August 02, 2016, BY Matthew Beltz

Professor Matías Vernengo, economics

Q: The state of Rio de Janeiro recently declared a state of financial disaster. Was this caused by the expense of preparing to host the Olympics?

A: The current problems are more a result of a broader fiscal crisis. Brazil is going through a horrible recession. In 2015, Brazil's gross domestic product fell 3.5 percent and 2016 will likely be the same, which over two years is very large — the largest since the Great Depression. The first thing that happens in a recession is consumer spending goes down because people lose their jobs, which means they don't pay as much in taxes, which leads to smaller government revenues. On top of this, Rio is already strained since it is spending on infrastructure in preparation for the Olympics.

Under normal circumstances, a host city will have some fiscal problems related to all of the big things it needs to do leading up to the Games, but it likely wouldn't have led to as dismal of an economic picture as exists in Brazil now. To a great extent, this crisis is worse than those you might have heard about for previous hosts because normally, the Olympics don't occur in a country that's having its worst recession in over 80 years, so this is more bad timing than anything else. If there were no upcoming Olympics, Rio and Brazil would still be in dire economic straits. The fact that Brazil is hosting the Olympics amplifies its problems because the entire world is watching.

Q: What are some of the factors behind the recession?

A: There are many things that explain it. South American countries' economies are largely based on commodity production — things like soybeans, copper, oil and coffee. Brazil is somewhat industrialized — it makes airplanes, for instance — but normally, its two biggest exports are iron ore and soybeans, most of which go to China. The prices of commodities have tanked, and therefore so has most of the South American economy.

Brazil is worse because in the middle of this, there has been a significant political crisis tied to corruption that has somewhat paralyzed the government and perhaps prevented it from taking the usual steps that governments take to minimize the effects of a recession. Some of that corruption could be tied to government contracts related to the buildup for the Olympics as well as the World Cup in 2014. There is some evidence that some of these contracts were connected to bribes and kickbacks. If you already have a certain level of corruption, it is natural that big projects like these will be a vehicle for more corruption.

Q: Some economic studies have concluded it's almost always a financial loss for a country or city to host the Olympics. For this reason, some cities have passed on an opportunity to bid for upcoming Olympic Games. Is hosting the Olympics economically good or bad for the host?

A: There is some evidence that it is bad economically and basically a waste of money, much in the same way studies have found that it generally doesn't benefit a city financially to spend big on a new stadium to attract or keep a professional sports team. On the other hand, there are things that happen that might be good, even if they don't pay off economically. For example, Rio redid a big chunk of the city's infrastructure to prepare for the Games. Salt Lake City, which hosted the Winter Olympics in 2002, used the Games as an impetus to create a trolley system, which has greatly improved public transportation. These projects might not have happened, or at least would not have happened as quickly had those cities not had the Olympics. So, while it is costly to host and the city may not recoup the money, it certainly can allow for infrastructure improvement, which can have a lasting impact.

There is also a sense of civic pride in hosting the Olympics that's not tangible, and you can't put a pricetag on that. Unfortunately, since this year's Olympics are occurring in the middle of this crisis in the host country, some of that pride is clouded, but in the end, I think it will help bring people together because they have that sense of community and want to showcase their country in the best possible way to the rest of world.

Read more answers about the Olympics here.

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