Complex Playing Field of Sports Economics

Sport represents a large and fast-growing sector of the economy, making an important contribution to growth and jobs, with value added and employment effects exceeding average growth rates. Supporters of mega-sporting events claim that they attract hordes of wealthy visitors and lead to lasting economic benefits for the host regions.

Recently, developing countries have become increasingly vocal in demanding that they get the right to share the economic benefits of these international games. China, for example, was awarded the 2008 Summer Olympics, and an African nation hosted the 2010 World Cup. Regional, continental and international sports events clearly leave sizeable economic legacies. Hundreds of thousands of tourists travel to the host countries to watch the matches and spend money in the local economy. For several weeks, the hosting country will be the centre of worldwide media attention. This media exposure will reach billions of people and some of them will decide to visit the host country in the future.

The long-term benefits, or hosting legacy, might include improvements in infrastructure and increased trade, foreign investment or tourism after the Games; as well as intangible benefits, such as the “feel-good effect” or civic pride.

The authorities of the recently rounded up Rio Olympics stated that the number of visitors for the Games was similar to what they receive for Carnival – an estimated one million people.

According to Joaquim Monteiro de Carvalho, the CEO of Empresa Olimpia Municipal (EOM), Rio used the Olympics to create a long-lasting legacy in terms of public transport and infrastructure. As he put it:

“We went from less than 20% of the population using mass transport (bus, rapid transit, ferry, train, subway, light rail system) to more than 60%. A city that had been made for cars is now being made for the people.”

The city is using public private sector partnerships (PPP) to finance Rio’s facilities and lining up a number of business, convention and innovation hub events post-Games to avoid an Olympic “hangover”, as experienced by other host cities.

When we see football, the world does not just play the game – it watches it, bets on it, argues about it and spends money on it. The English Premier League (EPL) is broadcast in 212 territories, reaching 643 million homes. The world’s 20 richest clubs made 7.4 billion dollars during the 2012-13 season, according to Deloitte. European football clubs see lots of potential for growth in the big markets of Asia and have increased their marketing efforts there. American, Chinese and Indian domestic leagues too have seen a recent influx of cash.

The exaggeration of benefits induced by a large sporting event occurs for at least three specific reasons.

First is the substitution effect – the increase in direct spending attributable to the Games may be a “gross” as opposed to a “net” measure. Direct spending has been estimated by some subsidy advocates by simply summing up all receipts associated with the event. The fact that the gross-spending approach fails to account for decreased spending directly attributable to the event represents a major theoretical and practical shortcoming. Spending on a mega-event displaces spending that would have occurred otherwise, as local residents purchase tickets to the event rather than spending that money on other activities in the local economy.

The Summer Olympics in 2000 in Sydney, Australia, indicate that the vast majority of Sydney hotels peaked at near 100pc occupancy during the Games. This represents an increase of 49% relative to the first half of the same month.

In contrast, other major cities experienced significant demand shortfalls for the same period.

The importance of the substitution effect is given great emphasis, and drives the question of which, if any, governmental entities should be involved in subsidising sporting mega events.

The second reason is the “crowding out” effect. Event tourists may simply supplant other travellers who would normally visit the host countries. A competition that attracts one million sports visitors while displacing an equal number of regular visitors is huge in terms of gross measures, though the net impact is negligible. A typical survey 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 of those who are not.

A third relates to what economists refer to as the “multiplier” – the notion that direct spending increases additional rounds of spending due to increased incomes that occur as a result of additional spending. Typical ex-ante economic impact studies estimate direct expenditures as a result of foreign visitors and then apply an economic multiplier that usually doubles the final impact numbers. Of course, if errors are made in assessing direct spending, those errors are compounded in calculating indirect spending through standard multiplier analysis. Furthermore, precise multiplier analysis includes all “leakages” from the circular flow of payments and uses multipliers that are appropriate to the event industry. If the host economy is at or very near full employment, for example, it may be that the labour essential to conduct the event resides in other communities where unemployment or a labour surplus exists. To the extent that this is true, the indirect spending that constitutes the multiplier effect must be adjusted to reflect this leakage of income and subsequent spending.

To assess the impact of mega-events, a balance of payments approach should be utilised. Since the input-output models used in the most sophisticated ex-ante analyses are based on fixed relationships between inputs and outputs, such models do not account for the subtleties of full employment and capital ownership noted here. As a consequence, it is not clear if economic impact estimates based on them are biased up or down. It is reasonable to believe, however, that since mega-events represent specialised entertainment, where the entertainers (or athletes) must be imported from participating countries around the world, the multiplier will be lower than the multiplier for spending on local entertainment.

In its extreme, imported entertainment could have a multiplier of nearly zero, so that the lower multiplier combined with the substitution and crowding out effects could lead to an event having a negative economic impact.

There are common growth potentials enumerated in the sports field. As a market exhibiting high growth rates itself, the sports nutrition market may represent an important growth potential in the country’s economy; given the high risks embedded in many sport activities, insurance companies too could seek new growth potential in insuring sport risks and sport clubs, at a semi-professional or voluntary level; the overall increased need for economic and legal consultancy could also affect sports-related businesses.

Potential growth in this sector would have an important economic impact on the output of other products. Sport tourism, measured as the share of spending of sport tourists in hotels and restaurants, bears potential growth. Our country has a relatively low share of sports media, while increased demand for sport periodicals would induce sizeable intermediate consumption in the rest of the economy, as indicated by domestic multipliers. Though we are not in the position of such developed international awareness and economic wellbeing to sprint for international sport podium bidding, we can reap such untapped benefits from regional and continental events. This can help us to progress our sports infrastructure, and related systems, important for potential future international events.


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