Fiscal Policy In Emerging Markets - Alcoholic Beverages Demand And Macroeconomic Factors Essay.

Alcoholic Beverages Demand and Macroeconomic Factors

Discuss about the Fiscal Policy in Emerging Markets.

Demand for goods like alcoholic beverages is always subject to substantial policy debate. The hard and fast rule of demand cannot be applied here. This is because of ambiguous effect of the alcoholic beverage consumption. Demand for alcoholic beverages is important for different macroeconomic fields. The positive effect of higher demand is it has significant contribution in raising government’s revenue in Canada (De Goeij et al., 2015). The revenue sources from this industry include monopoly liquor shop, licensing fees for new and existing liquor shop and imposed exercise duty on such items.

Two factors need to be considered in determining alcoholic beverages demand in Canada. First is, in the last few years incidence of immigration has rapidly increased in Canada. This leads to some major demographic changes for Canadian population. The likely changes in demographic feature affect beverages demand. This is the reason for varying alcoholic beverages demand for different provinces of Canada. The next demand-influencing factor is that use of discriminatory policy for sales and advertising different types of beverages.  The demand for different category of beverages is different. For example, people often prefer wines to beer or spirits because wine has a greater cardiovascular benefit.

Demand for spirit is elastic whereas wine demand is inelastic in response to its own price. Sprit and Wine are often considered as substitutes though wine is more preferred than Spirit. On the other hand relation between beer and spirit is complement is nature. Wine demand has a relatively income elastic demand (Amlung & MacKillop, 2015). Hence, alcoholic beverages are considered as a luxury item in Canada. There is an independent relation between alcohol demand and unemployment level in the economy.

Oil price in Canada has experienced a 30% drop in the last two quarters of 2014. The sluggish oil market affects investments in major energy companies. Since, energy sector is an important determinant of economic growth, the events resulted in a negative growth in some territories of Canada in the beginning of 2015. The downturn in the energy sector continued in 2015 and 2016 results in a continuous trend of slower growth. The projected growth rate was even lower than 2.2% (Smith, 2017).

Globalization brings some changes in the structure of Canadian economy.  Associated computer revolution in Canada had rapidly changed profession trend among Canadian workers. The direct effect of occupation is on the income of people. The distribution of income in Canadian Society has changed in favor of richer population. Share of total income going to the richest section of the society has increased while the share to bottom 40% has declined.

Expansionary Monetary Policy and Economic Growth

To recover from sluggish economic growth trend, Canada has increased its reliance on the external sector. Depreciation of Canadian currency indicates export enhancement of the nation.

Another challenge that the economy is facing is the rising debt of the Canadian government. With a increase in the flow of immigrants, government expenditure has increased significantly to provide different facilities to its citizen.

Canada is making slow progress in improving its unemployment rate. The average unemployment rate in Canada from 1966 to 2017 is 7.69 (Agénor, & Flamini, 2016). Unemployment rate slightly improved in the month of July than that prevailing in June.

Alcoholic beverages industry in Canada experiences an overall rising trend. As recorded in 2011, total alcoholic drink sales had increased by 4% in Canada. However, depending on macroeconomic factors there are variations among demand for different alcoholic beverages. The three main alcohol items are beer, wine and spirits. Demand for beer increase very rapidly as compared to Wine and Spirit. This is because of sluggish economic growth leading to a decline in people’s income.

To compensate rising government debt Canadian government imposes heavy exercise duty. However, having an inelastic demand for beer and Spirit among Canadian population, the demand for these products does not reduce. With a rising inequality, rich people in Canada become richer. Demand for Wine comes from this group as it is a luxury item.

In the total sales, contribution of imported Wine is approximately 70% (Gilmore et al., 2016). This explains why despite having a relatively small domestic wine industry both preference and retail sales in Canada is growing.

The consumption pattern as evidenced in Canada supports the relation of alcoholic beverages and macroeconomic factors found earlier. Increase in consumption despite imposing a heavy exercise duty support the fact of relatively inelastic demand for beer and spirit. Increasing Wine demand from richer class explain that it is a luxury factor. From the tax imposed on alcoholic beverages government has earned significant revenue. Nearly 85% of the government revenue is generated from exercise duty on tobacco and liquor (agr.gc.ca 2017).

Canada in the recent years has seen substantial economic activities, both positive and negative. The economy has shown impressive growth trends in different economic and non-economic aspects. The monetary policies, as designed by the Canadian government, had contributed significantly in the economy’s growth.

It can be seen from the above graph that the economy of Canada has grown substantially in the last few years. Though the economy faced a negative growth rate in its Gross Domestic Product, in the year 2015 and in the second half of 2016, the economy bounced back with immense vigor during the first quarters of 2017. The growth rate of GDP had past all expectations during the first half of the current year embarking the economy on a path of economic progress.

Flaws in Fiscal Policy Framework

However, if seen in details, the economy portrays several flaws, much of which has been due to the implementations of fiscal and monetary policies which were not in synchronization to each other. It is seen that the economy had taken a rather expansionary monetary policy framework, which has significantly contributed to the economic growth of the country in the recent period. The expansionary monetary policy framework included a general low interest rate maintenance by the economy, which stimulated consumption expenditure, loans by both commercial and public banks and a rise in the level of investments in the economy, facilitating economic growth.

However, during this period, the economy did not emphasize much on the fiscal policy framework, thereby making it incapable to run at par with the robust monetary activities. This has been a wrong doing on part of the Canadian government, as the stability in any economy depends more on the fiscal policy framework rather than the monetary framework as the latter is by nature more fluctuating, volatile and more vulnerable to external influences (Ferede & Dahlby, 2012).

This becoming one of the primary reason for future threat of the growth rate taking a backseat, has become one of the primary concern for the Canadian Government and the policy makers, in the recent period. The monetary policies reaching their extreme and having been done all that they could have for the economy, the Government of Canada is likely to reform its fiscal policy framework largely, especially in the short run. The fiscal and monetary policies, which are likely to be taken by the government, are discussed below:

Anti-Inflationary Policy Mix- Due to an expansionary monetary policy targeting increased consumption and investment expenditures, both public and private, the inflation level of the country has increased significantly within a short span of last quarter of 2016 to the first quarter of 2017:

It is evident from the above graph that inflation rising significantly, anti-inflationary measures have been becoming a necessity for the Government. A policy mix of appropriate monetary can effectively control inflation and fiscal policy, with special emphasize on the latter. With a contracting monetary policy, corrective fiscal measures for increasing production in an overall basis are required to bring the price levels down (Weale et al., 2015).

Employment Generation- The country requires to create employment scopes to eradicate the problem under-utilization of resources. To improve the economic conditions of any economy, generation of proper employment opportunities are important as this is consequence improves the overall standard level of the residents of the economy, thereby bringing in sustainability (Weale et al., 2015).

Reforming Fiscal Policy Framework

Imposing Import Restrictions- One of the ways to combat high price levels in Canada, is producing more goods and services domestically and restricting foreign imports (which can be cheap substitutes to the former ones) as far as possible. In the light of the current inflationary pressure on the economy, the Canadian Government is likely impose stricter excise duties and excise on foreign imports, especially on those goods which are not products of primary consumptions and investments (Kopits, 2013).

The current exchange rate of Mexican Peso and Canadian Dollar is 14.29:1, that is 1 Canadian Dollar is nominally equal to 14.29 Mexican Peso. Increasing the exchange rate can help in keeping inflation in control; however, decreasing it may result in a decrease in the unemployment levels (Bahmani-Oskooee, Bolhassani & Hegerty, 2012).

Given the current economic situations of Canada, the expected monetary and fiscal policy implementations, may have significant impact on the sales of tequila spirits of the two Mexican companies:

Spirits being highly price elastic, if the Canadian Government imposes excise on spirits, the demand for spirits can reduce significantly, as the consumers will shift to other options like beer or wine, both having much lesser price elasticity as compared to spirit, thereby creating losses for the concerned companies (Stockwell, 2012).

An increase in the employment may imply indirectly a shift of the consumer base, at least a large part of it, towards better options like wine, as the consumers become lesser rice sensitive. This may indirectly imply loss in the market share of spirits that are exported by the companies.

In the above scenario, if the Canadian Dollar sales price of tequila remains the same, there are not much prospects the Mexican tequila exporters earn greater revenue from selling their products in the Canadian markets. This is because if the expected reforms take place in the policy framework of the country, the spirit sector is expected to lose a significant share of its clientele to other forms of liquor like wine (Bahmani-Oskooee, Bolhassani & Hegerty, 2012).

References

Agénor, P. R., & Flamini, A. (2016). Institutional Mandates for Macroeconomic and Financial Stability (No. 231). Economics, The Univeristy of Manchester.

Amlung, M., & MacKillop, J. (2015). Further evidence of close correspondence for alcohol demand decision making for hypothetical and incentivized rewards. Behavioural processes, 113, 187-191.

Bahmani-Oskooee, M., Bolhassani, M., & Hegerty, S. (2012). Exchange-rate volatility and industry trade between Canada and Mexico. The Journal of International Trade & Economic Development, 21(3), 389-408.

Consumer Trends - Wine, Beer and Spirits in Canada - Agriculture and Agri-Food Canada (AAFC). (2017). Agr.gc.ca. Retrieved 30 August 2017, from https://www.agr.gc.ca/eng/industry-markets-and-trade/foreign-market-information-by-region/canada/consumer-trends-wine-beer-and-spirits-in-canada/?id=1422297046469

De Goeij, M. C., Suhrcke, M., Toffolutti, V., van de Mheen, D., Schoenmakers, T. M., & Kunst, A. E. (2015). How economic crises affect alcohol consumption and alcohol-related health problems: a realist systematic review. Social Science & Medicine, 131, 131-146.

Ferede, E., & Dahlby, B. (2012). The impact of tax cuts on economic growth: evidence from the Canadian provinces. National Tax Journal, 65(3), 563.

Gilmore, W., Chikritzhs, T., Stockwell, T., Jernigan, D., Naimi, T., & Gilmore, I. (2016). Alcohol: taking a population perspective. Nature Reviews Gastroenterology and Hepatology.

Kirby, J. (2017). Canada’s 50 most important economic charts for 2016. Canadian Business - Your Source For Business News. Retrieved 30 August 2017, from https://www.canadianbusiness.com/economy/canadas-50-most-important-economic-charts-for-2016/

Kopits, M. G. (2013). Rules-based fiscal policy in emerging markets. International Monetary Fund.

Smith, G. W. (2017). Economic Research in Canada: Evolution and Convergence.

Stockwell, T., Auld, M. C., Zhao, J., & Martin, G. (2012). Does minimum pricing reduce alcohol consumption? The experience of a Canadian province. Addiction, 107(5), 912-920.

Tradingeconomics.com. (2017). Canada GDP Growth Rate | 1961-2017 | Data | Chart | Calendar | Forecast. Tradingeconomics.com. Retrieved 30 August 2017, from https://tradingeconomics.com/canada/gdp-growth

Weale, M., Blake, A., Christodoulakis, N., Meade, J. E., & Vines, D. (2015). Macroeconomic policy: inflation, wealth and the exchange rate (Vol. 8). Routledge.