Alcohol Affordability and Alcohol Demand: Cross‐Country Trends and Panel Data Estimates, 1975 to 2008

Abstract

Relatively little is known about cross-country differences in alcohol affordability or factors that determine differences in affordability over time. This information is potentially important for alcohol policy, especially policies that focus on higher taxes or prices to reduce total alcohol consumption. This study estimates cross-country alcohol consumption relationships using economic models incorporating income and prices and alternative models based on alcohol affordability. The data and analysis are restricted to higher income countries. Data for alcohol consumption per capita (ages 15+) are analyzed for 2 samples: first, 17 countries in the Organisation for Economic Co-operation and Development for the period 1975 to 2000; second, 22 countries in the European Union for the period from 2000 to 2008. Panel data models are utilized, with country and time fixed-effects to control for confounding influences. In economic demand models, covariates are real per capita income and real alcohol price indices. In affordability models, income is divided by prices to yield an index of alcohol affordability. Analysis of data trends reveals that much of the increase in affordability is due to rising real incomes, and not falling real prices. Economic models of demand perform slightly better statistically, but differences are not substantial as income and affordability are highly correlated. For both samples, exogenous rates of growth of alcohol consumption are negative. Price and income elasticities, on average, are within the range of prior estimates. Affordability elasticities are between 0.21 and 0.25. Although alcohol affordability is a valid concept statistically, its use in policy discussions tends to hide underlying causes of changes in affordability. A better approach is a comparison and analysis of trends and cross-country differences in real incomes and real alcohol prices together with the affordability index. Country-level analysis of income and price elasticities also is required.