An own goal for unwary governments

A leading sports economist is sceptical about the value of hosting major events as a way of boosting local economies.

British economist Stefan Szymanski gets quoted often in the newspapers – and almost always in the sport section. Professor Szymanski, who teaches at Cass Business School in London as well as BMI Management Institute in Vilnius, is an authority in the field of sport economics. Applying rationality to a world where passion and heart usually rule, he draws attention to inefficient government subsidies linked to false promises, extravagant sport shows that unduly tax poorer countries, and prickly ethical issues related to fair (business) competition. He spoke with MercatorNet's Bryan Bradley during a recent visit to Lithuania, which is gearing up to host the European Basketball Championship in September.

MercatorNet: What are the hot issues at present in the field of sport economics?

Szymanski: There are really two focuses for economic analysis of sport. One is professional sport, and the other is people’s participation in physical activity. Professional sport is a unique kind of business: there’s no other business in the world where you need your competitors in order to make a product. Manchester United can’t play a football match on their own. Nor can the New York Yankees. You have to have an opponent, and they have to make the product with you. That creates a special interdependence, where competitors need an agreement on the rules, etc.

But how far should that agreement go? How far should you be allowed to act in concert with your sporting competitors? In the United States, the leagues are very closely coordinated, almost like socialist organizations. They share all of their income. They are very profitable, but the owners agree to share everything and they enter into agreements which also help to keep wages down. Whereas in Europe we’ve developed structures where there’s very little cooperation. Typically clubs agree on the rules, but they agree on very little else.

The issue in Europe is to what extent we should move towards the more American system: either because people think that the inequalities in competitions in Europe are growing and that’s bad; or because American investors are starting to look at European markets and saying, “well, there is potential, but we know how to organize this better.” On the other hand, there is resistance to commercialism of sport in Europe. This is a very high-level conflict because potentially there is a lot of money in sport in Europe, but it isn’t being extracted at the moment. And the politicians are resisting.

It’s important that as a result of the Treaty of Lisbon of 2009 the EU, for the first time in history, now has legal competence to look at sport. And there is much debate what that policy should be. Organizations like FIFA and UEFA are pressuring the EU to introduce rules which would make it easier for these organizations to control sport and to tell clubs what to do, but so far the European Commission is quite reluctant to get involved. Those are some of the big issues now in the economics of professional sport.

The other side is sport and physical activity in terms of participation, and the role that plays in health and well-being. Governments are increasingly concerned about the obesity crisis, and because sport and physical activity are seen as being highly beneficial, and most politicians are convinced more physical activity is good for the economy, so there’s the question of how do you facilitate increased participation in sport. This comes at a time when state subsidies have disappeared and volunteering to organize informal sport for young people is declining. In fact this is a global challenge, where traditional forms of sport are declining just when government would like to see an increase.

MercatorNet: Can sport bring big economic benefits to a country, especially hosting a major international event?

Szymanski: Governments seem very enthusiastic to host major events: obviously it's happened in Lithuania with basketball, in London with the Olympics next year, in Poland and Ukraine for the 2012 World Cup. And these events have turned into significant drains on public budgets. You might ask why when sport really is very popular and successful is the government going to subsidize the events? With the World Cup, corporations like Coca-Cola and McDonald's are ready to pay hundreds of millions of dollars to be sponsors. Yet the government still has to spend in some cases billions of dollars to subsidize the activities.

The question we asked is whether there is any benefit to the economy from this kind of government subsidy. There's a lot of economic research, and the evidence quite strongly suggests that there are only very limited economic benefits. Governments claim that the investments in infrastructure will create construction activity and will boost the economy. But the construction of these structures really just displaces other construction activity, and those other construction activities usually are more productive. So you'd be better off building roads and flats and new commercial properties than building stadiums, because stadiums just aren't used enough. And particularly, the stadiums and arenas that you build for a major event never get used to the same extent afterwards. People also believe there are large tourism benefits, but these benefits are usually massively overstated. Often there are as many people put off from visiting the area by an event they view as disruptive as there are people attracted. The numbers of extra visitors are usually quite small.

Politicians promise economic benefits when they spend money to host these events, but the economic benefits don't materialize in reality. So why on earth don't politicians get penalized at the ballot box by disappointed voters? One answer is suggested by research I've done with a colleague on well-being. We took the large EU databases on the subjective evaluation of well-being by individuals – twice a year people in all the EU countries are asked how happy they feel – and we looked at it after major sport events in Europe. It turns out that host nations report significantly higher life satisfaction just after the event. So hosting such events makes people happy. That justification for spending the money is not the usual one presented, but perhaps it’s a more sensible one.

MercatorNet: So the economics of sport is really a study in public welfare...

Szymanski: There are other questions about sport and well-being. Is it true that sport participation makes you happier? There's a lot of evidence that happier people participate more in sport. But the problem is the direction of causality. Is it sport participation that makes people happy, or is it just that happy people are more likely to participate in sport? We haven't uncovered the answer, yet, but it is also very important in terms of how governments should allocate money.

There's a major policy question as to whether you should try to increase physical activity by promoting sport, or whether you should find other ways to do that. Many people assume sport is the right way to increase physical activity. Now the reason many people like sport is because they like competition and they think it is fun, but that's precisely the reason many other people don't like sport: they don't like competition and they don't think it is fun. Often the people in most need of physical activity are those who don't like competition (perhaps because they're most likely to lose).

It's interesting that the sports lobby is very powerful. Most of the great heroes these days are sports heroes, and politicians like to associate themselves with sports heroes. That gives them a very powerful voice. But it doesn't necessarily make their ideas about what we need the right ones.

Major sport events are luxury items. If you're going to spend money on sport, the question is always the alternatives.  I would say you'd do better to promote participation in sport in schools by improving facilities for kids than building a big national stadium.

MercatorNet: For a country like Lithuania, whose virtues are not yet so well known internationally, couldn't there be more real economic benefits than for the UK, for instance, from hosting a major sport event?

Szymanski: That's a very good point. Marketing London seems absolutely crazy, since London is already one of the most popular destinations in the world. In fact, the problem we have in London is lack of capacity for so many visitors, so trying to attract more seems a bit crazy. Whereas it's certainly true, that for many countries... I mean, South Africa felt very much the same way about the World Cup in 2010, Poland and Ukraine for 2012, that this is a way of marketing the country.  No doubt if you add up all the column-inches that gets written about a country when it hosts a major event, and then think of converting that into costs that you would pay in terms of marketing, it would certainly be worth millions of dollars.

But how many millions of dollars is it really worth? Well, you get time on television that would cost you potentially millions of dollars. Of course not all of that time is devoted to your country, so you can only consider a fraction of that as really advertising for the country. What would that cost? Maybe tens of millions of dollars, maybe even a hundred million dollars – but not billions, which is the size of costs to the national government. I just don't believe the benefit is that big if you compare it to the expense that governments have to go to in order to hosts these events.

The real problem is the bidding for these events is out of control. That’s because the international associations that sell these tournaments are effectively answerable to no one. They are great big monopolists selling to the highest bidder. You could say that countries like the UK with the Olympics, World Cup hosts Germany in 2006, France in 1998 and Korea in 2002 are big rich countries that can afford to throw money around.

But when you talk about countries that still have a lot of catch-up to do, like Lithuania, Poland, Ukraine or South Africa, then it's crazy to spend large sums of public money for what is essentially a big party. Nothing wrong with parties, but parties are expensive. I believe these organizations have a social responsibility to find ways to reduce the costs. To be fair, at least the International Olympic Committee has been trying to reduce some of this arms race in spending. But I think they could do more to find ways to cut down some of the extravagance of these events.

MercatorNet: What about investing in sports clubs, how attractive is that as a business venture?

Szymanski: The press likes to say that sport is now a big business. It's certainly bigger than it was, but it's still a pretty small business. Even if you take the biggest football clubs, like Manchester United, annual turnover is still less than 500 million Euros, which wouldn't even put it in the top 100 companies in the UK And once you get below that level, these are tiny, some have turnover of less than a million Euros... So these are not big businesses.

But they do generate huge amounts of publicity for the individual owners. If you think about people like Roman Abramovich of Chelsea, that's why they buy these things, because they're interested in the media coverage and the prestige that it brings. The problem is it's very, very difficult to make money, so usually you end up subsidizing. People tend to stick with these things as long as they are not spending too much money, but eventually they usually give up because the amount of money they have to spend is more than they can bear. Sure, if you have clubs in different markets, there are some opportunities to trade players, but these are not big profit opportunities.

Of course, the other thing conspiracy theorists say is that these are ways of laundering money, which is a very serious allegation. I personally am quite sceptical. These are high-profile transactions. If I wanted to launder money, I would try to avoid doing it around transactions that everybody is interested in. It seems not too difficult for tax authorities, once they know a transaction has taken place, to check up where the money went and who did what. So I'm sceptical, although I'm sure there may be instances where this is going on.

This article is published by Stefan Szymanski and MercatorNet.com under a Creative Commons licence. You may republish it or translate it free of charge with attribution for non-commercial purposes following these guidelines. If you teach at a university we ask that your department make a donation. Commercial media must contact us for permission and fees. Some articles on this site are published under different terms.