[Intl-tobacco] Jha and Chaloupka: The economics of global tobacco control (fwd)

[Robert Weissman]

The economics of global tobacco control
BMJ 2000;321:358-361 ( 5 August )
by Jha and Chaloupka 321 (7257): 358
Source: British Medical Journal, Friday, 8/4/00

Prabhat Jha, senior scientist a, Frank J Chaloupka, professor of economics
b.  a Economics Advisory Service, World Health Organization, 20 Avenue
Appia, CH-1211 Geneva 27, Switzerland, b University of Illinois at
Chicago, USA

Correspondence to: P Jha jhap@who.int

Few people now dispute that smoking is damaging human health on a global
scale.1 However, many governments have avoided taking action to control
smoking--such as higher taxes--because of concerns that their
interventions might have harmful economic consequences, such as permanent
job losses.

In 1997 the World Bank, in partnership with the World Health Organization,
began a global study on the economics of tobacco control. A team of over
40 economists, epidemiologists, and tobacco control experts critically
examined the current state of knowledge about tobacco control. The aim was
to provide a sound and comprehensive evidence base for the design of
effective tobacco control policies in any country, with an emphasis on the
needs of the low income and middle income countries, where most smokers
live. A synopsis of this work, including interim results, was published in
1999.2 Final results, including 19 chapters and a statistical appendix,
are now available.3 This article presents the key findings from this
study.

Summary points

Tax increases are the single most effective intervention to reduce demand
for tobacco (tax increases that raise the real price of cigarettes by 10%
would reduce smoking by about 4% in high income countries and by about 8%
in low income or middle income countries)

Tax comprises about two thirds of retail price of cigarettes in most high
income countries but is less than half of the total price on average in
lower income countries

Improvements in the quality and extent of information, comprehensive bans
on tobacco advertising and promotion, prominent warning labels,
restrictions on smoking in public places, and increased access to nicotine
replacement treatments are effective in reducing smoking

Reducing the supply of tobacco is not effective in reducing tobacco
consumption

Comprehensive tobacco control policies are unlikely to harm economies

Methods

Each chapter of the study relied on extensive literature searches and
contact with experts working in the area. A study database was compiled
from various sources: the WHO's tobacco database
(www.who.int/toh/Library/whopub.htm);  agricultural data on consumption
(www.econ.ag.gov/briefing/tobacco/); a commercial tobacco database
(www.marketfile.com); a World Bank survey of over 70 countries on
consumption, prices, taxes, control policies, and other variables
(www.worldbank.org/html/extdr/hnp/health/tobacco.htm); and World Bank
macroeconomic and demographic data (www.worldbank.org/data/wdi2000/). This
study database was used to estimate smoking prevalence across the seven
World Bank regions, price levels across countries, the effectiveness and
cost effectiveness of interventions, the impact of bans on advertising and
promotion, the estimation of revenues, the impact of trade on consumption,
and the impact of tax increases on smuggling. Some analyses, such as for
smuggling, were restricted to the set of countries for which complete data
were available.  Details of specific methodologies are provided in each
chapter of the study.3 Anonymous peer reviewers reviewed each chapter.

Findings

Scale of the problem

About 80% of the world's 1.1 billion smokers live in low income and middle
income countries.4 Data from high income countries, where the tobacco
epidemic is well established among men, suggest that about half of long
term regular smokers are killed by tobacco and that, of these, about half
die in middle age (35-69 years old). Worldwide, about four million people
died of tobacco related disease in 1998.4 This figure is expected to rise
to 10 million annual deaths by 2030, with 70% of these deaths occurring in
low income countries. Peto and Lopez estimate that about 100 million
people were killed by tobacco in the 20th century and that, for the 21st
century, the cumulative number could be one billion if current smoking
patterns continue.1 Many of these deaths over the next few decades could
be prevented if current smokers quit, but in low income and middle income
countries quitting is rare. For example, only about 5% of males in Mumbai,
India, are former smokers.5

Economic rationale for intervening in the tobacco market

Some economists have argued that smokers know all of the risks and bear
all the costs of their choice.6 They argue that there is therefore no
economic justification for governments to intervene in tobacco markets.
There are, however, three "market failures" in the tobacco market:
inadequate information about the health risks of tobacco, inadequate
information about the risks of addiction, and physical or financial costs
imposed on non-smokers. 7 8

General awareness of the risks of smoking is relatively low in low income
and middle income countries.9 For example, a representative national
survey in China found that 55% of Chinese non-smokers and 69% of smokers
believed that cigarettes did "little or no harm."10 While there is more
widespread general awareness of the risks of smoking in high income
countries, many people underestimate these risks relative to other health
risks, and many fail to internalise these risks.11 Similarly, young people
seem to underestimate the risks of addiction. Among US students in their
final year at high school, fewer than two out of five smokers who believe
that they will quit within five years actually do so.12 About seven out of
10 adult smokers in high income countries say they regret starting and
would like to stop.13 Recent economic modelling suggests that, even if
young people "decide" to risk becoming addicted, imperfect information can
result in seemingly rational decisions being later viewed with regret.14

Ideally, interventions that specifically address a market failure should
be implemented as the "best" options. In the tobacco market such "best"  
interventions would include educating young people about the risks of
addiction and disease from smoking or restricting their access to tobacco.
However, the evidence suggests that these measures are relatively
ineffective. 8 15

In contrast, taxation, albeit a blunt instrument and thus a "second best"  
intervention, is clearly effective at protecting children from taking up
smoking. More practically, any tobacco control policy whose sole effect
was to deter children from starting smoking would have little impact on
numbers of smoking related deaths for many decades, since most of the
projected deaths for the first half of the next century are those of
current smokers (fig 1).1 Therefore, achieving health gains in the medium
term requires encouraging adult smokers to quit. Taxation can also correct
for any health costs imposed by smokers on others. However, taxation and
various other interventions do impose costs on smokers.

View larger version (21K):

Fig 1. Cumulative numbers of smoking related deaths according to three
scenarios. Only current smokers quitting will substantially reduce the
number of deaths in the next 50 years. Adapted from Peto and Lopez1

Measures to reduce demand

Higher tobacco taxes

Tax increases are the single most effective intervention to reduce demand
for tobacco. Our review of numerous studies from high income countries and
several studies from low income and middle income countries indicates that
higher tobacco prices significantly and consistently reduce tobacco use. A
price increase of 10% would reduce smoking by about 4% in high income
countries and by about 8% in low income and middle income countries. The
evidence indicates that young people, people on low incomes, and those
with less education are more responsive to price changes.16

The question of what the right level of tax should be is a complex one.8
The size of the tax depends in subtle ways on empirical facts that may not
yet be available. It also depends on 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 an increase in revenues or a reduction in
disease. In most high income countries with comprehensive tobacco control
policies, tax comprises between two thirds and four fifths of the retail
price of cigarettes.  In lower income countries taxes are generally less
than half of the total price (fig 2).

View larger version (21K):

Fig 2. Average cigarette price, tax, and percentage of tax share per pack
by countries' income for 1996. If tax is to account for four fifths of the
retail price, this requires prices to be increased by four times the
manufacturer's (untaxed) price per pack. Thus, if the manufacturer's price
is $0.50 then the tax rate would be $2 and the retail price $2.50.
Depending on retail factors, an increase of this order would raise the
population weighted retail price by 80-100% in low income and middle
income countries

Consumer information

Policies to improve the quality and extent of information can reduce
smoking, especially in low income and middle income countries, where
baseline levels of awareness are low.9 "Information shocks"such as the
publication of new evidence on the health consequences of smokingin the
United States and Britain in the 1960s and '70s reduced consumption
between 4% and 9%, with a cumulative impact between 15% and 30%.
Similarly, prominent warning labels on cigarette packs can also reduce
consumption. 9 17

Bans on advertising and promotion

The existing empirical data suggest that tobacco advertising has, at best,
a modest impact on consumption.18 However, advertising is at such a high
level that it is nearly impossible to measure the incremental impact of
additional advertising. Examining advertising bans is a more robust way of
determining the impact on consumption. A review of 102 countries and
econometric analyses of high income countries concludes that comprehensive
bans on tobacco advertising can reduce tobacco consumption. Partial
advertising bans have little or no effect, given the opportunities for
substitution to other forms of media.18

Regulatory policies

Evidence, largely from the United States, suggests that policies designed
to prevent smoking in public places, workplaces, and other facilities can
significantly reduce cigarette consumption.19 These policies seem to work
best when there is a strong social consensus against smoking in public
places and, therefore, self enforcement of the restrictions.

Nicotine replacement treatments and other pharmacological aids to quitting
can roughly double the chances that an individual will successfully
quit.20 Nicotine replacement treatments are highly regulated, in contrast
to the large and unregulated market for cigarettes.21 The nicotine
replacement market is presently limited by several factors, including high
retail prices, relatively low global demand for quitting, and complex
regulatory issues. Deregulating this market may help to increase demand.

Effectiveness of interventions

A model of the potential impact of control policies was developed for this
study.22 Based on deliberately conservative assumptions, it estimated that
tax increases that would raise the real price of cigarettes by 10%
worldwide would lead to about 42 million smokers in 1995 quitting and
would prevent 10 million premature tobacco related deaths (table). A set
of "non-price"  measuresincluding information campaigns, comprehensive
bans on tobacco advertising and promotion, prominent warning labels, and
comprehensive smoking restrictionswould reduce the current number of
smokers by 23 million and would avert five million deaths. A third
measure, the widely increased use of nicotine replacement treatments,
would persuade six million smokers to quit and would avert one million
deaths.

View this table:

Potential impact of a price increase of 10% and a package of non-price
measures (advertising and promotion bans, consumer information, clean air
laws, and prominent warning labels) on cigarette consumption and tobacco
related deaths*

Measures to reduce supply of tobacco

While interventions to reduce the demand for tobacco are likely to
succeed, measures to reduce its supply usually fail. Attempts to impose
restrictions on the sale of cigarettes to youths in high income countries
have mainly been unsuccessful.15 Moreover, in low income countries it may
be difficult to implement and enforce such restrictions. Crop substitution
is often proposed as a means to reduce the tobacco supply, but there is
little evidence that it reduces consumption, since the incentives for
farmers to grow tobacco are currently much greater than for most other
crops.23

The evidence suggests that freer trade in tobacco products has led to
increases in smoking and other tobacco use. Because trade restrictions
impose other costs, a better option is for countries to adopt measures
that effectively reduce demand and apply those measures equally to
imported and domestically produced cigarettes.24

However, one supply side measure is vitalaction against smuggling.
Effective measures include prominent tax stamps and local language
warnings on cigarette packs, as well as the aggressive enforcement of
anti-smuggling measures and consistent application of tough penalties to
deter smugglers.25

Costs and consequences of tobacco control

Several concerns are often raised about taking measures to reduce tobacco
consumption. The first is that tobacco control will cause permanent job
losses.  However, falling demand for tobacco does not mean falling
employment. 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.23 Studies show that most countries would
see no net job losses, and a few would see net gains, if tobacco
consumption fell (see extra tables on BMJ website for details). Even under
the most optimistic scenarios, measures to reduce demand would slow the
growth in global demand rather than significantly reducing it in the near
term. However, a very small number of countries are heavily dependent on
tobacco farming. For them, reductions in domestic demand would have little
impact, but a global fall in demand would result in job losses. Policies
to aid adjustment in these circumstances would be essential.

A second concern is that higher tax rates will reduce government revenues.
We estimated the revenue generating potential in 70 countries and found
that a 10% increase in cigarette taxes in these countries would raise
cigarette tax revenues by nearly 7% on average.16 The increase in revenues
would be somewhat larger in high income countries, where demand is less
elastic and taxes account for a larger share of price. However, even in
low income countries the increased revenues, though smaller, would still
be considerable.

A third concern is that higher taxes would lead to massive increases in
smuggling, thereby keeping smoking high but reducing government revenues.  
Smuggling is a serious problem. Estimates suggest that 6-8% of all
cigarettes consumed globally are smuggled, mostly in the form of non-taxed
cigarettes exported free of tax and smuggled back into a country. Large
tax differentials between countries provide an obvious motive for
smuggling. However, corruption within countries is a stronger predictor of
smuggling than price. An econometric model that accounts for potential
bootlegging (the legal purchase of cigarettes in one country for
consumption or resale in another country without paying applicable taxes
or duties) in response to tax increases in 23 European countries in 1995
finds that a unilateral tax increase of 10% by one country would lead to
an average increase of 7% in revenue. Coordinated tax increases among
neighbouring legislatures would increase tax revenues by 8%.26

It is important to note the experience of Canada,27 which reduced its tax
rates as an attempt to counter smuggling. The result was that consumption
rose, especially among youths, and revenues fell. Thus, rather than
forgoing the health benefits of reduced smoking, and increased revenue,
the appropriate response for governments is to crack down on smuggling.
Smuggling control is a top priority of the World Health Organization's
framework convention on tobacco control.

Conclusion

The threat posed by smoking to global health is unprecedented, but so is
the potential for preventing millions of smoking related deaths with
highly effective policies. A comprehensive tobacco control policy is not
likely to harm economies.

Acknowledgments

This paper does not represent official views of the World Bank or the
World Health Organization. We thank Son Nguyen and Phyllida Brown for
helpful comments.

Footnotes

Competing interests: None declared.

Extra tables showing the contribution of tobacco to various countries'
economies appear on the BMJ's website

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(Accepted 5 July 2000)

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