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Prohibition, Illicit Alcohol and lessons learned from Lockdown

The highly contagious and lethal nature of Covid-19 forced governments worldwide to rapidly implement measures to stem the spread of the virus. In pursuit of social-distancing objectives, closing large parts of economies, implementing work- and school-from-home restrictions, and even imposing personal stay-at-home quarantines quickly became the new normal. At the same time, governments were challenged to keep alive industries that they had locked down, buoy the economy and maintain employment for millions of people who might otherwise be forced into the already swollen ranks of the unemployed.

Achieving public health goals while avoiding the economic and social consequences clearly presented a paradox to policymakers rarely if ever witnessed before.

Within this mixed bag of emergency measures is the case of forced restrictions on the production, sale and consumption of alcoholic beverages, otherwise known as dry laws and collectively a modern version of prohibition.

Supply restrictions incentivise illicit markets and criminal activity

Sudden restrictions in access to legal alcohol create a downward shift in supply that causes increases in the demand for illicit substitutes and incentivises illicit suppliers to enter the market to meet that new demand. In the case of outright bans/dry laws, consumers are prevented from purchasing legal products and pent-up demand has no other option than to shift entirely to illegal markets.

This report provides evidence on both consequences. For example, customs and police officers in India reported a significant increase in consumers’ demand for illegal liquor and an uptick in seizures of illicit product. This trend repeated in Mexico, India, South Africa, Panama, Colombia, Namibia and Sri Lanka, all of which imposed prohibition measures on alcohol.

Furthermore, in South Africa the Institute for Security Studies reported an increase in criminal activity and that criminal networks active during the pandemic had added illicit alcohol to other illegal products they offer clandestine customers, such as narcotics. This trend was repeatedly observed in most places where dry laws were imposed, consequently, boosting criminal activity and shifting markets further into the control of illicit actors.

Beware of associated consumer health risks

Perhaps the most alarming consequence of alcohol prohibition measures was the exposure of consumers to health risks associated with toxic illicit alternatives. Beyond the fact that these illicit substitutes do not comply with sanitary, quality and safety regulations, the most hazardous are contaminated with toxic chemical additives.In the worst cases, people died from consuming illicit beverages as a substitute or as a perceived remedy to Covid-19.

In other cases, they were driven to engage in harmful behaviours, such as alcohol looting and panic buying, all of which undermine social distancing objectives and their exposure to the Covid-19 virus.

Therefore, the sombre lesson about prohibition and illicit alcohol is found in the collective harm, serious injury and reported death counts.

Prohibition reduces tax collections and constrains budgets

Taxes collected on alcohol at various points along the legitimate supply chain are traditionally an important source of revenue for many governments. Consequently, a fiscal priority is to stop the revenue leakages associated with the sale and consumption of untaxed illicit alcohol.

During the pandemic, tax and revenue authorities from India, South Africa, Colombia, Sri Lanka, Mexico, United States, and Kenya, for example, all reported significant drops in taxes collected on alcoholic beverages.

Consequently, the lesson learned from lockdown is that governments that implement draconian supply restrictions on the alcoholic beverage sector end up depriving their own treasuries of much-needed fiscal revenue. While it is difficult to imagine that Finance Ministers would be surprised by this result, perhaps this situation highlights the need for Finance Ministers and Health Ministers to improve coordination, consultation, and joint impact assessment of proposed laws.

This report also finds that in addition to the immediate drain on treasury revenues, negative impacts on future fiscal collections can be significant. The longer legal businesses are sidelined, the greater is the opportunity for illicit traders to capture market share and fortify demand for their untaxed, unregulated products. Under these circumstances, regaining revenue losses can take years, especially if there follows a period of economic depression and high unemployment.

In all cases, reduced tax revenue resulting from a government’s own alcohol prohibition laws puts extra burdens on its ability to pay for policing criminal activity, including cross-border smuggling activities, that underpins illicit trade. Mounting expenses in the face of declining revenues put considerable strain on government budgets at a time when fiscal stimulus is needed most.

Prohibition sidelines legitimate businesses and depresses formal job opportunities

Emergency restrictions on alcohol production and sales have had an outsized impact on legitimate industry, jeopardizing long-term employment and growth, while fuelling a parallel underground market that further harms the legal sector’s ability to rebound once restrictions are lifted.

While it is challenging to evaluate the full effect of prohibition laws on an industry that employs millions of people in primary and secondary sectors, any job losses – especially those lost via a government’s own alcohol bans – are particularly debilitating in countries where the overall unemployment rate is already high. Taking South Africa as an example where prohibition measures have had severe impacts, it is estimated that over 165,000 South African jobs were lost during the first alcohol ban.

A few words about the post-pandemic recovery

As governments move from crisis management to recovery planning, the findings from this report suggest that valuable lessons from alcohol prohibition can usefully shape the most constructive and inclusive ways to build back economic activity, employment and growth.

The alcoholic beverage sector and its multiple and varied secondary industries are significant contributors to GDP and employment – and tax revenues – in virtually every economy worldwide.

Because of this, the sector will be an important part of the recovery. But governments should think twice about sudden increases in excise taxes levied on alcoholic beverages as a means to replenish budget shortfalls. A quick fix approach could end up being as reckless as the imposition of prohibition laws, resulting in lower consumption of legal beverages, smaller pools of tax collections and an increase in demand for untaxed, cheaper illicit alternatives.

Moreover, policymakers would be wise to note that this sector and the people who work there have already been particularly hard hit by prohibition measures. Governments must anticipate that prohibition sidelines legitimate businesses and depresses formal job opportunities.

There are a great number of alternatives to increasing excise taxes, and consideration should be given to a portfolio of time-proven regulatory measures that can complement taxes, not undermine them.

Ensuring accessibility of regulated taxable products will generate legitimate and significant levels of tax revenues. Governments cannot collect taxes on products that are not sold or on illicit products that exist outside of tax regimes.

Imposing sanctions on the bad actors that supply markets with fakes or smuggle contraband across borders will help plug fiscal leakages by disincentivising the supply of illicit, untaxed products.

Increasing consumer awareness about the harms of illicit alcohol is an important measure that governments can use to steer people away from harm and into the legal, regulated and taxable marketplace.

In all cases, the result can be greater tax collections on a larger pool of legal, taxable product – with the knock-on value of economic growth and reduced consumer risk.

Government actions need to be carefully considered and finely balanced in dealing with the challenges associated with Covid-19.

The conclusions of this report, for example, delineate four lessons for avoiding the negative consequences associated with the imposition of alcohol prohibition laws. They also suggest the value to Finance, Trade and Health Ministers of improving coordination, consultation, and joint impact assessment of proposed laws.

There is also a role for private and public partnership dialogue on ways to prevent illicit trade. If new restrictive measures are being considered, governments should consult and cooperate with industry to ensure that any restrictions are temporary in nature, proportionate and sustainable. Any such measures should be accompanied by appropriate public health messaging and reinforced by responsible retail standards.

Governments must also ramp up implementation of enforcement measures to ensure that illicit trade activities caused by the pandemic do not become permanent features of the post-pandemic economy. All stakeholders have an interest in stamping out illicit trade in alcohol and all benefit from collective action.

In the face of a health pandemic, such as Covid-19, it is recommended that governments: Avoid prohibition laws as emergency response measures to protect people from the spread of virus. The benefits are conjectural, while the negative consequences are many and counterproductive to interdependent health, employment, and economic objectives.

Ensure availability and access to legitimate products that conform with social-distancing objectives without inducing demand for illicit substitutes.

Avoid the imposition of “emergency tax” increases on alcohol. A quick fix approach could end up being as reckless as the imposition of prohibition laws, resulting in lower consumption of legal beverages, smaller pools of tax collections and an increase in demand for untaxed, cheaper illicit alternatives.

Ramp up implementation of enforcement measures to ensure that illicit trade activities caused by the pandemic do not become permanent features of the post-pandemic economy.

Gujarat High Court admits petition challenging prohibition

The petition has argued that the government cannot decide what a person will eat or drink inside the premises of one’s house. The petition has invoked the ‘Right to Privacy’ in challenging the prohibition law. The Gujarat government’s Advocate General Kamal Trivedi said the petition should be filed in the Supreme Court as the apex court had upheld the Act in its 1952 judgment. He contended that the law validated by the apex court cannot be overturned by the High Court.

Petitioners say matter should be heard on merits

The petitioners, however, argued that the matter should be taken up on merits, as the provisions challenged in the pleas are materially different from what they were in 1951 as they have been amended over the years. They added that the right to privacy was not recognised as a fundamental right in 1951 when the Supreme Court upheld the validity of the provisions in the prohibition law.The batch of petitions have challenged the constitutional validity of sections section 12, 13 (total prohibition on manufacture, purchase, import, transportation, export, sale, possession, use and consumption of liquor), 24-1B, 65 of the Gujarat Prohibition Act, 1949, and sought them to be declared as ultra vires Article 246 of the Constitution.The provisions are “arbitrary, irrational, unfair, unreasonable, and discriminatory…and despite prohibition being in place for more than six decades, a steady supply of liquor continues to be available through an underground network of bootleggers, organised criminal gangs and corrupt officials”, the petitioners who were represented by senior advocates such as Mihir Thakore, Mihir Joshi, Devan Parikh and Saurabh Soparkar said.“With expanding interpretation of the right to life, personal liberty and privacy, as contained in Article 21 of the Constitution, a citizen has a right to choose how he lives, so long as he is not a nuisance to the society. The state cannot dictate what he will eat and what he will drink,” one of the pleas said.

Right to privacy is a fundamental right’: SC

The Supreme Court in another judgment had held that the right to privacy is a fundamental right and is an integral part of the right to life and liberty. Privacy is a right to be enjoyed by every human being by virtue of his or her own existence. It also extends to bodily integrity, personal autonomy, compelled speech and freedom to dissent or move or think. The right to privacy is to restrain government and private actions that threaten or hinders the privacy of individuals.

Regulation, and not prohibition, is what Gujarat needs: Devan Parikh, advocate

Devan Parikh, one of the advocates to the petitioner in a YouTube post by Vibes of India, has put forth the argument that the petitioners are not “asking for the removal of the prohibition policy lock, stock and barrel. We are asking the government to draw a fine line.”He pointed out that advertising of liquor in many parts of the world is not based on the alcohol content or intoxication. “Alcohol is sold basically for its refined taste. The kind of liquor that was available (when prohibition was introduced in 1961), there was some justification to have a rider. But after all these years and the knowledge base we have, the law needs a relook. Petitioners are saying balance the liberty a person can have, the choice a person can have. If it has an ill impact, then deal with those issues. You cannot throw the baby with the bath water.”

Four walls concept clarified

He further mentions that the petitioners are clear that you cannot do anything within the four walls. “If that is the case, I can consume drugs, I can commit any crime within my four walls. The four walls concept is not very well understood in this case.” The petitioners believe that one should have the liberty to drink in a manner that does not impact society at large or have adverse social repercussions. Devan Parikh referred to the Constitutional provision of principle of proportionality. “The Constitution permits you to put reasonable restrictions on the exercise of your rights, in public interest, in the society, and in your own interest… those interests have to be balanced. There is justification to put restrictions, put it, but in present times, does it make sense to have total prohibition. There is need for regulation not prohibition.”

Prohibition needs a relook

Taking the argument further, he said the rest of the country where there is no prohibition, are there problems or not. Will Gujarat have more problems if prohibition is lifted? “We are saying with the passage of time, people are more entitled… Constitution is a live organ and that this issue needs a relook. When prohibition was introduced look at the kind of liquor that was available then and look at the fatalities at that point of time.”Terming it as contradictory, government giving liquor permits on medical terms, he asked “a person consuming liquor for health reasons, will he or she not get intoxicated.” A person can permit in Gujarat for an annual fee of nearly ` 4,000 and the eligibility is that he or she should be above the age of 40 and should have some medical condition. Visitors too can apply for a temporary permit, but not the residents of the State.

Gujarat in a Gandhian-bind

The problem with Gujarat is that it has a perception problem. Gujarat is a state from where Mahatma Gandhi came who considered alcohol consumption as a social evil. Gujarat is caught in a Gandhian-bind. Devan Parikh asks the logic behind the prohibition in the name of Mahatma Gandhi. “With no disrespect to Mahatma Gandhi, I would like to state that Gandhi died in 1948 and at that time there was no prohibition in Gujarat till 1961. What happened during this interim period to Gandhiji’s advocacy?Till such time the High Court gives its verdict, we are going to see a lot of heightened activity from both sides espousing their causes and social media is going to flame it further. Meanwhile, liquor (including spurious) will be available through various ‘underground’ channels in Gujarat, a state which has seen many deaths due to illicit liquor. In 2012, 143 deaths were reported from Gujarat in a hooch tragedy.