The Economic Legacy of Tokyo 2020

Tokyo 2020 was a world-first in many ways. Amidst two golden weeks, the Games bore witness to sporting history, as well as heart-warming displays of camaraderie and sportsmanship. Held when Japan was in the grip of the pandemic, these Games were the first without a live audience. They were the first games for surfing, skateboarding, and karate. They saw the first golds for nations including the Philippines, Qatar, and Bermuda; other countries such as San Marino and Burkina Faso medalled for the first time.

Tokyo was first in another way, too. These Games were the most expensive ever.

Analysts say that delaying these Games by a year (and the lack of spectators) have cost Japan dearly. When Tokyo bid for the Olympics in 2013, policymakers initially estimated costs to be around $7.4 billion. Over the best part of a decade, these ballooned to an official budget of $15.4 billion: government auditors now estimate total direct costs to be over $20 billion. For Tokyo 2020, the construction of eight new venues was the greatest expense, costing roughly $3 billion.

Whilst the pandemic has certainly contributed to this record cost, statisticians point out that overspending appears to be a regular feature of the Games, even in normal years. A study from Oxford University demonstrates that, since 1960, every Olympic Games has run over budget, at an average of 172% in real terms. This represents the highest overrun on record for any type of large-scale public infrastructure project or megaproject. The study finds that “the average sports-related costs of hosting are $12.0 billion”, while indirect non-sports-related costs are typically several times that.

Moreover, host nations consistently overestimate the economic benefits that the Olympics will bring. Back in 2013, the government promised prosperity and riches during its bid. Building on its rise in international stature, the Tokyo municipal government estimated that these Games would bring in $109 billion (12 trillion yen) to Japan, the majority of which would come from foreign tourists. Of course, they assumed that foreign spectators would become frequent visitors to Japan. Even without factoring in the pandemic, these economic forecasts are undeniably overoptimistic.

Any hopes of recuperating costs evaporated in March 2021, when the government announced that they would ban foreign spectators from entering Japan. Resisting strong public opposition, Prime Minister Yoshihide Suga remained adamant that the Games go ahead.

Why is it so hard to plan for and manage the Olympics successfully?

Half of the answer lies with the International Olympic Committee (IOC), the non-governmental organisations at the centre of the Olympic movement. As the IOC has a monopoly over the Olympics, they have significant power over bidding contracts when multiple nations contest for the hosting rights. Their current contracts require hosts nations to guarantee that they will cover possible budget overruns. Each Olympics, the IOC generates lucrative profits through the sale of broadcasting and marketing rights, while hosts are locked into a non-negotiable commitment to cover inevitable – at best, highly probable – rises in costs.

The other half lies with the host nations and their bids. Each time a city hosts the Olympics, politicians promise so much more than financial gain. The project itself is tied up with an unwieldy mix of politics, national pride, and international reputations. As with many megaprojects, newly built Olympic parks transcend their role as public infrastructure to become monuments to the modern age.

This is not a bad thing in itself. Aesthetics are an integral part of design decisions. Cities built solely on a strict financial cost-benefit ratio would be heartless, ignoring the fact that humans value many things other than money. Nevertheless, it is precisely these desires that can lead planners astray. Instead of renovating old stadiums, hosts insist on building brand-new venues, costing considerably more. The long-term viability of projects is often ignored in favour of a keen short-term focus on aesthetics. Once the Games have finished, these venues are left to crumble into dust. Take Rio 2016. By 2020, judges had ordered the closure of the majority of the Olympic park over safety concerns. Rusty metal remains scattered around the park, remnants of half-demolished buildings. While the aquatics centre and the stadium still stand, their front facades have atrophied; inside, looters have stripped them bare. The apartments in Rio’s Olympic Village remain unoccupied. Hubris haunts many megaprojects and often dooms them to failure.

Misaligned incentives further perpetuate poor decision making. For many government projects, teams of civil servants compete against each other to secure the final bid. Pressure is placed on planners to produce grandiose designs while remaining within the constraints of a parsimonious budget. Consequently, successful bids exaggerate the economic benefits while paring costs down to the bone. As the project authors audit their own proposals (or, at least, pay someone else to do it for them), deceptive or delusional claims can remain unchallenged. Economists call this phenomenon “the survival of the least fit”.

Even if proposals undergo rigorous scrutiny, they can suffer from so-called black swan events, or unexpected predictable events. For instance, take the construction of the Millennium Bridge in London. When it opened in 2000, engineers quickly discovered that the bridge would noticeably sway during high footfall, due to the build-up of resonant frequencies. Delaying the opening cost roughly £6 million.

As the scale of a project increases, there is inevitably a greater potential for things to go wrong. Human reasoning does not cope well with rare, high-impact events that are beyond normal expectations. They are impossible to predict and would be impossible to factor into every thinking. For example, an asteroid may end the world tomorrow, yet no sensible person would consider this specific event likely. The problem arises when these probabilities build-up, as with megaprojects. You can be sure something will go wrong, but you will never be able to predict what that something is.

The economic benefits of hosting the Olympics are routinely overstated; budget overruns are highly likely. If cities are to host the Olympic Games successfully, they need explicitly to consider the financial risk. Governments should treat new infrastructure as commercial investments whilst taking modest proposals, such as retrofitting old stadiums, more seriously. In the future, sole bidders may be able to demand more favourable terms from the IOC: the Brisbane 2032 Summer Olympics will only be held on the condition that over 80% of the venues needed to host the games would use existing infrastructure.

2 thoughts on “The Economic Legacy of Tokyo 2020

  1. It is worth noting that part of the problem is that approaches to estimating benefits from strategic interventions are very difficult and most economic models don’t help as they tend to focus on marginal benefits. It is worth reading this supplementary guidance to the Green Book on Valuing Infrastructure Spend which explains why standard cost-benefit approaches don’t work: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/417822/PU1798_Valuing_Infrastructure_Spend_-_lastest_draft.pdf

    Interestingly it does not really spell out what to do instead!

    See also this from Mariana Mazzucato and Simon Sharp on the problems with using cost benefit analysis to make policy decisions:

    https://www.project-syndicate.org/commentary/uk-treasury-complex-system-economic-policymaking-framework-by-mariana-mazzucato-and-simon-sharpe-2020-12

    Like

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