On Oct. 2, 2009, the entire country of Brazil threw a party. After a bidding process that lasted more than two years, the International Olympic Committee announced that Rio de Janeiro had won the right to hold the 2016 Summer Olympics, beating out Chicago, Madrid and Tokyo. As Brazil’s Olympic representatives celebrated in Copenhagen, crowds in Rio danced and hugged and shot confetti into the air.
But if Brazilians took a look at the financial troubles that Olympic Games almost always get their host cities into, they wouldn’t have celebrated. In fact, they would’ve been smarter not to have competed to host the Games at all.
No other mega sporting event is as financially risky as hosting the Olympics. Every Games since 1960 has overrun its initial budget, and not just by a few percentage points, but by an average of 179%. Countries not only spend hundreds of millions of dollars on sports venues that could be spent on much-needed infrastructure, but those venues often go unused once the Olympics are over.
Since the Barcelona Games in 1992, which went over budget by a mind-numbing 417%, it seemed as if countries had wised up. After ’92, successive countries gradually got closer and closer to hitting their projected numbers. China got the closest when it held the 2008 Summer Olympics in Beijing, only going over budget by 4%.
But this year is different. The London Olympics are on track to become the most over-budgeted Games when it comes to sports-related costs since ‘96 — and the costliest ever, at $14.8 billion.
Bent Flyvbjerg, a co-author of a new University of Oxford study that looks at Olympic budgeting, essentially blames cost overruns on two things: optimism and politics.
“Politicians low-ball the budgets in order to get the Olympics,” Flyvbjerg says. “It’s simply easier to get it approved. And people are just optimistic about most things, especially large projects like these.”
Flyvbjerg says that for most political leaders, hosting the Olympic Games is about creating a legacy that will be remembered for generations. But more often than not, that legacy is one of financial recklessness.
(MORE: 50 Olympic Athletes to Watch)
Some observers say it’s unfair to blame a country for outrunning its budget. After all, hosting the Games is clearly an arduous task, one that many host cities have never attempted before. Trying to estimate everything a city would need to successfully put on the world’s games, including constructing the appropriate venues, providing security for the Olympic athletes and building infrastructure like a new airport, may seem almost impossible.
But still, hosting the Olympics – even if cities do meet their budget projections – is often not a smart financial move in the long-run.
“The competition alone has each city bidding higher and higher until it outweighs the benefits,” says Smith College economics professor Andrew Zimbalist. “Then they celebrate like they won the World Series. A lot of people will benefit from the Games, like construction companies, but that doesn’t mean the city benefits.”
Oftentimes cities do use the Olympics as a way to push through vast new infrastructure projects like airports and subways. And in fact some of those have yielded long-term benefits for a country or city, most notably Barcelona, which redeveloped entire swaths of the city thanks to new housing developments and public transportation.
“They didn’t just want a two-week splurge,” says Flyvbjerg. “They wanted to lift Barcelona from a backwards state economically into a new city of the future. They used the Olympics to do that and very successfully.”
But many economists, like Zimbalist, argue that much of the money that’s spent on hosting the Games could be put toward useful infrastructure projects that will have a more lasting value to a city.
Andrew Rose, a business professor at the University of California, says that mega sporting events are almost always wasteful for advanced open economies. Just look at the Athens Olympics in 2004. Greece went well over budget on the Games and exacerbated a debt problem that is now threatening the entire euro zone.
The one positive economic outcome that has been shown across Olympic cities has been a relatively permanent increase in trade for a host country. In their paper “The Olympic Effect,” Rose and Mark Spiegel, a vice president at the Federal Reserve Bank of San Francisco, found a 30% increase in trade for countries that have hosted the Olympics. But guess what countries also had a similar increase in exports: countries with cities that had unsuccessful bids to host the Olympics.
“You don’t have to be the host,” says Spiegel. “If you’re just one of the finalists, you get the same impact – without the expense of hosting the Games.”
The one developed city that did successfully host the Games while holding down infrastructure costs was Los Angeles, largely because it used existing venues at UCLA and USC. The Olympics just wasn’t used as a reason to rebuild the city.
While London is one of the world’s most developed cities, East London is not, and that’s where most of the Olympic venues have been built. So far, it does appear that the city has realized that many former Olympic sites start quickly collecting dust once the games end. Athens’ Olympic Park is now a ghost town. Beijing’s Bird’s Nest, a 91,000-seat venue that wowed the globe, has become a temporary man-made ski slope and a mildly popular tourist destination. But mostly, it’s an enormous structure that China has no idea what to do with.
So far, London has plans to turn the Olympic Village into apartments, and soccer club West Ham United is supposed to move into the Olympic Stadium. While a few studies have portrayed a parallel Olympic universe being built next to, rather than integrated with, the poorer sections of East London, it’s too early to tell whether the city’s goals will be realized.
“East London is a deprived area that needs a boost,” says Flyvbjerg. “If all goes well, I think it will be successful for East London. I think that the Olympics could come to stand as an example that the Games could do some good for the part of the city where it’s implemented.”
But Flyvbjerg is very clear in specifying that it could be good for East London, not the city as a whole. Because even though hosting the world’s games are a time of celebration, there’s not much to cheer about the bottom line.