Tag: baptists

Karnataka’s bizarre liquor license policy

Karnataka has a rather weird liquor license policy. Some twenty years ago, back when S Bangarappa was the chief minister (if I’m not wrong) the state decided to freeze the number of bars. “Growing alcoholism” was the ostensible reason. Since then, if someone has to open a bar, the license has to be purchased from an existing bar owner who will then shut down his bar. Thus, the number of bars in the state (whose population has increased manifold since) has remained constant.

This is not the only funny aspect of liquor regulation in Karnataka.  Till recently, there was also the rather bizarre requirement that each bar sell a minimum “quota” of liquor each month. If the bar failed to do so, it had to pay “short lifting” fines. While this regulation (minimum “lifting” by bars) went much before the time when number of licenses was capped, the two can be seen to be related. When the number of licenses is capped, the state needs to ensure that it gets a certain fixed revenue out of excise licenses and sales. Fixing a minimum sale quantity ensures that licenses are not “wasted” by bars with low sales, and in case they are, the government doesn’t lose out on such sales.

A possible reason that this rather bizarre regulation on minimum sales was lifted is due to it becoming moot thanks to competition. When the number of liquor licenses is limited, the price increases, and thus bars which are selling lower amounts of liquor find it more profitable to cash out on their licenses than continue their business. Thus, bars that continue to have their licenses are those that continue to sell significant quantities, which makes the quotas moot.

Nevertheless, the cap on the number of bars means that the liquor scene in Karnataka is rather bizarre, the point being that there are no “middle class bars”. Here in Barcelona, where I’m currently on holiday, pretty much every restaurant and cafe has an alcohol license (at least beer and wine), and it is possible to have a drink in an “ordinary setting” at a reasonable price. A glass of beer at any of these establishments, for example (small quiet places which are seldom crowded), costs about EUR 1.80 (~Rs. 120 by today’s exchange rate).

In Karnataka, on the other hand, thanks to the limited licensing regime, a bar needs to do a certain minimum amount of business before it is viable. This has led to bars in Karnataka adopt one of two opposing routes. Some play the volume route, setting up an atmosphere where there is quick turnaround of customers (it can be argued that atmosphere is set up to ensure customers don’t stay too long) each of who consumes in significant volumes so that the bar can make significant amount of money despite charging only a small premium on the liqour.

At the other end you have the rather fancy “value players”, who make their margins on rather large markups on the liquor they sell. These are typically fine dining restaurants where people’s primary purpose is eating (rather than drinking) and which have rather low table turnover. A combination of the above two means that volumes are low, but such restaurants more than make up by means of significant markups. These markups are extended to non alcohol items also (these restaurants can afford to charge a premium since all other similar restaurants serving alcohol also charge the same premium, and presence of alcohol is a hygiene factor for such restaurants). Here is an old blog post where I argue why liquor regulations imply high.

So the question is if the government can do away with the bizarre regulations on minimum sales, why can’t they increase the number of liquor licenses? The problem is that it is a classic case of baptists and bootleggers. The baptist case is that by issuing more liquor licenses, it makes things easier for people to drink alcohol and that’s not a good thing for society. And the bootleggers are existing licenseholders, whose licenses will get devalued if their supply increases. I just realised I’ve already done another blog post addressing this topic.

Irreversible policies

Some policies are so badly designed that they become irreversible. Take, for example, the “5/20” rules for airlines in India. For an airline registered in India to fly abroad, it needs to have been in operation for 5 years and have at least 20 aircraft. The rule is silly, and the government wants to change it. But established players say that changing the rule will be unfair to them, for they have sunk costs in order to comply with the rule and want newer competitors to go through the same.

Now, given that the airline industry is dynamic in terms of firms going in and out of business, there will always be new firms and old firms in the market. And given that the rule is fundamentally senseless, there will be proposals to change it at many points in time. Now, notice that the arguments that today’s established players are making can be made at all those points in time! In other words, if you were to postpone changing the rule because older airlines are going  to be unhappy, you are giving reason to postpone the rule change indefinitely!

When you design a policy, you should keep in mind that there is a chance that changed market environments might render it useless/absurd (as for the 5/20 rule, it was absurd from inception!). Hence, you need to consider how easy the rule is going to be to dismantle when it goes past its use-by date. If such a “poison pill clause” doesn’t exist in the rule, then it will be very difficult to undo and the absurdity will propagate into perpetuity, causing much more damage than necessary!

Then again, if the rule has been framed due to the influence of bootleggers (the 5/20 rule definitely has indications of that, and it is hard to identify any “baptists” who could have backed the rule), then the bootleggers are likely to prevent any such “poison pill clause” from being put in. Such are life.

Op-Ed in Mint on Environmentalism, Baptists and Bootleggers

After a very long time (~7 months) I’ve written an Op-Ed in Mint. It got published in the physical paper this morning. I’ve used the “Baptists and Bootleggers” framework propounded by economist Bruce Yandle in 1983 to analyse the hijacking of the green cause in India. An excerpt:

In the context of Indian environmental regulation, bootleggers refers to the vast coalition that seeks to profit from curbing industrial growth and development. This includes but is not limited to industries seeking to stifle competition (by preventing competitors’ plants from being built), political parties that rely on people’s poverty and backwardness in order to come to power, and local politicians with vested interests.

The baptists are environmentalists, conservationists and people who are truly interested in the green cause and ensuring sustainable development. Their motivations are straightforward, in that they do not want any developments that could cause lasting damage to natural resources, and they believe that strong environmental regulations are necessary to guard natural resources and ensure sustainable development.

While I was writing the piece I found that Yandle himself has written about the application of the framework to climate change, Kyoto Protocol, etc. This paper (possibly paywall, I only read the abstract) and this one (I’ve read it, and it’s good) are some suggested readings if you want to know more of the concept.

Baptists and Bootleggers: Karnataka Edition

“Baptists and bootleggers” is a popular concept in economics. It is used to illustrate that in the absence of sound economic thinking, good intentions don’t count for much. According to this concept, baptists want to ban the sale of alcohol on Sundays because it is the day of the lord, and they don’t want people to be drinking that day. And this plays out directly into the hands of bootleggers – who make a living supplying people their booze on Sundays.

So by calling for the sale of liquor to be banned on Sundays, baptists are essentially encouraging an illegal activity and an illegal trade. If not for the baptists, people would be able to buy their liquor legally on Sundays, and bootleggers would be out of business.

There is also a social cost to policies like this – by pushing an activity (such as the sale of liquor on Sundays) underground, you encourage nefarious elements to get into business, rather than keeping it in clean hands. And this is likely to increase the overall rate of crime.

Thus, by their supposedly moral position that alcohol should not be sold on Sundays, baptists actually end up unintentionally encouraging crime!

A similar story to this has been playing out in Karnataka in the last twenty years. For whatever reason, in 1993, the government of Karnataka decided to freeze the total number of liquor licenses in the state. Since 1993, if you want to open a bar or a liquor shop, you need to purchase a license from the secondary market. Effectively, for every new liquor outlet, some outlet somewhere in the state has to close down (whether such closure is usually voluntary or not is left as an exercise to the reader). This increases the cost of liquor intermediation in the state and leads to higher prices for the consumer.

While higher prices may be desirable for “sin goods” such as liquor, there is a better way for the government to increase consumer prices – by levying higher taxes, which ensures that the additional money thus paid by the consumer flows into the government coffers. By limiting the number of licenses, however, the government doesn’t get extra revenue.

Instead what this encourages is illegal sale of liquor! That there is a limit on the number of liquor licenses doesn’t push down people’s need for liquor. And they end up buying liquor from illegal sources and bootleggers, and it becomes difficult to maintain quality and hygiene standards on such sales. And with a bar having to close down for every new one that needs to open, you might imagine the kind of characters that might get involved in the process.

Back in 2008, a friend was trying to start a lounge bar, and he mentioned that he had to pay up to the tune of Rs. 30 lakh to get his license, while the official price is about a tenth of the amount. It is obvious that not all the money he paid for his license went to the government’s coffers.

Where do the baptists come here? Because every time there is a proposal to increase the number of liquor licenses, you will have a wave of morality which protests this decision. They are the baptists who keep Karnataka’s bootleggers in business.

Also read this piece on the funny rules of Karnataka’s liquor licensing regime.

Common kids versus coaching factories

Given that I can consider it as my “specialist subject” I continue to comment on entrance exams. Glanced through an article about changes in medical entrance exams today in the newspaper, which talked about “eliminating negative marking”, and also talked about having a common entrance exams for all colleges (didn’t read in enough detail to figure out the details).

Now, when you have a broad-based entrance exam which is supposed to cater to people of varying backgrounds, there is a need to keep it simple. There is a need to announce a “syllabus”, and stick to it. And to pre-announce a format which will allow students to prepare adequately for the exam. The problem with this, however, is that it plays right into the hands of coaching factories, whose influence the examiners want to try and reduce. Given a syllabus and a format, it becomes easier to cram for an exam without understanding fundamentals, and this is what coaching schools want.

When the format of the examination is unknown, it becomes harder to “prepare for the exam”, and all one can do is to “prepare the concepts”. In theory, a random examination format allows the examiner to examine concepts better, and doesn’t give unfair advantage to people who go to coaching factories.

That makes me wonder if the attempt to make heavily-coached entrance exams “easier” (this applies to IIT admissions also) can be explained with a baptists-and-bootleggers argument. The baptists in this case are the inclusionists, who want to keep entrance exam papers simple and reasonably deterministic so that “common kids” are not disadvantaged. The bootleggers are the coaching factories, since a deterministic exam will make it easier to coach and thus increase their demand.

For the same reasons, the move to using board exam scores for IIT admissions is daft. Board exams are inherently designed to make people pass, which means they have a defined syllabus and a deterministic format. Use of that for something as competitive as IIT admissions is only going to play into the hands of coaching factories.