Alcohol in China: Beer before wine?

There's been plenty of web chatter lately about a very serious topic of global economics: beer drinking.

Both the Economix blog on the New York Times, and economics blogger Felix Salmon of Reuters have poured over beer consumption data from around the world.

In particular the focus has been on China, where annual consumption has ballooned from a half bottle of beer in 1961 to almost 103 beers per adult in 2007.

That's a lot of beer, and is enough to make China the world's largest market for the stuff.

But economists being economists, there's always more to the story. And, naturally, that story has to do with demand and income levels.

According to a research paper by two economists in Belgium cited by the above blogs, people in developing countries drink more beer as their incomes go up. But when their annual incomes reach $22,000 per year, their beer drinking starts to decrease.

Here's how the Belgians put it in their special brand of econo-speak:

Our first important result is that we do indeed find an inverted-U shaped relation between income and per capita beer consumption in all pooled OLS and fixed effects specifications. From the pooled OLS regressions, we find that countries with higher levels of income initially consume more beer. Yet, the second order coefficient on income is negative, indicating that from a certain income level onwards, higher incomes lead to lower per capita beer consumption. The first and second order effects for income are strongly significant and the coefficients are quite robust across the different specifications.

The fixed effects regression results confirm this, so the non-linear relationship for income holds not only between countries, but also within individual countries over time. As a country becomes richer, beer consumption rises, but when incomes continue to grow, beer consumption starts to decline at some income level. We calculated the turning point, i.e. the point where beer consumption starts declining with growing incomes, to be approximately 22,000 U.S. dollars per capita.

The paper doesn't offer much in the way of explanation for this result, but the Economix blog suggests an obvious answer:

Perhaps the most obvious one is something many Americans personally experience in their 20s. As you start making more money, and assuming more responsibility, there is less opportunity to drink — and the potential consequences become more costly.

Another reasonable explanation: people start drinking more wine once they can afford it, a fact that is likely to have significant implications for the global wine industry.

Here's Salmon's take:

I can imagine that we’re going to see a China-driven surge in global wine consumption when the middle class population there starts earning that kind of money. In the first instance, most Chinese wine consumption will probably be domestic, but over the long term it’s surely inevitable that wine imports into China will stop being concentrated at the high end of the market and will start lubricating China’s middle classes on an everyday basis. But that’s probably not going to happen for a decade or two yet.