It was an unlikely pairing. Thirty years ago the legendary Olympic champion Carl Lewis became the face of Pirelli, the Italian tire maker. “Power is nothing without control,” the advertisements proclaimed.
This photo of sprinter Lewis in high heels made the point very well (as did a spectacular television commercial). Power without a strong foundation isn’t very useful. It is important to assess situations from the ground up (where the “rubber meets the road”) rather than simply top-down.
The Tax Man Cometh
What prompts my interest in vintage tire advertisements? I am inspired by recent reports from South Africa. The wine industry there, as I will explain below, is robust and resilient, and yet fragile. However, the South African government doesn’t seem to appreciate the situation’s complexity and has recently announced an excise increase of 7.17% on still wine, 7.17% on sparkling wine, and 6.67% on brandy. This is a harsh blow to an economically important but fragile industry just as it moves to recover more fully from the dismal pandemic days.
It is worth noting that South Africa is not the only wine region facing detrimental tax or other policies. One survey of winegrowers in Ontario, for example, lists discriminatory tax treatment as one of the top two or three headwinds and I know other regions with similar concerns.
It seems to me that the officials behind this tax fail to appreciate the wine industry’s double nature. It is robust, resilient, and an important economic driver of the national and many local economies, which is something to be protected. But, at the same time, it is fragile because the foundation of the wine industry is farming, and especially in South Africa, that is a difficult business.
Read the Report!
I recommend that government officials study a recent report issued by South Africa Wine titled “Macro-Economic Impact of the Wine Industry on the South African Economy.” The report traces the economic impact of the wine and brandy industry on the South African economy, making the case that it is an effective driver of economic growth.
The wine and brandy industry’s extensive value chain, which is deeply rooted in agriculture, has, over the past 365 years, played a significant role in South Africa’s cultural and economic history. Its distinct role within the South African alcohol industry landscape includes an extensive rural footprint, tourism, foreign revenue via exports of wine to more than 120 countries, and the associated brand reputation for the country.
You would not think it necessary to make such a case, but the industry suffered a variety of headwinds in recent years, including devastating drought and covid-related policies that banned the domestic sale of alcoholic beverages for long periods and also limited port access that is necessary for export shipments. What a nightmare!
Unsustainable Foundations
So it is important to dig down into the report to assess the condition on the ground, which in this case means the wine growers. The news is not good. Winegrape growers in South Africa, as in many places including the United States, have been hit with rising costs and limited opportunities for price increases. Margins have been squeezed like a fragile grape.
This chart from the report shows how quickly a fragile situation has worsened. In 2018 only 20 percent of grape farmers reported profits high enough to justify continued investment. Fifty-two percent of growers reported unsustainably low profits. Twenty-nine percent experienced losses. This is a picture of an industry on the edge.
Fast forward to the 2022 vintage and you can see that conditions deteriorated significantly. Only 12 percent of growers experienced sustainable profits while nearly a third reported losses and almost half unsustainably low net revenues. It is no wonder that hectares under vine have been in steady decline.
The Curse of Stein’s Law
In the past, the report explains, winegrowers have responded to higher costs by pushing up vineyard yields rather than through price increases. This strategy is difficult to sustain, however, and Stein’s Law holds that if something cannot go on forever, it will eventually stop. The steadily falling quantity of producing vineyard land indicates Stein’s Law at work.
So what should the government do when an economically important industry, with substantial domestic and international backward and forward linkages, is in such a fragile condition? Raising taxes on its products doesn’t seem like the obvious answer. Some may argue that the tax increases are intended to reduce alcohol abuse, which they might do, except for the existence of robust illegal alcohol markets, which would likely expand as the regulated market declines.
The South African wine industry has many problems, just like other wine regions today, but it has one thing going for it: professional organizations like Sound Africa Wine that provide unusually strong data and analysis that could and should help guide public policy. Now it needs government officials to wake up and understand that the wine industry is a powerful but fragile engine for growth and change and not just a conveniennt source of tax revenue.
