The costs of hosting the Olympics are enormous.
Take the 2012 games in London. It’s now expected they’ll cost more than $13.5 billion -- nearly four times the initial estimate. The price tag for the 2014 Winter Games in Sochi is currently around $12 billion.
Yet hosting such events is hard to justify economically, since the costs generally outweigh the direct benefits like revenues. So why do countries keep bidding?
Two U.S. economists may have the answer. In a new study, Andrew Rose and Mark Spiegel say countries that host a large sporting event like the Olympics or football’s World Cup typically see a big boost to trade, which they call the "Olympic effect."
"When a country hosts the Olympic Games, its trade rises by around 30 percent. And this is a permanent effect, not a transitory effect," says Rose, a professor at the University of California.
Trade Boost
The link is trade liberalization.
Many of the world’s export powerhouses are countries that have hosted the games: Japan, South Korea, China.
In 2001, China was awarded the 2008 Olympic Games; within months it had joined the World Trade Organization. Tokyo first hosted the games in 1964, the same year Japan joined the International Monetary Fund. And South Korea’s moment in the Olympic spotlight -- with the 1988 games -- was accompanied by its political liberalization.
But perhaps more surprisingly, Rose and Spiegel's study finds that even losing bidders reap the same benefits. "It turns out you don't actually have to host the games to get the Olympic effect," Rose says. "What you have to do is put in a serious bid for the games."
Rose and Spiegel say it's bidding for a big sporting event, rather than hosting the event itself, that matters. In effect, by announcing a bid, countries are sending a signal that they are serious about liberalizing trade.
"Usually what happens is that you have to make a serious bid for a mega-event, and then people realize, investors realize, that [the country is] really serious about liberalizing, and investment starts to pour into the sectors that are going to gain from the liberalization," Rose says.
Serious Commitment
Undertaking reforms to open an economy can be very difficult politically. That's because while Rose says liberalization tends to benefit a country overall, it can be damaging to certain industries.
So reforms can easily be derailed. Making a bid for a "mega-event," he argues, makes it harder to backslide on those reforms.
"A serious bid for a mega-event is extremely internationally visible, and it would be highly embarrassing to back down. Accordingly, it makes the trade reform, the liberalization, much more serious because it would be embarrassing to back down," Rose says.
"Liberalizations also work best if they have long lead times," he adds. "And the lead time for a bid for a mega-event is five or six years, which is exactly appropriate for the mega-event and trade reforms."
The study doesn’t explain everything, of course.
For example, why a highly developed country like Japan, already a three-time host, would bid again, as it’s currently doing -- this time for the 2016 Games.
Or why some countries would bid again and again, with no success. Argentina has failed in all four of its attempts to host the Olympic Games, most recently in 2004.
Take the 2012 games in London. It’s now expected they’ll cost more than $13.5 billion -- nearly four times the initial estimate. The price tag for the 2014 Winter Games in Sochi is currently around $12 billion.
Yet hosting such events is hard to justify economically, since the costs generally outweigh the direct benefits like revenues. So why do countries keep bidding?
Two U.S. economists may have the answer. In a new study, Andrew Rose and Mark Spiegel say countries that host a large sporting event like the Olympics or football’s World Cup typically see a big boost to trade, which they call the "Olympic effect."
"When a country hosts the Olympic Games, its trade rises by around 30 percent. And this is a permanent effect, not a transitory effect," says Rose, a professor at the University of California.
Trade Boost
The link is trade liberalization.
Many of the world’s export powerhouses are countries that have hosted the games: Japan, South Korea, China.
In 2001, China was awarded the 2008 Olympic Games; within months it had joined the World Trade Organization. Tokyo first hosted the games in 1964, the same year Japan joined the International Monetary Fund. And South Korea’s moment in the Olympic spotlight -- with the 1988 games -- was accompanied by its political liberalization.
But perhaps more surprisingly, Rose and Spiegel's study finds that even losing bidders reap the same benefits. "It turns out you don't actually have to host the games to get the Olympic effect," Rose says. "What you have to do is put in a serious bid for the games."
Rose and Spiegel say it's bidding for a big sporting event, rather than hosting the event itself, that matters. In effect, by announcing a bid, countries are sending a signal that they are serious about liberalizing trade.
"Usually what happens is that you have to make a serious bid for a mega-event, and then people realize, investors realize, that [the country is] really serious about liberalizing, and investment starts to pour into the sectors that are going to gain from the liberalization," Rose says.
Serious Commitment
Undertaking reforms to open an economy can be very difficult politically. That's because while Rose says liberalization tends to benefit a country overall, it can be damaging to certain industries.
So reforms can easily be derailed. Making a bid for a "mega-event," he argues, makes it harder to backslide on those reforms.
"A serious bid for a mega-event is extremely internationally visible, and it would be highly embarrassing to back down. Accordingly, it makes the trade reform, the liberalization, much more serious because it would be embarrassing to back down," Rose says.
"Liberalizations also work best if they have long lead times," he adds. "And the lead time for a bid for a mega-event is five or six years, which is exactly appropriate for the mega-event and trade reforms."
The study doesn’t explain everything, of course.
For example, why a highly developed country like Japan, already a three-time host, would bid again, as it’s currently doing -- this time for the 2016 Games.
Or why some countries would bid again and again, with no success. Argentina has failed in all four of its attempts to host the Olympic Games, most recently in 2004.