BUSINESS
09/04/2013 01:19 pm ET

Why 2020 Olympic Bidders Should Be Hoping For Second Place

AP

This weekend seems certain to bring raucous celebration to the streets of Madrid, Tokyo or Istanbul, as the International Olympic Committee awards the 2020 summer games to one of those three cities, all currently vying to play host.

For the two metropolises whose bids fall short, stunned disappointment will surely descend, as city leaders bemoan a lost economic opportunity. Yet this inevitable reaction fails to account for a little-understood reality of the Olympics as catalyst for urban development: In seeking to host the games, coming in second tends to work out better, say economists who have studied this phenomenon.

The runner-up tends to invest in the same sort of infrastructure aimed at impressing the Olympic committee, such as roadway improvements and modern signage, which assist in spurring trade and commerce. But the No. 2 choice then gets spared the expense and hassle of actually hosting the games. The result is a surge of productive investment in the early stages, and an avoidance of the sort of white elephant construction projects that get built right before the games commence.

“There is no way that it’s in your national interest to host the games, but it may be in your interest to bid for the games,” said Andrew Rose, a professor at the University of California, Berkeley, who co-wrote a 2009 paper on the economic benefits of hosting the Olympics.

According to Rose’s research, countries that hosted the Olympics between 1950 and 2006 saw a 30 percent jump in international trade thanks to measures they took while they were trying to impress the IOC -- including political decisions like opening up trade or allowing freer exchange in the national currency.

It might sound like a good argument for hosting, Rose said, were it not for the fact that bidding countries not selected saw an economic impact "every bit as big as the effect of actually hosting the games."

The positive outcome for the runner-up nations reflects the nature of the Olympic host bidding process, Rose said. In the multi-year campaign for Olympic glory, countries generally take productive steps to open and modernize their economies.

“You want to send a signal to the world and to your own populace that you’re opening up, that you’re an important part of the world, and hosting a mega-event is one way to do that,” Rose said. “Of course, it’s better if you don’t have to pay for it.”

Stephen Billings, a professor of urban economics at the University of North Carolina in Charlotte, N.C., has similarly studied the economic gains seen from hosting the Olympics. His conclusion: Cities that get as far as the finalist stage are already winners.

“There’s no real difference between runner-up cities and the ones that are eventually selected,” Billings said. He explained that, in nearly all cases, cities bidding to host the games spend the years before the final IOC decision building up their infrastructure, a dynamic that yields positive economic fruits.

In fact, many economists have said that having the games rarely benefits the host nation at all. Once they actually win the bid, cities spend massive sums on stadiums and Olympic villages that often prove less useful in the future. The expensive projects tend to experience massive cost overruns as construction deadlines approach. And security costs running into the billions of dollars have made the possibility of running a profitable Olympics even less likely in a post-9/11 world.

Of the three cities currently vying for the Olympics, Madrid has presented a self-described “low-budget” option, costing an estimated $5 billion. The city says it will rely heavily on existing infrastructure and will only need to build four stadiums for the event. Some 19 new Olympic Village apartment blocks will be reused as housing projects once the games have left town.

Those projections haven’t stopped critics on the country’s political left from labeling the event, being sought at a time when Spain is facing Depression-level unemployment and a foreclosure crisis, as “The Hunger Games.”

Istanbul has pulled out all stops, proposing a $19 billion budget for the Olympics. Tokyo’s proposal involves $8 billion in projected expenses. An April report by the IOC team scored various aspects of each city’s bid, giving an edge to Madrid and Tokyo, with preliminary scores of 8.08 and 8.02, respectively. Istanbul received a score of 6.98.

“Nearly all academic economists who aren’t connected to the IOC agree that the Olympics are extremely expensive events and that cities have almost no chance to make up those costs,” said Victor Matheson, a professor of economics at Holy Cross University in Worcester, Mass., who has also studied the issue.

There have been exceptions, Matheson noted, including profitable games in Los Angeles in 1984 and an Olympics in Barcelona in 1992, which helped transform the Spanish metropolis from an industrial second city into one of Europe’s most important tourist destinations.

But those cases are highly unusual: Los Angeles presented a low-ball bid that was accepted by the Olympic Committee for lack of better options. Barcelona “had the perfect combination for the event,” Matheson said -- “a hidden gem city that had a lot to offer tourists, but wasn’t well-known to the world.”

The people pushing for their cities to be Olympic hosts are not ignorant of these facts, Matheson said, but they may convince themselves their city is the next Barcelona.

“It’s almost like what they say about a second marriage: It’s the triumph of hope over experience,” Matheson said.

Andrew Zimbalist, a professor at Smith College in Northampton, Mass., takes a dimmer view. His extensive research on the topic has shown him that cities most likely to win Olympic host bids are the ones with opaque political institutions captured by special interests, he said.

“The city that wins is likely the one that has outbid everyone because they have a lot of construction companies and construction unions, and maybe lawyers, and maybe investment bankers who are looking to float the loans, all pushing hard for this,” Zimbalist said. “It’s a self-perpetuating Olympic juggernaut.”

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