Is the demand for alcohol in Indigenous Australian communities ‘price inelastic’?

COMMENTARY

Is the demand for alcohol in Indigenous Australian communities‘price inelastic’?dar_425 1..5

DENNIS GRAY

National Drug Research Institute, Curtin University, Perth, Australia

AbstractObjective. To review the findings of a paper that has often been cited as evidence—with potentially adverse public healthconsequences—that the demand for alcohol in Indigenous Australian communities is not responsive to price and that, in the faceof increasing alcohol prices, expenditure is diverted from basic sustenance to the purchase of alcohol. Methods. The raw dataon income and various items of expenditure from the original study were entered in a database, a trend variable was created,and trends in measures of interest were tested using appropriate cross-correlations. Results. Re-analysis of the data did notsupport the findings of the original study. Conclusions. The original study does not contradict the general findings of thenational and international literature that the demand for alcohol is sensitive to increases in price and does not provide evidencefor the assertion that, other factors being equal, price controls on the availability of alcohol in Indigenous communities are likelyto be ineffective. [Dennis Gray. Is the demand for alcohol in Indigenous Australian communities ‘price inelastic’? DrugAlcohol Rev 2012]

Key words: alcohol, Indigenous, price elasticity of demand.

Introduction

A major international review of measures to reducealcohol-related harm reported that the relationshipbetween price and consumption ‘has been more exten-sively investigated than any other potential controlmeasure’; other factors being equal, this relationshipholds across studies (although a diversity of elasticityvalues have been observed); and, studies have demon-strated that ‘alcoholics’ and heavy drinkers tend to be asresponsive to short-term changes in the price of alcoholas moderate drinkers [1]. In Australia, price controlmeasures have included state or territory levies on theprice of beverages (since declared unconstitutional bythe High Court [2]) and local or regional restrictionson the sale of wine in containers of >2 L in volumewhich increase the cost of alcohol by removing from themarket a beverage having a low unit cost per standarddrink [3,4]. More broadly, the reports of both the‘Henry Tax Review’ and the National Preventative

HealthTask Force called for the introduction of a tieredvolumetric tax on alcoholic beverages [5,6], and therehave also been calls for the imposition of a minimumprice per standard drink below which alcoholic bever-ages should not be sold [7].

Despite the evidence for the effectiveness of priceincreases in reducing consumption, there is somepopular opposition to the imposition of such measures.In part, this is based on the assertion that demand foralcohol has a low elasticity value—that is, that in the faceon increasing prices, heavy drinkers in particular willtend to increase expenditure rather than decrease con-sumption. It is often asserted that this is particularly thecase in Indigenous Australian communities—whetherdue to high levels of alcohol dependence and/or social orcultural factors. It is also asserted that, given this,increases in the price of alcohol are likely to result inmoney being diverted from the purchase of foodstuffsand other essential items to the purchase of alcoholicbeverages—further disadvantaging those communities.

Dennis Gray MA, MPH, PhD, Professor and Deputy Director. Correspondence to Professor Dennis Gray, National Drug Research Institute,Curtin University, GPO Box U1987, Perth, WA 6845, Australia. Tel: +61 08 9266 1624; Fax: +61 08 9266 1611; E-mail: [email protected]

Received 5 December 2010; accepted for publication 18 January 2012.

R E V I E W

Drug and Alcohol Review (2012)DOI: 10.1111/j.1465-3362.2012.00425.x

© 2012 Australasian Professional Society on Alcohol and other Drugs

There has been little systematic research in this areawithin Indigenous Australia. However, an older studyby Martin—still cited in support of the argument—concluded, ‘Detailed evidence from one Cape Yorktownship at least is that the relationship between theprice of alcohol and demand for it is highly inelastic forthis group . . .’ [8]. In the literature, these findings havebeen cited in passing and not subject to critical analysis[4,9,10]. However, as they are often cited in publicdebate it is the objective of this paper to subject them tosuch a review.

The Martin report

Martin was concerned with identifying a broad range ofpolicy options in response to high levels of alcohol-related harm and was not opposed to alcohol restric-tions per se. In his paper, he argued for a multifacetedapproach to reduce the availability of alcohol in CapeYork Aboriginal communities. However, he cautionedthat in the relatively closed, remote community hestudied price was ‘highly inelastic’ (i.e. had a low elas-ticity value) [8].

In the community, initially, alcohol was available onlyillicitly. However, in week 16 of a 52-week observationperiod, a beer canteen was introduced with the objec-tives of reducing illicit purchases and encouragingresponsible consumption by limiting the amount ofalcohol that could be legitimately purchased (althoughthese limits were subsequently lifted). Following theopening, Martin claimed that:

• Expenditure on alcohol from the canteen contin-ued to trend upwards—partly because of removalof initial limits to the quantity of alcohol that indi-viduals could purchase, and because of priceincreases set by the community Council.

• Expenditure on illicit alcohol was only marginallyaffected by availability of alcohol in the canteenand continued to exist because there was ademand for alcohol that was essentially not pricerelated.

• There was a significant reduction in expenditureon basic food items and a shift in expenditure awayfrom basic sustenance to alcohol.

• There was an increase in expenditure on purchaseof takeaway foods that required less preparation[8].

Evidence for these conclusions was presented ingraphic form only and was not subjected to any statis-tical testing. As summary numerical data were not pre-sented there was no means of verifying Martin’sconclusions from that paper itself.

Methods

Martin’s paper was based on his PhD research [11] aspart of which he collected detailed data on income(largely government transfer payments) and expendi-ture at the small number of locations within the com-munity at which money could be spent. Estimates ofexpenditure on illicit supplies of alcohol were madebased on the observation that there was no capitalaccumulation in the community and that all of thesurplus of net inflow over net outflow of cash wasexpended on such purchases.

It is important to note that Martin’s argument isdependent on this latter assumption. However, the factthat the difference between net inflow and net outflow(and hence expenditure on illicit alcohol) was some-times negative (see Figure 1) casts some doubt on theveracity of the observation. Nevertheless, for thepurpose of this review, the observation is taken at facevalue.

The data on which Martin’s paper was based wereprovided in his thesis and, for the purpose of this review,were entered into an IBM spss 19 (IBM Corporation,Armonk, NY, USA) data file (available in Appendix S1).To examine changes through time a linear trend vari-able, based on the observation weeks, was created. Totest for trends in the measures of interest the data wereanalysed using the IBM spss cross-correlations proce-dure at zero lags, as appropriate for time series data. Inorder to test trends in variables prior and subsequent tothe opening of the community canteen, cross correla-tions (Pearson’ ‘r’) were computed for each of the sub-ordinate series and the weekly trend variable, and thecorrelation coefficients compared.These were then usedto test the validity of Martin’s conclusions.

Results

Before considering the data in detail, it is importantto note that during the observation period, there were nosignificant changes in either net cash inflows(r = -0.066,P = 0.641) or net cash outflows (r = -0.004,P = 0.980) within the community. That is, changes inpatterns of expenditure were re-arranged within a con-stant pool of financial resources (these and other rela-tionships not included in figures in this paper are alsoavailable in Appendix S1).

A demand for alcohol that is ‘highly inelastic’

Martin observed that cash surpluses were not accu-mulated and contended that the surplus of net inflowsover outflows was expended upon illicit alcohol. Ascash inflows and outflows were essentially constantthroughout the observation period, so too was

2 D. Gray


estimated expenditure on illicit alcohol (r = -0.115,P = 0.417). Thus, when change in total expenditureon alcohol is considered, all of the significant increase(r = 0.395, P = 0.004) was accounted for by sales ofbeer from the canteen, which increased from itsopening to the end of the observation period(r = 0.651, P = 0.000).

To calculate the elasticity value of demand foralcohol, as well as having data on expenditure, it is alsonecessary to have data on the volume of alcohol pur-chased. These latter data were not available to Martinand in their absence his claim that demand was ‘highlyinelastic’ (i.e. had a low elasticity value) cannot bedemonstrated.

What Martin did demonstrate was that with theopening of the canteen there was an increase in pur-chases of alcoholic beverages over and above that pur-chased illicitly. This additional volume of alcohol wassold at a lower price per unit than that available illic-itly. At the same time, there was essentially no changein the amount purportedly expended on illicit pur-chases of alcohol. Thus, there was a significant (butvolumetrically) unknown, increase in consumption (i.e.the alcohol purchased illicitly plus the restrictedvolume purchased in the canteen) at an overalldecrease in price (i.e. the mean of that which contin-ued to be purchased illicitly at higher prices plus thatpurchased at lower prices through the canteen). Thisis not, itself, consistent with the claim that demandwas highly price inelastic, but is consistent with the

empirically established observation that increasingavailability of lower cost alcoholic beverages results inincreased consumption [1].

A shift in expenditure away from basic sustenanceto alcohol

Over the observation period, there was a significantdecline in expenditure at the community store(r = -0.450, P = 0.001) and, a significant increase inpurchases of takeaway foodstuffs (r = 0.746,P = 0.000). However, when these expenditures arecombined to provide a measure of basic sustenancethere was no significant change in total expenditure onfood within the community (r = -0.106, P = 0.454).Furthermore, when all expenditures on what Martindefined as ‘essential’ items (including food, clothing,fuel and other items) are considered, there was nosignificant change in this variable over the observationperiod (r = -0.112, P = 0.429) (Figure 2).

As indicated above, Martin reported an increase inexpenditure on takeaway foods which he attributed tothe opening of the canteen. However re-analysis showsthat expenditure on takeaway foods was increasing priorto the introduction of the canteen (r = 0.598,P = 0.018)—a trend that continued following itsopening (r = 0.473, P = 0.003)—indicating that theincrease had little relationship to the opening of thecanteen.

Figure 1. Weekly expenditure on alcohol prior and subsequent to the introduction of a beer canteen (n.b. prior to introduction of the canteen,total alcohol expenditure was equal to illicit expenditure).

Indigenous alcohol price elasticity 3


Other changes in expenditure

Martin reported a significant reduction in expenditureon air travel in and out of the community following theopening of the canteen (r = -0.772, P = 0.000) and thatthis was largely diverted to the purchase of alcohol fromthe canteen [11]. Unfortunately, data are not availableto further explore this relationship. Nevertheless, it sug-gests that one purpose of air travel had been to pur-chase alcohol and was, in effect, an additionalcomponent of the cost of illicit alcohol. This seems toconfirm Martin’s observation about diversion, but thepoint is that the money was diverted to purchasecheaper alcohol.

Conclusion

This analysis shows that Martin’s assertions that, in thisparticular community, demand for alcohol was notresponsive to price are not supported by the data.Whatthe data do indicate is that the canteen effectivelyreduced the price of alcohol and that as price decreasedconsumption increased. Thus, the study does notsupport the assertion, made by others, that it demon-strates that population-based price control measuresare likely to be ineffective in reducing consumption inIndigenous communities. Nevertheless, there is needfor considerably more research into elasticity of pricedemand for alcohol among Indigenous Australians aswell as expenditure patterns more broadly.

Acknowledgements

I would like to thank David Martin for providing theraw data and for providing comments on a draft of this

paper, John Boffa for discussions which stimulated thisreview, Tanya Chikritzhs for advice on the statisticalanalysis, Michael Doyle for help in entering the data,and Anna Stearne for assistance with referencing. TheNational Drug Research Institute receives core fundingfrom the Australian Government Department ofHealth and Ageing.

References

[1] Babor T, Caetano R, Casswell S, et al. Alcohol: no ordinarycommodity. Research and public policy, 2nd edn. Oxford:Oxford University Press, 2010.

[2] High Court of Australia. Ha v New South Wales [1997]HCA 34; (1997) 189 CLR 465; (1997) 146 ALR 355;(1997) 71 ALJR 1080 (5 August 1997). Available at: http://www.austlii.edu.au/au/cases/cth/high_ct/1997/34.html(accessed December 2011).

[3] National Drug Research Institute (contributors ChikritzhsT, Gray D, Lyons Z, Saggers S). Restrictions on the sale andsupply of alcohol: evidence and outcomes. Perth: NationalDrug Research Institute, Curtin University of Technology,2007.

[4] Chikritzhs TN, Stockwell TR, Pascal R. The impact of theNorthern Territory’s Living with Alcohol program, 1992–2002: revisiting the evaluation. Addiction 2005;100:1625–36.

[5] Henry K, Harmer J, Piggott J, Ridout H, Smith G. Austra-lia’s future tax system: report to the Treasurer. Part oneoverview. Canberra: Australian Taxation Office, 2009.

[6] National Preventative Health Task Force. Australia: thehealthiest country by 2020. Preventing alcohol-relatedharm in Australia: a window of opportunity. Technicalreport 3. Canberra: Australian Government, PreventativeHealth Task Force, 2010.

[7] Aboriginal Medical Services Alliance of the Northern Ter-ritory. Options for alcohol control in the Northern Terri-tory. Darwin: Aboriginal Medical Services Alliance of theNorthern Territory, 2008.

Figure 2. Weekly expenditure on food from the community store, takeaway outlets and total weekly expenditure on food.

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[8] Martin DF. The Supply of alcohol in remote Aboriginalcommunities: potential policy directions from Cape York.Discussion Paper No. 162/1998. Canberra: Centre forAboriginal Economic Policy Research, Australian NationalUniversity, 1998.

[9] Senior K, Chenhall R, Ivory B, Stephenson C. Movingbeyond the restrictions: the evaluation of the Alice SpringsAlcohol Management Plan. Darwin: Menzies School ofHealth Research & School of Public Health and PreventiveMedicine, Medicine Nursing and Health Sciences, MonashUniversity, 2009.

[10] Brady M, Martin D. Dealing with alcohol in Alice Springs:an assessment of policy options and recommendations foraction. CAEPR Working Paper No. 3/1999. Canberra:Centre for Aboriginal Economic Policy Research, Austra-lian National University, 1999.

[11] Martin DF. Autonomy and relatedness: an ethnography ofWik People of Aurukun, Western Cape York Peninsula.

Unpublished PhD thesis. Canberra: Australian NationalUniversity, 1993.

Supporting information

Additional Supporting information may be found in theonline version of this article:

Appendix S1. Indigenous alcohol price elasticity: rawdata and analyses.

Please note:Wiley-Blackwell are not responsible for thecontent or functionality of any supporting materialssupplied by the authors. Any queries (other thanmissing material) should be directed to the correspond-ing author for the article.

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Is the demand for alcohol in Indigenous Australian communities ‘price inelastic’?