Public policy is seldom straightforward. A policy introduced with best of intentions might have dire consequences if policymakers fail to consider all the not-so-obvious ways it could fail. Crackdown on drug trafficking has been found to increase violent crimes.
Rent ceiling imposed with the ostensible goal of providing affordable housing to middleclass urban families have in many places gone so horrendously wrong that economist Assar Lindbeck dubs rent ceiling “the most effective way of destroying cities next to bombing.” Similarly, common sense would dictate the taxing alcohol would reduce consumption. But that does not seem to be the case either. [break]
Researchers at the Centers for Disease Control and Prevention (CDC), the American federal public health institute, found that increasing the price of alcohol across the board actually increases consumption. For the well-off, even a significant increase in the price of alcohol products does not change their consumption pattern. In the case of people on the lower rungs of economic ladder, when the price of their favorite brand of tipple goes up, they simply switch to less expensive brands. Since the newly adopted brands still cost less than the increased price of their previous favorites, the converts tend to guzzle even more. The liquor entrepreneurs in Nepal who have been protesting the government decision to increase excise duty on liquor products might have a point after all.
In its new budget, the government increased liquor license renewal fee for hotels from Rs 500 to Rs 3,500 and for liquor retailers from Rs 1,000 to Rs 7,000. Similarly, license renewal fee for liquor wholesalers have shot up to Rs 30,000 from Rs 20,000. According to existing provisions, hotels, liquor retailers and liquor wholesalers need to renew their license every year.
In addition to rolling back these increases, liquor entrepreneurs want the government to withdraw its decision to revoke 25 percent excise duty rebate liquor stores outside the Kathmandu Valley were getting. Of course, liquor entrepreneurs might be the least bothered about the health effect of their products on prospective consumers. But if the increased excite duties and license fees stand, the prices will eventually be passed down to the consumers. Since all liquor products will be affected by increased excise duties, prices will increase across the board and alcohol consumption might go up.
This, surely, was not the intention of tax hike on alcohol products. What should be done then? The CDC researchers suggest taxes be maximized on the cheapest alcohol products, which would reduce consumption among those on the lowest rung of economic strata. But even this will be tricky in Nepal where the poor usually imbibe homemade raksi. Getting into people’s kitchens could raise a whole new debate on the right to privacy. We are not suggesting liquor price be determined solely by market mechanisms. That would be even more dangerous considering how adept alcohol manufacturers are in bending rules to enlarge their consumer base. What we would like to see is for the government to carefully consider all the possible repercussions before imposing what seems like ‘obvious’ interventions. Sometimes, the obvious solution is far from the right one.
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