Indonesia’s Drinking Problem

In the wake of a crackdown on black-market alcohol in Indonesia, the country’s sole legal alcohol importer is suddenly faced with meeting demand four times higher than what the government’s import quotas allow.

The resulting crunch has led to chronic alcohol shortages and skyrocketing prices across the country, the BBC reports.

Alcohol consumption is generally frowned upon in Indonesia — it’s the most populous Muslim country in the world.

But will higher liquor prices discourage Indonesians from drinking? Or, instead, will more expensive alcohol behave like a Giffen good, becoming that much more in demand?

(Hat tip: Foreign Policy)


NM

You keep talking about those Giffen goods, but the concept is quite unclear. Let's assume for a moment that the Indonesian gov't be perfectly effective at its "war on ethanol;" the result is a fixed, constant supply. The result is that price will increase until enough demand is destroyed. Is that supposed to be super advanced economics, somehow?

ceolaf

This is not a giffen good; it is NOT more in demand because the price is higher.

The causality is the other way. The price is higher because of the demand. And that's just normal.

MikeS

What will happen is the same disaster that happened during American Prohibition. People will make the equivalent of low quality bath tub gin which will not be the less toxic ethanol, it will have some methanol and who know what else.

People will go blind, destroy their livers and have all sorts of medical problems from drinking this junk. Then there will be a huge medical crisis blamed on the victims.

Christopher

Padon my ignorance, but is hoarding excluded from the concept of Giffen Goods?

In this example, supply goes down, prices go higher, and demand actually may go higher because people will hoard.

Now, continuing this... lets say hoarding is excluded. Couldn't we also see demand going higher because people are hoarding and then becoming more addicted to the product? Is there an Giffen exclusion to addiction?

Because addiction doesn't always follow normal economic rules (supply/demand).

frankenduf

hello-o- moonshine- or, just don't harvest some of the rice in the backyard...

Daniel

I suspect that higher prices will simply increase the incentive to smuggle in and sell alcohol on the black market.

mus

I suspect these higher prices will make alcohol into the next "cool" thing for the kids, which will in turn increase demand.

Steve

Surely if a price rise causes demand for alcohol to go up, it would be a Veblen good rather than a Giffen good, no? Alcohol isn't a staple in Indonesia, and, assuming demand rises, it won't be because people are substituting it for other goods.

Quill

Moonshine and bathtub gin are minor threats compared to the boost organized crime groups will receive as they tap into alcohol smuggling.

Gerald

From here in Jakarta, the result has been as follows;

Beer (which is brewed locally and is not subject to import tax) is in higher demand than ever as an alternative good.

Wine and Spirits (mostly imported) have become very hard to come by (even for top end bars and hotels) and prices have sky-rocketed. This has no parallels with prohibition because most Indonesians are not drinkers and only the wealthiest 5% of Indonesians (and expats) were drinking wine or spirits in the first place. They can afford higher prices if they need to but are likely to cut back.

More worrying is the knock on effect for the tourism industry. Bali relies on wealthy tourists from Australia, most of whom may be satisfied with beer but spirits and wine drinkers are not going to celebrate their new year holiday in a country where they cannot enjoy their favourite tipple.

Steve

What's the substitute for alcohol?

End

@Steve
Would Sex considered to be substitute for alcohol?

Steve

"@Steve
Would Sex considered to be substitute for alcohol?"

I was hoping but when she dumped me last summer, there was only alcohol.

Ken Taylor

The most interesting aspect of this article and most of the comments is the misunderstanding on which they are based. Only the "From here in Jakarta" contributor alludes to the facts. There is an assumption that all alcohol is imported but the vast majority isn't. There is locally brewed beer, much cheaper than Australia and most other places and locally brewed spirits, Arak, which is cheap enough for everyone.

It is the international name brand liquors that are imported and it is the crack down on illegal importers that is raising the prices. I'd interpret the crack down as partly a tax leak repair and partly a wealth transfer from low level officialdom to high level officialdom. Low level officialdom takes a bribe for letting in illegal imports but high level officials are selling the exclusive right to legally import foreign liquor. When three quarters is getting in illegally it destroys the tax take and the price of the exclusive right.

As the the first two posters pointed out, higher prices are not leading to more consumption, rather supply has gone down and prices have risen to reduce demand.

Read more...

Thomas B.

Alcohol is one of those unexpected commodities that puts a wrinkle in the grand schemes of the WTO. Sure, cases in Japan have come out against economic protection of local cultural values, but the the morality exemption enjoyed by Muslim countries is one thread that could unravel the whole sweater of free trade.

What if America suddenly decided that it had ethical objections to any goods produced in countries without a 40 hour work week, or free speech, or labor rights? It could reverse 40 years of progress on trade, and return us all to isolationist/protectionists in under a decade.

Whether that would be a good or bad thing is another debate, the takeaway point here is that import quotas on alcoholic beverages are an ugly reminder that the WTO has no real teeth.

Yusuf

Interesting... I live in Jakarta. From my experience, imported alcohol is actually sold cheaper than should be, because as said in the article, 3/4 of them are illegal i.e they used fake import duty stickers (with cooperation with Duty Office, of course).

Now, with stricter rule imposed, price will be higher (which it should be) with temporary unavailable stock. As for Indonesian people, they are not really big in drink since mostly are Muslim and drink is not allowed by their religion.

So I assume it will not discourage people from drinking or it will become more in demand.

Wan

I guess Bali is one exeption for Indonesia. No difference between Bali and Australia, the drunken country.

- Wan-

Indofreakinesian

But will higher liquor prices discourage Indonesians from drinking? --> Like another booze, no matter how expensive alcohol is the drinker will still buy them as they are addicted. In Indonesia, the drinker are either, western tourist who drink like crazy, western expatriate who think that they live in the cheapest heaven on earth regardless of the price increase in alcohol will still be cheaper than where they were from, and upper class society who will spend any fortune to have a booze.

I dont think price will cause the discouragement from drinking.

Brett

Alcohol has not become a Giffen good. From here in Jakarta, the only impact is a HUGE inconvenience for hoteliers and bars and mild frustration for consumers. Demand hasn't increased.

Australian expat in Jakarta

Most Indonesians don't drink?........they do if they can afford to from what I have seen living in Jakarta for the last few years.

This has made a huge impact on businesses that cater for expats and tourists in Jakarta and Bali. Many places are closing and or laying off staff. Travel agents are advising tourists to BYO alcohol and cheese or choose a different destination.

You can buy alcohol at greatly inflated prices, eg. Australian wine is 6+ times the price sold in Australia. If you can get to the shop before the 'officials' arrive you can get more than 1 to 2 bottles for a large donation...

Jakarta has also stopped most imported food unless it has a food license...fee payable of course.

Health minister has announced plans to ban all imported pharmaceuticals with in the next 2 years as well.

There is a big election this year........related possibly?