The South African Journal of Economics Suid Afrikaanse Tydskrif vir Ekonomie
Vol. 72:5 Desember/December 2004
MEGA-SPORTING EVENTS IN DEVELOPING
NATIONS:
PLAYING THE WAY TO PROSPERITY?
VICTOR A. MATHESON

AND ROBERT A. BAADE

WITH ATTENDANCES IN THE MILLIONS and television viewing audiences in
the billions, the World Cup and Olympic Games without question
qualify as mega-events. Nation states compete as vigorously to host
these events as the athletes who participate in them. Why? A variety
of reasons explain the quest to host these events. Many argue that
these events "put the country (or city) on the map" and provide
significant international exposure to the host. These events can also
be seen as political events that serve to showcase the economic,
political, and cultural power of the host country or as a signal that a
country has arrived as a major figure on the international scene.
No reason appears more compelling, however, than the promise
of an economic windfall. Event promoters envision hoards of rich
visitors with fat wallets descending upon the venues lucky enough to
host these competitions. Increasingly developing nations have begun
insisting on their right to host these events, and thereby reap the
perceived monetary rewards. The question, however, remains: do
mega-sporting events provide a boost to the host nation's economy
that justifies the substantial costs and risks? The purpose of this
paper is to shed some light on this subject by reviewing the existing
academic literature on the economic impact of sporting events and
 Lecturer, Department of Economics, College of the Holy Cross, Worcester,
USA.
 Lecturer, Department of Economics and Business, Lake Forest College, Lake
Forest, IL. USA. The authors would like to thank Professor Black and three
anonymous referees for helpful comments on earlier drafts of the paper.
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providing discussion regarding the benefits of these competitions on
developing nations.
1. BACKGROUND
The sites of the Summer and Winter Olympic Games are determined
by the International Olympic Committee (IOC) years in advance of
the actual event, and historically, the IOC has awarded the Olympic
Games to western, industrialized nations. Only the 1968 and 1988
Summer Games hosted by Mexico City and Seoul, respectively, and
the 1984 Winter Games in Sarajevo, Yugoslavia have been held in
developing nations. In recent years, however, cities from developing
nations have increasingly demanded the right to host these
spectacles. Finalists for the 2004 and 2008 Summer Games included
Cape Town, Buenos Aires, and Istanbul with Beijing ultimately
winning the right to host the 2008 event.
The choice of the host country for soccer's World Cup is
determined by the Federation Internationale de Football Association
(FIFA). FIFA has been much more willing than the IOC to award its
tournament to developing nations, in part because of the rich soccer
tradition that exists in Latin America, with past hosts including
Brazil, Argentina, Mexico, and Uruguay. Like the IOC selection of
Salt Lake City as the 2002 Winter Olympics host, the recent decision
to award the 2006 World Cup to Germany was tainted by scandal. In
the wake of previous decisions to award the Cup to the United
States and the Asian nations of Japan and South Korea, a
groundswell of support had emerged for awarding the World Cup to
an African nation both because Africa had never hosted the games
previously and because African nations have become increasingly
competitive on the world soccer stage.
In the final round of voting, the 24 members of the venue
selection committee chose Germany over South Africa only after the
Oceania Football Confederation delegate broke with his
confederation and abstained from voting, leaving the vote 12-11 in
favour of Germany. A vote in favour of South Africa would have
left FIFA President Joseph "Sepp" Blatter with the tie-breaking vote
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which would have resulted in South Africa's selection. Allegations
were made that the Oceania delegate faced personal threats and
monumental pressure from lobbyists in order to secure his "vote"
(BBC, 2000).
In response to the furore over the 2006 decision, FIFA guaranteed
that an African nation would host the event in 2010, and five
countries, Egypt, Libya, Morocco, Tunisia, and South Africa, all
submitted formal bids for the tournament. Ultimately, South Africa
won the final bid and will host the 2010 World Cup.
2. REVIEW OF "MEGA-EVENT" ECONOMIC IMPACT STUDIES
Hosting the Olympics and the World Cup brings significant costs
and potentially large benefits. On the cost side, FIFA requires that the
World Cup host country provide at least 8 and preferably 10 modern
stadiums capable of seating 40,000 to 60,000 spectators each. For the
jointly hosted 2002 World Cup in Japan and South Korea, each
country offered to provide 10 separate stadiums. As neither country
had a large existing infrastructure for soccer, South Korea built ten
new stadiums at a cost of nearly $2 billion, and Japan built 7 new
stadiums and refurbished 3 others at a cost of at least $4 billion. The
total investment for new infrastructure in Japan for the World Cup
"is unknown but some analysts peg the expenditure at more than 750
billion yen ($5.6 billion)." (Sloan, 2002)
The Olympics can be an equally expensive affair. Both the
Summer and Winter Games require extensive specialized
infrastructure in order to accommodate all of the events. Atlanta
spent $600 million in direct infrastructure improvements for their
Games, Nagano spent $1.3 billion on the 1998 Winter Games, and
Beijing will reportedly spend over $20 billion on just on
infrastructure improvements in preparation for the 2008 Summer
Games.
The operating costs of a mega-event are enormous and are
growing. In the wake of terrorist incidents at the 1972 and 2000
Olympics and September 11, 2001 in the United States, security
arrangements alone can run into the hundreds of millions of dollars.
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Salt Lake City spent in excess of $300 million on security alone for
the 2002 Winter Olympics in addition to $1.7 billion in other
operating costs. Greece spent upwards of $1.5 billion on security
alone for the 2004 Games. With expenditures of this magnitude, can
the economic impact of an event, even one the size of the World
Cup or Olympics, compensate the host nation for the substantial
infrastructure and operating costs?
Past and present prospective economic impact analyses prepared
by event boosters have predicted economic windfalls from hosting
the World Cup and Olympics. Boosters for the 1994 World Cup in
the United States predicted it would bring thousands of visitors to
the country and result in a $4 billion boost to the United States
economy. South Africa's bid for the 2006 World Cup was based, in
part, on the promise that it would bolster the economy by
approximately $6 billion and create as many as 129,000 new jobs
(Khoza, 2000). The largest estimates to date have been provided by
the co-hosts of the 2002 World Cup. A study by the Dentsu Institute
for Human Studies estimated a $24.8 billion impact from the Cup for
Japan and a $8.9 billion impact for South Korea.
Olympic boosters have provided equally rosy projections for
their events. An analysis sponsored by the Atlanta Olympic
Organizing Committee predicted a $5.1 billion economic boost and
77,000 new jobs as a result of the Atlanta Games. The Office of
Financial Management for the New South Wales Treasury predicted
a $6.3 billion impact for the Sydney Games in 2000 along with roughly
100,000 new jobs. Promoters for future Summer and Winter
Olympics bids have touted economic impacts of $4.3 billion
(Houston, 2012), $5.7 to $10 billion (Vancouver/Whistler, 2010), and
$11 billion (New York City, 2012).
Even smaller international events such as the Cricket and Rugby
World Cups tout large benefits. Tourism officials estimated that the
2003 Cricket World Cup generated at least 1.2 billion rands (about
$200 million) for the South African economy. (Hassen, 2003).
Claims that sports mega-events provide a substantial boost to
the economy of the host city, region, and country have been strongly
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criticized by most independent scholars. In contrast to event
organizers who make ex ante predictions regarding the potential
impact of a mega-event, several researchers have examined past
economic data for cities that have hosted large sporting events to
make ex post estimates of the economic impact of these
competitions. In assessing the impact of the American football
championship, the Super Bowl, Porter (1999) claimed a proper
measurement of the economic impact would show the event had no
permanent net effect.
Baade and Matheson (2003) examined the 1984 and 1996 Summer
Olympics using metropolitan area employment data. Their study of
the 1984 Olympics revealed that Los Angeles experienced an
unexplained increase of 5,000 jobs during the year of the Olympics.
If all of the unexplained increase were attributed to the presence of
the Olympic Games, this employment effect would translate into
roughly a $300 million boost for the Los Angeles economy (in 2001
dollars), but one which is likely to be of a transitory nature only. The
estimates for the Atlanta economy over the period from 1994-1996
ranged from a cumulative employment increase of 3,500 jobs to an
increase of over 42,000 jobs. While the estimates for Atlanta exhibit a
great deal of uncertainty, even the most generous estimate was
roughly half that of the 77,000 increase in jobs predicted by the
organizing committee.
Baade and Matheson (2004) also examined the 1994 World Cup
using metropolitan area income data. While boosters predicted a
cumulative $4 billion positive impact on the nine host cities, Baade
and Matheson found that in 1994 the economies of the host cities
experienced economic growth that was $4 billion less than would
normally have been expected for these metropolitan areas. Few, if
any, ex post studies have been performed on mega-events taking
place in developing nations, at least in part due to the limited
frequency of such events.
What is responsible for the wide divergence between the ex ante
figures provided by event boosters and the ex post numbers estimated
by economic scholars? The answer to this question should concern
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public officials who are betting on a massive influx of tourists to pay
for the costs of hosting these events.
3. THEORETICAL ISSUES
Scholars generally cite three specific reasons why the benefits
induced by a sports mega-event are exaggerated. First, the increase in
direct spending attributable to the games may be a "gross" as
opposed to a "net" measure. Most economic impact studies estimate
direct spending by simply summing all receipts associated with the
event. However, spending on a mega-event displaces spending that
would have occurred otherwise as local residents purchase tickets to
the event rather than spend that money on other activities in the
local economy. The international appeal of the World Cup or the
Olympics arguably allows for a convergence of the gross and net
spending figures given the fact that so many of the attendees come
from other countries. Even eliminating the spending by residents of
the host community does not fully eliminate this bias, however, since
some residents may dramatically change their spending during the
event given their desire to avoid the congestion in the venues'
environs.
A second reason that economic impact may be exaggerated is
the "crowding out" effect. Event tourists may simply supplant other
travellers who would normally visit the host venues. A typical
approach to measuring economic impact will identify a large number
of visitors to a mega-event, but will fail to identify those regular
visitors who are displaced. A fundamental shortcoming of economic
impact studies pertains, therefore, not to information on spending
for those who are included in a direct expenditure survey, but rather
with the lack of information on the spending behaviour for those
who are not.
For example, during the 2002 World Cup the number of
European visitors to South Korea was higher than normal, but this
increase was offset by a similar sized decrease in the usual tourists
and business travellers from Japan who avoided World Cup hassles.
The total number of foreign visitors to South Korea throughout the
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tournament was estimated at 460,000, a figure identical to the number
of foreign visitors during the same period in the previous year
(Golovnina, 2002).
A final reason economic impact may be exaggerated relates to
the multiplier, the notion that direct spending increases induce
additional rounds of spending. Typical ex ante economic impact
studies estimate direct expenditures as a result of foreign visitors and
then apply an economic multiplier, which usually doubles the final
impact numbers. Precise multiplier analysis includes all "leakages"
from the circular flow of payments and uses multipliers that are
appropriate to the event industry. Leakages may be significant
depending on the state of the economy. If the host economy is at or
very near full employment or if the labour needed is highly
specialized, it may be that the workers essential to conducting the
event reside in other communities or countries. To the extent that
this is true, the multiplier must be adjusted to reflect this leakage of
income. Furthermore, the multiplier technique exacerbates any
errors made in estimating direct expenditures.
Labour is not the only factor of production that may repatriate
income. If hotels experience higher than normal occupancy rates
during a mega-event, then the question must be raised about the
fraction of increased earnings that remain in the community if the
hotel is a nationally or internationally owned chain. Since megaevents
represent specialized entertainment where the athletes must
be imported from participating countries around the world, the
multiplier for such a event will be lower than the multiplier for
spending on many other local goods and services.
4. CONSIDERING DEVELOPING NATIONS:
THE CASE AGAINST HOSTING
The experience of developing nations hosting a mega-event may
differ widely from that of a developed nation. First, the expenditure
required for infrastructure is likely to be much higher in developing
nations. In order to host the 1994 World Cup, the United States
spent less than $30 million on infrastructure improvements since the
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country could easily provide nine existing facilities that met FIFA
standards for hosting the games. South Korea in 2002, on the other
hand, needed to build its stadium infrastructure from scratch,
spending $2 billion on 10 new soccer-specific stadiums. Similarly,
South Africa, having won the right to host the 2010 World Cup, will
require significant refurbishment to its stadiums to meet FIFA's
stringent demands, and the other potential hosts would have needed
even more massive building programs.
The opportunity cost of capital may also be particularly high in
developing nations. From an economic point of view, the cost of
building a new stadium is not best described by the amount of
money needed to build the facility but rather the value to society
from the same amount of capital spent on the next best public
project. The Nigerian government recently spent $330 million on a
new national soccer stadium, more than the annual national
government expenditures on health or education (Farah, 2001). The
intense criticism of this project is not directed at the cost of the
stadium, but rather the cost of the stadium in the face of other
pressing needs in a country like Nigeria.
The extent to which newly constructed sports facilities represent
a good public investment depends not only on the immediate
economic impact of the mega-event but also on the usage of the
facility after the event. As sports entertainment is a luxury good, the
demand for specialized sports infrastructure in the wake of the
World Cup or the Olympics will likely be lower in developing
nations than in developed countries. South Korea, for example, has
few plans for its ten sparkling new stadiums outside of infrequent
cultural events and occasional international soccer matches. Only
five of the ten stadiums currently have regular tenants, and these
teams rarely draw significant crowds. Attracting the World Cup or
Olympics without a well-developed domestic spectator sports
industry reduces the benefits of the new infrastructure.
Along similar lines, the 2002 Winter Olympics resulted in a surge
in hotel construction in the Salt Lake City area. While these facilities
were filled during the actual Games, hotel occupancy rates in general
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have fallen significantly in Utah over the past few years due to this
increase in supply. Clearly, stadiums are not the only buildings that
may go unused after a mega-event.
Finally, industrialized nations tend to be able to attract larger
numbers of fans to mega-events than developing nations. Local
residents in developing nations are more reluctant to pay the high
ticket prices required to pay for the event. Foreign visitors approach
developing nations with trepidation due to worries about crime,
infrastructure, and the quality of accommodations. The English
National team chose to forfeit a match in the 2003 Cricket World
Cup rather than play in Zimbabwe due to concerns about player
safety. In the 2002 World Cup, Japanese stadiums were filled to 89.1
per cent capacity for its games while Korean stadiums achieved only
a 78.8 per cent capacity, so that roughly twice as many seats remained
unfilled in Korea, a relatively wealthy developing country, than in
Japan.
The fear of crime also limits the potential development benefits
of non-specialized infrastructure improvements. Hundreds of new
residential units for athlete housing were proposed as part of Cape
Town's bid for the Olympic Games. Unlike sports specific
infrastructure, this type of spending can easily be converted to nonsports
use after the event. The desire to locate visitor
accommodations in low-crime areas, however, meant that most of
the new construction would occur in parts of the city that were in
the least need of rehabilitation.
5. CONSIDERING DEVELOPING NATIONS: THE CASE FOR
HOSTING
Not every factor unique to developing countries works against the
economic success of a mega-event. First, the relatively low wages of
developing nations serve to lower operating and infrastructure costs.
Before security demands resulted in exploding costs, the official
operating budget of $1.71 billion for the 2004 Summer Games in lowwage
Athens was lower than the $1.97 billion spent by Sydney four
years earlier and the $2.4 billion (adjusted for inflation) spent by
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Atlanta in 1996. Beijing initially proposed a $1.625 billion budget for
2008 excluding infrastructure improvements. While low wages do
reduce a host city's ability to charge high prices to local residents or
domestic visitors, lower wages do not limit a hosťs ability to charge
wealthy foreign visitors high prices for lodging, meals, and tickets.
Second, while academic economists are nearly universal in their
criticism that specialized sports infrastructure does little to promote
economic growth, mega-events often spur spending on non-sports
related infrastructure that may provide for future economic
development. Only a fraction of Beijing's planned $22 billion in
infrastructure improvements will be spent on sports facilities. A
mega-event may prompt otherwise reluctant public officials into
making needed improvements in general infrastructure. On the other
side of the coin, there is, of course, no reason to believe that general
infrastructure improvements necessarily increase economic growth.
As mentioned previously, even infrastructure that is not directly
sports related may go unused after the completion of the event, or
may be a second-best use of scarce investment capital.
Furthermore, the separation between what is "sports"
infrastructure and what is "general" infrastructure is not always clear.
The new Wembley stadium in London was originally slated to cost
around $500 million. In addition, over $150 million in "general"
infrastructure improvements were proposed at the same time
including new roads and a completely renovated underground
station. Without the presence of Wembley Stadium, however, no
new roads or subway station would be required. Therefore, from an
objective standpoint, the entire $650 million price tag should be
considered specialized sports infrastructure, and an analysis of the
expenditure would likely lead to a negative appraisal of its economic
benefit.
An additional factor that favours hosting mega-events in
developing nations is the widespread availability of unemployed or
underemployed labour in most developing countries. In the presence
of underemployment, the opportunity cost of labour nears zero.
Furthermore, the presence of unemployment discourages temporary
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labour migration where temporary workers return home and
repatriate their Olympics earnings. If a city has unutilised labour
resources, the chances are increased that earnings generated by a
mega-event will be earned by local citizens and stay within the area
after the event is concluded.
Mega-events can also serve a role in providing intangible
benefits in the form of publicity or nation building. The 1995 Rugby
World Cup in South Africa represented an opportunity for the
country to announce its re-emergence as a full member of not only
the worlďs sporting community but its political community. The
picture of South African President Nelson Mandela wearing the
jersey of the white South African captain Francois Pienaar while
presenting him with the championship trophy, was a powerful image
to the world indicating that South Africa had emerged from its years
of racial oppression and served to unify the country.
While these benefits undoubtedly exist, the question remains as
to whether their value exceeds the cost. Furthermore, it should be
remembered that mega-events need not always lead to positive
intangible gains. For example, the German psyche was damaged by
the terrorist events during the 1972 games in Munich, and the
reputation of the citizens of Salt Lake City certainly suffered from
the bribery scandal associated with the 2002 Winter Games.
6. CONCLUSIONS AND POLICY IMPLICATIONS
Cities vigorously compete to host sports mega-events because they
perceive that doing so will enhance their image and stimulate their
economies. International sporting events require substantial
expenditures on infrastructure, organization and security and
critically depend, therefore, on public subsidization. The ability of
event promoters to secure public funds often depends on
convincing a sometimes sceptical public that hosting the event
generates economic profit. A motive for exaggerating the impact of a
mega-event clearly exists. Our own previous examinations of megaevents,
as well as the research of other independent scholars, suggest
that the true economic benefits are typically far less than the
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numbers touted by promoters. Cities and countries would be well
advised to more thoroughly evaluate booster promises of a financial
windfall from hosting a sports mega-event such as the World Cup
and Olympics before committing substantial public resources to
such an event (rather than to other uses in the economy). Indeed,
hosting these premier events may be more of a monetary burden
than an honour and a means of achieving economic development.
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