Wednesday, July 30, 2008

Beijing Olympics: Costs & Benefits (Unit 2)

Readers’ Question: Can you post something on upcoming Olympic?

Beijing National Stadium


Major sporting events such as Olympics, World Cup & even Euro often bring along opportunity for economic regeneration. But of course not without critics.

Benefits:

1. Increase in economic growth. Over the past 7 years, the Chinese government had spent $33 billion onto sport venues, roads, airport terminals, improving subway lines, parking accommodations etc. It is reported that infrastructure boom also happens 1000 miles away at the East of Beijing. This is closely associated with the multiplier effect. Increase in government spending over various projects will cause AD to shift right & this lead to higher economic growth

2. Efficiency & productive capacity. The Chinese government has spent heavily on infrastructures like new highways, subway lines, sail port etc. The most significant one will be the Beijing Capital International Airport which has a floor area larger than all 5 terminal buildings at London Heathrow Airport. More roads help to reduce congestion. The airport will encourage more international trade. Overall, productive capacity of economy will be increased & AS curve shifts right

3. Fall in unemployment. As government spending into the economy increases, more contractors & project managers will be engaged to run the project within the stipulated time frame. In return this means more job creations & ultimately this will lead to fall in local unemployment. It has many knock on effects such as lower crime rate, more tax revenue for the government etc

4. Wealth effect. Development all over Beijing & in cities nearby had caused the prices of property to surge to record high level. For example, Qingdao which will be hosting sailing & windsurfing is now experiencing the biggest increase in its property prices compared to other major China cities. This in return means growing wealth which can be a boost to existing consumption power

5. Projecting the positive image. The Chinese government can use this opportunity to advertise the modern China to the rest of the world. Bear in mind that there will be more than 30,000 journalists during the event (asia.investorplace) & the broadcast may reach to a number of 4 billion viewers. If it is done effectively, it will leave a long lasting impact towards the Chinese economy in aspects like increase in numbers of foreign investors, tourists & greater trade

6. Influx of foreign visitors. Number of tourists will increase significantly by July & August. Hotels will be fully booked, local shops & stores will gain record high profits etc. Normally, major sporting events can lead to a long term growth in visitor numbers. Barcelona saw higher visitor numbers after the Barcelona Olympic

Costs

1. Expenditure is actually much larger than estimated. The costs of hosting such major events have surged in recent years. It includes not only the initial money pumped but also the heightened security. Furthermore there are just too many costs that increase out of hand e.g. raw materials, oil, & land

2. Negative externalities. The construction of infrastructures all over the place in these few years may have led to problems like serious congestion, worse air pollution especially in Beijing & noise pollution especially on those who live in proximity of the site

3. Higher tax. Since the government had spent so much, it may think of raising various taxes in the near future (In China there are 26 types of taxes, Wikipedia)

4. Will the infrastructure be used in the future? The investment onto so many infrastructures like Beijing National Stadium, Beijing National Indoor Stadium, National Aquatics Centre, Green Convention Centre etc could be a huge waste if the Chinese government fails to recoup the spending & if it can’t be turned into other uses in the future

Evaluations

1. Beijing Olympic expenditure leaves minimal impact onto economy. From the $33 billion spent over the span of 7 years, roughly the Chinese government spends $5 billion each year. However the China’s total annual construction spending is larger than $300 billion which means that the additional spending due to Olympic contributes only to 2% of total construction spending. Hence it is very arguable whether this will leave significant impact onto the local economy

2. Tourists arrival in Beijing may not be that high. There are many that visit China for the purpose of leisure. As such they may choose to avoid crowded places like Beijing, Qingdao etc where sports event will be held. Therefore the estimated private benefits & external benefits may not be that high as anticipated

3. The venues will still be use after Olympics. Tenders for building sports venues encouraged winners to put these structures to commercial use after the games. Other venues went up in universities and other educational institutions which will make use of them after the competitions are over. These arrangements reduce the future cost to the government of maintaining these facilities




3 comments:

Edward said...

I have a question Mr Lawrence. Well, of course the Olympics will generate a lot of jobs opportunities and business, etc. My question is, what happens AFTER the Olympics. Would businesses or people find it hard to adapt to the sudden loss of business opportunities or job opportunities? For instance, lots of engineers are sought after for building stadiums, but after the Olympics, where are they going to find jobs in China since there is no more sudden need of these labour? And also, lets say i open a souvenir shop nearby the stadium, but after the games, my business slumps steeply, I might even go bankrupt. Will it turn into a crisis for China then?

Lawrence Low said...

Thanks. I will reply you in next few postings

Dan said...

China was using this as a launching pad for growth. Yes there may be some short term post olympic slowdown but the influx of opportunity it brings to the city is a net positive gain.