Financial boom or bust: UK expert analyzes economic impact of the Olympics

LEXINGTON, Ky. (Aug. 8, 2024) — A global spectacle, the Olympics often brings promises of economic prosperity to host cities.

However, the financial outcomes can be double-edged. While some cities experience a lucrative boost in tourism and infrastructure, others struggle with massive debts and underutilized facilities.

In the Q&A below, Michael Clark, director of the Center for Business and Economic Research (CBER) in the Gatton College of Business and Economics, discusses the real costs and benefits that come with the grandeur of the Games. 

Economic Overview

UKNow: Can you provide an overview of the typical economic impact hosting the Olympics has on a city or country?

Clark: The main, and most visible, positive economic impact is the additional tourism spending the Olympics bring to host cities.

Additionally, the International Olympic Committee (IOC) contributes funds to help host cities prepare for the Games. The IOC estimates its contributions to support the Paris Olympics will total $1.7 billion and expects to contribute $1.8 billion to support the 2028 Games in Los Angles.

The increase in tourism spending, and IOC contributions, supports economic activity, employment, wages and government revenue, which begins years before the opening ceremony.

Lastly, the Olympics may also provide intangible benefits to residents, such as a sense of civic pride. A study by Atkinson et al. estimates, residents of the United Kingdom were willing to pay nearly £2 billion ($4 billion USD) to host the 2012 Summer Games. 

UKNow: How do the economic benefits and costs of hosting the Olympics compare in the short term versus the long term?

Clark: Host cities might experience long-term, or “legacy,” benefits. The Olympics showcase the host city in a positive way, which could attract future tourists and/or investors. However, research by Firgo suggests the economic benefits are likely to fade following the Games.

While cities still aggressively compete to host the Games, the costs to the cities, and their residents, appear to greatly exceed the benefits they receive.

In a 2016 article published in the Journal of Economic Perspectives, Robert Baade and Victor Matheson describe the Olympics as a “money-losing proposition” for cities in most cases.

Infrastructure and Investment

UKNow: What types of infrastructure investments are commonly seen in host cities, and how do these investments impact the local economy?

Clark: Cities bidding to host the Olympics must agree to provide adequate infrastructure, as required by the IOC. This includes the various sport venues for the events, housing and training facilities for the athletes and accommodations for the fans.

Cities may also add transportation to support the large crowds traveling throughout the area.

Selected cities begin investing in the needed infrastructures years before the Games, and the total amount invested really depends on the degree to which the existing infrastructure can accommodate the needs of the Games.

Job Creation and Employment

UKNow: How does hosting the Olympics affect job creation in the host city, and what types of jobs are most commonly created?

Clark: The construction, leisure and hospitality sectors all experience a significant increase in demand due to the Olympics. However, these jobs do not represent the net increase in employment.

The Olympics tend to crowd out other economic activity that might have occurred otherwise. For example, tourists who might normally visit the city might choose to avoid it due to crowds and higher prices.

Additionally, a city that allocates funds to build infrastructure for the Games might have spent those funds on other government programs or infrastructure projects that also would have employed workers.

Finally, private economic activity is also crowded out. For example, when a city increases construction spending for the Olympics, it might put upward pressure on construction input prices, which could reduce the demand for construction from private businesses or residents.

UKNow: Are these jobs typically permanent or temporary, and what happens to employment levels after the Games?

Clark: Most of the jobs associated with hosting the Olympics are temporary. Some studies have examined whether host cities experience long-term economic gains, but the evidence for longer-term effects is not strong.

In some cases, we might expect employment to fall below previous levels. For example, a host city might expedite planned infrastructure projects to accommodate the Games, which could result in fewer projects in the future.

Economic Risks and Challenges

UKNow: What are the primary economic risks and challenges associated with hosting the Olympics?

Clark: City officials should be aware that estimates of the benefits of hosting the Olympics are often substantially overstated and that just bidding can be expensive.

Cities that win also take on substantial financial risk. Historically, cities have struggled to accurately anticipate how much hosting the Olympics will cost. A recent report from the University of Oxford examined the costs that 23 cities incurred to host the Olympics. They found that all 23 cities spent more than they had budgeted.

While cost overruns were only 2% for Beijing in 2008 and Pyeong Chang in 2018, other cities were not so fortunate. Rio de Janeiro’s cost to host the 2016 Summer Olympics came in 352% over budget and Tokyo was 128% over budget in 2020. The report found that 13 of the 23 cities experienced cost overruns exceeding 100%.

Future Outlook

UKNow: Based on your research and experience, what do you believe is the most critical factor for a host city to achieve a positive economic outcome from the Olympics?

Clark: Studies of the Olympics suggest that host cities are unlikely to see benefits that exceed costs. So, this might be an issue of host cities minimizing their net costs. Some cities have done this by using existing infrastructure to keep costs down. Also, cities should consider how facilities built for the Olympics can be used after the Games. For example, Los Angeles and Atlanta converted Olympic housing into dormitories for universities.

UKNow: If you could offer one piece of advice to future Olympic host cities, what would it be?

Clark: City officials should try to get an accurate understanding of how the Games will affect the city and recognize that projected benefits are likely to be overly optimistic.

They should also recognize their city will face significant financial risk and may be responsible for substantial cost overruns. Given this financial exposure, they should have a good understanding of whether their communities support hosting the Games.