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Decline and fall of the Algerian wine industry: Filling in the study gaps

Wed, 04/23/2014 - 07:49

The French vineyards had been decimated by the Phylloxera infestation of the 1860s and Algeria had ridden the "magic carpet" of unfulfilled French consumer demand to the point where, in 1905, it was exporting 5 million hl of wine to France (50% of its total exports), fully 1/3 of its GDP.  A new Journal of Wine Economics paper (The Rise and Fall of the World's Largest Wine Exporter -- And its Institutional Legacy, Vol 9 (1), 2014), written by economists Giulia Meloni and Johan Swinnen of the LICOS Centre for Institutions and Economic Performance (Leuvin, Belgium), detailed the upward trajectory of the industry as well as its subsequent fall but, I contend, does not paint a complete picture in the rationale provided for the decline.  I reviewed their findings on the rise of the industry in an earlier post; in this post I cover their findings on the fall and flesh out the rationale palette.

After French producers had dug up their infected vines and replaced them with vines grafted onto American rootstocks, the Phylloxera threat abated. As production increased, wine prices declined significantly, falling 65% in the 25 years following 1880. French producers sought government relief and this came in the form of tariffs on Italian and Spanish wines imported into the country. Italian and Spanish wine imports declined as a result of the tariff-driven price increase and this led to further increases in the volume of Algerian exports as French consumers substituted Algerian wine for its more expensive competition.

World War I and the spread of Phylloxera to its vineyards took Algerian wine off the table as an issue for French producers; Algerian production fell from 10 million hl pre-war to 5 million hl in 1922. But this was a temporary state of affairs as rapid adoption of the American-rootstock technique, significant expansion in vineyard area (175,00 ha to 400,000 ha from 1925 - 1935), and high wine prices in France (23 francs/hl in 1921 - 1925; 32 francs/hl, 1926 - 1930) saw production grow to 20 million ha in 1935. Production declined to 1922 levels in the middle of WWII but was back up to 18 million hl by 1953.

On Algeria's independence in 1962 it had 360,000 ha under vine; by 2005 that number had declined to 25,000ha. Production was 15 million hl at independence and 600,000 hl in 2009. Exports were 14.8 million hl at independence and 17,000 hl in 2008. To what forces were these precipitous declines attributable?

Production (blue) and export (rust) data for the Algerain wine
industry. Smoothing obscures inter-point volatility.Selected data points from Meloni and Swinnen time series
Selected data points from Meloni and Swinnen time series.
Smoothing obscures inter-point volatility.

According to Meloni and Swinnen:

  • Export constraints after independence. France had agreed to purchase 39 million hl over 5 years but, encouraged by domestic producers, failed to meet its obligations under the treaty.
  • Poor management after the wine industry was nationalized
  • The inability to find substitute markets. A deal in 1969 to supply the Soviet market was abandoned due to profit pressures.
While the authors mentioned poor management as one of the main reasons for the failure of the industry, they do not provide any quantitative or qualitative data to back up that assertion. Further, they failed to mention a number of potentially critical elements of the decline.
First, these selfsame authors had attributed the rapid growth of the Algerian wine industry to the 50,000 families entering the country after the Phylloxera infestation in France, bringing critical winemaking and management skills to the country. Is it not likely then that the 900,000 European Algerians who left the country after independence might have taken some of those skills (remember 97% of the vineyards were owned by French settlers) with resultant short- and long-term negative implications for the industry? asserts that the Algerian wine industry was "severely handicapped by the sudden loss of foreign managers and skilled labor." In addition, many of the Algerians who had worked closely with the French pre-independence either fled the country or were killed shortly after independence. Could some winemaking and managerial skills also have been lost in this manner?
Second, the authors stress the loss of the export market but Algeria lost its domestic market also when the 900,000 Algerian-Europeans went home. And that market would never be coming back.

So these guys were screwed: they had lost their only export market; they had lost their domestic market; and they had lost the critical winemaking and management skills of the foreigners and locals who had "fled" the country. Add to this the "government view that dependence on wine was probably inappropriate for a muslim state" ( -- another rationale that the authors failed to mention -- and you end up where Algeria is today. According to the authors, "From a global perspective, the Algerian wine industry has 'effectively disappeared.'"

This study was, overall, very digestible. It was an "old school" study which eschewed econometrics and mathematical economics in favor of time series data and associated analysis. I had some issues with the paper though. First, it seemed as though the authors tried to cram three separate studies into one: (i) The rise and fall of the Algerian wine industry; (ii) the bi-directional flow of wine-related legislation as it relates to France and Algeria; and (iii) the role of French wine regulation in shaping the direction of European -- nay worldwide -- wine regulation. Second, the authors failed to at least advance some of the decline-and-fall narrative that I have provided; and (iii) a little bit of modeling (using regression analysis and dummy variables) would have helped us to understand the relative importance of the provided reasons for the decline and whether other heretofore unidentified factors also contributed.

©Wine -- Mise en abyme

The rise of the Algerian Wine Industry

Sun, 04/20/2014 - 11:48

In his otherwise excellent history of wine (Reinventing Wine), Paul Lukacs failed to mention that 1960s Algeria was the world's largest wine exporter and its fourth largest producer. Further, while he described his version of the formulation of the French appellation system at great length, he did not mention the catalytic role of the Algerian wine industry in its development. These two points, along with many others, are detailed in a new Journal of Wine Economics paper (The Rise and Fall of the World's Largest Wine Exporter -- And its Institutional Legacy, Vol 9 (1), 2014) written by economists Giulia Meloni and Johan Swinnen of the LICOS Centre for Institutions and Economic Performance located in Leuvin, Belgium.

The French conquered Algeria in 1830 and managed it as a colony until granting it independence in 1962.

With French colonization, Algerian viticulture began to grow, with settler and colonists alike drinking the beverage because of its perceived safety and medicinal benefits. The country's warm temperature retarded development, however, and it was not until the introduction of the "cold fermentation" technique (allowing complete fermentation of the harvested grape) that serious commercial viticulture could be undertaken.

The introduction of cold fermentation, coupled with the devastation of French vineyards by the Phylloxera louse, lit a fuse under the nascent Algerian wine industry. Phylloxera caused a 70% decline in French wine production but this loss of capacity did not result in a diminishing of the French consumer's demand for wine. The combination of lost capacity and continued high product demand resulted in the following state of affairs:

  • Increased demand for Algerian wine as France filled its 15 million hl demand shortfall with imports and adulteration. Imports increased from 1.2 million hl in the 1865-1869 period to 10.6 million hl in the 1875-1879 period.
  • 50,000 French families emigrated to Algeria and took control of 700,000 ha, much of it destined to become vineyards
  • An exponential increase in the level and amount of winemaking skills now resident in Algeria.

The Bank of Algeria was also a key enabler in the expansion of Algerian wine production as, in this timeframe, it overcame its previous reluctance to provide capital to the industry.

Initially, France's European neighbors also benefitted from its demand gap but as Algerian production ramped up, their fortunes fell off. While Algerian exports to France rose to 5 million hl in 1905, it was almost zero from Italy (down from 1.5 million hl in the late 1880s) and 2 million hl from Spain (down from 7 million hl in the same timeframe). For Algeria, by the turn of the century, 1/3 of its GDP, and 50% of its exports, revolved around wine production. By 1933, that export percentage had risen to 63%.

The charts below show production and export of Algerian wine and the area under vine. The details behind the charts will be discussed in a later post but the take-away here is the massive increase in all three measures from the starting point in the late 1800s.

Production (blue) and export (rust) data for the Algerain wine
industry. Selected data points from Meloni and Swinnen time series
Selected data points from Meloni and Swinnen time seriesI will cover the issues surrounding the fall of the Algerian wine industry in a subsequent post.

©Wine -- Mise en abyme

French wine quality: From thin air to a weapon of war

Fri, 04/18/2014 - 21:38

In a recent post I touched briefly on how the French appellation system had evolved into a standard of quality. Recent research has pointed out that this was not a benign evolution. Rather, quality was used as a hammer to dispose of the ongoing threat posed to the well-being of the French producers by the Algerian wine industry. And succeed it did. But that success is the story of another post. In this post I provide further detail on the origins of the appellation system, drawing heavily on the work of Guilia Meloni and Johan Swinnen (The Rise and Fall of the World's Largest Wine Exporter ..., Journal of Wine Economics, Vol 9 (1), 2014), both economists at the LICOS Centre for Institutions and Economic Performance in Leuvin, Belgium.

At the turn of the 20th century, the French wine industry appeared to align along three poles: the establishment (Bordeaux, Burgundy, and Champagne producers); the French south; and Algerian producers. And these groups had all "lawyered up" for the battle-royal in which they were engaged.

Selected Turn-of-the-Century French Wine-Producer Organizations Region Organizations Champagne Fédération des Syndicats de la Champagne Syndicat du Commerce des Vins de Champagne Association Viticole Champenoise Southern France Syndicat des Viticulteurs (1887) Confédération Génerale des Vigneros du Midi (1907) Algeria Confederation des Vignerons des Trois Départments Algériens Source: Meloni and Swinnen

According to Meloni and Swinnen, the continental French producers wanted to reduce/eliminate imports from Algeria because of its pricing effect (Bordeaux and Burgundy producers) and similarity of offering (Southern France producers) and pushed the French government, over a number of years, to enact legislation which resulted in the attainment of their goals.

The first of what Meloni and Swinnen call "Quality Regulations" arose out of the so-called "Leakey Affair" wherein Algerian producers had contracted with a British merchant to sell their wines in England. With Algeria being a French Colony, Mr. Leakey took the liberty of advertising the Algerian wine as French and this angered continental French producers when it came to their attention. They accused the Algerian producers of being in cahoots with Mr. Leakey in this "false advertising" campaign and, further, accused them of producing "non-natural, artificial" wine. One month after the Leakey contract went into effect, the French government passed the Frauds and Falsification Law of August 1905 which stipulated that French wines sold commercially had to indicate its origin on the label.

Once this law was in effect, the producers hastily pursued the advancement of their interests by championing laws which tied the quality of a wine to (i) its place of production and (ii) the traditional wine producing methods of that (those) place(s). To take full advantage of the new reality that had been created on the ground, Bordeaux, Cognac, Armagnac, and Champagne were demarcated between 1906 and 1912 and began to be referred to as appellations (The Champagne boundaries were not finalized until 1927 when Aube kicked the doors in. The Champagne case was a little different than the case of the still-wine producers but the motivations were similar. The Champagne Growers felt that the Champagne Houses were bringing in "foreign wines" and calling it Champagne so these quality initiatives advanced their cause also.).

Once the foundation had been laid, the legal terroir was extended and solidified by a series of additional "quality laws":

  • A 1919 law made it illegal for an unauthorized producer to use an appellation name
  • A 1927 law restricted the varieties and viticultural practices that could be used for appellation wine
  • A 1935 law created the AOC system which:
    • combined earlier legislation
    • stipulated regions, variety, minimum alcohol content, and maximum vineyard yield.

With the passage of the 1935 law, the French producers had completed the journey from selling whatever they could get their hands on to developing a framework which, on the surface, seemed altruistic and consumer-friendly, but, in reality, was a tremendous barrier to entry. Quality is a high-value, desirable word and who would fault the producer for pursuing quality? Only the ones who are frozen out by the "quality" initiatives. But who is listening.

Today we think of the French AOC system as being definitive of the taste of a region and, to some extent, a designator of quality wines. But that is only the part of the iceberg that is visible above the surface. Beneath the waves this is a significant barrier to entry which, in addition to saying who is in, serves to effectively keep the "other" out. This system was formulated initially by the French wine-producing establishment as a series of geographic exclusionary zones which were then legally reinforced with "quality" characteristics, made unique with variety and viticultural restrictions and, finally, with the AOC laws of 1935, codified for the state and, eventually, the rest of Europe.

Telecommunications providers have this old adage around bandwidth -- Build it and they will come. The French producers built this. And we all came.

©Wine -- Mise en abyme


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