The Swedish Solution

“We are all socialists now.”  That’s what my wife Sue said yesterday as we drove back from the airport listening to radio reports about the U.S. plan to stabilize American bank capital by making direct government investments in financial firms. Yes, I thought, like Sweden (and its solution to an earlier banking crisis).  Then I started thinking about the Swedish solution to wine …

Systembolaget

Here’s a paradox.  The Swedes have relatively low levels of alcohol consumption, but are home to one of the world’s largest alcoholic beverage retailers. How can we reconcile this paradox?  The answer is Systembolaget, the Swedish wine and liquor monopoly.

Systembolaget, until recently the world’s largest single purchaser of alcoholic beverages, reflects an interesting Swedish viewpoint.  Capitalism is pretty good — profit incentives are very powerful.  And alcohol is OK, too.  But when you mix the two of them, well you only get trouble.  So you need a non-profit state monopoly to handle alcohol sales.

Here’s how the Systembolaget website explains it.

The monopoly is based on the principle that there should be no private profit motive in the sale of alcohol. (Without any private profit motive, there is no reason to try to persuade customers to buy as much as possible, and no reason to sell to people less than 20 years old). This idea has proved highly effective in practice. Alcohol consumption in Sweden, which in the early 1800s was among the highest in Europe, is today among the lowest.

The idea seems to be for the organization to respond to “demand pull” for wine and spirits but not to use a “supply push” to encourage excess alcohol consumption.  Unlike some state-run systems I have known Systembolaget seems to be relatively responsive to consumer needs (perhaps Swedish readers can leave comments regarding this observation).  This is partly driven by the system’s continuous need to justify its existence in the face of EU regulations that challenge its right to monopoly status. The stores, of which there are many, are bright and well organized, the staff gets continuing education on food and drink topics  and there are regular tastings and other events.  A recent study suggests that eliminating the monopoly would be detrimental to Swedish public health.

Systembolaget seems to work in a typically different Swedish fashion, although it is certainly not above criticism.  I reject the fundamental assumption, which is common here in the U.S., too, that alcohol is alcohol and the rules that government hard liquor should apply to table wine.  It seems to me that wine is associated with the culture of temperance rather than alcohol abuse.  But this is an old debate and I don’t expect to be able to resolve it here. (Here in Washington State where I live the state has a monopoly on spirit sales but wine, although still tightly controlled, is available through both state and private sector retail outlets.)

The Swedish Solution?

Certainly Systembolaget represents an alternative to the market as a way to satisfy the demand for wine.  A monopoly that puts public health first is not necessarily a bad thing, especially if it can avoid becoming a “lazy monopolist,” to use Albert O. Hirschmann‘s phrase, and ignore legitimate consumer interests.

This got me thinking about the financial crisis again.  What if the Swedes are right that the profit motive is dangerous in some markets.  Alcohol?  Well, that’s the idea behind Systembolaget.  Banking?  Hmmm.  Is finance like booze — useful, but potentially lethal?  Fine when legitimate needs are addressed, but explosive when the profit motive leads to abuse?

It is heresy for an economist to say these things.  But it looks like this financial crisis is pushing us to adopt a Systembolaget system of banking.  Wine is life!

The Chernobyl Effect

How a Nuclear accident in the Ukraine launched Washington wine in Europe.

chernobyl_fallout1.jpg

Economics has been called the science of unintended consequences because economists are good at tracking down the complex indirect effects of seemingly simple policies and events. The study of global wine markets always makes me appreciate the power of unexpected connections.

The Washington and Oregon wine industries are making a major push right now to get attention (and distribution) in Great Britain and other export markets. I hope that these programs have their intended effect, but one the first significant Washington exports to Europe was not planned; it was the unexpected consequence of a freak accident. Here is a story that I have pieced together from various sources about how Washington wine made one of its first important impacts on foreign markets.

It started with an accident that occurred on April 26, 1986 in a town called Pripyat in the Ukraine. Pripyat was home to the Chernobyl nuclear reactor, which experienced a catastrophic failure on that April day, resulting in panic and loss of life. Pripyat was evacuated and remains a ghost town to this day. But the effects extended well beyond the reactor site. Plumes of radioactive fallout rose high into the atmosphere and were taken by the prevailing winds north and west as the map above shows (click on the map to enlarge it).

The northern radiation plume caused panic and alarm in Scandinavia, as you might expect. The uncertain long-term consequences of an unavoidable invisible threat continues to haunt residents of this region. At the time, of course, the priority was to avoid radioactive contamination: stay inside, don’t eat food that was grown in the fallout zone, don’t drink milk from cows that grazed on fallout-dusted fields, and so on. The health concern naturally extended to wine.

Systembolaget, the Swedish national retail alcohol monopoly, faced a dilemma. Much of the red wine it sold came from regions of France that were squarely in the path of the western fallout plume (although not, as the map indicates, among the most severely affected regions). There was no way that it could sell this French wine to anxious Swedish customers.

So the word went out through wine networks: Systembolaget was looking for sources of uncontaminated Bordeaux-style red wines to fill their shelves until the French wine scare was over. And so Tom Hedges received a call. Tom (a 1973 graduate of the University of Puget Sound) was hard at work trying to sell Washington wines in Taiwan — a difficult task in the 1980s as you may imagine. Tom saw an opportunity to act as a middleman between the Washington winemakers he knew who had Cabernet and Merlot to sell and the Swedish wine retailer. He became a négociant as such middlemen are called in the wine business. He bought up surplus wine from various Washington sources, blended and bottled it (under the Hedges Cellars label) and shipped it off to Sweden, where it found customers who might not otherwise have been willing or able to try a Washington wine.

The wines were good enough that Systembolaget came back from more. In fact, they wanted to visit Tom’s Chateau and Estate, to see how good wine was produced in what was to them an unlikely part of the world. This was a problem, of course, since Hedges Cellars was what we would call today a “virtual” winery. And so he responded by planting a vineyard (one of the first on Red Mountain, which is today one of Washington’s premier AVAs) and building a winery (which is now Hedges Family Estate).

Thus did a nuclear accident in the Ukraine help bring Washington wines to the international market.

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