1

Curbing the Epidemic Governments and the Economics of Tobacco

Control

Curbing the Epidemic Governments and the Economics of Tobacco

Control

Global Evidence and Indonesia

By Ayda A. Yurekli, Ph.D

Economics of Tobacco Control Seminar in Jakarta, Indonesia November 2000

Why did the World Bank produce this report?

Economic arguments for, or against, tobacco control are unclear and often debated

• Government Revenues from Tobacco Taxes

• Jobs in Agriculture, Manufacture etc.

• Possible smuggling

• Cost to individuals, especially the poor

3

Importance of Tobacco to Indonesian Economy in 1997

• Produced 4% of global production

• 0.45 % of all export earnings,

• 2% of global tobacco export

• 10 million employment related to tobacco

– 172,000 Manufacturing tobacco employment,

including 120,000 hand-made kreteks producers

• Government revenue Rp.10.3 trillion in 2000

4

Unless current smokers quit, smoking deaths will rise dramatically over the next

50 years

Unless current smokers quit, smoking deaths will rise dramatically over the next

50 years

0

340

520

70

500

220

190

0

100

200

300

400

500

1950 2000 2025 2050

Year

Toba

cco

deat

hs (m

illio

n)

Baseline

If proportion ofyoung adultstaking up smokinghalves by 2020

If adultconsumptionhalves by 2020

Source: Peto and others, 1994; Peto, personal communication.

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Why should governmentsintervene?

Large and growing number of deaths fromsmoking

Why should governmentsintervene?

Large and growing number of deaths fromsmoking

World: Annual Tobacco deaths (in millions)

Source: Peto, Lopez, and others 1997; WDR 1993

2000 2030Developed 2 ~3Developing ~2 ~7World Total 4 ~10

u 1 in 2 of long-term smokers killed by their addictionu 1/2 of deaths in middle age (35-69)

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Figure 1: Indonesia Cigarette Consumption 1960-1999

0

50

100

150

200

250

19

60

1964

1968

1972

1976

1980

1984

1988

1992

1996

Bil

lio

n p

iece

s

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Higher Increase in Cigarette Consumption

Volume Billion 1990 1997% change90-97 2000

% change97-00

China 1,550 1,652 7% 1,656 0.24%US 525 507 -3% 446 -12.0%Japan 322 328.1 2% 332.3 1.3%Indonesia 145.7 202 39% 228.6 13.2%Russia 245.8 230.1 -6% 287 24.7%Germany 127.7 143.8 13% 145 0.83%Brazil 164.1 110.3 -33% 104 -5.7%South Korea 95.7 104.3 9% 95.5 -8.4%India 77.9 102.8 32% 94.7 -7.9%Turkey 70.3 100 42.2 118 18%

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Which interventions are effective?Measures to reduce demand

• Higher cigarette taxes

• Non-price measures: consumer information, research, cigarette advertising and promotion bans, warning labels and restrictions on public smoking

• Increased access to nicotine replacement (NRT) and other cessation therapies

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Taxation is the most effective

measure • Higher taxes induce quitting and prevent

starting

• A 10% price increase reduces demand by:– 4% in high-income countries– 8% in low or middle-income countries

• Young people and the poor are the most price responsive

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Figure 8: Cigarette Consumption, Real Price and Income Per Capita in Indonesia, 1966-1995

0.51.01.52.02.53.03.54.04.55.0

19

66

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

1992

1994

log

Pri

ce a

nd

Con

sum

ptio

n

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

2000000

Rea

l GN

P/c

apit

a

Consumption ln Real Kreteks Price/10 Real GNP/pc

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What is the “right” level of tax?

• Complex question– Depends on various factors, degree to

which society wishes to protect children, revenue considerations, etc.

• Useful yardstick: where comprehensive programs used, tax is at least 2/3 to 4/5 of retail price.

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Cigarette tax levels are lower in low or middle-income countries

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

High Income Upper MiddleIncome

Lower MiddleIncome

Low Income

Countries by income

Ave

rage

pric

e or

tax

per p

ack

(US$

)

0

10

20

30

40

50

60

70

80

Tax

as a

per

cent

age

of p

rice

Average price in US$Average tax in US$Tax as a percentage of price

Source: Authors’ calculations

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Tax share in average retail price of cigarettes varies among countries

Tobacco tax share in average retail price of pack of cigarettes in South East and East Asia

Countries

2030 30 33 36 38

60 60 62 63

0

20

40

60

80

Source: World Bank data

% t

ax

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The Share of Cigarette Excise Tax Revenues in Total and Excise Tax Revenues in Indonesia

1992-1996

4.1 4.3 4.2 4.2 4.2

8795 93 94 91

0

20

40

60

80

100

120

1992 1993 1994 1995 1996

% s

har

e

% of total revenues % of excise revenues

Real Cigarette Excise Tax Revenue and Its Rate of Increase from the Previous Year, Indonesia, 1993-

2000

CPI, 1995=100Assuming cpi99=cpi00

11%5.9% 4.4%

25% 4% 3%

0

1000

2000

3000

4000

5000

6000

1993 1994 1995 1996 1998 1999 2000

Bil

lio

n R

ub

iah

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As cigarette tax rises, revenues increase too

Tax per pack and cigarette tax revenues inNorway, 1990-1998

Tax per pack and cigarette tax revenues inNorway, 1990-1998

2000

2500

3000

3500

4000

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

Cig

are

tte

ta

x r

ev

en

ue

in

loc

al

cu

rre

nc

y (

mil

lio

ns

)

15

20

25

30

35

Ta

x p

er

pa

ck

in

lo

ca

l

cu

rre

nc

y

Cigarette tax revenues Tax per pack

Source: World bank 1999

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Tobacco smuggling tends to rise in line with the degree of corruption

Smuggling as a function of transparency index

Brazil

Pakistan

Cambodia

Indonesia

Sweden

Austria

y = - 0.02x + 0.2174

R2 = 0.2723

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0 2 4 6 8 10

Transparency index for country

Sm

ug

glin

g a

s a

sh

are

of

co

ns

um

pti

on

(%

)

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Canadian Government reduced tobacco tax rates dramatically in

February 1993Domestic Sale of Cigarettes and Fine-Cut Equivalents And

Domestic Tobacco Tax Revenues Canada 1981-1993

30

35

40

45

50

55

60

65

70

75

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

Cigarettes Billion

$2

$4

$6

$8

source:the smuggling of tobacco products: Lessons from Canada

Tax revenue $ billion

Sale of cigarettes

total tax revenue

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Trend in Cigarette Tax Revenues and Tax Rates in Sweden 1970-1998

0

1000

2000

3000

4000

5000

6000

7000

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

Mil

lio

n S

KE

(lo

cal

cu

rren

cy)

0

5

10

15

20

25

Tax/p

ack S

KE

(lo

cal

cu

rren

cy)

TaxesMillion SKE Taxes per pack

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Sweden decreased cigarette taxes (17%) due to fear of smuggling in 1998

Cigarette Tax Revenue and Consumption in Sweden, 1970-1998

0

1000

2000

3000

4000

5000

6000

7000

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

Mil

lio

n S

KE

0

10

20

30

40

50

60

70

80

pack/c

ap

ita

TaxesMillion SKE cigarette/pack

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Summary• Tobacco deaths worldwide are large and growing, and

have higher burdens in the poor

• Specific market failures support government intervention

• Demand measures, chiefly tax increases, information, and regulation are most effective to reduce consumption

• Control of smuggling is the major supply-side intervention

• Tobacco control is cost-effective