unrecorded alcohol consumption: its economics and its effects on alcohol control in the nordic...

Addiction (2000) 95 (Supplement 4), S551–S564

ROLE OF SUPPLY AT LOCAL AND NATIONAL LEVELS:

CONSUMPTION AND CONSEQUENCES

Unrecorded alcohol consumption: itseconomics and its effects on alcohol control inthe Nordic countries

STURLA NORDLUND1 & ESA OSTERBERG2

1National Institute for Alcohol and Drug Research,Oslo, Norway & 2National Research andDevelopment Centre for Welfare and Health, Alcohol and Drug Research Group, Helsinki,Finland

AbstractThe starting point of this paper is the fact that no country has complete records of alcohol consumption. Inaddition to being a matter or statistical accuracy, unrecorded alcohol also plays an important role in alcoholpolicy discussions. Furthermore, its quantity is bound to basic economic laws. These latter two aspects are themain interest in this paper, which discusses, � rst, what is really meant by unrecorded alcohol consumption andwhat kind of categories are included in it. The next task is to discuss the economics of different categories ofunrecorded alcohol and the mechanisms which lead to increases or decreases in them. The examples in thispart of the paper come from the Nordic countries. Arguments about increased smuggling and illegal distillinghave always been used against alcohol policy restrictions in the Nordic countries. Recently the level oftravellers’ alcohol imports and border trade have also been used for the same purpose. In the European Unionthe task to harmonize alcohol excise taxes is partly given to increased travellers’ duty-free allowances andmarket forces. This policy has already led to reductions in alcohol taxation both in Denmark and Sweden.

IntroductionThe Nordic countries, Denmark, Finland, Ice-land, Norway and Sweden, are among those fewnations in the world which have tried to controlalcohol-related harms with a conscious alcoholcontrol policy. Four of the � ve Nordic countrieshave, at times, built up a comprehensive statealcohol monopoly system consisting of monopolyrights on production, import, export, wholesaleand retail sales. Denmark is the only one whichhas not relied on a state alcohol monopoly in itsalcohol control, but like the other Nordic coun-

tries it has used high alcohol taxes as a meansto control alcohol consumption and to collectalcohol tax money for the state.

In connection with Finland’s and Sweden’smembership in the European Union (EU) andIceland’s and Norway’s participation in the Eu-ropean Economic Area Agreement, in the mid-1990s these countries were forced to abolish allalcohol monopolies except the off-premise retailsales monopoly on alcoholic beverages (see e.g.Holder et al., 1998). This has resolved onecontroversy regarding EU regulations in the al-

Correspondence to: Dr Sturla Nordlund, National Institute for Alcohol and Drug Research, Dannevigsveien 10,Oslo, 0463, Norway.

Submitted 27th March 2000; initial review completed 3rd May 2000; � nal version accepted 28th July 2000.

ISSN 0965–2140 print/ISSN 1360–0443 online/00/12S551–14 Ó Society for the Study of Addiction to Alcohol and Other Drugs

Carfax Publishing, Taylor & Francis Limited

DOI: 10.1080/09652140020013773

S552 Sturla Nordlund & Esa Osterberg

cohol � eld. The remaining one deals with excisetaxes on alcoholic beverages, which are muchhigher in the Nordic countries than in non-Nordic EU countries.

From the the EU viewpoint the harmonizationof all excise taxes, not only excise taxes onalcohol, has been seen as a precondition for theworking of the single European market. In theNordic countries this would mean decreased al-cohol excise taxes, which domestic economicactors have also demanded for their own reasons.In both cases the relatively large amount of un-recorded alcohol consumption has been used asan argument for lower excise taxes on alcoholicbeverages as well as for generally less restrictivealcohol control measures.

The role of unrecorded alcohol consumptionIn the industrialized western world of� cial al-cohol consumption � gures are usually good indi-cators of the total amount of alcoholic beveragesthat have been drunk in the country. In some ofthese countries, as well as in many developingcountries, recorded alcohol consumption � guresmay, however, be highly misleading. In everycountry recorded consumption � gures are some-what inaccurate in giving the real level of totalalcohol consumption, no matter how it isde� ned. The amount of unrecorded alcohol con-sumption is, therefore, an important issue whentrying to reveal how much alcohol people in aspeci� c country really drink and how much theydrink in relation to inhabitants of other coun-tries.

In broad terms recorded alcohol consumptioncan be de� ned as the amount of alcoholic bever-ages sold to consumers through legal retail out-lets in a country, or as the amount of legalcommercial alcoholic beverages consumed by theinhabitants of that country. Consequently, un-recorded alcohol consumption can be character-ized as, for one reason or another, the amount ofalcohol left out of the statistics. To be clear, inthe following we are dealing only with alcoholthat is drunk by people, not with alcohol used forindustrial, technical or medical purposes or asfuel.

In addition to being a matter of statisticalaccuracy, unrecorded alcohol also plays anotherimportant part in the alcohol � eld. Like recordedalcohol, unrecorded alcohol, partly legal andpartly illegal, is also bound to basic economic

laws, and there is often an interplay betweendifferent categories of recorded and unrecordedalcohol consumption. For instance, it is clearthat the more travellers take alcoholic beverageswith them when returning home from abroad theless alcoholic beverages they buy from domesticsources. To take another example, a growingalcohol black market means decreases inrecorded alcohol consumption and lost taxes forthe state. These aspects of unrecorded alcoholconsumption are our main interest in this paper.

First, this paper will discuss what is reallymeant by unrecorded alcohol consumption. Whyis some part of alcohol consumed for drinkingpurposes left outside the statistics? What kind ofcategories are included in unrecorded alcoholconsumption? Next, the economics of differentcategories of unrecorded alcohol will be dis-cussed. Why, for instance, do people carry fairlyheavy alcoholic beverages with them when re-turning home from abroad, and why are theybecoming involved with such illegal activities assmuggling or moonshining?. What kind of econ-omic and social consequences do these be-haviours have? The examples in this part of thepaper come from the Nordic countries. Further,the mechanisms which lead to increases or de-creases in different categories of unrecorded al-cohol will be discussed, and the effects andconsequences these changes have on alcohol con-trol policies and state � nances.

Different categories of unrecorded alcoholconsumptionThe concept of recorded alcohol consumptionhas developed in each country in conjunctionwith local alcohol legislation (see e.g. Room,1993). When governments started to tax theproduction, import, wholesale or retail sale ofalcoholic beverages they had to de� ne how thistaxation should be carried out. If the tax was putonly on the right to produce, import or sellalcoholic beverages there was no special need toknow the amounts of alcoholic beverages in-volved. However, most countries have developedan alcohol taxation system which is related to theamounts of alcoholic beverages involved, andtherefore a system of registration of theseamounts has become necessary. In the main, thisis the way alcohol statistics have developed indifferent countries at different times. In somecountries the de� nition of recorded alcohol con-

Unrecorded alcohol consumption S553

sumption also has a connection with the controlof the amount of alcohol consumed because ofthe social order and public health consequencesof drinking alcohol.

Statistics concerning the consumption of al-coholic beverages are based on different types ofdata in different countries. Some countries relymainly on production data, some mainly on dataof wholesale or on data from off- and on-premiseretail sales (see e.g. Finnish Foundation, 1977).Strictly speaking, outputs from these types ofsources are not � gures on alcohol consumption.It would be more precise to call them productionor sales � gures, depending on the type of basicdata. Usually this discrepancy does not causeproblems at the national level, but at the locallevel production and even sales data often lead todif� culties in estimating real alcohol consump-tion.

The accuracy and reliability of of� cial � gureson alcohol consumption probably vary consider-ably depending, for instance, on the economicimportance of alcohol taxation. In countries withlow or no alcohol taxes the necessity of producingreliable alcohol consumption � gures is, of course,lower than in countries where a large fraction ofgovernment revenues comes from alcohol tax-ation. Also the mode of production and tradeaffects the reliability of data as it is much easier,for instance, to collect the relevant � gures from ahighly concentrated brewery industry than fromwine-making based on a large number of rela-tively small family � rms.

It is a matter of de� nition as to what is meantby recorded alcohol consumption in each coun-try, and every country that produces of� cial al-cohol consumption � gures has to agree on sucha de� nition. When recorded alcohol consump-tion is de� ned the unrecorded alcohol consump-tion is, of course, de� ned at the same time. Allalcohol consumption that is not recorded is un-recorded. This de� nition is, however, too generalfor most practical purposes. If, for instance, onewants to estimate the total amount of unrecordedalcohol consumption it is often convenient � rst toestimate separately speci� c categories of this con-sumption and to calculate an estimate for thetotal unrecorded consumption on the basis ofthese estimates.

Estimates of separate categories of unrecordedalcohol consumption may also be important intheir own right. The quantities of alcoholic bever-ages that are imported legally or illegally by

travellers might, for instance, in some countries,or in some periods, reduce government’s alcoholtax revenues considerably, and in order to adjustthe taxation to an optimal level reliable estimatesof this unrecorded import are necessary. It is alsohelpful for police and customs of� cials to havereliable estimates of the magnitude of illegalproduction and import of alcoholic beverages inorder to allocate their control resources in anoptimal way.

Some of the alcohol which is drunk within acountry is not drunk by the inhabitants of thecountry, and some of the alcohol drunk by theinhabitants of a country is consumed abroad oron travels to or from foreign countries. Most ofthis consumption is actually recorded, but it isnot included in the of� cial statistics of the con-sumers’ native country, so this consumption is, ina sense, misrecorded. This might lead to mislead-ing � gures for of� cial per capita alcohol con-sumption in some countries or regions,particularly in the most popular tourist regions,or in small countries intentionally offering theinhabitants of their neighbouring countries thepossibility of cross border-shopping for cheapalcohol.

If every country estimated their total per capitaalcohol consumption by adding to recorded al-cohol consumption an estimate of alcohol con-sumed abroad or imported by travellers, the totalalcohol consumption on a global level would beoverestimated. For instance, what is importedinto one country legally or illegally by travellers isoften, but not always, a part of the recordedconsumption in another country. Therefore, theunrecorded alcohol consumption in a country orregion can mean two different things. On onehand it can be de� ned as the consumption ofalcohol by the inhabitants that is not included inthe country’s or region’s own statistics, irrespec-tive of where the consumption takes place. On theother hand, it can be de� ned as the consumptionof alcohol within the borders of the country orregion that is not recorded in the country’s orregion’s own statistics, irrespective of who is con-suming it. In most cases, however, this possibledifference in de� nition will not be of much prac-tical signi� cance, either because the quantities ofalcohol the inhabitants drink outside the bordersand the non-residents within the borders are bothrelatively small, or both are of about the samemagnitude and, therefore, more or less counter-balance each other.


Table 1. Different categories of unrecorded alcohol consumption

1. Consumption of privately imported alcohol(a) Alcoholic beverages imported by travellers within the legal quotas either from tax-free outlets or through cross

border shopping(b) Illegal alcohol imports by travellers (small-scale smuggling)(c) Large-scale smuggling of alcohol

2. Consumption of privately produced alcohol(a) Beer (in most countries legal, but might be illegal) either traditional home-brew or made from ready-made

kits(b) Wine (in most countries legal, but might be illegal) either made from grapes, fruit, berries, rice and � owers,

etc. or made from ready-made kits(c) Spirits (in most countries illegal)

3. Drinking alcohol that is meant for industrial, technical or medical use, or drinking products involving alcohol notproduced for drinking purposes

4. Consumption of alcoholic beverages that are sold duty-free to foreign embassies, foreign military personnel, etc.

5. Travellers’ consumption of alcoholic beverages abroad and during travels

6. Consumption of alcoholic beverages by sailors and other people who are living outside their native country forlonger periods

7. Consumption of beverages that contain alcohol, but are not de� ned as alcoholic beverages in the of� cial statistics

8. Over- or underestimation of the of� cially recorded consumption due to inadequacies in the collection of data forof� cial statistics

The general de� nition of unrecorded alcoholconsumption discussed above can be given amore detailed content with the different cate-gories of unrecorded alcohol consumption pre-sented in Table 1. The � rst two categories inTable 1 are the most important, since in mostplaces they cover a large part of the total un-recorded alcohol consumption. Categories threeand four certainly belong to the unrecorded al-cohol consumption but usually they are of nogreat signi� cance in quantitative terms. Cate-gories � ve and six belong to those categories wehave earlier called misrecorded consumption. Ifthese categories are to be included in the un-recorded alcohol consumption one should sub-tract the consumption by non-residents from therecorded consumption � gures. The last two cate-gories in Table 1 are cases which are usually notincluded in unrecorded alcohol consumption.Beverages in category 7 are, for instance, lowal-cohol beer or wine coolers. These beverages aresometimes included in recorded alcohol con-sumption, but in most countries they are not.

The de� nition of “alcoholic beverage” by giv-ing the minimum alcohol content of alcoholicbeverages also de� nes other beverages as “non-alcoholic beverages” or “alcohol-free beverages”,even if these beverages include some alcohol. Asthis de� nition varies in different countries so theproduct range of lowalcoholic beverages varies

somewhat from country to country. The quanti-ties covered by point 8 in Table 1 are, in mostwestern European and North American coun-tries, probably of small magnitude, but might besigni� cant in some countries and should betaken into consideration.

Most of the of� cially recorded alcohol is dis-tributed through legal channels to the con-sumers, but there also exist non-standard andclearly illegal channels of alcohol distribution inmost countries. According to legality four com-binations of products and distribution channelsare possible. In Table 2 some examples are giventhat illustrate the variation in market. The al-cohol quantities involved in each market varyover time, from country to country and alsowithin countries, depending on the possiblepro� ts on the market and on the efforts andresources of the police and other controllingbodies. In some countries it seems that a marketthat is irregular, but not really illegal, has evolvedand constitutes a large part of the alcohol mar-ket. For instance, it is usual in many developingcountries to have homebrew of different typessold in simple private bars, licensed or not. Itmight not be legal, but it is tolerated and it is avery common phenomenon. In developed coun-tries some illegalities are also tolerated. For in-stance, smallscale private production of strongbeer and spirits for personal use is illegal in


Table 2. The combinations and examples of legal and illegal distribution channels of alcoholic beverages and legaland illegal alcohol products

Legal distribution channel Illegal distribution channel

Legal alcohol products Legally produced or imported Legally bought alcohol productsproducts sold in licensed alcohol served in unlicensed bars, clubs,shops and licensed restaurants, etc. or sold on the street tobars, etc. minors, homeless people, etc.

Illegal alcohol products Contraband sold in licensed Contraband or illegally producedshops, restaurants, bars, etc. products sold on the street or

through unlicensed bars, clubs,or other distribution networks

Norway, but almost never reported to police andpunished.

Economics of unrecorded alcohol consump-tionWith regard to the economics of unrecordedalcohol consumption, all categories under mis-calculations (categories 5 and 6 in Table 1) aswell as categories 4, 7 and 8 in Table 1 falloutside our interest. The reason for ignoringthese categories is that they do not have theirown economic dynamics in the overall domesticalcohol system and, therefore, these categorieshave not been included in discussions whereunrecorded alcohol consumption has been usedas an argument for changing the prevailing al-cohol control policy. Those categories of un-recorded alcohol that have been relevant in thesediscussions are of all privately imported alcoholand privately produced alcohol. Also, the drink-ing of alcohol that is meant for industrial, techni-cal or medical use, and of surrogates such asdenatured spirits, medicine or car chemicals con-taining alcohol, or alcohol-containing productsmeant for washing windows and so on, has somerelevance in these discussions.

Drinking of alcohol produced for industrial, technicaland medical purposes as well as surrogatesWhy are people drinking alcoholic productsmeant for industrial, technical and medical useor other products containing alcohol? There isone very clear answer to this question: a certainamount of alcohol in these forms is muchcheaper than in alcoholic beverages sold legallyin ordinary shops or restaurants for drinkingpurposes. A second answer could be that theavailability of legal or ordinary alcohol is so

restricted that people simply resort to these typesof alcohol products if they are willing to becomeintoxicated. This explanation is valid, for in-stance, during periods of prohibition or otherunusual circumstances when the legal alcoholsupply has been exhausted.

With regard to drinking alcohol produced forindustrial, technical and medical use we usuallyhave an impression of severely dependent alco-holics drinking whatever they are able to pro-cure. This picture is usually quite accurate, butwe should not forget that pharmacies also sellalcoholic products for medical purposes. Forinstance, in Finland during the time of prohib-ition in the 1920s pharmacies were places wherephysicians, veterinarians and the so on couldobtain pure spirits, cognac and different types offorti� ed wines, of� cially for medical purposesbut in practice for drinking purposes (Kallenau-tio, 1979). Even nowadays a percentage of thespirits bought from pharmacies for medical pur-poses ends up in drinking glasses, but its occur-rence nowadays is quite small in Nordiccountries because of harsher controls by authori-ties (see e.g. Makela, 1979, 1982; Osterberg,1987).

Drinking surrogate alcohol as well as alcoholproduced for industrial, technical and medicalpurposes has clearly decreased in all Nordiccountries during the last decades. This can beexplained by the increased availability of legalcommercial alcoholic beverages, the general risein the standard of living and a better socialsecurity system, giving even severe alcoholics thepossibility to resort to ordinary alcoholic bever-ages. The importance of these developments ishighlighted when comparing Nordic countriestoday and in the early 1960s. It can therefore beshown that it would be much easier today toprocure surrogate alcohol, it would be easier and


healthier to drink it, and the price differencebetween it and legal commercial alcohol is still ashuge as it was three decades ago. The drinking ofalcohol produced for industrial, technical andmedical purposes as well as surrogates has de-creased to practically nothing (Osterberg, 1987;Holder et al., 1998). However, there still may beepidemic increases from time to time. In Fin-land, for instance, the last epidemics date back tothe late 1960s and early 1970s, as well as to thetimes of strikes in the Finnish State AlcoholMonopoly in 1972 and 1985 (see eg. Ahlstrom &Osterberg, 1981; Osterberg & Saila, 1991). Thereason for the epidemic increase in the use ofsurrogate alcohol in the late 1960s was thechange in the denaturing agent used for an al-cohol product meant for window-washing, whichstill retained the product’s bad taste and badsmell but was no longer immediately hazardousto health.

Home productionHistorically, home production of alcohol hasbeen very important. For instance, if we go some150 years back we note that in the Nordic coun-tries almost all distilled spirits were producedlegally in small stills in the countryside. One aimof the banning of home distillation in the Nordiccountries in the mid-19th century was to con-centrate distilling of spirits in large distilleries, inorder to be able to collect tax money moreef� ciently.

Some decades ago wine-making at home wasbased mainly on fruit and berries cultivated orcollected personally by the wine maker. Nowa-days people also use ready-made kits for wine-making. This commercial invention has affectedwine-making in all Nordic countries. In Finlandthe selling of wine-making kits started by mail-order companies in larger quantities in the 1970s(Poysa & Simpura, 1978). In the late 1980s andearly 1990s Finland experienced a boom in mak-ing wine at home, with many small specialitystores selling wine-making equipment. The mainreason for this boom was the economic recessionin Finland at the beginning of the 1990s, givingpeople a stronger motivation to produce cheapalcohol. Furthermore, equipment and materialssold by the special stores have developed: nowa-days any layman can produce reasonably good,or at least drinkable, wine at home with practi-cally no risk of spoiling the batch.

In Nordic countries producing beer at homefollows in many ways the same trends as wine-making at home, but at a much lower level. InFinland, for instance, home-made beer used tobe special sahti beer, a traditional home-madeale. It is laborious to make sahti, which has hadand partly still has its place in certain parts ofFinland at local � estas and family gatherings. Inthe late 1980s beer-making kits appeared on themarket, but in beer-making the economic advan-tages are smaller than in wine-making. This isthe reason why making beer at home in Nordiccountries has never grown to the same level ashas wine-making.

The reasons for producing alcoholic beveragesat home both legally and illegally are basicallyeconomic. Making alcoholic beverages at homeis economically bene� cial because productioncosts for home-made alcohol are clearly lowerthan the prices of commercial alcoholic bever-ages, because prices of commercial alcohol in-clude excise taxes. A good example of the role ofhigh excise taxes in home production comesfrom Denmark, where alcohol control has beenless restrictive than in other Nordic countries.However, in Denmark there was also a marketfor wine-making kits in the 1980s. After Den-mark cut wine excise taxes by half at the begin-ning of the 1990s this market disappeared.Because of the increase of alcohol availabilityand the decrease in real prices of alcoholic bever-ages, wine- and beer-making at home also seemsto be decreasing in other Nordic countries(Holder et al., 1998).

Unlike home production of beer and wine,home distilling is an illegal activity. In distillingspirits the difference between the costs of distil-ling at home and buying the same amount ofalcohol in the form of legal commercial distilledbeverages is clearly greater than the difference inwine- and beer-making. This is explained partlyby the fact that in the Nordic countries a certainamount of alcohol is taxed more heavily in theform of distilled spirits than in the forms of beeror wine. Alcohol is also heavier and more space-consuming in the form of beer and wine than inthe form of distilled spirits. Therefore, besidesproducing distilled spirits for personal consump-tion, illegally distilled spirits also have had andstill have a commercial market in Nordic coun-tries.

Traditionally, Norway has had a reputationfor widespread home distilling of spirits. In par-


ticular, during the prohibition from 1919 to1927 home distilling � ourished and even afterthat time, as a reaction to the high-price andlow-availability alcohol policy, home distillinghas been common in Norway, particularly incertain parts of the country. The sale of equip-ment for distilling spirits was forbidden in Nor-way in 1973. For several years subsequently theproducers of such equipment found a legal ex-port market in other Nordic countries, especiallyin Sweden.

In Norway in 1991 home-distilled spirits wereestimated to account for 25% of the total con-sumption of distilled spirits. The corresponding� gure for home-made wine was 30% and forhome-made beer 1%. The � gure for total alcoholconsumption of home-produced alcohol wasabout 15% (Nordlund, 1992). In Sweden in1996 the share of home-distilled spirits of totalconsumption of distilled spirits was about 20%and the corresponding � gure for home-madewine was about 10%. The � gure for total alcoholconsumption of home-produced alcohol wasabout 9% (Kuhlhorn et al., 2000). In Finlandhome distilling is uncommon, and therefore the� gure for home-made alcohol has clearly beensmaller in Finland than in Norway and Sweden.In 1998 home-produced alcohol was estimatedto account for about 3% of total alcohol con-sumption. Furthermore, home production hasbeen decreasing since the mid-1990s. However,of total wine consumption the proportion ofhome-produced wine was still about 10% (Intox-icants Statistical Yearbook, 1999).

SmugglingLarge-scale smuggling is motivated by economicpro� ts, which means that there must be a marginbetween the purchase price of the smuggled al-cohol and the price at which smugglers are ableto sell the beverages in the country of desti-nation. In practice this means that countrieswhich are taxing alcoholic beverages very highlyare potential markets. On the other hand, thecosts of smuggling can be too high, and clearlythe higher these costs are the the more smug-gling is controlled by the authorities. Further-more, in order to bene� t from price differencessmugglers must have a channel for retailing thebeverages they have been able to smuggle intothe country.

At certain periods smugglers have been exten-

sively active. For instance, during the Norwegianand Finnish prohibition periods professionalsmuggling reached a very high level, and illegaldistribution networks spread throughout allsocial groups and classes. Despite harsher con-trols, smuggling could not be stopped, and large-scale smuggling and illegal distribution becametwo of the strongest arguments against the pro-hibition.

Smuggling has been on the decrease in theNordic countries since the Second World Warand—with the exception of small-scale smug-gling by travellers—it almost died out in the early1980s. One explanation for this is that shipsspent less and less time in harbour and it becameincreasingly dif� cult for ships’ personnel to usesmuggling as a private business. From the mid-1980s, however, a new wave of large-scale, moreor less professional, smuggling seems to havetaken place in Norway triggered by strikes at theNorwegian State Alcohol Monopoly. After estab-lishing contacts, networks and transport possibil-ities during the strikes the large pro� t potentialin this activity was realized, and the businesssimply continued after the strikes were over.Nowadays smugglers seem mainly to bring al-coholic beverages over the borders by car, andoften in very large trucks. The opening of theborders within the EU has made this traf� ceasier, and is the reason why large-scalesmuggling also appeared in the mid-1990s inSweden and Finland. During later years thelarge-scale smuggling of alcohol has been linkedincreasingly to other criminal activities such asprostitution, smuggling of drugs and tobacco,money-laundering, etc. and the criminal milieuhas become more violent and organized.

It is extremely dif� cult to estimate the extentof the smuggling. The Swedish KALK study in1996 estimated the amount of smuggling to be8% of the total consumption of distilled spiritsand 3% of total alcohol consumption (Kuhlhornet al., 2000). In Finland the corresponding esti-mates were 8% and 2%, respectively, in 1998(Intoxicants Statistical Yearbook, 1999). In Nor-way the rate of smuggled spirits has been esti-mated to be between 7% and 16% of total spiritsconsumption (depending on the estimationmethod), and between 2% and 5% of total al-cohol consumption (Nordlund, 1992). Datafrom 1999 show that the quantities of smuggledspirits seem to have decreased somewhat duringthe latter part of the 1990s.


Privately imported alcoholLike home production and smuggling of al-coholic beverages, alcohol imports by travellersare basically motivated by economic reasons.This holds true whether alcohol imports are re-lated to tax-free purchases or cross-border shop-ping, or if the imports of travellers are within thelegal quotas or exceeding them, which we re-ferred to earlier as small-scale smuggling. If thedifference between the prices of alcoholic bever-ages in tax-free shops or in the neighbouringcountries is large enough compared to domesticprices, it is worthwhile for travellers to carryalcoholic beverages with them when returninghome even if wine and beer, in particular, maybe heavy in relation to the economic savings onecan obtain by carrying them.

There has been border trade for as long asthere have been borders between countries, be-cause national borderlines drawn on the mapand marked out on the terrain have always ap-peared to be arti� cial obstacles in the eyes of thepeople living on the frontier. Thus, the volumeof border trade is in� uenced by the same factorsthat affect the volume and orientation of trade ingeneral; or, where the necessary products areavailable, what these products cost in differenttrading places, the buying power of the popu-lation and what travelling expenses connectedwith shopping.

In addition to the natural factors affecting theorientation of border trade, volume is also con-trolled by arti� cial factors which manifest them-selves in rules and practices imposed bycountries in order to either limit or advance theborder trade and in the control of these rules andregulations. Furthermore, the total volume ofborder trade is naturally affected by the numberof people living close to the crossing-points andtheir social relations, such as family connectionsand friendships.

As living standards have risen, the volume ofborder trade has also begun to be in� uenced bysuch factors as possibilities to connect shoppingtrips with various forms of entertainment. More-over, the supplying party has often actively en-deavoured to make good use of the demandbeyond the border by, for example, advertisingits products in the neighbouring country orbuilding shops especially suited for customersfrom the other side of the border. For instance,at the Germany–Denmark border in post-Second World War times these shops have

developed from banana kiosks to modernhypermarkets (BygvraÊ , 1992).

Tax-free sales form a special issue in relationto border trade, and its role has been importantin Nordic countries with respect to alcoholicbeverages for several reasons. Geographical factsin general and concentrations of population inparticular, as well as the location of the Nordiccapitals and the distances between them, haveresulted in the fact that waterborne and air traf� cat the borders is extremely busy. By means ofthis traf� c, as opposed to the traf� c over nationalborders simply marked on the terrain, travellershave been offered an opportunity to buy certainproducts tax-free from special shops for thatpurpose. These products have been mainly al-coholic beverages, tobacco products, cosmeticsand sweets, which are subject to special excisetaxes in all Nordic countries.

Because alcoholic beverages have been heavilytaxed in all Nordic countries the role of tax-freesales in travellers’ alcohol imports has been mostimportant. In fact, during the post-SecondWorld War period until the mid-1990s, with theexception of Denmark, almost all alcoholic bev-erages taken with them by Nordic travellerswhen returning home from abroad were boughtfrom tax-free outlets. Still today alcoholic bever-ages bought from tax-free outlets are highly im-portant among travellers’ alcohol imports inNorway and Finland. After Sweden joined theEU in 1995 more Swedes have began to shop foralcoholic beverages from ordinary outlets bothfrom Denmark and Germany. By the mid-1980sbetween Denmark and Germany this type ofborder shopping had already increased.

As a partner to the EEA agreement but not asa member of the EU, Norway still has very strictlimits on how much alcoholic beverages trav-ellers are allowed to bring in duty-free. Further-more, the abolishment of tax-free sales ininter-EU traf� c did not affect Norway. Thisexplains why the role of tax-free alcohol in trav-ellers’ alcohol imports is still very important inNorway. The fact that tax-free alcohol is alsoimportant for Finnish travellers is two-fold. First,during travels to Estonia and Russia travellersare able to buy alcohol from tax-free shops.Secondly, the ferries plying between Finland andSweden now stop in the AÊ land Islands in orderto be able to continue with tax-free sales.

According to the KALK study travellers’alcohol imports in 1996 accounted for nearly


15% of total alcohol consumption. Counted foreach beverage group the corresponding � gureswere 20% for distilled spirits, about 15% forwine and 10% for beer (Kuhlhorn et al., 2000).In Finland the rate of travellers’ alcohol importsof total alcohol consumption in 1998 were justover 10%. With respect to different beveragegroups the corresponding � gures were about16% for distilled spirits, about 14% for winesand about 8% for beer (Intoxicants StatisticalYearbook, 1999). According to recent estimatestravellers’ imports accounted for nearly 10% oftotal alcohol consumption in Norway in 1999.For spirits the rate was about 20%, for wine 9%and for beer just over 1%.

Potential effects of unrecorded alcoholconsumption on alcohol control measuresThe existence of different categories of un-recorded alcohol consumption is, of course,bound up with the incompetence of the of� cialstatistical system to record them. However, thebasic explanation for that is not to be found insome technical inability of the recording system,but from the willingness of people to keep part oftheir alcohol consumption outside of� cial statis-tics because it is economically pro� table forthem. In Nordic countries the main explanationfor smuggling alcohol, producing it at home andcarrying it in luggage when returning home fromabroad in large quantities is the price differencebetween unrecorded alcohol and those alcoholicbeverages sold through legal domestic outlets.The explanation for this price difference is thatthose alcoholic beverages sold in legal domesticoutlets are heavily taxed.

The volume of unrecorded alcohol has animpact on alcohol tax revenues. For instance, themore travellers bring alcoholic beverages withthem when returning home from abroad the lessthey buy alcoholic beverages in domestic shopsand the less they pay taxes on alcoholic bever-ages. The same is true for home production ofalcoholic beverages and also for smuggled al-cohol. This means that the state has a clearinterest in restricting the volume of differentcategories of unrecorded alcohol consumptionwith different kinds of laws, regulations and en-forcement practices, such as trying to stop smug-gling with ef� cient checking by custom of� cialsor trying to combat illegal alcohol sales withactive police surveillance. The state may also

regulate travellers’ imports of alcoholic beveragesby strict limits on the amounts of duty-free al-cohol imports, a minimum time limit for stayingabroad in order to obtain the right to duty-freeimports and strict personal control by customof� cials and penalties for breaking the rules.

The volume of unrecorded alcohol consump-tion also affects domestic alcohol production andtrade, as well as employment in domestic al-cohol-related businesses. Domestic economic ac-tors can, of course, support the rules andregulations imposed by the state for controllingunrecorded alcohol consumption, but for theseactors a better solution in combating unrecordedalcohol consumption would be the lowering ofalcohol excise taxes. Besides giving less incentiveto alcohol consumers to procure unrecorded al-cohol and to change from unrecorded torecorded alcohol, the lowering of alcohol taxeswould also mean incentives for alcohol con-sumers to buy more alcoholic beverages. There-fore, alcohol industries as well as their employeesare usually very eager to resolve the problem oflarge unrecorded alcohol consumption with low-ered alcohol excise taxes. In most cases the stateis not willing to follow this policy, as loweralcohol excise taxes in most cases mean lowerlevels of alcohol-related tax incomes. However, ifthe state is no longer able to control the amountof unrecorded alcohol consumption by differentkinds of legal administrative restrictions the onlyremaining way to counteract, for instance, hugeincreases in travellers’ border trade with al-coholic beverages or an expansive illegal alcoholmarket is to lower the price difference betweenunrecorded and recorded alcohol by decreasingexcise taxes on alcoholic beverages.

Taking advantage of the market forcesThe idea of harmonized excise taxes inside theEuropean Community dates back to the Treatyof Rome. In trying to build the European singlemarket in the mid-1980s this target once againbecame important. Attempts to harmonize al-cohol excise taxes in the EC and EU must beseen against this background. The basic targetwas to harmonize value-added taxes and all ex-cise taxes, alcohol excise taxes among them.

In 1987 the European Commission issued aproposal for the harmonization of excise dutieson alcoholic beverages (Osterberg, 1993). Theproposal was based on plans for centralized and


administrative implementation of uni� ed exciseduties for four different categories of alcoholicbeverages: distilled spirits, intermediate prod-ucts, wines and beer. The proposed rates wereeither an average or an adjusted weighted aver-age of the prevailing rates of alcohol excise dutiesin the member states. Therefore, accepting thisproposal would have meant quite dramatic re-ductions of alcohol excise duties in Denmark,Ireland and the United Kingdom, but also clearincreases in alcohol excise duties in many othermember states. It is important to note that inmost EC member states there were not at thattime excise duties on wine.

After sharp criticism, the Commission cameup with a new proposal in autumn 1989, includ-ing minimum excise rates and target excise ratesfor different categories of alcoholic beverages.The proposed target rates were the 1987 uniformrates raised by 10%. The minimum rates for beerand wines were half the target rates. For distilledspirits the proposed minimum rate was about90% of the uniform rate proposed in 1987. Eventhis proposal was not accepted by memberstates.

In 1992 the Commission again came up witha new proposal for excise duties on alcoholicbeverages, and this time the proposal was � nallyaccepted in autumn 1992 (osterberg, 1993). Ac-cording to the new directive there is a minimumexcise rate on distilled spirits, ECU 550 perhectolitre of pure alcohol, half the minimum ratein the 1989 proposal. Every member state has toapply at least this rate. The target excise rate fordistilled spirits was set to ECU 1000. Countrieswhere the current excise rate is below the targetrate cannot reduce their excise duties on distilledspirits. Countries where the current excise dutyon distilled spirits exceeds the target rate candecrease their excise duties, but the decreasedrate cannot go below the target rate. There are,however, no obligations to decrease the excisetaxes on distilled spirits if they are above thetarget level. The minimum excise rate for winewas set at zero, whereas the minimum rate forbeer was put to ECU 1.87 per hectolitre anddegree of alcohol in the � nished product, thesame as the minimum rate in the 1989 proposal.Target rates for beer and wine were droppedaltogether.

The 1992 directive for alcohol excise taxesmay be seen as a totally watered-down version ofthe 1987 and 1989 proposals. However, in 1989

the Commission had already seemed to changeits strategy of harmonization of value-addedtaxes and excise duties. Instead of trying toimplement uniform taxes and duties the Com-mission began to encourage neighbouring coun-tries to negotiate bilaterally and to stress theright of travellers to import duty-free goodsacross the borders. As the Commission had ear-lier wanted only to extend current levels fortax-free imports of private citizens it nowadopted the abolition of all restrictions as itsgoal. The idea was that market forces shouldtake care of the harmonization which the Com-mission was not able to do administratively.Consequently, there should appear to be press-ure on high alcohol taxes through the bordertrade without any directive on how the excisetaxes are to be harmonized.

From theory to practice: the case ofDenmarkPrices of alcoholic beverages have long beenlower in Germany than in Denmark. Despite thedifferences in price levels travellers’ imports ofalcoholic beverages from Germany to Denmarkwere insigni� cant before Denmark joined the ECin 1973. This was because Danish travellers re-turning home from a trip of less than 3 days werenot allowed to bring with them any alcoholicbeverages, and this order was strictly controlled(BygvraÊ & Hansen 1987, p. 144). Danish ECmembership did not immediately lead to amarked boost in the border trade on alcoholicbeverages, because for a long time Denmarkcould limit the amounts of alcoholic beveragestravellers crossing the border could bring in (seeTable 3).

Since 1993, when returning home from shorttrips, the Danes have been allowed to bring withthem alcoholic beverages according to the rec-ommendation associated with the creation of thesingle European market (Council Directive 92/12/EEC). In other words, one can bring withhimself/herself from another EU country 110litres of beer, 90 litres of wine and 20 litres ofintermediate products. Even today Denmark is,however, restricting the import of distilled spiritsso that distilled spirits cannot be brought in if thetrip has lasted less than 24 hours, and if return-ing from a trip longer than 24 hours, the maxi-mum amount is 1.5 litres of distilled spirits. Itshould, however, be emphasized that in the EU


Table 3. Regulations concerning the import of alcoholic beverages by adultDanes crossing the border with Germany

Year Beer Table wine Forti� ed wine Distilled spirits

–1973 0 0 0 01973 2 3 3 01985 * 4 3 01987 10 4 3 01989 10 5 3 01990 12 5 3 01993– 110 90 20 0

*The value of import could not exceed DKK 2300. Sources: BygvraÊ &Hansen, 1987; BygvraÊ , 1992.

travellers’ imports of alcoholic beverages aremeant for own consumption only. This alsomeans that the above-mentioned limits are onlyindicative. The traveller can bring more than theindicative amounts if he or she is able to provethat imported alcoholic beverages are for theirown consumption only.

Since 1977 the Border District Research Insti-tute in Denmark has studied the volume of bor-der trade several times. According to the May1977 survey, 92% of Danes returning home hadtaken advantage of the opportunity to buy goodsfrom Germany. In March 1989, the correspond-ing � gure was 96% and in 1991 purchases weremade by 91% of Danes returning home fromGermany. Thus, shopping has played an import-ant part in trips by Danish travellers crossing theborderline.

The number of Danish private cars in the early1970s which have crossed the border betweenDenmark and Germany was about 1.5 million.As Denmark joined the EC, the yearly numberof cars rose by 1978 to over 2.5 million. Thisboom was followed by a slight drop in the late1970s and the early 1980s. After 1984 the num-ber of Danish cars crossing the border began toincrease rapidly, and in 1989 it reached a toprate of over 5 million cars a year. The number ofDanes crossing the borderline between Denmarkand Germany grew to over 14 million in thesame year. By 1991 the annual number ofDanish cars crossing the border had decreased toabout 3 million.

Table 4 gives estimates of the amounts ofalcoholic beverages imported by returning Danesfrom Germany in millions of litres based on thesurveys carried out by the Danish Border DistrictResearch Institute (Thorsen, 1988). The tableshows clearly that a loosening-up of import re-

Table 4. Estimates of the amounts of alcoholic beveragesimported by returning Danes from Germany in millions oflitres based on the surveys carried out by the Danish Border

Research Institute

1977 1980 1983 1986

Beer 6.6 7.0 6.0 86.2Table wine 7.6 8.0 7.0 13.9Forti� ed wine 1.5 1.6 1.4 1.9

Source: Thorsen (1988).

strictions in the mid-1980s led to a huge increasein travellers’ duty-free imports of beer, but alsoto a clear increase in wine imports. The Danishbeer industry was not, however, concerned aboutthis increase as the beer Danes imported fromGermany was mainly Danish beer � rst exportedto Germany. We may also speculate that thestate was not concerned of the increase in trav-ellers’ beer imports from Germany, as this wasfor the most part an addition to the beer con-sumption of Danes. In other words, according tothe of� cial statistics beer sales inside Denmarkdecreased in the 1983–86 period from 666 mil-lion litres to 628 litres, or by 38 million litres,which is about half the increase in border trade.Furthermore, during the same period wine salesincreased in Denmark from 96 to 101 millionlitres (Nordisk alkoholstatistik, 1982–1987,1989).

In the longer term, however, the brisk bordertrade with beer and wine caused Denmark torevise its alcohol taxation, as there most certainlywould have been a further increase in bordertrade after the new regulations coming into forcein 1993 in connection with the single Europeanmarket. The decreases in excise duty on beer andwine in July 1991 and in October 1992 meantthat excise taxes on beer and wine were cut by


50% (Brazeau et al., 1993). A declared aim wasto cut down border trade.

Lowered taxation of beer and wine has re-duced border trade of alcohol. According toMilhøj (1993), beer bought abroad had fallen tounder 10% of the aggregate consumption in the� rst quarter of 1993 and wine bought abroad tounder 15% (Milhøj, 1993, p. 323). The import-ant conclusion, therefore, is that the amount ofwine and beer imported by travellers seems notto have increased in 1993, despite the fact thatthe import restrictions were essentially alleviatedat the outset of 1993 (see Table 3).

Emerging trendsWhen Finland and Sweden joined the EU in1995 they were granted derogation from thegeneral EU limits on private importation of al-coholic beverages for the � rst 2 years of member-ship. The limits were set to 1 litre of spirits or 3litres of intermediate products and 5 litres ofwine and 15 litres of beer. In 1996 this deroga-tion was continued for Finland until the end of2003 and for Sweden until 1 July 2000 (Holderet al., 1998). Sweden has renegotiated its deroga-tion and agreed to adjust to normal EU limits bythe end of 2003, the same day that Denmark hasto give up its remaining derogation for travellers’imports of distilled spirits. Consequently, in thebeginning of 2004 Denmark, Finland and Swe-den will join the same rules and restrictionsconcerning travellers’ imports of alcoholic bever-ages as other EU countries.

Even with the derogation, travellers’ duty-freeimport allowances for beer and wine increased inFinland and Sweden in 1995 both from otherEU member states and from third countries. Forthird countries the new import allowances were 1litre of distilled spirits or 2 litres of intermediateproducts and 2 litres of wine and 15 litres ofbeer. Before 1995 the corresponding limits were1 litre of spirits and 1 litre of wine and 2 litres ofbeer or 2 litres of wine and 2 litres of beer, winede� ned as both forti� ed and table wine (Holderet al., 1998). In Finland this led to an increase intravellers’ alcohol imports especially from thirdcountries, Russia and Estonia (Osterberg &Pehkonen, 1996). In Sweden travellers’ alcoholimports rose especially from trips to Denmarkand Germany (Trolldal, 1998; see also Kuhlhornet al., 2000).

Thus far the increase in travellers’ alcoholimports and the increase in smuggling of alcoholhas not led to a general decrease in alcohol excisetaxes. However, Sweden lowered its excise taxeson beer at the beginning of 1997 by nearly 40%due to increased cross-border trade, and in Fin-land excise taxes of wine and intermediate prod-ucts were decreased by 17% on 1 January, 1998(Holder et al., 1998). In both countries there is alively continuing debate of the pros and cons ofdecreasing alcohol taxes and in both countriesthe discussion seems to indicate that decreases inalcohol taxation will be realized around the 2004(see e.g. Osterberg et al., 1998).

EU-induced border trade with alcoholic bever-ages has not affected Norway as much as it hasaffected Sweden or Finland (Lund, Trolldal &Ugland, 1999), and it will most certainly notaffect Norway as directly as Sweden and Finlandin the future. However, Norway has a long bor-der with Sweden and if Sweden decreases al-cohol tax levels the price difference of alcoholicbeverages between Norway and Sweden willgrow even larger than it is now, leading to in-creases in border trade with alcoholic beveragesand putting more pressure on Norwegian alcoholtax levels.

ConclusionsNo country has complete records of alcohol con-sumption. In all countries people drink somealcohol that is unrecorded, some percentage of itbeing legal and some percentage illegal. In par-ticular, the illegal percentage has the potential tolead to political, social and economic problems.The size of these problems vary greatly, and it isevident that the problems are greater in countrieswith strict rules for alcohol production, distri-bution, sales and consumption as well as incountries with high excise taxes on alcoholicbeverages. On the other hand, it is also evidentthat countries with strict rules and high taxeshave lower per capita consumption than themore liberal countries, even when unrecordedconsumption is included. Therefore, much of thealcohol policy debate is about weighing what ismost important: low criminality related to al-cohol handling (illegal production, smuggling,etc.) or low alcohol consumption and therebylow rates of alcohol-related health and socialproblems.

Especially in the Nordic countries, restrictive


alcohol policy measures have been used for gen-erations to moderate alcohol consumption andrelated problems, and the alcohol policy debatehas been very intense in these countries. Argu-ments about increased smuggling and illegal dis-tilling have always been used against alcoholpolicy restrictions. For instance, these argumentswere crucial for the abolition of the prohibitionin Finland and Norway. Also the level of trav-ellers’ alcohol imports and border trade have, incertain periods, been used for the same purpose.

In recent years all these arguments have againbeen heavily used in the alcohol policy debate inNordic countries, but in particular border tradearguments have gained more importance due toEuropean economic integration. Whatever viewsone has in general about the European singlemarket, it is obvious that in the � eld of alcoholtaxation this integration is a serious threat totraditional Nordic alcohol policy, with high taxesand prices on alcoholic beverages. Importantly,the directives that imply that in practice marketforces should take care of the harmonization ofalcohol excise taxes indicate an undermining of avery important part of Nordic alcohol control. Ithas already led to reductions in alcohol taxation,both in the old and new EU member states(Denmark, Finland and Sweden) and in theEEA countries (Norway and Iceland).

Not only does the EU act as a threat to therestrictive alcohol policy in the Nordic countries.Internal forces such as commercial economicactors in each of these countries have also beenactive in the same direction. It is obvious that theviews of the people have changed in a moreliberal direction throughout most of the postwarperiod. This is also mirrored in the countries’parliaments. The political power to defend thetraditional restrictive policies has weakened, to-gether with the number of members in the tem-perance movement. In this way differentprocesses act in the same direction, triggered byEU integration, making it dif� cult to shape anduphold an independent policy in the alcohol � eldin the way it used to be.

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