REG I ONAL DEVELOPMENT AND IMPACT OF 25TH W I NTER UN I VERS I ADE ON ERZURUM’S ECONOMY

1. REGIONAL DEVELOPMENT AND IMPACT OF 25TH WINTER UNIVERSIADE ON ERZURUM’S ECONOMY Onur ÖZSOY Professor of Economics Ankara University Faculty of Political Sciences Department of Economics Tel: (0312) 595-1240 Email: ozsoy@politics.ankara.edu.tr

2. INTRODUCTION • The main purpose of this study is to analyze the relationship between regional development and impact of 25th Winter Universiade on Erzurum’s Economy. This study will be divided into two main parts. • The first part includes some proposals for Erzurum’s economic development.

3. INTRODUCTION(continued) • The second part of the study focuses on the possible impacts of the 25th Winter Universiade 2011 on Erzurum’s and region’s economy.

4. INTRODUCTION (continued) • Due to low level of competitiveness in attracting private sector investors to come and invest in Erzurum, Erzurum and surrounding region suffer with two major problems.

5. INTRODUCTION (continued) • The first one is high unemployment rates and the second one is high poverty levels. These two macroeconomic problems are closely related. If we find ways to overcome the unemployment problem, we can easily increase the welfare of Erzurum and its surrounding region.

6. IMPACT OF SMEs ON REGIONAL DEVELOPMENT (continued) • Entrepreneurship and development and formation of small-and-medium-sized enterprises (SMEs) are the main sources of innovation and economic development (Schumpeter, 1994). • Schumpeter (1994), in his theory of economic development also indicated that entrepreneurship is the engine of economic growth.

7. IMPACT OF SMEs ON REGIONAL DEVELOPMENT (continued) • Entrepreneurial-led SMEs continue to be the main sources of socio-economic stability and employment in both developed and developing countries. • SMEs accounted for approximately 95 % of European business and provided 60 % of all the jobs (Wintermantel, 1999).

8. IMPACT OF SMEs ON REGIONAL DEVELOPMENT (continued) • SMEs are also the most crucial segment of economies in transition. They have adopted entrepreneurship-led SMEs as a growing visible and vibrant economic activity (Hoing, 1998).

9. IMPACT OF SMEs ON REGIONAL DEVELOPMENT (continued) • Entrepreneurship and SMEs have played an important and leading role in economic development of major Asian economies, such as Japan, Taiwan, South Korea, and China.

10. IMPACT OF SMEs ON REGIONAL DEVELOPMENT (continued) • Japanese economy consists of six million SMEs, which accounted for 99 % of all firms in the country that employed 75 % of the total labor force (Dana, 1998).

11. IMPACT OF SMEs ON REGIONAL DEVELOPMENT (continued) • Taiwanese economy is also centered on the SMEs, which constituted almost 96 % of all businesses and employed 78 % of total labor force in the country (Lin, 1998).

12. IMPACT OF SMEs ON REGIONAL DEVELOPMENT (continued) • As Lee (1998), in his research, reports that South Korean SMEs accounted for more than 70 % of all the jobs. Furthermore, entrepreneurial-led SMEs play an active role in economic development and in job creation process in many other countries today.

13. IMPACT OF SMEs ON REGIONAL DEVELOPMENT (continued) • Entrepreneurial-led SMEs have also contributed to every aspect of Turkish economy. The SMEs are the main sources of the industrialization process, economic and social stability, regional development, and the supply of intermediate goods to the larger scale corporations in Turkey.

14. IMPACT OF SMEs ON REGIONAL DEVELOPMENT (continued) • According to the 1994 Census of Industry and Business establishment, 98.8 % of the enterprises in Turkey were SMEs and they provided approximately 45.5 % of all the jobs within the country. However, SMEs accounted for only 8 % of the total exports.

15. Economic and Social Characteristics of SMEs • SMEs can generate a considerably high number of jobs in a very short time period. Therefore, SMEs are very effective tools to overcome the most crucial macroeconomic problems in Erzurum and in surrounding region. • SMEs can adapt and promote new technologies in the production processes easily and fast. SMEs can also develop new technologies through research and development. • SMEs are created in accordance with needs of the society in which it will operate. Consequently, SMEs can quickly determine the needs of the region and provide adequate solutions to them.

16. Economic and Social Characteristics of SMEs (continued) • SMEs can serve for economic stability by equally distributing economic activities in the society. • SMEs have a very elastic structure. This gives them a high chance of adapting the changing economic and social conditions. • SMEs usually produce intermediate goods for bigger size firms. Therefore, they are not only beneficial forthe local economy; they are also beneficial for the national economy as a whole.

17. Problems of SMEs • Many SMEs shuts down in each year. • SMEs have managerial, financial, marketing, procurement, and human resources problems. Additionally, external factors negatively affect SMEs.

18. Needs of SMEs • In order to determine and solve the internal problems, some entities are needed to be established. • To improve the productivity and competitiveness • To easily reach suitable production technologies • To provide marketing support • To provide help in improving human resources • To determine suitable management methods and help to adapt them in SMEs • To make SMEs aware of the resources available to them and show them the way to reach them.

19. Therefore, in order to attain economic development and solve macroeconomic problems faced by Erzurum and its surrounding areas, the first and the most important task is to provide a satisfactory ground for the formation and development of entrepreneur sprit.

20. Additionally, two important factors in economic growth and development are qualified labor force and capital stock. Therefore, existing labor force should be educated in accordance with the needs of the local SMEs to increase productivity and provide efficiency.

21. To summarize, in order to solve economic problems and provide economic development in Erzurum and its surrounding region the followings must be done: • Infrastructure must be enhanced. • A SME center must be open to provide entrepreneur education to those who wants to establish SMEs. This center must collaborate with Atatürk University and with similar organizations in other European countries. • It is also important to establish a close relationship between the local SMEs and winter sports activities and winter sports related tourism activities. For this purpose a winter sports and winter tourism related agency should be established to work through out the year to determine the problems of the sector and to help to solve them. This agency should also design informative advertisements about Erzurum and winter tourism related activities which can be conducted in Erzurum both nationally and internationally

22. POTENTIAL IMPACT OF 25TH WINTER UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY

23. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • Host cities for mega sporting events must invest huge amount of money in infrastructure and sports facilities. • Mega sporting events and preparation for them are expected to have enormous positive impact on the host city’s economy during and years after the events.

24. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • On the one hand, ex-ante economic impact studies usually extrapolate that these types of expectations and impacts on the host city’s economy are billions of dollars. • However, I can say that these forecasts are exaggerated. On the other hand, ex-post studies showed no indication of positive impact of hosting mega sporting events on host city’s economy.

25. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • For the 25th Winter Universiade, a tremendous amount of infrastructural investment has made and many world class sporting facilities have built. • Total investment for improving and building new infrastructure and sports facilities is around 1 billion TL (approximately 700 hundred million US dollars).

26. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • If we were to conduct an ex-ante economic impact analysis on the economy of Erzurum and its surrounding areas, most probability, as expected, the results would have been more than satisfactory.

27. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • Unfortunately, we did not conduct such a study and thus we have no such estimation results about the ex-ante economic impact of 25th Winter Universiade to share with the public and authorities prior to the starting of the games.

28. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • However, we can conduct ex-post studies to calculate the mid-term and long-term economic impact of 25th Winter Universiade on Erzurum’s and regions economic well being a few years after the games.

29. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • As all participants of this conference are aware of the fact that for the preparation of such big sporting organizations, the governments has to spend a huge amount of money for renewing and investing in new infrastructure and for building new sporting facilities. • Therefore, in order to convince the public that the money is spent right, conducting economic impact analysis and sharing the results with the public is a crucial issue.

30. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • When we review the literature on the topic, we figure out that ex-ante economic impact analyses of Olympic Games (or big sporting organizations) mostly indicate that investment in the infrastructure and sporting facilities would generate long-term positive impacts on host cities economy by creating new jobs, attracting domestic and foreign tourists to come to the host city.

31. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • However, ex-post economic impact analyses indicate that the results are not as well as they are expected to be prior to the events. Many studies have shown that the estimated results are different from the actual results (or from the facts). • For instance, Porter (1999) studied the impact of Super Bowls on local economies and concluded that there is no measurable impact on spending related to the sporting event.

32. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • According to Porter (1999), estimated spending and spillover effects rarely come out to be true. He also indicated that capacity constraints in the hotel sector lead the room prices to go up while the occupancy rates remain the same. The high hotel prices would cause the number of incoming visitors and expected total spending to decrease.

33. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • Therefore, mega sporting events and sports programs (including constructing mega sporting facilities and developing sporting clubs) may not create long term economic and spillover impacts as expected prior to those events.

34. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • Nevertheless, the 25th Winter Universiade of Erzurum is expected to generate a considerable economic and spillover impact on Erzurum and its surrounding region not only in the short-run, but also in the long-run.

35. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • When the size of the organization and the amount of public spending in the share of Erzurum’s economy are considered, anticipation of positive economic and spillover impacts would not be unrealistic. • However, we should not set high expectations about the economic and spillover impacts of 25th Winter Universiade on the economy of Erzurum.

36. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • Economic and spillover impacts of 25th Winter Universiade on Erzurum’s economy would be similar to the sporting events similar to this one. • According to the socio-economic development index, Erzurum is one of the lowest developed citiesin Turkey. Therefore, this mega sporting event should have positive and long lasting economic and spillover impact. • Five cities with lowest socioeconomic development index: Van, Ağrı, Mardin, Şanlı Urfa, Erzurum • Contribution to GDP: %1, %0.6, %1.2, %2.2, %1.0 • Per capita GDP index: 35, 34, 46, 54, 50 • Unemployment rates: %11, %1.7, %6.1, %10.8, %4.1

37. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • Nonetheless, there are some studies indicating that negative impacts of mega sporting events are bigger for developing countries than the developed countries. • For example, Matheson and Baade (2003), in their study concluded that such mega sporting events created more negative impacts on developing countries’ economies than the developed countries’ economies.

38. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • The main reason for this is that the opportunity cost of financing mega sporting events are said to be higher for the developing countries than expected.

39. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • I will review results of economic and spillover impacts of similar mega events and try to come up with accurate conclusions for economic and spillover impacts of 25th Winter Universiade on Erzurum’s economy.

40. Results of Economic Impact Studies on Host Cities’ Economies

41. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • Impact of mega sporting events on the economy of host city is measured by economic impact analysis. The results are mostly found to be positive. • Therefore, the results of economic impact analysis are widely accepted by the organization committees, public and the media. Additionally, these results are in accordance with the beliefs of supporters of these events.

42. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • In many cases, cost of investment in mega sporting facilities and infrastructure is considered as benefit to the local economy. • The reason for this is that the wages received by construction workers and the revenues received by local construction retail or whole sale stores. This approach considers only production side of these projects and ignores the impact of actual consumption of the products.

43. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • For example, an initial expenditure of 100 million TL on a sports facility can have an initial 100 million TL worth of impact. • This is the direct effect of the investment. Expenditure on construction material is the indirect effect of the investment.

44. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • If the economy is operating in full employment level, demand for labor force would have a negative impact on other sectors of the economy. • However, unemployment rate is very high in Erzurum. Therefore, construction of big sporting facilities should have a positive impact on the employment in the city.

45. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • From economists’ point of view, opportunity cost of these types of sporting activities must be calculated. • In other words, one has to conduct a research to find out the cost and benefit of alternative investments such as schools, hospitals, and factories.

46. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • Another question is to be answered is that if the money spent on building new sporting facilities and infrastructures were distributed to the people in the region and have them spend would have had more impact on the economy of Erzurum?

47. Possible Benefit and Cost of Mega Sporting Events

48. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • There are three categories of costs and benefits of hosting mega sporting events. • These are costs and benefits before, during and after the games held. • As illustrated in above table, during the pre-games period, the expected costs are investment expenditures, preparatory operational costs, and opportunity costs. • The expected benefits are tourism revenues and revenues received by construction workers, and retail and whole sellers of construction materials.

49. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • During the times of the games, the city is expected to benefit from incoming tourists, stadiums and constructions, games-related jobs, revenues from games, tickets, T.V. rights, sponsorship etc. • Additionally, operational, games-related, congestion-related, and opportunity costs are most likely to occur.

50. POTENTIAL IMPACT OF UNIVERSIADE 2011 ON ERZURUM’S AND REGIONS ECONOMY (continued) • After the time of the games, it is expected to have tourism, stadiums, infrastructure, urban regeneration, human capital, and international reputation related benefits. • Additionally, maintenance of stadiums and opportunity costs are the ones that the city has to bear with after hosting the games.