Friday, November 28, 2014

Olympian Economics

LONDON – As Olympic mania swept the world in recent weeks, it transported the host country, Great Britain, to a rare display of public exultation. Indeed, the successes of “Team GB” produced an upsurge of patriotic rejoicing akin to victory in war. Britain finished third in the gold medal count, behind the United States and China, much larger countries, but ahead of Russia, which traditionally competes with America for first place.

So, what is the secret of Olympic success? The acquisition of medals, precisely because it gives so much satisfaction, has become the object of scientific inquiry and national endeavor. Before the 2012 Games, the Financial Times combined four economic models to produce the following “consensus” prediction of gold medals (the actual results are in brackets): 1. United States, 39 (46); 2. China, 37 (38); 3. Great Britain, 24 (29); 4. Russia, 12 (24); 5. South Korea, 12 (13); and 6. Germany, 9 (11). The gold medal rankings and overall medal placement (gold, silver, and bronze) were correctly predicted in all cases.

The most striking finding is that the medal count can be predicted with great accuracy from four key variables: population, GDP per capita, past performance, and host status. Everything else – different training structures, better equipment, and so forth – is pretty much noise.

The impact of population and GDP is obvious: A large population increases the chance that a country will have athletes with the natural talent to win medals, and a high GDP means that it will have the money to invest in the infrastructure and training needed to develop medal-winning athletes.

Past performance is also important: the visibility and prestige of a sport increases after Olympic success, as does funding. Medals attract money; failure results in cuts.

Finally, the “home advantage” includes not just the benefit of morale and the opportunity to train in the actual Olympic venues, but also the funding boost that host status brings. In 2004, British athletes received £70 million ($110 million). By 2008, after London was awarded the 2012 Games, the total was £245 million, and stood at £264 million this year. Over the past ten Olympics, the host country has won 54% more medals on average than when it was not the host. Hosting the Olympics boosts performance before the hosted Games, and has effects that outlast them.

Some sports are more sensitive to income and host-nation effects than others. Equestrianism, sailing, cycling, and swimming, for example, are far more expensive than running, and this reduces the participation of low-income countries. It is almost impossible for some countries to produce medal-winning athletes in some sports – Ethiopia has only one swimming pool per six million people.

Sometimes, poor countries are priced out of a sport. India was historically strong at field hockey, winning almost all of the gold medals between 1928 and 1968, but, since the Games switched from grass to expensive synthetic turf, the Indians have won just one field hockey medal. Some of the sports at which Britain has done particularly well, like cycling and rowing, are most highly influenced by income and host effects.

Brazil can therefore expect to improve considerably on its modest haul (15 medals) and 21st-place finish when it hosts the 2016 Games. As for the others, the formula for success is fairly simple: select your potentially winning sports, pick the potential medalists in those sports, pour money into them, and stick with both the sports and the players until the medals roll in. The funding can be corporate sponsorship (as in the United States), state money (as in China), or a mixture of National Lottery and state money (as in the United Kingdom).

Two questions arise. First, why should a country concentrate on accumulating trophies at the expense of other desirable goods? And, second, can the formula for “picking winners” in sports be replicated for competitive success in international trade?

The answer to the first is not obvious. An economist would probably argue that money spent on education, housing, and health care brings more “welfare” than money spent in the quest for medals. When all is said and done, sports is entertainment; the others are necessities.

But that argument ignores the effect of sporting success on national morale, an intangible factor in a country’s success in other, more “serious,” spheres of endeavor. A country that can succeed in one sphere of peaceful competition is encouraged to feel that it can do well in others.

One can treat this claim with a certain degree of skepticism – after all, the 2004 Athens Olympics failed to produce a Greek economic miracle. But it does lead to the second question: Can the methods that produce Olympic winners be applied elsewhere?

Nothing is more discredited in Anglo-American economics than the policy of “picking winners.” The consensus has been that it inevitably leads to the state “backing losers.” Economic success, on this view, is best left to the unfettered play of market forces.

This philosophy has been heavily jolted by two inconvenient facts: the financial collapse of 2007-2008 and the experience of countries like Japan, South Korea, Taiwan, Germany, and even the US, where economic success depended heavily on sustained government investment of the kind that has produced Olympic medals. As in sports, so in economic life: government commitment can start a virtuous circle of success, while government neglect can trigger a vicious circle of decline.

Nevertheless, the popular hunger for sporting success, and the celebratory outpouring that it evokes, is bound to provoke some disquiet. It seems to mark humanity’s retreat into infantilism. But if the douceur of sports can channel aggressive passions into benign, if trivial pursuits, why should we deny our star performers their heroic stature?

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    1. CommentedJ K

      "Everything else – different training structures, better equipment, and so forth – is pretty much noise."

      In other paragraph author argues that GDP is important because infrastructure and training equipment costs. So the first statement is false.

    2. CommentedKoldo Casla

      Which is the key to Olympic success: Competitiveness or public investment?

    3. CommentedAtul Mehta

      Nathan Carroll: You have a good point with regards to questioning objective reasoning behind hosting the 2010 Commonwealth Games in Delhi. Perhaps some folks in the antiquated Indian bureaucracy went that way in order to quickly portray a capacity to host a future Olympics after being held in awe with the magnificient display at the Beijing 2008 Olympics. It appears though that building a sports culture that "looks beyond cricket" was one of the primary objectives, given that the Indian psyche knows not and cares not for any other sports but cricket. There's the big Olympics and then an Asiad every couple of years, and the queen no longer rules half the world, so that irrelevant concept of something called as "Commonwealth Games" makes no sense to begin with and should be retired. A couple of billion dollars would have gone a long way in building a nationwide foundation for a sports culture (like the Brits or Chinese did), with a better risk-reward ratio, so that was clearly a decision-making error within the higher echelons of India's elites. Indeed, the whole world would be a much better place if decisions related to economics and other matters of significance was done by computers instead of humans. The recent Olympic indifference stance seems a bit wiser while timing a Mars mission annoucement right after the London 2012 Olympics closing ceremony:

    4. CommentedUtku Ören

      another perspective about the topic can be found here:

    5. CommentedAtul Mehta

      Several decades ago, Indians did well at India's national sport of hockey. The expensive synthetic hockey turf doesn't appear to be one of the main reasons behind not medaling in hockey thereafter. The hockey interest somehow just withered away there which was gradually replaced by substantial fanaticism toward the English sport of cricket. India did well in cricket but it's not an Olympic sport. Neither is chess.

      The unproven concept of temporarily boosting national morale with a medal count better than other countries seems to be quite an odd reason, relative to cost, as much as hosting the Olympics which has never been touted by prominent economists for generating an "economic miracle." Hosting an Olympics is six times more expensive than flying a robot to Mars! If anything, the current woes of Greece could be traced back to Athens 2004. Also, it took Canada 30 years to pay off its 1976 Olympics debt in 2006. For nation as populous as India along with its baggage of dire poverty and record malnutrition rates, there would be a public outrage (given its pluralist democracy) if state money was spent on sports instead of necessities.

      Here's a WSJ article which explains the India's indifference toward the Olympics:

      The professor indeed has an astute observation regarding "picking winners" vs "backing losers".

        CommentedNathan Carroll

        Was there any public outrage when Delhi hosted the 2010 Commonwealth Games? Those games were seen by most as an opportunity for India to show their capacity to host a future Olympic games.

    6. CommentedMark Thomson

      Two things -

      As you point out, the impact of population is obvious. So surely it's hardly interesting enough for you to write about. A discussion of the predictors of meals per head of national population would be much more useful.

      Secondly, you say that past performance is important because of its relationship to funding. Why then even bother to identify past performance as significant if funding is the real issue?

    7. Portrait of Zaki Laïdi

      CommentedZaki Laïdi

      interesting . in line with my own piece on the topic published three days ago. you mentionned population i mentionned morphology, you refer to past performances i mentionned traditions and sport policies , you mention gdp per capita i mentionned level of development. The host factor is important but works by definition for one country.

    8. CommentedThomas Haynie

      Medal count = (B)Pop+(B)GDPpercapita+(B)Past perform1…z+(B) Host status?

      Also curious to read more about the analysis andmodeling methods for these conclusions.

        Portrait of Hosein Maleki

        CommentedHosein Maleki

        Your regression, though maybe just as a hobby, looks pretty interesting! But I guess the past performance has an AR effect.

        - Not really serious but looks interesting anyway!

    9. CommentedUtku Ören

      Prof. Skidelsky,

      If this is an article I would love to read it. Can you please mention the title of the work? Thank you.