Tobacco Documents Online

complex. Tobacco is a legal good, and consurncrs of tobacco pay for it because they gain something from smoking. A basic principle of modem economics is that individual consumers know what is best for them and that, by choosing what goods and services to pay for, they will maximize their wellbeing or "welfare" within the limits of their preferences and income. Most economists believe that the most effective means of maximizing all consumers' welfare, and hence the allocation of resources, is through free competitive markets. However, it is recognized that some markets fail to achieve such "allocative efficiency". Market failures arise, for example, where the consumption of a consumer good has external costs-those that are not taken into consideration in the transactions between producer, consumer and distributor, and not bomc by these parties but by others. Other market failures include the inadequate provision of information about a product by its manufacturers to consumers, which complicates consumers' ability to assess what they are getting for their money. Where substantial market failures arise, gov~cmments may be justified in intervening to correct these failures, for example by taxing the consumer good, provided that they can do so without creating further problems in the economy. The tobacco market has several failures. One is that information about the health consequences of smoking-both for addiction to nicotine and for long-term risks of fatal disease--is not made fully available. The industry has no motivation to provide such information and many consumers are not fully aware of the risks. In addition, smoking has several types of external cost, including the nuisance and health risks to non-smokers of exposure to environmental tobacco smoke. Tobacco also has features that make it very different from most typical consumer goods. First, the vast majority of new recruits to smoking are in their teens. At this age, most individuals discount the future heavily and perceive themselves less vulnerable to risks than older adults. Second, tobacco contains an addictive substance, nicotine. Most young smokers become addicted within a short time and by early adulthood regret having taken up the habit. In these circumstances, it is difficult to argue that they choose to buy tobacco as they might choose, say, to buy shirts. This particular consumer good combines inadequate knowledge of the risks, addiction, and a high probability of dying prematurely. The report explores the complex question of what tobacco use costs society, health systems and governments. It weighs the economic costs 9fsmoking against the perceived economic benefits, that is, the value that smokers place on smoking, measured in terms of smokers' consumer surplus. It finds that, as with other drugs, the consumer surplus of tobacco is large, but that, once smokers' lack of information about the health hazards of tobacco, and their addiction to nicotine, are taken into account, the size of the surplus falls dramatically. The report shows that the consumer surplus of tobacco in the high- incbme countries has fallen steadily over recent decades as more and more people quit, and suggests that the global surplus may eventually turn downwards too. In contrast, the Draft: Not for circulation or citation I0 321422970

costs of tobacco use are large and growing. The conclusion is that, while there arc still um-esolved issues of how to quantify the costs and benefits of smoking, the costs arc ultimately greater and rising while the benefits are overestimated by traditional economics, and falling. Government intervention is therefore justified, the report concludes, to reduce the risks to smokers and to shift the costs of smoking more squarely onto tobacco's producers and consumers. Within the confines of the discipline of economics, intervention would be justified only to protect children and non-smokers and to increase information for all consumers. For adult smokers, the principle of consumer sovereignty would dictate that smokers should be leR alone. But conventional economics is poorly equipped to analyze the market for consumer goods that have addictive properties. Policy makers must weigh consequences of several choices. They might decide to adopt only those interventions that protect children and non-smokers and still achieve substantial health gains halfway through the 21st century. Alternatively, they might consider that the principle of consumer sov.creignty is not sufficiently clear in the case of tobacco to allow indifference to the expect .¢d deaths of quarter a billion of today's adull smokers in the shorter term, many of which may be preventableby prompt action. In that case, interventions that will affect all smokers would bc justified. Effective interventions to reduce demand Using the evidence from industrialized and developing countries, the report examines the impact of various interventions. It finds that the single most effective policy is to increase taxes on tobacco. Raise taxes In the past, it was thought that smokers would be so dependent on cigarettes that they would pay anything for them. Today, however, a substantial body of research in the high- income countries shows that price increases induce some smokers to quit, prevent others from taking up the habit, and reduce the number of ex-smokers who return to it. Addiction to nicotine means that these changes will be made comparatively slowly, however. Thus the impact of a tax increase is to decrease tobacco consumption and, for the short to medium term, increase tax revenues. Models for this report show that tax increases of just I 0 per cent applied to the real price of cigarettes worldwide could induce 40 million people worldwide to quit, and could prevent l 0 million tobacco-related deaths, among smokers alive in 1995. The assumptions on which the model is based are highly conservative, and these figures must therefore be regarded as minimum estimates. Policy makers traditionally raise several objections to the idea of higher tobacco taxes. One is that higher tobacco taxes will simply reduce government revenues. The report prbvides evidence from industrialized countries that this is not the case, and that, in fact, tax revenues climb in the short to medium term because of consumers' relatively slow Draft: Nnt for circulation or citation I1 321422971

response. In the UK, for example, a tax increase of I per cent increases revenue by between 0.6 and 0.9 per cent. A model developed for this study suggests that a modest ten percent increase in cigarette excise taxes would increase cigarette tax revenues by about seven percent, or about 10 billion US dollars more globally. [suggested graphics to add if these are possible: summary table to show deaths averted, by region, by 10per cent tax increase (improve to impact of IOper cent per year for a decade when done), NRT and non-price measures; and graphic if possible to show impact of tax increase on tobacco tax revenues over a given period.J A second objection is that higher taxes on tobacco would have a disproportionate impact on poor consumers, creating household hardship. The report argues that poorer consumers may not have higher tax burden from. increases, given they are more price sensitive. Moreover, the burdens of higher taxation need to be considered with benefits-which would accrue more to the poor. A third objection is that higher taxes will simply create greater incentives for tobacco smuggling from low-tax states or countries into high-tax states or countries. If this happens, consumption would remain high but government revenues in the high-tax state or country could fall. The report shows, with empirical evidence and econometric models, that while tobacco smuggling is a serious problem, its impact on tax revenues is unlikely to be large, and that the appropriate response to smuggling is to crack down on criminal activity, not to lower tax rates. "Non-price "' measures: more health information, advertising bans and restrictions on indoor smoidng Next, the report discusses a range of"non-price" measures that governments have already employed effectively to reduce the demand for tobacco. These measures include better warning labels, information campaigns, the publication and dissemination of research findings on the health consequences of smoking, and counter-advertising; comprehensive bans on advertising and promotion of tobacco; and restrictions on smoking in workplaces and public places. The report provides evidence that each of these measures can reduce demand for cigarettes. For example, studies of the effects of so-called "information shocks", such as the publication of research studies on the health effects of smoking, show that these consistently reduce demand by a few percent, and that the cumulative effect of several such shocks over time can have a permanent and substantial effect. A comparison of study of more than 100 countries shows that those with a comprehensive ban on advertising and promotion have seen cigarette consumption fall by 8 per cent over the study period, compared with a fall of only 1 per cent in countries without such bans. Recent econometric studies in Europe support such an effect size. In the case of indoor smoking restrictions, the clearest benefit is to non-smokers, but there is also some evidence that such restrictions can reduce the prevalence of smoking. Models developed for' this study suggest that, employed as a package, such "non-price" measures used globally could persuade some 23 million smokers alive in 1995 to quit and avert the Draft: Not for circulation or citation 12 321422972

deaths of 5 million of them. As with the estimates for tax increases, these are minimum estimates. Wider access to nicotine replacement therapy A third intervention would be to aid those who wish to quit by making it easier for them to obtain nicotine replacement therapy (NRT). NRT is usually self-administered by individuals and depends on buying products such as gums and patches that deliver nicotine without the requirement to smoke tobacco. Evidence from the high-income countries indicates that NRT is a relatively cost-effective and efficient means of enabling people to quit, Compared with other interventions. Yet in many countries NRT is difficult to obtain. Models for this study show that, with extremely conservative assumptions about its effectiveness, NRT made widely available could reduce tobacco-related deaths among today's smokers by 14 milli6h. The combined effect of all these measures is not known, since smokers in most countries are exposed to a mixture of them and none can be studied strictly in isolation. However, even if there were no additive effect, the number of deaths that could be averted by modest demand-reducing measures is clcariy greater than for most traditional health interventions. Most measures to reduce the supply of tobacco will fail While interventions to reduce demand for tobacco are likely to have a substantial effect, measures to reduce its supply are less promising. A useful comparison may be made with the illegal drug trade. The experience of the United States in attempting to reduce the supply of narcotic drugs shows that measures such as crop destruction and domestic law- en£orcing crackdowns had substantially less effect than measures to reduce demand. Action to prevent smuggling, such as better tracking of cigarette consignments and tough penalties to deter smugglers is likely to have some impact, however. Other measures have less chance of success. For example, there is little evidence from around the world that crop substitution can succeed as a means of reducing the tobacco supply, since the incentives to farmers to grow tobacco ate currently much greater than for other crops. Similarly, the evidence so far suggests that trade restrictions, such as import bans, will fail to stop cigarette consumption from rising worldwide. Instead, countries are more likely to succeed in curbing tobacco consumption by imposing the measures that are known to reduce demand (higher taxes, better information, and so on) symmetrically on imported and domestically-produced cigarettes. ls tobacco control worth paying for? The. report asks what it would cost to introduce tobacco controls and what the gains could be, in terms of lives saved and tax revenue generated. Draft: Not for circulation or citation 13 321422973

The costs to economies of reducing tobacco consumption are also explored. The tobacco industry is often.described as playing a major role in national economies. While this is true for a handful of countries, the report finds that most economies would not lose jobs overall if tobacco consumption fell. This is because money not spent on tobacco would be spent elsewhere in the economy, generating further jobs. In the handful of countries that depend heavily on the tobacco industry, there would be net job losses, but these would occur slowly and adjustment, though possibly difficult, would certainly be no worse than for many other declining markets. The report also assesses the likely impact of the various control interventions--tax increases, non-price measures and wider access to nicotine replacement therapy--on welfare. It concludes that tax increases would cause some welfare loss to consumers but that this loss would be offset by any .reasonable willingness to pay for averted premature deaths and averted disability. '~ The report then examines the likely cost-effectiveness of specific interventions, both in terms of deaths averted for a given amount spent and in terms of the amount of premature death and disability that can be avoided ovc~, time for each dollar spent. It finds that raising taxes would be highly cost-effective, costing just cents for each year of healthy life saved in low-income and middle-income countries, less than many basic health interventions that arc assumed to be essential. Nicotine replacement therapy would also be cost-effective in most settings, costing between $15 and $450 per year of healthy life saved in low- and middle-income countries. The package of non-price measures, although slightly less cost-effective than the other demand-reducing measures, would still represent an excellent "buy" compared with many health interventions. The findings are consistent with earlier studies that suggest that tobacco control is highly cost-effective as part of a basic health package in low-income and middle-income countries. [more specific numbers pending]. The report ends by making specific recommendations to governments and international organizations. These are shown in full on pages xx and xx. In sum, the recommendations to governments include raising taxes by at ]east l 0 per cent per year for l 0 years, imposing comprehensive bans on advertising and promotion, restricting smoking in public places and workplaces, and widening access to nicotine replacement therapy. The report stresses that effective efforts by governments are likely to involve using all the measures suggested, not just some, although the mix will vary from country to country depending on the type of economy. Careful political mapping and stakeholder analysis will be needed for each government to assess its needs and the optimal policy mix. For international organizations, the report recommends a careful review of existing programmes and policies, to ensure that tobacco control is being given due prominence and applied in the most efficient ways possible. It recommends that agencies with a remit to sponsor and/or conduct research do so to provide more information about the causes Draft: Not for circulation or citation 14 321422974

and consequences of tobacco use, including its costs, and the cost-effectiveness of interventions at local level. Finally, the international agencies should address tobacco control issues that cross borders and facilitate international agreements. These might include controls on smuggling, discussions on tax harmonization to reduce the incentives for smuggling between neighbourlng states with large differentials in tobacco tax, and means to prevent the industry from avoiding bans on advertising and promotion through the global communications media. The threat posed by tobacco to global health is unprecedented, but equally so the potential for reducing tobacco-related mortality with cost.effective economic policies. This report shows the scale of what might be achieved: modest action could ensure substantial health gains for the 21 st century. Draft: Not for circulation or citation 321422975

3. Global trends in tobacco use 3.1 Rising consumption in low-income and middle-income countries By the mid-1990s, there were approximately 1.1 billion smokers-one in three of the adult population worldwide, consuming about 6 million million cigarettes per year. More than 80 per cent of smokers today live in low-income and middle-income countries, and the prevalence of smoking in these countries rose on average by 3.4 per cent per year between 1970 and 1990. The nature of tobacco use is also changing, from the traditibnal habit of chewing to an increasing reliance on smoking manufactured cigarettes. The upward trend, expressed in ter/ns of cigarette consumption per head, is shown in Figure 3.1. Because of growth in the adult population worldwide, the number of smokers is expected to rise in absolute terms in coming decades to, leach 1.5 billion within the next two decades. Figure 3. I Trends in per capita adult (15 years old and above) cigarette consumption in developed and developing countries 3000 2500 2000 1500 1000 500 0 1970-72 1980-82 1990-92 Source: WHO 1997Year • Develo;~ing J D Wo~ J In contrast, smoking is becoming less common in most high-income countries such as the USA, Canada, the northern European nations and Australasia. In the USA, for example, the prevalence of smoking fell from 40 per cent at its peak in 1964 to 25 per cent by the mid-1990s. In the United Kingdom, cigarette sales have fallen by almost half over the past three decades. The overall decline in smoking in these countries' populations is not a uniform trend, however. Smoking prevalence has risen among certain groups, such as teenagers, since the early 1990s (see, for example, Institute of Medicine 1998. 3.2 The impact of trade liberalization International trade in tobacco, like other goods, was until recently subject to a large number of tariff and non-tariff barriers. Countries implement such barriers to protect their own tobacco industries, and to gain foreign exchange reserves through the domestic production of goods that would otherwise be imported. Draft: Not for circulation or cRation 16 321422976

However, in the past two decades, and particularly in the late 1950s and 1990s, trade in goods and services between nations has been increasingly liberalized as a result of a number of bilateral and multilateral agreements, such as the 1974 Trade Act and its subsequent amendments, and the General Agreement on Tariffs and Trade (GATT). The GATT (1994) agreement .sets limits on tariffand non-tariffbarriers to trade and will eventually eliminate such tariffs. It requires all trading partners to be treated equally and without discrimination, and requires that products be treated equally whether they are produced domestically or abroad. Tobacco is no exception. The removal of trade barriers tends to tends to introduce greater competition that results in lower prices, greater advertising and promotion, and changes in other activities that stimulate demand. Several studies show that people on low incomes are in general more responsive to price changes than people on higher incomes, and therefore countries where, on average, incomes are lowzhay be expected to see the biggest increases in cigarette purchasing wherever prices fall. In addition, companies newly entering each market will spend more than before on advertising and promotion. Studies of a number of Asian countries indi~te that low-income and middle-income countries have seen large and significant inc'-eases in cigarette consumption through the 1980s as a result of being forced to open their markets to US imports. High-income countries, in contrast, have seen little impact. A study of 10 Asian countries, using pooled time-series data, estimated the impact of trade liberalization in the region in response to section 301 of the 1974 Trade Act (Chaloupka and Laixuthai, 1996). It found that in four countries that were forced to open their markets to US cigarette imports during the 1980s- -.lapan, Taiwan, South Korea and Thailand--cigarette consumption per capita was almost 10 per cent higher on average in 1991 than it would have been if the markets had remained dosed. Simulations suggest that the same trends would emerge in other Asian countries if these were opened up to US imports. These suggest that in 1991, average per- capita cigarette consumption would be about 7.5 per cent higher than it would have been had the markets remained closed An econometric model of trade developed for this study (Chaloupka et al, 1998) suggests that a doubling of total imports as percentage of GDP would result in per-pack consumption rising by 13 per cent in low-income countries, 6 per cent in middle-income countries, but less than 1 percent in high-income countries. Draft: Not for circulation or citation 17 321422977

Figure 3.2 cigarette (in million) World tobacco consumption and US exports WORLD CONSUMPTION 6°000°000 5,000,000 4.000,000 3,000,000 2,000,000 1,000,000 0 years cigarette (in million} 250.000 200,000 150,000 100.000 50,000 US exports 3.3 Tobacco use is increasingly associated with poverty As the popularity of smoking shifts from the rich countries to the middle-income and low-income countries, it is also shifting within the rich countries to become increasingly concentrated among the poor. This trend represents a reversal of the pattern found earlier in the smoking epidemic. In the early and middle decades of the century, smokers were more likely to be wealthy than poor. But in the past three decades, more affluent households have increasingly aband6ned tobacco. In Nor~vay, for example, the percentage of men with high incomes who smoked fell from 75 per cent in 1955 to 28 per cent in 1990. Among men with low incomes, the proportion who smoked declined much less, from 60 per cent in 1955 to 48 per cent in 1990, and with little overall reduction since 1970 (Figure 3.3). Similar trends have emerged in many industrialized countries. In the 321422978

USA, for example, more than one-third of people living below the poverty level in 1995 smoked, compared with one-quarter of those at or above the poverty level. Figure 3.3 Tobacco Use is Most Prevalent in the Poor, Smoking Trends in Norwegian Males by Income group, 1955-90 75% ~4:5% 3:5% 2.5% 1935 1960 1965 1970 1975 1980 14|$ 199(I Although smokers in the middle-income countries and low-income countries have tended to be more affluent than non-smokers, there is now growing evidence that this pattern is changing to resemble the situation in high-income countries. In recent years, studies in China, Brazil and India, together home to nearly two-fifth of the world's smokers, have found that tobacco use is more common among people with low incomes than those with high incomes. Similar patterns have been found in South Africa, Vietnam and a number of Central American countries. As we shall see in Chapter 5, education appears to account for much of these differences, although income effects persist in some studies (Novotny, 1995). 3.4 Patterns of tobacco use by region, gender and age Data on the number of smokers in each region have been compiled by the World Health Organization using more than 80 separate studies. For the purpose of this report, these data have been used to estimate the prevalence of smoking in each of the seven World Ba.,~ country groupings.O~ The data are shown in Table 3.1. {~> These groupings are shown in Annex I. In sum they are as follows: (1) East Asia and the Pacific; (2)Eastern Europe and Central Asia (a group that includes most of the former socialist economies); (3) the Middle East and North Africa; (4) Latin America and the Caribbean; (5) South Asia; (6) Sub-Saharan Africa; and (7) the high-income countries, such as North American. Australasian, northern European nations and Japan. Draft: Not for circulation or citation ! 9 321422979