The economic legacy of the Olympics

Author: Andrew McCulloch

Three of the men involved in bringing the Olympics to

London are all politicians: Lord Coe, Chair of the London

Organising Committee of the 2012 Olympic Games and

Paralympic Games; Boris Johnson, Mayor of London, and

British Prime Minister David Cameron are pictured here

during the session 'Special Address' at the Annual Meeting

2012 of the World Economic Forum at the congress centre

in Davos, Switzerland, January 26, 2012.

Image/Copyright by World Economic Forum.

Now that the London Olympics have finished and analysts are debating whether the Olympics are an opportunity to project soft power or not, I thought we might take a look at an article published in last years' Economic Journal which examined the impact of the Summer Olympics on the value of the host country's exports. Somewhat surprisingly, the article concludes that countries which held the Olympic Games since 1950 experienced a significant and fairly substantial increase in the value of their exports after holding the Olympics.

The authors stress, however, that their results do not establish a causal relationship between hosting the Olympics and the rise in exports. Indeed, countries which bid unsuccessfully to hold the Olympics experienced a rise in exports similar to that of those countries which bid successfully. The authors propose that countries seek to host major sporting events in order to signal their openness to trade with other countries. From this perspective, the increase in exports (and also in imports) following the Olympics results primarily from economic policies which promote trade rather than any direct effect of having hosted the Olympics. In this article, we will look at the dataset used in the analysis and how the authors attempt to isolate the effect of holding the Olympics from other factors unique to particular time periods and to specific countries. I find this type of work quite tricky, so let me know if I don't understand it properly.

Firstly, let's just plot some data to see if the idea that holding the Olympics increases trade is a plausible one. The figure below plots the log of the value of exports from 1950 to 2006 in millions of US dollars (adjusted for inflation using the US consumer price index) for the largest European countries. Between 1950 and 2006, Italy (1960), Germany (1972) and Spain (1992) held the Olympics while the other countries did not, although the UK (London) held the games in 1948. While the figure shows that for the last forty years Germany has had the largest exports of any European country, it is difficult to see any clear differences between countries in the pattern of export growth.

Any differences in exports over time for different countries might be easier to see if we plotted the value of exports for each country in each year relative to their value in 1950. This is done in the figure below where the y-axis is the log of the real value of exports in each year divided by the value in 1950 multiplied 100. The figure suggests that the UK, Netherlands and France have had lower relative levels of export growth in comparison to the countries which hosted the Olympics. It would seem worthwhile therefore taking the analysis further.

As always it helps to have a model of how the process we are studying works in the real world. The simplest model used to analyse trade between countries is termed a gravity model, after Newton's law of gravitational attraction. Newton's law states that the gravitational force between two objects is directly proportional to the objects weights and inversely proportional to the distance between them. In the analogous model for trade flows, size or economic wealth takes the role of mass; countries which are larger and richer are expected to import more while countries which are closer will have higher trade than countries which are far apart. Data on trade flows between individual countries is available from the Directory of Trade Statistics (DoTS) database produced by the International Monetary Fund. The dataset used is helpfully available on the authors website. The dataset includes annual observations on the value of exports and imports for a total of 196 countries and the table below illustrates the structure of the data using, as an example, exports from Spain to both France and Germany for the years from 1990 to 1995.

The variable EXPORTS is the log of the real value of exports from the exporting country (in this case, Spain) to the importing country (Germany or France) in each year. In accordance with the gravity model, the data also includes the log of geographical distance (DIST) between each pair of countries and the logs of population (POP1 and POP2) and annual real GDP per capita (GDP1 and GDP2) of each country. The main question is whether holding the Olympics increases trade and the variable OLYMPIC takes the value 1 for years after a country has hosted the games, as Spain did in 1992, and the value 0 for the years prior to the games. The calendar year in which a country hosted the Olympics is also expected to be important in influencing the overall level of exports. As a result of globalisation, for example, trade between countries will be higher in 2010 than it was in 1980. We want to remove such trends in the level of trade across countries from the estimate of the Olympic effect and we can achieve this by using a set of dummy variables for the year of observation in the analyses. Using this data to compare the trade performance of hosts and non-hosts, the paper estimates that countries which hosted the Olympics have exports which are shifted-up by around 39 percent in comparison to non-host countries.

It might be more interesting to examine how the impact of the Olympics on exports varies dependent on the number of years since hosting the Olympics. We can do this by replacing the single variable OLYMPIC with a set of dummy variables which model the number of years following the Olympics (the variable OLYMPIC TREND). The figure below shows the estimates and 95 percent confidence intervals for the effect on exports in each year following the Olympics. The figure shows that the export boost increases in magnitude over time after the games with exports at least 20 percent higher for host countries relative to non-hosts after a period of around twenty years.

Can we expect this now to happen in the UK? This is not an area I know well, but it is clear from the figures above that UK exports have not grown at the same speed as that of other major European countries over the last fifty years. The UK economy may get an export boost from the Olympics but I doubt that, like most of the problems we currently face, the answer could possibly be as simple as that.