy 1 Cited in Bruckner and Pappa (Bruckner & Pappa, 2011) Page 5 of 17 uncertainty. The obverse, should also be true, a negative experience should enhance macroeconomic policy uncertainty. I rely on Baker, Bloom, and Davis uncertainty index to capture policy uncertainty (Baker, Bloom, & Davis, 2012). The uncertainty index is available for various geographic regions including the United States, China and Europe. Review of the Literature Arthur Andersen, a global consulting firm, conducted a study the year before the Sydney Olympic Games, which is often cited in later Olympic literature as a reliable source that presents the difficulty of distinguishing an Olympic effect. The study claims a $6.5 billion dollar extra economic activity in Australia, with $5.1 billion in New South Wales alone. These days the summer Games might generate $5-to-6 billion in total revenue (nearly half of which goes to the International Olympic Committee). In contrast, the costs of the games rose to an estimated $16 billion in Athens, $40 billion in Beijing, and reportedly nearly $20 billion in London. Only some of this investment is tied up in infrastructure projects that may be useful going forward. (ZIMBALIST, 2012) The high costs are bound to make hosting the Olympics a bad deal in the short-run. Promoters, however, claim that there is a strong benefit that accrues over time connected to the advertising effect of hosting Page 6 of 17 the games. The idea is that the hundreds of hours of television exposure to hundreds of millions of viewers around the globe will generate increased tourism and business for the city. The Arthur Andersen study also describes some of the economic trends that the company discovered about the Atlanta and Barcelona Games. In Atlanta, the study claims there is a tight labor market, so the city could not maximize potential gains for employment, and furthermore, the Olympics were unable to overpower Georgia’s already struggling economy at the time. Knowing that Georgia’s economy was already under pressure at the time of the Olympics may override any potential Olympic effect. However, in Barcelona, the study notes that the Olympics and economic activity need to host may have stimulated the economy, which before the Olympics was in an economic downturn. (Edds, 2012) Another possibility for economic stimulation is Spain entering the EU, which likely had a large, positive economic impact. Because the models in this study compare autonomous communities within Spain, the EU effect is held constant, and a significant change in construction, tourism, financial services or manufacturing industry in Catalonia compared to Madrid AC might be attributable to the Olympics. Similarly, the province of Barcelona’s (a subset of Catalonia) employment rate went from 23.6% to 11.7% from 1986 to1992. (Edds, 2012) Page 7 of 17 By holding countrywide effects constant it may be possible that significant employment change exists for the construction, tourism and financial services industries.