Whenever a sporting event comes around, there is mad frenzy from countries across the world to enter a bid – this was entirely evident with the 2018 World Cup bids! And it’s not really surprising with the attention that the World Cup and the Olympics receive. Hundreds of thousands of spectators, billions of pounds worth of investment in infrastructure, thousands of jobs created and television deals in every country of the world.
However, why is it that every sporting event of this magnitude fails to come in on budget? The costs are always underestimated. The Athens Olympics was supposed to cost £1.5 billion, but ended up costing over 10 times as much. It is also suggested that it may have played a part in the current Greek financial crisis. The 2002 Japanese World Cup had little effect on the struggling Japanese economy. The London 2012 Olympics was estimated to cost £2.35 billion, but suggestions say it will now cost taxpayers some £20 billion, although budget cuts are inevitable. What about South Africa? Costs of $300 million were estimated for stadiums and infrastructure, with a boost to GDP of $2.9 billion. However, $300 million was not even sufficient to renovate Soccer City (where the first and final game will be held). Add on to this over $1 billion to rebuild the rest of the stadiums and then take into account rising inflation, which has caused inevitable cost over-runs.
On top of this, every country says ‘look at the benefits’ when they enter their bid. However, economists have suggested that there are actually minimal employment benefits in the long term. Obviously there is substantial investment in infrastructure leading up to the World Cup, which will benefit locals, but the overall boost to GDP is not expected to be significant. A similar thing can be seen with the London Olympics. In the study by PriceWaterhouseCoopers in 2005, there were estimates of a direct gain to London’s GDP of £5900 million between 2005 and 2016. However, UK GDP would only rise by £1936 million. Some of the costly stadiums that were built for the Portuguese European Championships were simply knocked down after the event.
So, what can we expect from South Africa? There have been many criticisms of poor ticket sales and that this World Cup is only for the rich. Street sellers have been booted out of their normal selling ground, as they do not have the necessary permits to sell and cannot afford to buy the permits anyway. Whilst transport has been improved, there are still concerns about the distance that has to be travelled between stadiums and this has put off many potential spectators. However, the Super 14 Southern Hemisphere Rugby tournament was staged in South Africa, with the final at the end of May and the event was successful. Transport worked perfectly, spectators arrived by the thousand and it is hoped that this is a positive omen for the fast approaching World Cup!
Articles
Saved by the Ball Times Online (5/6/10)
South Africa World Cup just for the rich BBC News (10/5/10)
Footing South Africa’s World Cup bill BBC News (4/6/10)
Will South Africa reap rewards from hosting the tournament? Peace FM Online (5/6/10)
Did 2004 Olympics spark Greek financial crisis The Associated Press (4/6/10)
Cost of 2012 Olympic pool triples BBC News (8/4/08)
Watchdog attcks ‘astonishing’ £5bn rise in cost of 2012 games Times Online (22/4/08)
South Africa World Cup costs above budget Reuters (13/8/08)
Reports and papers
Olympic game impact Study PriceWaterhouseCoopers December 2005
A Cost-Benefit Analysis of an Olympic Games Queen’s Economics Department Working Paper No. 1097, Darren McHugh, Queen’s University (Canada) (August 2006)
Questions
- Why do costs tend to be under-estimated and benefits over-estimated?
- What technique could be used to determine whether a sporting event, such as the World Cup, should go ahead? Can you apply this to the London 2012 Olympics?
- How is the multiplier effect relevant to a sporting event, such as the World Cup or the 2012 Olympics?
- To what extent do you think the Athens Olympics contributed to the Greek Financial Crisis? Could the same thing happen with London?
- What might happen to the South African exchange rate during the South African World cup and the sterling exchange rate during the London 2012 Olympics?
- How has inflation affected the budget of South Africa?
The second estimate of UK output for Q1 2010 from the Office for National Statistics reports that the economy grew by 0.3%. The first estimate, based on limited data, put growth in Q1 at 0.2%. But, it appears that more recently available data picked up evidence of stronger growth in the latter stages of the quarter, particularly in the production industries, such as manufacturing, as well as in capital spending by firms.
When analysed in terms of the composition of demand for our firms’ goods and services, there has been something of a rebound in investment expenditure. This follows a marked collapse during 2008 and the first half of 2009. In 2010 Q1 investment volumes increased by 4.2% on the back of a 2.4% rise in the last quarter of 2009.
This rebound in the investment figures across the last two quarters has partly been driven by firms running down their stockpiles of finished goods at a considerably slower rate. When firms build up their stocks of inventories for sales in future periods they are deemed to be engaging in investment. When firms then ‘tap into’ these inventories, as they have been since Q4 2008, they are disinvesting. It is now the case that the pace of disinvestment through running down inventories is slowing. This reflects a pick up in the demand for firms’ goods and services and, hopefully, an expectation of stronger future demand.
More encouragingly, the rebound in investment volumes in Q1 also reflected an increase in gross fixed capital formation, i.e. an increase in the purchase of non-financial fixed assets used in production, such as machinery. Gross fixed capital formation increased in Q1 by 1.5%. This was the first quarter since Q2 2008 in which there has been an increase in the volume of capital purchases by firms. Again, this is likely to reflect increased optimism about future demand since these assets are purchased to do one thing – to produce goods and services!
The improvement in the investment numbers is such that the volume of investment in Q1 2010 was 0.6% higher than it was in Q1 2009. This is largely the impact of a slower rate of disinvestment by firms through running down inventories since despite the rise in gross capital formation in Q1 2010 it still came in 5.7% lower than in Q1 2009. Nonetheless, it will be interesting to see whether the recent improvement in the UK’s investment numbers is maintained as we go forward.
Of particular concern is whether the volume of capital purchases can continue to grow. Can these purchases help to both boost growth now and our economy’s potential output in the medium term? Some of the key issues in determining the answer to this are likely to include: (i) the extent to which aggregate demand grows; (ii) the impact of fiscal consolidation measures on both firms and consumers; (iii) sentiment (confidence) across firms – especially of their own medium-term prospects; and (iv) the ability of firms to access credit from financial institutions. One can undoubtedly add many other issues to this list. One thing is for sure, these are very uncertain times indeed!
Articles
The economy: GDP growth revised up The Times, Grainne Gilmore (26/5/10)
Manufacturing pushes up economic growth The Independent, Sarah Arnott (26/5/10)
UK economic growth revised up to 0.3% BBC News (25/5/10) )
Economy tracker: GDP BBC News (25/5/10)
Boost for UK as GDP growth revised up Telegraph, Edmund Conway (25/5/10)
UK GDP growth revised upwards to 0.3% Financial Times, Daniel Pimlott (25/5/10)
UK first-quarter GDP revised higher Wall Street Journal, Natasha Brereton (25/5/10)
Data
Latest on GDP growth Office for National Statistics (25/5/10)
UK output, income and expenditure, Statistical Bulletin, 1st Quarter 2010 Office for National Statistics (25/5/10)
UK Output, Income and Expenditure, Time Series Data Office for National Statistics
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission
Questions
- Why do the National Accounts record a positive change in inventories as investment and a negative change in inventories as disinvestment?
- What factors might explain the running down of inventories across firms in the UK since Q4 2008? Why didn’t this start in Q2 2008 when the UK economy went into recession?
- In Q1 2010 the running down of inventories was worth, at 2005 prices, some £1.347 billion. This was considerably less than the £4.883 billion in Q3 2009 and the £2.596 billion in Q4 2009 (again at 2005 prices). Why might the pace of disinvestment be slowing?
- Of what importance do you think, firstly, the change in inventories and, secondly, gross capital fixed formation are for an economy’s potential output?
- What arguments do you think there are for distinguishing between different types of investment goods and services when considering our future economic growth?
In 2007, BT, Virgin, Top up TV and Setanta complained about Sky’s dominance within the pay-TV industry. Sky, who have an estimated 85% share of the market were investigated by Ofcom and a decision has now been made. Sky will be forced to reduce the price it charges to other Broadcasters for showing premium sport channels. The wholesale price of Sky Sports 1 and 2 (two of my favourite channels!!) will each be reduced by just over 23% to £10.63 a month each. The idea is that this decision will benefit consumers by increasing choice. However, Sky argues that it will be to the ‘detriment of consumers’ as incentives to invest and take risks will be blunted.
Furthermore, there are also concerns that it will mean less money going into sport. Rugby, football, tennis etc benefit from some very lucrative TV rights deals and if Sky is forced to reduce prices (it is appealing the decision), then the value of these deals is likely to decline, which may lead to less investment in grass-routes participation.
Whilst progress has been made within this area, critics argue that Ofcom have not gone far enough and should have extended their decision to more sport channels (not just Sky Sports 1 and 2) and even to the premium movie channels. This would again increase consumer choice and provide more people with access to premium TV. This would work alongside more innovation within the pay-TV industry, which has seen Sky being given permission to offer pay-TV services on freeview, which will open up pay-TV to millions more consumers. Whilst no action has been taken regarding Sky’s dominance of premium movie channels, this issue has been referred to the Competition Commission. Is Sky’s dominance over sporting events about to come to an end?
Articles
BSkyB ordered to cut sports channels rates Reuters, Kate Holton (31/3/10)
Sky forced to cut price of sports channels Telegraph (31/3/10)
Consumers are big winners in BSkyB ruling Financial Times, Ben Fenton and Andrew Parker (31/3/10)
BSkyB should shake hands and move on Financial Times (31/3/10)
Sky told to cut wholesale prices by regulator Ofcom BBC News (31/3/10)
Ofcom v Sky BBC News blogs: Peston’s Picks, Robert Peston (31/3/10)
BSkyB ‘restricting competition’ BBC Today Programme (31/3/10)
Ofcom orders Sky Sports price cut Guardian, Mark Sweney (31/3/10)
Sky ruling: Culture Secretary challenges Tories to back Ofcom Guardian, Mark Sweney (31/3/10)
Sky forced to cut the price for top sports events: Q and A Telegraph, Rupert Neate (31/3/10)
New ruling lets fans see Premier League on TV for just £15 a month London Evening Standard, Jonathan Prynn (31/3/10)
Regulator sets the fuse for shake-up of pay-TV Independent, Nick Clark (31/3/10)
Ofcom report
Delivering consumer benefits in Pay TV Ofcom Press Release (31/3/10)
Pay TV Statement Overview (31/3/10)
Pay TV Statement Summary (pdf file) (31/3/10)
Pay TV Statement Full document (pdf file) (31/3/10)
Questions
- To what extent will Ofcom’s decision to force Sky to reduce prices lead to an increase in consumer choice? Why is consumer choice good?
- Why has Sky been able to charge such high prices in the past, in particular for sports channels?
- According to the BBC News article, Sky shares were the biggest risers on the FTSE by midday on the day of the announcement. Why do you think this was the case?
- Would a similar decision on premium movie channels significantly increase consumer choice?
- Into which market structure does the Premium TV industry best fit? Consider the characteristics of the pay-TV industry. Into which market structure does it best fit?
- Why may Ofcom’s decision lead to less investment in sport at the grass roots?
Traffic congestion is both frustrating and costly. As The Economist article below states:
Congestion does more than irritate drivers. It makes employees and deliveries late, it snarls up modern “just-in-time” supply chains and it clogs up labour markets by making commuting difficult. The cost of all this is almost impossible to measure. But a big review of transport carried out by Rod Eddington, a one-time boss of British Airways, put the cost between £7 billion and £8 billion ($10.6-$12.2 billion) a year.
So what can be done about it? The report, published by the Confederation of British Industry (CBI), looks at various solutions. These range from staggering work times, car sharing and working from home, to improving roads and road pricing.
As economists we should look at the relative costs and benefits of alternative solutions in coming to sensible policy solutions. The problem is that people are often very emotional about traffic schemes. They may complain about sitting in traffic jams, but don’t want to pay to tackle the problem. There is thus a political element in any debate about solutions. Not surprisingly, the government has shied away from introducing road pricing
So what are the best solutions to traffic congestion and how do we overcome the political obstacles? The following articles look at these questions.
Articles
CBI urge radical changes to avoid gridlocked roads Independent, Peter Woodman (15/3/10)
Bunged up The Economist (15/3/10)
Road travel ‘needs big overhaul’ to avoid gridlock BBC News (15/3/10)
CBI sets out case for road pricing Logistics Manager (16/3/10)
CBI urges change to work patterns to avoid road gridlock Business Financial Newswire (15/3/10)
Road tolls ‘essential’ to avoid gridlock autoblog UK, Nic Cackett (15/3/10)
Report
Tackling congestion, driving growth CBI (March 2010)
Questions
- Why does the market fail to achieve the socially optimal amount and pattern of road use?
- What externalities are involved in road use?
- What are the arguments for and against increased road building as the solution to traffic congestion?
- Assess the arguments for and against road pricing
- If increasing use is to be made of road pricing, what is the best form for road pricing to take?
- Why is road pricing ‘lethal’ for politicians?
- Assuming you were in government and were acutely aware of how your policies might be perceived by the public and the press, what would you do about traffic congestion?
Is this a problem you find when you go shopping? Maybe that’s because the shop that sells it has closed. A report by the Local Data Company has revealed that one in eight shops stand empty on Britain’s high streets, after the recession saw vacancies shoot up by 24% in the second half of 2009. The number of empty town-centre shops climbed to 17,880 in the second half of 2009, equivalent to 12% of the 149,000 shops covered by the research.
Margate in Kent and Wolverhampton in the Midlands were two of the worst-hit areas, where vacant shops stood at 27% and 24% respectively. Take a stroll down a high street in almost any city or town in the UK and you are bound to see ‘Shop for let’. We’ve seen Woolworths and Borders close down and Threshers’ parent company collapse. But these stores have largely remained empty.
Empty houses have also been a problem as the number of repossessions increases. Statistics show an average of 126 people a day were thrown out of their homes in 2009. What is the explanation behind this?
An obvious answer is the recession. As shops felt the strain of low demand, some were simply unable to cope and they shut down as a result. At the same time, new firms were reluctant to take the risk and enter the market during an economic downturn – and who can blame them?
However, are there other reasons why Britain’s high streets are seeing more and more empty shops? The following articles look at the reshaping of our high streets and some of the explanations behind it.
Empty Shops
Shops ‘empty due to recession’ The Press Association (11/2/10)
UK recession has left one in eight shops empty Telegraph, Graham Ruddick (11/2/10)
Bradford second worse for empty shop premises Telegraph and Argus, Will Kilner (11/2/10)
25% of town shops now empty Express and Star (11/2/10)
British town centres in crisis, conference told Reuters, Sinead Cruise (10/2/10)
Empty shop numbers continue to rise in UK Property Week, Laura Chesters (10/2/10)
Empty shops caused by more than recession Startups (12/2/10)
Empty Homes
Buy-to-let: Landlords blow as tenants struggle to pay Telegraph (11/2/10)
Housing Minister says repossession is the ‘best thing’ for homeowners Telegraph, Myra Butterworth (11/2/10)
Home repossessions at highest since 1995 This is Money (11/2/10)
Questions
- What are the main factors behind the high number of empty shops? Use a demand and supply diagram to illustrate these factors.
- In the Startups Article, the BRC Director says: “High street shops are often battling big bills for business rates and rents, parking and access difficulties, as well as failure to manage and invest in the area.” Illustrate this on a diagram and explain how this effect has contributed to empty shops.
- To what extent is more internet shopping the main cause of the problem? Why is it cheaper to run a business via the internet than on a high street?
- Why have some cities and towns been more affected than others?
- Is there a link between empty shops and repossessions?
- What more could the government and local councils do to try to encourage businesses to set up on the high street?