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
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
Restrictions on youth access to
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
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.
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
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,
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
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.