1988 Korean Olympics and Macro Effects: What s there?

Transcription

1 1988 Korean Olympics and Macro Effects: What s there? Jonathan Willner April 8, 2007 Hosting the Olympic Games requires significant expenditure by the hosting country government. Recognizing this, hosting countries often argue that the net effect of the Olympics on the economy will be positive. The 1988 Olympics held in Seoul are examined. Using a panel approach the other Asian Tiger economies as benchmarks growth implications from holding the Olympics are searched for. Under numerous specifications there is little evidence to support GDP growth associated with hosting the Olympic Games. JEL Codes: L83 Sports, F43 Economic Growth of Open Economies Professor of Economics Oklahoma City University. Oklahoma City University, 2501 N. Blackwelder, OKC, OK USA, (450) , jwillner@okcu.edu All errors and omissions are mine but will be blamed on the nearest available dog.

2 Introduction Every Olympic Games in the postmunich era is presented by organizers, supporters and hosting governments as providing significant positive economic effects as well as prestige and a positive image. The prestige and image claims do not seem to be an issue and are, at best, difficult to quantify in any agreed upon manner. Certainly governments see the Olympics, when hosted, as a method to instill a strong sense of national pride. The economic effects are potentially quantifiable, as the mentioned economic variables such as income, employment, etc., are measured in commonly agreed upon units with standardized methods across time. At the micro level, direct measurement may be possible but the data are not generally available. Accounting processes and information distribution are not standardized and are often less than above board. For example, a volleyball venue built for the Olympics might be budgeted through the parks department for general funds, and not accounted for in the Olympics. Likewise, the construction of a necessary university dormitory may be charged to the Olympic effort, though it was a necessary expense in another category. Macroeconomic variables such as GDP, gross investment, etc. are less subject to manipulation and discretion. Much of the expenditure associated with hosting the Olympics is for large scale projects both specific to the Games themselves, such as arenas, and for infrastructure that is valuable outside of hosting the games such as highways and subways. The latter constitute public investment and the former are often presented as such. Economic evidence does not support the idea that sports facilities are in the public interest, see Noll & Zimbalist (1997) for a collection of work on this point. Despite their size in the sports world, relative to some economies the Olympics are small. Looking for national effects of hosting the Olympics in Atlanta, Georgia would be futile, while the effects on Georgia are more likely to be noticeable. Looking for the effect of the Olympics on relatively small economies, such as the Lillehammer Olympics in Norway or the Seoul Olympics in South Korea may reveal the validity of the claims of positive economic impact. As Pyun (2004) points out, the Olympics 2

3 accounted for at least 0.4% of GDP for several years. This does not appear to be an insignificant proportion of economic activity. Since during the build up to the Olympic Games expenditures are virtually all in the form of investment this constitutes are much larger share of overall investment in the economy during the period. Hosting the Olympics may provide the political cover and support necessary to invest in valuable public infrastructure. From this investment should come improvements in a number of macro level measures of economic wellbeing. The baseline measure of this is real GDP growth and changes in that growth rate that may be attributed to the Olympic effort. In this paper the Seoul Olympics of 1988 are examined for impact on the South Korean economy. First direct implications for the Korean macroeconomy are examined. This is followed by controlling for the Asian Tiger phenomenon that occurred during the 1980s and 1990s. Economic changes in Korea may be consistent with other similar economies that did not host the Olympics. The implications of the financial crisis of 1997 are also included in the analysis. Literature and Background Holger Preuss is, without doubt, the leading writer on the subject of Olympic economics. His extensive work on the matter is compiled in The Economics of Staging the Olympics in It constitutes the first significant effort to examine the general economic impact of the Olympics. Most work on the issues surrounding the economics of the Olympics do not follow standard economic research. They are vignettes extolling the wonders of the Olympics. There is little chance of direct economic studies on the matter being done because, as Pruess points out, accurate and consistent data are difficult if not impossible to obtain. Some of this difficulty is simply a matter of time and relative scarcity of data on anything that occurs once every four years. Indirect studies of the economic impact of the Olympics is even more scarce. Hotchkiss, Moore and Zobay (2003) in a study of the Georgia economy finds limited positive employment effects for to the Atlanta Olympics. Aravantinos, Elias and Jonathan Willner (2003) refine those employment results. 3

4 Combined the papers show a limited, though positive, temporary effect on employment in areas immediately adjacent to the Olympic venues. A cursory look at macro series for Korea does not show any noticeable change in performance that might be associated with the Olympics. However, regional (East Asian) effects may have swamped Olympic effects so that the effect on Korea is lost in the torrid growth that created the Asian Tiger phenomenon. Though different in some respects South Korea, Taiwan, Hong Kong and Singapore are often referred to collectively because of their similar growth paths. If, for example, Taiwan s economic growth slowed while Korea s pace was unchanged after the Olympics then the Olympics would appear to have had a positive effect on the Korean economy. Perhaps the greatest proponent of the Olympic effect on economies is Do Young Pyun in, The Economic Impact of the Seoul Olympic Games (2004). Pyun notes the following: Investments in Olympic projects generated: 1. During the period from 1982 to 1988, the production resulting from Olympic projects amounted to 1,846.2 billion won. That figure accounts for 0.4% of the GNP over the same period. 2. Futhermore, from 1982 to 1988, 336 thousand new jobs were created. 3. During the period from 1982 to 1988, employment in Olympicsrelated projects accounted for 0.3% of total employment. 4. In 1987 alone, Olympic projects employed 0.5% of the nation's total employed. This litany provides direction for investigation. Did GNP (I use GDP) in Korea grow faster than it might have otherwise? We use as reference the other 3 Asian Tigers. Data and Methodology The basic measure of economic activity is GDP. Any number of factors may help explain GDP growth over time with Investment spending (animal spirits) and Government spending (fiscal policy) often seen as major players in the story. 4

5 A single sporting event is unlikely to have a noticeable impact on the GDP of any country. However, the Olympics by their size relative to some nations may leave some evidence in macroeconomic data. If this is the case, after controlling for investment and government spending and other factors, growth should be greater during the Olympic experience than in other similar countries. The data for this study comes from a multitude of sources. All Korea data comes from the Korea National Statistics Office Data on Taiwan comes from the Republic of China National Statistics site: Singapore and Hong Kong data come from the World Bank s WDI and Statistics Hong Kong. Where necessary, World Bank data series were used instead of the local information. All data are in real terms adjusted by the relevant data authorities method and base year. Effects of holding the Olympics start several years before the games actually occur. The Korean Olympics occurred in However, building for the Olympics commenced sometime between 1982 and This building includes infrastructure, game venues and myriad other activities. Much of this can be counted as investment, either public or private. Most of the investment is public in nature highways, venues, etc. Whether it is additional investment, a substitute for private investment or a bit of both should be evident in later GDP growth. Several competing hypotheses should be considered. If the Olympics provide political and popular support for sound public investment that would not be possible otherwise, growth rates should increase during and after the Olympics. Another possibility is that the Olympics are simply a substitute investment choice. Growth after the Olympics is no different than before the Olympics. The Olympics might also be an unsound use of funds leading to slower growth post Olympics since investment decisions were unsound. Another set of concerns is whether or not the Olympics constitutes investment or consumption spending. If it is simply consumption spending growth may pick up during the build up but will drop off immediately afterwards. This possibility would appear as similar to the neutral growth pattern. Further, if Olympic expenditure is consumption spending and crowds out investment growth, postolympics should slow. 5

6 The basic approach taken here is a simple. Using a dummy variable for the Olympics we run various regressions looking for some indication that there is a difference in GDP growth associated with the Olympics. All data is annual. Table 1 defines the variables included in various specifications of the models. A panel data approach is used for much of the analysis so identifiers are listed first. Country Identifiers Table 1: Variables and Definitions KOR = Republic of Korea, HKG = Hong Kong, SGP = Singapore, TAI Taiwan, WORLD = All economies in World Bank data, TIGER = sum of KOR, HKG, SGP, TAI Variable Defintion GROWGDP i Real GDP growth rate for country/region i. GROWIOVER i Growth rate of Investment as a share of GDP in country i. L1GROWIOVER i One year lagged growth rate of Investment as a share of GDP in country i. GROWGOVER i Growth rate of Government spending as a share of GDP in country i. L1GROWGOVER i One year lagged growth rate of Government spending as a share of GDP in country i. OLYMPICEXPERIENCE Binary equal to 1 for years , 0 for all other years OLYMPICPREPARATION Binary equal to 1 for years , 0 for all other years OLYMPICYEAR Binary equal to 1 for years 1988, 0 for all other years Korea is a very open economy. Trade (Exports plus Imports) as a share of GDP was 14% in 1970 and rose to 95% by While it is a large economy compared to many countries it is likely still subject to external shocks. It s close ties to other economis make it susceptible to external shocks. External shocks are accounted for in several ways. First the world rate of GDP growth is included. Second, when using panel data approaches the growth rate of the Asian Tiger economies are included. The Olympics were unique to Korea while the other Asian Tigers grew rapidly in the 1980s but did not host the Olympic Games. Chart 1 shows the growth rates for each of the 4 Tiger economies. While they move in a similar fashion, Table 2 demonstrates that these movements are only mildly correlated. CHART 1 HERE CHART 2 HERE 6

7 Chart 2 shows how Korea s GDP growth compares with those of the Tiger economies as a whole and as compared to the world. Korea and the Tigers generally exceeded the performance of the world as a whole, thus the moniker Tiger. This difference was true for both positive and negative growth. Results As a first and naïve attempt at finding a role for the Olympics a simple OLS model was used with several specifications. Because of the possible special circumstances associated with the Currency Crisis of 1997 all models look at the entire period ( ) and a slightly truncated period ( ). Each model is also estimated looking at the Olympics as a single event and as having two separate aspects preparation and the year of hosting. Table 3 shows the results of this naïve model. TABLE 3 HERE All of the OLS models find a positive and significant relationship between economic growth and the Olympics. Olympicyear has a slightly higher coefficient than Olympicpreparation which is consistent with the influx of tourists and last minute investment activities. Government spending growth and investment growth have generally predicted signs and significance. The negative coefficient on contemporaneous growth in government spending is easily explained as fiscal stimulus. Since the data is timeseries a broader model was implemented vector error correction on differences with 2 lags included. Table 4 shows these results. The Olympicexperience has a nice positive and significant sign on GDP growth. Surprisingly, it is negative and significant on Government spending growth. Surprising because typically much of the infrastructure associated with the Olympics has a public goods nature. TABLE 4 HERE 7

8 Taking into consideration external variables, shocks and endogenous issues requires a more complex approach. To control for natural growth rates and growth rates special to the Tiger economies a Pooled least squares approach was implemented. Table 5 shows the initial results using both common and fixed effects approach. TABLE 5 HERE When the entire period is considered the Olympicexperience has a positive and significant coefficient. However, when the postcrisis years are excluded the significance of Olympicexperience disappears. This suggests that the years are not, in and of themselves, special to the Tiger economies. Table 6 allows for country specific treatment of the Olympicexperience. TABLE 6 HERE Table 6 shows that Olympicexperience has a weakly positive association with GDP growth in Korea. This same relationship exists with Taiwan s GDP growth leaving some doubt about the role of the Olympics per se. Tables 7 and 8 are similar to Tables 5 and 6 but the Olympicexperience has been separated into preparation and the event year. TABLES 7 and 8 HERE Table 7 suggests that the preparation is positively related to growth, but only over the whole series. Table 8 allows for no Olympic effect except in Taiwan. 8

9 Conclusion If you torture the data long enough it will confess is attributed to many sources. In an effort to find evidence of a link between hosting the Olympic Games and economic growth this paper reports some first use of the rack on the Korean Olympics. In the most naïve of models the Olympic experience appears to have some positive implications for growth. When a model is used that captures a fuller set of possibilities the role to the Olympics in economic growth disappears quite rapidly. On net it appears that the Olympics do not harm an economy, so that the investment activities associated with the Olympics do not appear to be unsound. However, there seems to be no lasting positive or contemporaneous effect. From these results it would appear that the Olympics do no harm, but are no different than other paths that a country may choose. This paper has examined only real GDP growth. Many other macroeconomic variables have been put forward as positively associated with the Olympics. Future work will include investigation of employment effects and other macroeconomic variables. 9

10 Bibliography Aravantinos, Elias and Jonathan Willner. Impact of the 1996 Summer Olympic Games on Unemployment in Georgia Southwestern Journal of Economics 7(1), 2005 Hotchkiss, Julie L., Robert E. Moore and Stephanie M. Zobay. Imapct of the 1996 Summer Olympic Games on Employment and Wages in Georgia. Southern Economic Journal, January 2003, 69(3), pp Noll, Roger G. and Andrew Zimbalist. Build the Stadium Create Jobs. in Roger G. Noll and Andrew Zimbalist, eds. Sports, Jobs, and Taxes. Washington, DC: Brookings Institution Press, 1997, pp The Economic Impact of Sports Teams and Facilities. in Roger G. Noll and Andrew Zimbalist, eds. Sports, Jobs, and Taxes. Washington, DC: Brookings Institution Press, 1997, pp Deleted: Preuss, Holger, The Economics of Staging the Olympics: A Comparison of the Games Edward Elgar, Northampton, MA Pyun, Do Young. The Economic Impact of the Seoul Olympic Games downloaded January

11 Charts and Tables Table 2: Growth Rate Correlations GROWGDPH GROWGDPK GROWGDPS GROWGDPT GROWGDPW KG OR GP AI ORLD GROWGDPHKG GROWGDPKOR GROWGDPSGP GROWGDPTAI GROWGDPWORLD Chart 1: Tiger GDP Growth Rates GROWGDPKOR GROWGDPHKG GROWGDPSGP GROWGDPTAI.12 Chart 2: GDP Growth Rates GROWGDPKOR GROWGDPTIGER GROWGDPWORLD 11

12 Table 3: Korean GDP Growth (OLS) Variable Coefficient Std. Error Coefficient Std. Error Coefficient Std. Error Coefficient Std. Error C *** *** *** *** GROWGDPWORLD GROWIOVERKOR *** *** *** *** L1GROWIOVERKOR *** *** GROWGOVERKOR *** *** *** *** L1GROWGOVERKOR *** *** *** ** OLYMPICEXPERIENCE *** *** OLYMPICPREPARATION *** *** OLYMPICYEAR *** *** Adjusted Rsquared N *** significant at 1%, ** significant at 5%, * significant at 10% 12

13 Table 4: Korean GDP Growth (Vector Error Correction Estimates) Cointegrating Eq: CointEq1 GROWGDPKOR(1) GROWGOVERKOR(1) * GROWIOVERKOR(1) * C Error Correction: D(GROW D(GROW D(GROW GDPKOR) GOVERKOR) IOVERKOR) CointEq * * D(GROWGDPKOR(1)) D(GROWGDPKOR(2)) D(GROWGOVERKOR(1)) D(GROWGOVERKOR(2)) D(GROWIOVERKOR(1)) D(GROWIOVERKOR(2)) C OLYMPICEXPERIENCE * * * * Adj. Rsquared N = 31, * = significant at 5% level, standard errors 13

14 Table 5: GDP Growth, Olympic Experience (Pooled Least Squares) Variable Coefficient Coefficient Coefficient Coefficient C *** *** GROWGDPWORLD *** *** *** *** OLYMPICEXPERIENCE *** ** HKGGROWIOVERHKG * * KORGROWIOVERKOR ** ** * SGPGROWIOVERSGP ** ** * * TAIGROWIOVERTAI HKGL1GROWIOVERHKG KORL1GROWIOVERKOR SGPL1GROWIOVERSGP * TAIL1GROWIOVERTAI HKGGROWGOVERHKG *** *** *** *** KORGROWGOVERKOR ** ** * SGPGROWGOVERSGP *** *** *** *** TAIGROWGOVERTAI * ** * HKGL1GROWGOVERHKG KORL1GROWGOVERKOR * SGPL1GROWGOVERSGP TAIL1GROWGOVERTAI * * HKGC KORC SGPC TAIC Adjusted Rsquared N 33x4 33x4 26x4 26x4 *** significant at 1%, ** significant at 5%, * significant at 10%, Std. Error 14

15 Table 6: GDP Growth, Idiosyncratic Olympic Experience (Pooled Least Squares) Variable Coefficient Coefficient Coefficient Coefficient C *** *** GROWGDPWORLD *** *** *** *** KOROLYMPICEXPERIENCE * ** * HKGOLYMPICEXPERIENCE SGPOLYMPICEXPERIENCE TAIOLYMPICEXPERIENCE ** ** HKGGROWIOVERHKG *** KORGROWIOVERKOR ** ** ** ** SGPGROWIOVERSGP ** ** * TAIGROWIOVERTAI HKGL1GROWIOVERHKG KORL1GROWIOVERKOR SGPL1GROWIOVERSGP TAIL1GROWIOVERTAI HKGGROWGOVERHKG *** *** *** *** KORGROWGOVERKOR * SGPGROWGOVERSGP *** *** *** *** TAIGROWGOVERTAI * ** * HKGL1GROWGOVERHKG KORL1GROWGOVERKOR * * SGPL1GROWGOVERSGP TAIL1GROWGOVERTAI * * HKGC KORC SGPC TAIC

16 Adjusted Rsquared N 33x4 33x4 26x4 26x4 *** significant at 1%, ** significant at 5%, * significant at 10%, Std. Error 16

17 Table 7: GDP Growth, Olympic Prep & Year Variable Coefficient Coefficient Coefficient Coefficient C *** *** GROWGDPWORLD *** *** *** *** OLYMPICPREPARATION *** *** OLYMPICYEAR HKGGROWIOVERHKG * * KORGROWIOVERKOR ** ** * * SGPGROWIOVERSGP ** ** * * TAIGROWIOVERTAI HKGL1GROWIOVERHKG KORL1GROWIOVERKOR SGPL1GROWIOVERSGP * TAIL1GROWIOVERTAI HKGGROWGOVERHKG *** *** *** *** KORGROWGOVERKOR * ** SGPGROWGOVERSGP *** *** *** *** TAIGROWGOVERTAI * ** * HKGL1GROWGOVERHKG KORL1GROWGOVERKOR * * SGPL1GROWGOVERSGP * * TAIL1GROWGOVERTAI * * HKGC KORC SGPC TAIC Adjusted Rsquared N 33x4 33x4 26x4 26x4 *** significant at 1%, ** significant at 5%, * significant at 10%, Std. Error 17

18 18 Table 8: GDP Growth, Idiosyncratic Olympic Prep & Year Variable Coefficient Coefficient Coefficient Coefficient C *** *** GROWGDPWORLD *** *** *** HKGOLYMPICPREPARATION KOROLYMPICPREPARATION SGPOLYMPICPREPARATION TAIOLYMPICPREPARATION *** HKGOLYMPICYEAR KOROLYMPICYEAR SGPOLYMPICYEAR TAIOLYMPICYEAR HKGGROWIOVERHKG KORGROWIOVERKOR ** ** ** SGPGROWIOVERSGP ** TAIGROWIOVERTAI * HKGL1GROWIOVERHKG KORL1GROWIOVERKOR SGPL1GROWIOVERSGP TAIL1GROWIOVERTAI HKGGROWGOVERHKG *** *** *** KORGROWGOVERKOR SGPGROWGOVERSGP *** *** *** TAIGROWGOVERTAI * * HKGL1GROWGOVERHKG KORL1GROWGOVERKOR *

19 SGPL1GROWGOVERSGP TAIL1GROWGOVERTAI * HKGC KORC SGPC TAIC Adjusted Rsquared N 33x4 33x4 26x4 26x4 *** significant at 1%, ** significant at 5%, * significant at 10%, Std. Error 19