Can Olympics beat back recession?

Out of a small office in London's Angel neighbourhood, Mr Rajeeb Dey, a Kolkata-origin, British-born entrepreneur, runs Enternships.com, a company that helps connect start-ups and small companies with students hoping to gain experience in them — a twist on the traditional internship. Three years since it was founded, it's a sizeable business, with some 4,000 businesses and 30,000 students from across the globe as its clients, India included.

Mr Dey, who ran Oxford University's Entrepreneurs Society for a year while he was studying economics and management, didn't do what entrepreneurial peers at university were doing, namely, head westwards. “All previous presidents of the society had gone to the Valley; I was the first one not to do that,” he says. “I wanted to stay here in the UK and help develop the entrepreneurial spirit.”

TECH CITY

It's the kind of thinking that British Prime Minister David Cameron hopes people will embrace, as part of the government's ambition to create “Tech City.” That is: a Silicon Valley-esque tech and start-up cluster stretching all the way across East London to the Olympic Park, piggybacking on the considerable attention and investment that is going into the area ahead of the “XXX” Olympics this summer. By creating new jobs, and helping the economy diversify, Tech City would form a part of Britain's exit strategy from economic malaise, the plan goes, creating an enduring legacy from the Games.

“Right now, Silicon Valley is the leading place globally for high-tech growth and innovation. But there is no reason why it has to be so predominant,” Mr Cameron said at the launch in 2010. The project has had some success: from just 20 companies in an area that used to be affectionately known as Silicon Roundabout (given the high concentration of start-ups around the Old Street roundabout), there are now around 700, while big names are joining in, including Google — which has launched a campus designed to provide facilities and support for start-ups — and Intel, which is setting up a research lab.

While Mr Dey's business predates the Tech City project, he says the growth of a full-fledged cluster has advantages for him too, generating synergies and raising the international profile of the area.

Making plans to get the most out of economic opportunities presented by hosting the Olympics is something governments across the globe have always done with gusto. After all, with all those foreign big-spending ticket holders set to descend on the host city, infrastructure spending, and all the international eyeballs via television and computer screens, there could only be an upside, surely? On a motivational level, it makes sense too: the prospect of economic gains makes the huge disruption to normal life that residents will face, somewhat more palatable.

ECONOMIC BENEFITS

London is no exception. 17,000 athletes from 200 countries and several million visitors will descend on the city, major artery roads serving it will be closed to all but Olympic official traffic and emergency services, thousands of police, private security forces, and even the military will stand guard. Businesses have been warned of 100 days of traffic disruption in the city.

Economic benefits become all the more important, given the poor state of the economy — it is expected to grow just 0.8 per cent this year, and 2 per cent in 2013. At a time of fiscal austerity, the huge level of expenditure on the games — government estimates put the total cost to the public at £9.3 billion, while a recent parliamentary report suggests £11 billion — only ups the ante.

Yet, the performance record of past Olympic host cities don't paint a picture of an economic “godsend” — the phrase recently used by Mr Sebastian Coe, the Chairman of the Games' organising committee to describe the expected impact on London. In reality, immediate returns rarely materialise on the scale foreseen, and long-terms hopes of using the Games' infrastructure as a source of future growth simply don't match up to expectations.

“A lot of cities have struggled with the huge costs of the games,” says Mr Corin Taylor, a senior economic adviser at the Institute of Directors (IoD) in London. The 1976 games proved so costly to the Canadian city of Montreal that it took three decades for it to finally pay off its debts.

In a report published earlier this year, Michael Saunders, a Citigroup economist, charted the GDP of all countries before and after they hosted the Summer Games since 1964. While on average, real GDP growth in the run up to the Games rose from 5.9 per cent six quarters before, to 7.7 per cent two quarters before the Games, the post-Games scenario was less impressive.

“Real GDP growth, on average, slowed during the Games, and then fell steeply, to an average of 3.5 per cent year-on-year two quarters after the Games,” writes Saunders. “The pattern of post-Games slowdown is steeper, excluding those in the US, and is very persistent: in 9 of the last 10 Olympics, real year-on-year GDP growth was slower two quarters after the Games, than two quarters before the Games.”

CONSEQUENCES

He explains that while games can have good consequences such as more tourism, and construction, these factors can be offset by factors such as residents working less intensely, productivity falling as a result of travel disruption, while some who would have usually visited, won't. He concludes: “In our view, the Olympics are likely to be very entertaining. But the Games aren't an economic policy.” The IoD's Mr Taylor is also sceptical of economic benefits, though he believes that the hugely-improved transport infrastructure provided to East London will be one of the Games' most valuable outcomes, in the long term.

Even tourism bodies seem sceptical of the benefits. There was “little evidence of any benefit to tourism of hosting an Olympic Games, and considerable evidence of damage,” the European Tour Operators Association concluded, based on a study of the 1992 Barcelona and 2000 Sydney Olympics. Such sentiments don't seem to faze Mr Cameron, who, alongside initiatives such as Tech City, is planning a big tourism drive and an investment conference on the eve of the games, which the government estimates could bring in 1 billion pounds in the long term — a decent figure no doubt, though dwarfed by the total cost of the games.

While some entrepreneurs embrace government involvement in Tech City, there are some others who are less enthusiastic. Mr Andy Bell, the chief creative officer at start-up Mint Digital, expressed some of the frustration out there, arguing in a blog post that it took government “arrogance” to assume it could help the once-spontaneous cluster grow. “The best thing the government can do is get out of our hair,” he wrote. The trouble is Olympic Games seem to spur governments to Olympian ambitions and a flurry of activity. Such vision and impetus is no bad thing, though a little reality wouldn't hurt either.

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