Sochi's Olympic Windfall

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Do the Olympic Games benefit the host country? It depends on whom you ask. Politicians and the overwhelming majority of citizens from the host country support the games, but economists often point out that the Olympics are a very expensive indulgence.

At the Beijing Olympics, the opening ceremony alone cost more than $100 million. The Sochi Winter Olympics are expected to cost $10 billion in total. The expense of holding the games is rarely recouped by the host country. For example, economists calculate that the 1996 Olympics in Atlanta created slightly more than 24,000 jobs at a cost of $1.5 billion to the state of Georgia. That breaks down to an individual cost to taxpayers of $64,000 per new job. In addition, much of the infrastructure created to house the visitors and hold the events -- stadiums, hotels and other buildings -- frequently go unused or underused after the games leave town. Nonetheless, politicians often say that it is profitable to host major sporting events such as the Olympics or the World Soccer Championship because they put the country in the global spotlight and lead to new business opportunities.

Two weeks ago, Andrew Rose of the University of California at Berkeley and Mark Spiegel of the Federal Reserve Bank in San Francisco published their study "The Olympic Effect," which examined the connection between a country's hosting of the Olympics and its trade volume. The study used all currently available data and looked at countries that had made bids to conduct the games as well as those that actually hosted them between 1948 and 2004. It turned out that the positive effect of hosting the Olympics is significant. Countries that hosted the Olympic Games experienced a 30 percent increase in exports during the following years. That is an enormous dividend equal to the gains that could be expected from joining the World Trade Organization.

But showing a correlation between hosting the games and a subsequent increase in exports does not prove that the result was caused exclusively by the Olympics themselves. In fact, the reverse might be true: Countries that for one reason or another anticipate increased exports are most frequently awarded the right to host the Olympics. Or could it be that increased exports have nothing to do with the Olympics but are a result of an independent factor, such as the country's greater economic transparency? Rose and Spiegel compared the hosting countries' economies not with their previous status, but with the economies of the countries that had almost won their bids to host the games, but lost out in the final round. It turns out that those "losing" countries also showed the same gains in exports.

Thus, this proves that hosting the Olympics alone does not directly lead to greater economic transparency. On the contrary, the data suggests that it is the competition to become the host of the Olympics -- and a country's need to prove to the world community that it is open and transparent -- that causes the effect. It is no coincidence that China gained admission to the World Trade Organization not in 2008 or 2009, following its hosting of the Olympics in Beijing, but in 2001, when it first submitted its bid to host the games. Neither is it a coincidence that the 1964 Olympic Games in Tokyo coincided with Japan joining the International Monetary Fund the same year.

During the Sochi mayoral campaign, candidate Boris Nemtsov claimed that if incumbent Anatoly Pakhomov becomes mayor, Russia will not be able to carry out the Sochi Olympics efficiently. By promising to host the Olympic Games, however, Russia is sending a signal that the country is committed to integrating into the community of developed countries. The main economic effect from this declaration is that Russia is serious about creating a more open, liberal economy. To back out of its commitment to host the Olympics would result in tremendous losses, as Russia's business partners and allies would no longer believe Moscow's declarations about its liberal political and economic course. That is the threat Russia faces today. It stands to lose its good name, a colossal amount of resources spent for nothing and the chance to reap the economic effect of increased exports.

Sergei Guriev is rector at the New Economic School and Aleh Tsyvinsky is a professor at Yale University and the New Economic School. This comment appeared in Vedomosti.