The Opening Ceremonies are on television in the US right now, and while many of us have had fun with Twitter feeds and the drunk guy trying to catch a ride to Sochi while on a plane to Istanbul, the pageantry is nonetheless beautiful. It's in some ways a relief after years of spending and building that the day is finally here.
It's also a tremendous amount of money being spent. The 2010 Winter Olympic Games in Vancouver were a relatively modest $7 billion — modest, at least, in comparison to the the 2008 Games in Beijing, which cost the Chinese people $40 billion. When Putin's Russia won the bid for these games, it was estimated that the cost would be $12 billion. Instead, Russia has spent $50 billion. The cost has lead to criticism of Putin from so many quarters that he has had to deign to respond (mostly by obfuscating the cost.)
Economists have long argued that Olympics are a loser for an economy. Tourists flock to a place that often already has tourists. Overcrowding leads some of the locals to flee, taking their spending away. On net, it appears to be a wash.
There is a great amount of spending on construction, but once the Olympics end the buildings end up being white elephants. What exactly does one do with a velodrome or an Olympic ski jump once the flame goes out? Thus the return on the investment in construction appears to be nil or worse.
(I remember in 2009 driving by the Bird's Nest stadium in Beijing. It costs $11 million a year for upkeep after the Chinese government spent $480 million to build it. When I was there, the most noticeable feature was the litter strewn across the front of the park.)
So why do it? James Surowiecki puts his finger on the problem: At Sochi most of the $50 billion went to friends of Putin. A similar thing happened in Beijing. As Surowiecki notes, this is a common problem with most government-led construction spending:
Transparency International has long cited the construction industry as the world’s most corrupt, pointing to the prevalence of bribery, bid rigging, and bill padding. While the sheer scale of graft in Sochi is unusual, the practice of politicians using construction contracts to line their pockets and dole out favors isn’t.
In the past year alone, Quebec learned about systematic kickbacks and mob influence in the awarding of city construction contracts. In Turkey, Prime Minister Recep Tayyip Erdoğan has become embroiled in a vast scandal involving friendly construction tycoons who were given cheap loans and no-bid contracts. A recent report from the accounting firm Grant Thornton estimated that, by 2025, the cost of fraud in the industry worldwide will have reached $1.5 trillion.
What makes construction so prone to shady dealings? One reason is simply that governments are such huge players in the industry. Not only are they the biggest spenders on infrastructure; even private projects require government approvals, permits, worksite inspections, and the like. The more rules you have, and the more people are enforcing them, the more opportunities there are for corruption.
How many of the TV shows that you're missing during the Olympics have the crusading cop fighting the land developer in cahoots with the corrupt city councilor? 'Twas ever so.
Andrew Zimbalist is more hopeful for Brazil, host of this year's World Cup and the 2016 Olympics. It could work; most economists cite the 1992 games in Barcelona as proof that these things need not be disasters. (I'm a skeptic of that one myself, but there's a possible explanation there.) That said, the only sure beneficiaries of winning the Olympic Games bidding process are the friends of the winning country's ruling elite and the IOC. Good luck, Japan!