World Bank Report: Curbing the epidemic/Governments and the Economicsof Tobacco Control (fwd)

[Robert Weissman <rob@essential.org>]

World Bank Report: Curbing the epidemic/Governments and the Economics of
Tobacco Control

by The World Bank
Date: Friday, 7/9/99

Summary

Smoking already kills one in 10 adults worldwide. By 2030, perhaps a
little sooner, the proportion will be one in six, or 10 million deaths per
year—more than any other single cause. Whereas until recently this
epidemic of chronic disease and premature death mainly affected the rich
countries, it is now rapidly shifting to the developing world. By 2020,
seven of every 10 people killed by smoking will be in low- and
middle-income nations.




Why this report?

Few people now dispute that smoking is damaging human health on a global
scale. However, many governments have avoided taking action to control
smoking—such as higher taxes, comprehensive bans on advertising and
promotion, or restrictions on smoking in public places—because of concerns
that their interventions might have harmful economic consequences. For
example, some policymakers fear that reduced sales of cigarettes would
mean the permanent loss of thousands of jobs; that higher tobacco taxes
would result in lower government revenues; and that higher prices would
encourage massive levels of cigarette smuggling.

This report examines the economic questions that policymakers must address
when contemplating tobacco control. It asks whether smokers know the risks
and bear the costs of their consumption choices, and explores the options
for governments if they decide that intervention is justified. The report
assesses the expected consequences of tobacco control for health, for
economies, and for individuals. It demonstrates that the economic fears
that have deterred policymakers from taking action are largely unfounded.
Policies that reduce the demand for tobacco, such as a decision to
increase tobacco taxes, would not cause long-term job losses in the vast
majority of countries. Nor would higher tobacco taxes reduce tax revenues;
rather, revenues would climb in the medium term. Such policies could, in
sum, bring unprecedented health benefits without harming economies.

***




Current trends

About 1.1 billion people smoke worldwide. By 2025, the number is expected
to rise to more than 1.6 billion. In the high-income countries, smoking
has been in overall decline for decades, although it continues to rise in
some groups. In low- and middle-income countries, by contrast, cigarette
consumption has been increasing. Freer trade in cigarettes has contributed
to rising consumption in these countries in recent years.




Most smokers start young. In the high-income countries, about eight out of
10 begin in their teens. While most smokers in low- and middle-income
countries start in the early twenties, the peak age of uptake in these
countries is falling. In most countries today, the poor are more likely to
smoke than the rich.




The health consequences

The health consequences of smoking are twofold. First, the smoker rapidly
becomes addicted to nicotine. The addictive properties of nicotine are
well documented but are often underestimated by the consumer. In the
United States, studies among final-year high school students suggest that
fewer than two out of five smokers who believe that they will quit within
five years actually do quit. About seven out of 10 adult smokers in
high-income countries say they regret starting, and would like to stop.
Over decades and as knowledge has increased, the high-income countries
have accumulated a substantial number of former smokers who have
successfully quit. However, individual attempts to quit have low success
rates: of those who try without the assistance of cessation programs,
about 98 percent will have started again within a year. In low- and
middle-income countries, quitting is rare.

Smoking causes fatal and disabling disease, and, compared with other risky
behaviors, the risk of premature death is extremely high. Half of all
long-term smokers will eventually be killed by tobacco, and of these, half
will die during productive middle age, losing 20 to 25 years of life. The
diseases associated with smoking are well documented and include cancers
of the lung and other organs, ischemic heart disease and other circulatory
diseases, and respiratory diseases such as emphysema. In regions where
tuberculosis is prevalent, smokers also face a greater risk than
nonsmokers of dying from this disease.

Since the poor are more likely to smoke than the rich, their risk of
smoking-related and premature death is also greater. In high- and
middle-income countries, men in the lowest socioeconomic groups are up to
twice as likely to die in middle age as men in the highest socioeconomic
groups, and smoking accounts for at least half their excess risk.

Smoking also affects the health of nonsmokers. Babies born to smoking
mothers have lower birth weights, face greater risks of respiratory
disease and are more likely to die of sudden infant death syndrome than
babies born to nonsmokers. Adult nonsmokers face small but increased risks
of fatal and disabling disease from exposure to others' smoke.




Do smokers know their risks and bear their costs?

Modern economic theory holds that consumers are usually the best judges of
how to spend their money on goods and services. This principle of consumer
sovereignty is based on certain assumptions: first, that the consumer
makes rational and informed choices after weighing the costs and benefits
of purchases, and, second, that the consumer incurs all costs of the
choice. When all consumers exercise their sovereignty in this way—knowing
their risks and bearing their costs—then society's resources are, in
theory, allocated as efficiently as possible. This report examines
consumers' incentives to smoke, asks whether their choice to do so is like
other consumption choices, and whether it results in an efficient
allocation of society's resources, before discussing the implications for
governments.

Smokers clearly perceive benefits from smoking, such as pleasure and the
avoidance of withdrawal, and weigh these against the private costs of
their choice. Defined this way, the perceived benefits outweigh the
perceived costs, otherwise smokers would not pay to smoke. However, it
appears that the choice to smoke may differ from the choice to buy other
consumer goods in three specific ways.

First, there is evidence that many smokers are not fully aware of the high
risks of disease and premature death that their choice entails. In low-
and middle-income countries, many smokers may simply not know about these
risks. In China in 1996, for example, 61 percent of smokers questioned
thought that tobacco did them "little or no harm." In high-income
countries, smokers know they face increased risks, but they judge the size
of these risks to be lower and less well established than do nonsmokers,
and they also minimize the personal relevance of these risks.

Second, smoking is usually started in adolescence or early adulthood. Even
when they have been given information, young people do not always have the
capacity to use it to make sound decisions. Young people may be less aware
than adults of the risk to their health that smoking poses. Most new
recruits and would-be smokers also underestimate the risk of becoming
addicted to nicotine. As a result, they seriously underestimate the future
costs of smoking—that is, the costs of being unable in later life to
reverse a youthful decision to smoke. Societies generally recognize that
adolescent decision-making capacity is limited, and restrict young
people's freedom to make certain choices, for example, by denying them the
right to vote or to marry until a certain age. Likewise, societies may
consider it valid to restrict young people's freedom to choose to become
addicted to smoking, a behavior that carries a much greater risk of
eventual death than most other risky activities in which young people
engage.

Third, smoking imposes costs on nonsmokers. With some of their costs borne
by others, smokers may have an incentive to smoke more than they would if
they were bearing all the costs themselves. The costs to nonsmokers
clearly include health damage as well as nuisance and irritation from
exposure to environmental tobacco smoke. In addition, smokers may impose
financial costs on others. Such costs are more difficult to identify and
quantify, and variable in place and time, so it is not yet possible to
determine how they might affect individuals' incentives to smoke more or
less. However, we briefly discuss two such costs, healthcare and pensions.

In high-income countries, smoking-related healthcare accounts for between
6 and 15 percent of all annual healthcare costs. These figures will not
necessarily apply to low- and middle-income countries, whose epidemics of
smoking-related diseases are at earlier stages and may have other
qualitative differences. Annual costs are of great importance to
governments but, for individual consumers, the key question is the extent
to which the costs will be borne by themselves or by others.

In any given year, smokers' healthcare costs will on average exceed
nonsmokers'. If healthcare is paid for to some extent by general public
taxation, nonsmokers will thus bear a part of the smoking population's
costs. However, some analysts have argued that, because smokers tend to
die earlier than nonsmokers, their lifetime healthcare costs may be no
greater, and possibly even smaller, than nonsmokers'. This issue is
controversial, but recent reviews in high-income countries suggest that
smokers' lifetime costs are, after all, somewhat higher than nonsmokers',
despite their shorter lives. However, whether higher or lower, the extent
to which smokers impose their costs on others will depend on many factors,
such as from the existing level of cigarette taxes, and how much
healthcare is provided by the public sector. In low- and middle-income
countries, meanwhile, there have been no reliable studies of these issues.

The questions of pensions is equally complex. Some analysts in high-income
countries have argued that smokers "pay their way" by contributing to
public pension schemes and then dying earlier, on average, than
nonsmokers. However, this question is irrelevant to the low- and
middle-income countries where most smokers live, because public pension
coverage in these countries is low.

In sum, smokers certainly impose some physical costs, including health
damage, nuisance, and irritation, on nonsmokers. They may also impose
financial costs, but the scope of these is still unclear.




Appropriate responses

It appears unlikely, then, that most smokers either know their full risks
or bear the full costs of their choice. Governments may consider that
intervention is therefore justified, primarily to deter children and
adolescents from smoking and to protect nonsmokers, but also to give
adults all the information they need to make an informed choice.

Governments' interventions should ideally remedy each identified problem
specifically. Thus, for example, children's imperfect judgments about the
health effects of smoking would most specifically be addressed by
improving their education and that of their parents, or by restricting
their access to cigarettes. But adolescents respond poorly to health
education, perfect parents are rare, and existing forms of restriction on
cigarette sales to the young do not work, even in the high-income
countries. In reality, the most effective way to deter children from
taking up smoking is to increase taxes on tobacco. High prices prevent
some children and adolescents from starting and encourage those who
already smoke to reduce their consumption.

Taxation is a blunt instrument, however, and if taxes on cigarettes are
raised, adult smokers will tend to smoke less and pay more for the
cigarettes that they do purchase. In fulfilling the goal of protecting
children and adolescents, taxation would thus also be imposing costs on
adult smokers. These costs might, however, be considered acceptable,
depending upon how much societies value curbing consumption in children.
In any case, one long-term effect of reducing adult consumption may be to
further discourage children and adolescents from smoking.

The problem of nicotine addiction would also need to be addressed. For
established smokers who want to quit, the cost of withdrawal from nicotine
is considerable. Governments might consider interventions to help reduce
those costs as part of the overall tobacco control package.




Measures to reduce the demand for tobacco

We turn now to a discussion of measures for tobacco control, evaluating
each in turn.




Raising taxes

Evidence from countries of all income levels shows that price increases on
cigarettes are highly effective in reducing demand. Higher taxes induce
some smokers to quit and prevent others individuals from starting. They
also reduce the number of ex-smokers who return to cigarettes and reduce
consumption among continuing smokers. On average, a price rise of 10
percent on a pack of cigarettes would be expected to reduce demand for
cigarettes by about 4 percent in high-income countries and by about 8
percent in low- and middle-income countries, where lower incomes tend to
make people more responsive to price changes. Children and adolescents are
more responsive to price rises than older adults, so this intervention
would have a significant impact on them.

Models for this report show that tax increases that would raise the real
price of cigarettes by 10 percent worldwide would cause 40 million smokers
alive in 1995 to quit, and prevent a minimum of 10 million tobacco-related
deaths. The price rise would also deter others from taking up smoking in
the first place. The assumptions on which the model is based are
deliberately conservative, and these figures should therefore be regarded
as minimum estimates.

As many policymakers are aware, the question of what the right level of
tax should be is a complex one. The size of the tax depends in subtle ways
on empirical facts that may not yet be available, such as the scale of the
costs to nonsmokers and income levels. It also depends on varying societal
values, such as the extent to which children should be protected, and on
what a society hopes to achieve through the tax, such as a specific gain
in revenue or a specific reduction in disease burden. The report concludes
that, for the time being, policymakers who seek to reduce smoking should
use as a yardstick the tax levels adopted as part of the comprehensive
tobacco control policies of countries where cigarette consumption has
fallen. In such countries, the tax component of the price of a pack of
cigarettes is between two-thirds and four-fifths of the retail cost.
Currently, in the high-income countries, taxes average about two-thirds or
more of the retail price of a pack of cigarettes. In lower-income
countries taxes amount to not more than half the retail price of a pack of
cigarettes.




Nonprice measures to reduce demand

Beyond raising the price, governments have also employed a range of other
effective measures. These include comprehensive bans on advertising and
promotion of tobacco; information measures such as mass media
counter-advertising, prominent health warning labels, the publication and
dissemination of research findings on the health consequences of smoking
as well as restrictions on smoking in work and public places.

This report provides evidence that each of these measures can reduce the
demand for cigarettes. For example, "information shocks," such as the
publication of research studies with significant new information on the
health effects of smoking, reduce demand. Their effect appears to be
greatest when a population has relatively little general awareness of the
health risks. Comprehensive bans on advertising and promotion can reduce
demand by around 7 percent, according to econometric studies in
high-income countries. Smoking restrictions clearly benefit nonsmokers,
and there is also some evidence that they can reduce the prevalence of
smoking.

Models developed for this report suggest that, employed as a package, such
nonprice measures used globally could persuade some 23 million smokers
alive in 1995 to quit and avert the tobacco-attributable deaths of 5
million of them. As with the estimates for tax increases, these are
conservative estimates.




Nicotine replacement and other cessation therapies

A third intervention would be to help those who wish to quit by making it
easier for them to obtain nicotine replacement therapy (NRT) and other
cessation interventions. NRT markedly increases the effectiveness of
cessation efforts and also reduces individuals' withdrawal costs. Yet in
many countries, NRT is difficult to obtain. Models for this study suggest
that if NRT were made more widely available, it could help to reduce
demand substantially.

The combined effect of all these demand-reducing measures is not known,
since smokers in most countries with tobacco control policies are exposed
to a mixture of them and none can be studied strictly in isolation.
However, there is evidence that the implementation of one intervention
supports the success of others, underscoring the importance of
implementing tobacco controls as a package. Together, in sum, these
measures could avert many millions of deaths.




Measures to reduce the supply of tobacco

While interventions to reduce demand for tobacco are likely to succeed,
measures to reduce its supply are less promising. This is because, if one
supplier is shut down, an alternative supplier gains an incentive to enter
the market.

The extreme measure of prohibiting tobacco is unwarranted on economic
grounds as well as unrealistic and likely to fail. Crop substitution is
often proposed as a means to reduce the tobacco supply, but there is
scarcely any evidence that it reduces consumption, since the incentives to
farmers to grow tobacco are currently much greater than for most other
crops. While crop substitution is not an effective way to reduce
consumption, it may be a useful strategy where needed to aid the poorest
tobacco farmers in transition to other livelihoods, as part of a broader
diversification program.

Similarly, the evidence so far suggests that trade restrictions, such as
import bans, will have little impact on cigarette consumption worldwide.
Instead, countries are more likely to succeed in curbing tobacco
consumption by adopting measures that effectively reduce demand and
applying those measures symmetrically to imported and
domestically-produced cigarettes. Likewise, in a framework of sound trade
and agriculture policies, the subsidies on tobacco production that are
found mainly in high-income countries make little sense. In any case,
their removal would have little impact on total retail price.

However, one supply-side measure is key to an effective strategy for
tobacco control: action against smuggling. Effective measures include
prominent tax stamps and local-language warnings on cigarette packs, as
well as the aggressive enforcement and consistent application of tough
penalties to deter smugglers. Tight controls on smuggling improve
governments' revenue yields from tobacco tax increases.




The costs and consequences of tobacco control

Policymakers traditionally raise several concerns about acting to control
tobacco. The first of these concerns is that tobacco controls will cause
permanent job losses in an economy. However, falling demand for tobacco
does not mean a fall in a country's total employment level. Money that
smokers once spent on cigarettes would instead be spent on other goods and
services, generating other jobs to replace any lost from the tobacco
industry. Studies for this report show that most countries would see no
net job losses, and that a few would see net gains, if tobacco consumption
fell.

There are however a very small number of countries, mostly in Sub-Saharan
Africa, whose economies are heavily dependent on tobacco farming. For
these countries, while reductions in domestic demand would have little
impact, a global fall in demand would result in job losses. Policies to
aid adjustment in such circumstances would be essential. However, it
should be stressed that, even if demand were to fall significantly, it
would occur slowly, over a generation or more.

A second concern is that higher tax rates will reduce government revenues.
In fact, the empirical evidence shows that raised tobacco taxes bring
greater tobacco tax revenues. This is in part because the proportionate
reduction in demand does not match the proportionate size of the tax
increase, since addicted consumers respond relatively slowly to price
rises. A model developed for this study concludes that modest increases in
cigarette excise taxes of 10 percent worldwide would increase tobacco tax
revenues by about 7 percent overall, with the effects varying by country.




A third concern is that higher taxes will lead to massive increases in
smuggling, thereby keeping cigarette consumption high but reducing
government revenues. Smuggling is a serious problem, but the report
concludes that, even where it occurs at high rates, tax increases bring
greater revenues and reduce consumption. Therefore, rather than foregoing
tax increases, the appropriate response to smuggling is to crack down on
criminal activity.

A fourth concern is that increases in cigarette taxes will have a
disproportionate impact on poor consumers. Existing tobacco taxes do
consume a higher share of the income of poor consumers than of rich
consumers. However, policymakers' main concern should be over the
distributional impact of the entire tax and expenditure system, and less
on particular taxes in isolation. It is important to note that poor
consumers are usually more responsive to price increases than rich
consumers, so their consumption of cigarettes will fall more sharply
following a tax increase, and their relative financial burden may be
correspondingly reduced. Nonetheless, their loss of perceived benefits of
smoking may be comparatively greater.




Is tobacco control worth paying for?

For governments considering intervention, an important further
consideration is the cost-effectiveness of tobacco control measures
relative to other health interventions. Preliminary estimates were
performed for this report in which the public costs of implementing and
administrating tobacco control programs were weighed against the potential
number of healthy years of life saved. The results are consistent with
earlier studies that suggest that tobacco control is highly cost-effective
as part of a basic public health package in low- and middle-income
countries.

Measured in terms of the cost per year of healthy life saved, tax
increases would be cost-effective. Depending on various assumptions, this
instrument could cost between US(1)$5 and $17 for each year of healthy
life saved in low- and middle-income countries. This compares favorably
with many health interventions commonly financed by governments, such as
child immunization. Nonprice measures are also cost-effective in many
settings. Measures to liberalize access to nicotine replacement therapy,
for example, by changing the conditions for its sale, would probably also
be cost-effective in most settings. However, individual countries would
need to make careful assessments before deciding to provide subsidies for
NRT and other cessation interventions for poor smokers.

The unique potential of tobacco taxation to raise revenues cannot be
ignored. In China, for example, conservative estimates suggest that a 10
percent increase in cigarette tax would decrease consumption by 5 percent,
increase revenue by 5 percent, and that the increase would be sufficient
to finance a package of essential health services for one-third of China's
poorest 100 million citizens.




An agenda for action

Each society makes its own decisions about policies that concern
individual choices. In reality, most policies would be based on a mix of
criteria, not only economic ones. Most societies would wish to reduce the
unquantifiable suffering and emotional losses wrought by tobacco's burden
of disease and premature death. For the policymaker seeking to improve
public health, too, tobacco control is an attractive option. Even modest
reductions in a disease burden of such large size would bring highly
significant health gains.

Some policymakers will consider that the strongest grounds for intervening
are to deter children from smoking. However, a strategy aimed solely at
deterring children is not practical and would bring no significant
benefits to public health for several decades. Most of the tobacco-related
deaths that are projected to occur in the next 50 years are among today's
existing smokers. Governments concerned with health gains in the medium
term may therefore consider adopting broader measures that help adults to
quit.

The report has two recommendations:

1. Where governments decide to take strong action to curb the tobacco
epidemic, a multi-pronged strategy should be adopted. Its aims should be
to deter children from smoking, to protect nonsmokers, and to provide all
smokers with information about the health effects of tobacco. The
strategy, tailored to individual country needs, would include (1) raising
taxes using as a yardstick the rates adopted by countries with
comprehensive tobacco control policies. In these countries, tax accounts
for two-thirds to four-fifths of the retail price of cigarettes; (2)
publishing and disseminating research results on the health effects of
tobacco, adding prominent warning labels to cigarettes, adopting
comprehensive bans on advertising and promotion, and restricting smoking
in workplaces and public places, and (3) widening access to nicotine
replacement and other cessation therapies.

2. International agencies such as the UN agencies should review their
existing programs and policies, to ensure that tobacco control is given
due prominence; they should sponsor research into the causes, consequences
and costs of smoking, and the cost-effectiveness of interventions at the
local level; and they should address tobacco control issues that cross
borders, including working with the WHO's new Framework Convention for
Tobacco Control. Key areas for action include facilitating international
agreements on smuggling control, discussions on tax harmonization to
reduce the incentives for smuggling, and bans on advertising and promotion
involving the global communications media.

The threat posed by smoking to global health is unprecedented, but so is
the potential for reducing smoking-related mortality with cost-effective
policies. This report shows the scale of what might be achieved: moderate
action could ensure substantial health gains for the 21st century.

(1) All dollar amounts are in current U.S. dollars.