MEASURES TO REDUCE THE SUPPLY OF TOBACCO
WHEREAS there is abundant evidence that the demand for tobacco can be reduced, there is much less evidence of success in reducing its supply. Here, we briefly discuss the experience of countries in attempting to restrict access to tobacco and to reduce its supply through trade restrictions or agricultural policies. In the second section of the chapter, we discuss one key way in which governments can reduce tobacco supplies, by controlling smuggling.
The limited effectiveness of most supply-side interventions
A basic observation in markets is that, if one supplier of a commodity is pre-vented from operating, another will quickly emerge to take its place as long as there is a strong incentive to do so. There are currently clear incentives to supply tobacco, as the discussion here sets out.
Prohibition of tobacco
Given tobacco's unprecedented capacity to damage health, a few public health advocates have called for it to be prohibited, arguing that the problem of tobacco is not in its consumption, but its production. Advocates of tobacco prohibition point to the marked reduction in alcohol-related diseases when alcohol supply was restricted earlier in the 20th century. For example, when alcohol supplies were restricted in Paris, France, during World War II, alcohol consumption fell by 80 percent per capita. Deaths from liver disease in men were halved within one year and fell by four-fifths after five years. After the war ended and alcohol became freely available, mortality from liver disease re-turned to prewar levels.
However, for a number of reasons the prohibition of tobacco is unlikely to be either feasible or effective. First, even when substances are prohibited, they continue to be widely used, as is the case with many illicit drugs. Second, prohibition creates its own sets of problems: it is likely to increase criminal activity and entail costly police enforcement. Third, from an economic perspective, optimal tobacco consumption is not zero. Fourth, the prohibition of tobacco is unlikely to be politically acceptable in most countries. In India, recent attempts to ban a chewed type of tobacco known as gutka failed, largely due to a political backlash against prohibition.
Restrictions on youth access to tobacco
There have been a number of attempts to impose restrictions on the sale of cigarettes to teenagers in high-income countries. In their existing form, such restrictions have not been shown to be successful. In general, youth restrictions are difficult to enforce, especially given that young teenagers often obtain cigarettes from their older peers, and, sometimes, from their parents. Moreover, in low-income countries where tobacco consumption is rising, the necessary systems, infrastructure, and resources for implementing such restrictions and enforcing them are much less widely available than in the high-income countries.
Crop substitution and diversification
More than 100 countries grow tobacco, of which about 80 are developing countries. Four countries account for two-thirds of the total production: in 1997, China was responsible for 42 percent of all tobacco grown, with the United States, India, and Brazil producing about 24 percent between them. The top 20 countries produce more than 90 percent of the total (see Table 5.1). Over the past two decades, the share of global production by high-income countries has fallen from 30 to 15 percent, while that by countries in the Middle East and Asia has risen from 40 to 60 percent. Africa's share rose from 4 to 6 percent, and other regions have changed little.
Whereas China uses most of its tobacco crop for its domestic market, other major producers export large proportions of theirs. Brazil, Turkey, Zimbabwe, Malawi, Greece, and Italy all export more than seven-tenths of their crop. Only two countries worldwide are significantly dependent on raw tobacco for their export earnings-Zimbabwe, with 23 percent of export earnings, and Malawi, with 61 percent. A few other countries-Bulgaria, Moldova, the Dominican Republic, Macedonia, Kyrgyzstan, and Tanzania-rely heavily on tobacco as a source of foreign exchange, although their shares of the global tobacco-growing market are small. Tobacco is a major earner for a few countries with heavily agrarian economies, including Malawi, Zimbabwe, India, and Turkey.
Historically, tobacco is a highly attractive crop to farmers, providing a higher net income yield per unit of land than most cash crops and substantially more than food crops. In the best tobacco-growing areas of Zimbabwe, for example, tobacco is approximately 6.5 times more profitable than the next-best alternative crop. Farmers also find tobacco an attractive crop for more practical reasons. First, the global price of tobacco is relatively stable com-pared with other crops. The stability allows farmers to plan ahead and obtain credit for other enterprises as well as tobacco farming. Second, the tobacco industry generally supplies farmers with strong in-kind support, including materials and advice. Third, the industry often gives farmers loans. Fourth, other crops may cause farmers problems with storage, collection, and delivery. Tobacco is less perishable than many crops, and the industry may assist with its delivery or collection; by contrast, late collection, late payment, and price fluctuations may blight other crops.
There have been a number of experimental schemes to substitute other crops for tobacco. However, with the arguable exception of Canada, there is no hard evidence that these schemes succeed as a means of reducing tobacco consumption, because of the lack of motivation for farmers to participate while current tobacco prices persist and because of the readiness of other suppliers to replace them. Crop substitution will, however, occasionally have a place in broader diversification programs, if it aids the poorest tobacco farmers in their transition to other livelihoods. We discuss this issue in more detail in the next chapter.
Price supports and subsidies on tobacco production
While developing countries tend to tax export earnings from tobacco, high-income countries such as the United States and member states of the European Union, together with China, traditionally provide price supports and other subsidies to farmers who grow it. The motives for subsidizing tobacco production include keeping prices high and stable, supporting small family farms, con-trolling imports of tobacco from abroad to conserve foreign exchange, and maintaining political support. Often these subsidies go hand in hand with import restrictions.
With these price-support policies for producers, high-income countries' governments artificially raise world prices of tobacco and tobacco products. Economists have argued that, whenever the price is raised in this way, smokers may respond by reducing their consumption. However, the evidence shows that if there is such an effect on consumption, it is very small. In most high-income countries such as the United States, the producer price of tobacco leaf accounts for only a small part of the price of cigarettes. In addition, imports of lower-priced tobacco are rising. Thus, such price supports and subsidies will make only a negligible difference to the price of a pack. A recent analysis indicates that these programs raise prices by 1 percent in the United States. An increase of this order will have almost no impact on consumption. Accordingly, the removal of subsidies is unlikely to cause significant increases in cigarette consumption.
It is not clear how the removal of price supports and subsidies would affect global production. Higher domestic prices in the United States may help to raise the global price of raw tobacco leaf, offering better returns to farmers in low-income countries. On the other hand, there would be mixed effects for farmers in low-income countries if both subsidies and trade restrictions were removed. If, for example, the price of domestically produced tobacco in the United States were to fall because of the removal of subsidies, cigarette manufacturers there might use more of it, in turn reducing their imports of lower quality imports from low-income countries. But at the same time, with freer trade, imports of such tobacco could increase.
Regardless of their minimal impact on consumption, such price supports and subsidies make little sense in a framework of sound agricultural and trade policies. Their most significant function is perhaps political, enlarging the number of people with a vested interest in tobacco production.
Restrictions on international trade
Free trade has been shown to increase consumers' options and make production more efficient. A number of studies have shown that it brings increased growth to low-and middle-income countries. While the arguments in favor of free trade in general, then, are robust, tobacco is clearly more harmful to health than most other traded consumer goods. The key issue for policymakers is to decide how to control tobacco without jeopardizing the otherwise beneficial consequences of free trade. As we saw in chapter 1, trade liberalization has contributed to an increase in the consumption of tobacco in low- and middle-income countries. It might appear logical that, in turn, trade restrictions would stem that increase. However, there are a number of reasons why such restrictions would have undesirable consequences. One key reason is that restrictions would be likely to prompt retaliatory action that could reduce economic growth and incomes. Trade liberalization, meanwhile, has resulted in an inter-national response through the General Agreement on Tariffs and Trade (GATT) that gives countries the right to adopt and enforce measures to protect public health. The condition for such measures is that they should be applied equally to domestic and imported products. Article XX of GATT explicitly states that measures that are needed to protect human health shall not be prevented by the requirement for free trade.
In 1990, Thailand attempted to ban cigarette imports and advertising, a move that prompted a challenge from U.S. tobacco companies. A GATT panel investigated the situation and ruled that Thailand could not ban imports of cigarettes, but that it could impose taxes, advertising bans, and price restrictions, and that it could demand that all manufacturers whose products were available in Thailand should label their products with strong warning labels and descriptions of the ingredients. The GATT panel's ruling has even been interpreted as saying that Thailand could ban sales of all tobacco products in the country, provided the ban were applied symmetrically to domestically produced and foreign-produced cigarettes. Thailand implemented strong demand-reduction measures, including comprehensive bans on advertising and promotion, and strong warning labels on cigarette packs. This landmark decision, and Thailand's prompt and firm response, have set a precedent for countries to intervene to reduce tobacco demand on public health grounds while maintaining the principles of free trade.
Firm action on smuggling
Cigarette smuggling is a serious problem. Researchers estimate that some 30 percent of internationally exported cigarettes, or about 355 billion cigarettes, are lost to smuggling. This is a far higher percentage than most consumer goods that are internationally traded. The problem is acute where there are large variations in tax between neighboring states or countries, where there is widespread corruption, and where contraband sales are tolerated. Here, we briefly describe the extent of the smuggling problem and discuss the options for its control. The benefit of controlling smuggling is not principally that it reduces supply, but that it helps the effective implementation of price increases that reduce demand.
Differences in price between countries or states will clearly increase the incentives to smuggle cigarettes. However, the determinants of smuggling appear to be more than price alone. A study prepared for this report assessed the extent to which other factors, such as general levels of corruption in a country, contribute to the size of the smuggling problem. Using standard indicators of corruption levels based on Transparency International's Index of Countries, the study concluded that, with notable exceptions, the level of tobacco smuggling tends to rise in line with the degree of corruption in a country (Figure 5.1).
Large-scale tobacco smuggling relies on criminal organizations, comparatively sophisticated systems for distributing smuggled cigarettes in the destination country, and a lack of control on the international movement of cigarettes. Most smuggled cigarettes are well-known international brands. Significant sums of money are involved: organized smugglers can buy a container of 10 million cigarettes, on which they pay no taxes, for $200,000. The fiscal value of this quantity of cigarettes in the European Union is at least $1 million, taking ac-count of excise duties, value-added tax (VAT), and import taxes. The profits to smugglers are thus so high that they can absorb long-distance travel costs.
Cigarettes are usually smuggled in transit between their country of origin and their official destination. To encourage trade between countries, a so-called transit system operates that temporarily suspends custom duties, excise, and VAT payable on goods originating in country A and bound for country B while they are in transit through countries C, D, and so on. However, many cigarettes simply fail to arrive at their destination, having been bought and sold by unofficial traders. Another form of smuggling is so-called "round-tripping" where there are relatively large price differentials between neighboring countries. Exported cigarettes from Canada, Brazil, and South Africa, for example, have been documented entering neighboring countries and then reappearing in their country of origin at cut-rate prices, untaxed.
The success of smuggling relies on the cigarettes passing through a large number of owners in a short time, making it virtually impossible to track their movements. Additionally, poor enforcement of illegal sales and difficulty in separating legal and illegal sales may reduce the risks to smugglers. For ex-ample, in Russia, and in many low-income countries, the majority of cigarettes are sold on the streets.
Economic theory suggests that the tobacco industry itself will benefit from the existence of smuggling. Studies of the impact of smuggling show that when smuggled cigarettes account for a high percentage of the total sold, the aver-age price for all cigarettes, taxed and untaxed, will fall, increasing sales of cigarettes overall. The presence of smuggled cigarettes in a market that has hitherto been closed to imported brands will help to increase the demand for those brands, and hence increase their market share. It will also influence governments toward keeping tax rates low.
There is as yet very little experience and research on the effectiveness of different antismuggling measures. However, policymakers may consider several options. First, the legality or otherwise of cigarette packs could be made more immediately visible to consumers and law enforcers by, for example, the addition of prominent tax stamps-which must be difficult to forge-on duty-paid packs, and special packaging on duty-free packs. Strong and varied warning labels in local languages also help to distinguish legal from illegal sales. Second, the penalties for smuggling could be made sufficiently severe to deter those who currently perceive the risks of prosecution to be low. Third, all par-ties in the chain between manufacturer and consumer could be licensed. This is already the case in France and Singapore. Fourth, manufacturers could be required to stamp each pack of cigarettes with a serial number to enable tracking. With increasingly sophisticated technology, pack marking could provide information about the distributor, wholesaler, and exporter, too. Fifth, manufacturers could be required to take responsibility for better record-keeping to ensure the final destination of their products is as officially intended. Computerized control systems would enable governments to track individual consignments and inspect their progress at any time. Such a system is already in place in Hong Kong, China. Sixth, exporters could be required to label packs with the name of the country of final destination, and print health warnings in the language of that country. Where international companies produce their cigarettes locally, this could also be stated on the pack, to aid detection and in-crease awareness of smuggled cigarettes. A number of countries are stepping up their antismuggling activities. For example, the United Kingdom recently announced a package worth more than $55 million to combat the smuggling of tobacco and alcohol, including the provision of new dedicated staff posts. As experience grows, the prospects for better controls in all affected countries are likely to improve.
BOX, FIGURES, TABLES
TABLE 5.1 THE TOP 30 RAW- TOBACCO- PRODUCING COUNTRIES 1997 data, ranked by production
1 Production (1,000 metic tons)
2 Production change over 1994 values
3 Share of world total (percent)
4 Area (1,000 hectares)
5 Share of world total (percent)
6 Export ratio (percent)
7 Import ratio (percent)
8 Tobacco export revenue (as a percentage of total exports 1995)
| ||1||2||3 ||4 ||5 ||6 ||7 ||8 |
|South Korea||54.4||-44.8||0.68||27.2||0.6||8.4||26.2||0.02 |
|World Total||8,048.4|| ||25.9||100.0||4,893.8||100.0||25.3||24.4|
a. Ratio of exports to domestic production.
b. Ratio of imports to domestic production.
c. Less than 0.1 percent. n. a. = Not available.
Source: van der Merwe, Rowena, and others. The Supply- side Effects of Tobacco Control Policies . Background paper. (Data are compiled from U. S. Department of Agriculture, the Food and Agricultural Organization, and other sources.)
FIGURE 5.1 TOBACCO SMUGGLING TENDS TO RISE IN LINE WITH THE DEGREE OF CORRUPTION Smuggling as a function of transparency index [graph - shows Brazil Pakistan Cambodia Indonesia Sweden Austria] Smuggling as a share of consumption (%) y = - 0.02x + 0.2174 R 2 = 0.2723 0.00-40 0 1 2 3 4 5 6 7 8 9 10 Transparency index for country Source: Merriman, David, A. Yurekli, and F. Chaloupka. "How Big Is the Worldwide Cigarette Smuggling Problem?" NBER Working Paper. Cambridge, Mass.: National Bureau of Economic Research, forthcoming.