SMOKED OUT
Anti-Tobacco Activism at the World Bank
Richard
Tren* and Hugh High**
A
review of:
CURBING
THE EPIDEMIC: GOVERNMENTS AND THE ECONOMICS OF TOBACCO CONTROL,
WORLD
BANK, 1999
*RJT
Environmental Economics and Consultant to SA Government, South Africa
**Principal
Lecturer Economics, University of Cape Town, South Africa
We have written this review with
the intention of encouraging an economic debate on the highly politicised
subject of tobacco control. We would like to thank three anonymous reviewers
for their comments.
Preface: Up in Smoke by Deepak Lal
1. Global Trends in Tobacco Use
2. The Health Consequences of Smoking
3. Do Smokers Know Their Risks and Bear Their Costs?
4. Measures to Reduce Demand for Tobacco
5. Measures to Reduce the Supply of Tobacco
6. The Costs and Consequences of Tobacco Control
Deepak Lal, Coleman
Professor of Development Economics, UCLA
The World Bank (WB) has joined
the World Health Organisation (WHO) in a world war on tobacco. As its initial
broadside, the WB recently published an astonishing report. The following paper
exposes the many follies and economic errors in what is not a decent economic
study, but a document for crusaders. Whatever one's personal attitude to the
poisonous weed, most past studies of the economics of smoking found that it has
net social benefits (see e.g. K. Viscusi: Rational Risk Policy, OUP, 1998).
Thus, for the US it was estimated that in 1993, the social costs and benefits
per packet of cigarettes smoked were as follows. Social Costs: Medical care
$0.55; Sick leave $0.01; Group life insurance $0.14; Fires $0.02; Second hand
smoke $0.25; Local taxes on earnings $0.40. Total costs to society were
therefore $1.37. Social benefits: Nursing home savings $0.23; Pensions and
social security payments saved $1.19; Excise taxes paid $0.53. The total social
benefits were $1.95, yielding a net social benefit of $0.58 per pack of
cigarettes. The benefit could be even higher as this estimate takes at face
value the highly disputed scientific basis for the dangers of secondary smoke.
The World Bank report does an
intellectual somersault in denying this standard economic methodology based on
consumer sovereignty. In post-modernist garb, it characterises a divided self.
It claims a smoker has a physical addiction which prevents rational decisions,
so that the mind (I presume) imposes life-threatening smoking on the body. This
means that, within this divided self, there is an externality that the mind
imposes on the body. Thus the usual consumer surplus benefits that individuals
derive from the utility of smoking are in fact, benefits that accrue to the
mind at the expense of the body, and hence can, from the viewpoint of the body,
be completely discounted and be looked upon as costs! For mainstream economists
who have (rightly) always taken a more robust view of the mind-body problem,
this assumption can only be an example of higher nonsense.
Moreover, as the WB report
recognises, the poor – in both developed and developing countries – are
preponderantly smokers. So the consumer surplus losses from taxes and
regulations of tobacco accrue in disproportion to the poor. For a majority of
the world's poor the ingestion of tobacco provides one of their few pleasures.
To deny them this enjoyment, in lives which for the foreseeable future remain
'nasty, brutish and short', in the name of Western political correctness, is
questionable.
In estimating the benefits from
giving up tobacco, the Report uses a variant
of the quality of life adjusted years (QALYs) that would be gained. Ignoring
the serious conceptual flaws in QALYs (and DALYs, disability adjusted life
years as used in the Report), they
still require some estimate of standard life expectancy. The Report takes Japan as a standard, which has the highest life
expectancy in the world, and defines premature deaths from smoking in middle
age to include deaths up to 69 years. It is ripe to tell a landless labourer in
rural India that he is dying prematurely at the age of 69 because of his
addiction to 'bidis'!
I shall not detail the numerous
other illogicalities and inconsistencies in this report as the authors do this
admirably. More important are two other issues. The first concerns the reasons
for the success of this form of political correctness. Resistance to smoking
has a long history in the Christian West. But the crucial element which gave a
recent impetus to the campaign by anti-tobacco pressure groups was the issue of
passive smoking.
In most liberal Western
societies ordinary people realised that if one was damaging one's body
wilfully, it was one’s own and not the State's business. But once the scare
about passive smoking began in the 1980s, these anti-tobacco pressure groups
had the ammunition to inflame popular passions.
Passive smoking studies are
littered with poor methodology, science and statistics. The most influential
report, which promoted passive smoking fears, came from the US Environmental
Protection Agency in 1992. But this report was discredited by a US Court last
year for being inherently biased.
Similarly, the WHO had its
fingers burnt when its review of passive smoking studies also claimed that
there was an increased risk of lung cancer. When it was pointed out that the
results were not statistically significant by the UK Sunday Telegraph, they
were accused by the WHO of being pro-tobacco, as if this rebutted the
scientific counter-claim. But these WHO and EPA studies are still cited as
though they were quality research and have indirectly encouraged numerous
places/countries to enact laws on smoking in public, including cities like New
Delhi. This concern with passive smoking must seem a cruel joke to anyone who
has to breathe the polluted air of New Delhi or Xian.
This false scare has led to this
international war on tobacco, which raises the second issue. As is becoming
common, attempts to legislate Western 'habits of the heart' worldwide, are now
made through a treaty like the proposed WHO Framework Convention on Tobacco Control,
which it is hoped, health ministry officials from Third World countries will
readily sign. But apart from the welfare costs involved – particularly to the
poorest – there are also serious fiscal costs. The WB report is illogical,
claiming that a proposed annual 10 per cent real increase in taxes on tobacco
for 10 years will save millions of lives and not hurt tax revenues. Either
demand is elastic and so people will stop smoking at the expense of the
exchequer or it is inelastic whence revenues will not fall nor will the numbers
smoking. Finance ministries need to keep a careful eye and be part of any WHO
negotiations to prevent any agreements which are against the interests of their
poor and of their fisc.
Executive Summary
Curbing the Epidemic:
Governments and the Economics of Tobacco Control (World Bank, 1999), hereafter referred to as the Report,
attempts to provide an economic justification for increased intervention in the
tobacco market. The Report relies
upon several assumptions, evidence and studies (most of which are unpublished)
in order to justify this argument. However, not only are the arguments flawed,
but they, and the resulting recommendations, are muddled and incoherent.
The basis for intervention
relies on four main arguments. First, smokers, especially the young and
poorly-educated, are not aware of the risks associated with smoking. Second,
smoking imposes greater costs on those in lower socio-economic groups than
those in higher socio-economic groups, and that the former are not able to make
rational decisions about whether they should smoke. Third, smoking imposes
external costs on others and lastly, that far from imposing economic costs and
endangering jobs, tobacco control will actually result in increased employment
opportunities in many countries.
There are several problems with
these economic arguments. Among others, the
Report fails to recognise that it is entirely normal for individuals to
perceive risks to themselves differently to their perception of risks to
others. It is also entirely rational for the young and for those in poor
countries, where there are generally high risks of disease, to significantly
discount the future. That an increasing proportion of smokers are poor and
probably poorly informed about the harms from tobacco is not sufficient
justification for intervention, as smoking is only one of many cultural,
dietetic educational and lifestyle differences between the socio-economic
classes within and between countries.
The Report asserts
that tobacco is addictive, hence smokers are not able to make rational choices
about whether or not to continue smoking. From this, the authors argue that
intervention is justified, but the argument is considerably weakened by their
statement that tobacco consumption is greatly influenced by price rises. This
would suggest that far from being a ‘special good’ tobacco is a normal, albeit
inelastic, good and consumers are able to make rational choices about
consumption. Again, the Report does not
provide sufficient motivation for intervention (or, indeed, supporting evidence
for most of its claims).
The Report argues that
smoking imposes external costs on others and diverts scarce healthcare
resources away from other needs and illnesses. The Report however goes on to state that the size of these costs is
not known and admits that some studies have found that smokers do not incur
higher healthcare costs than non-smokers. Neither does the Report take adequate account of the considerable tax contributions
made by smokers in the form of direct taxation. Despite acknowledging that
neither the size nor even the existence of external costs is known, the Report boldly recommends policies,
such as tobacco tax increases, set at levels which “maximise revenues”.
For economists to admit that the
size of the externality is not known and that there are difficulties in
determining the optimal level of taxation, and then to propose taxes be set so as
to maximise revenue, displays a remarkable interpretation (if not perversion)
of the nature of external costs.
The Report argues
that, far from imposing costs on the economy through losses in tax revenue and
higher unemployment, increased tobacco controls will actually create new
employment opportunities in many countries. The authors argue that smokers, or
ex-smokers, will spend the money previously spent on tobacco on other goods,
which will stimulate the economy and create more jobs. None of the studies upon
which this argument is based are properly cited and many (perhaps all) appear
to be unpublished. Furthermore, the authors do not provide any information as
to the underlying assumptions of these studies.
The Report argues that
tobacco control is worth paying for and estimates the cost of intervention
based on the number of disability adjusted life years (DALYs). DALYs, which
measure the discounted value of a life burdened with disease, are based on
Japanese life expectancy of 80 years, which is wholly unrealistic for
developing countries, and indeed for many developed countries.
Much of the data and the
findings that underpin the Report’s
findings are not published, which not only makes it difficult to evaluate the
paper, but demonstrates the unscientific manner in which the authors have
approached the study. An example of this is the fact that the projection of
tobacco related deaths after the year 2000 is based on a single personal
communication.
In addition to the authors’
failure to provide any coherent economic justification for significant intervention
in the tobacco market, the Report is
riddled with inaccuracies and illogical statements. The authors attempt to
argue, for example, that although tobacco taxes are in themselves regressive,
the fact that poorer consumers will decrease consumption faster than wealthier
consumers means that overall, tobacco taxes are progressive. Furthermore, the Report proposes intervention strategies
that do not take into account the actual external cost (if there is any) of
smoking and it underplays the expected economic impacts of intervention.
With this publication the World
Bank has missed an opportunity for rational economic analysis and is close to
becoming a fully fledged anti-tobacco activist organisation (see Thomas Sowell,
The Vision of the Anointed, Harper
Collins, 1995, for similar ideologically driven government projects). The Report presents a case, much like an
anti-tobacco prosecution lawyer might, rather than trying to find out what is
the ‘case’, of the economics of tobacco farming, manufacture and use. It uses
every trick in the book to make its argument, abandoning good economics, and
the Bank’s reputation, in its wake.
It provides the reader with no
source material from which to judge its claims. It ignores published data in
favour of ‘new studies’ which the authors themselves are undertaking. It relies
on its own authors for much of its ‘review’ and on personal communications for
key projections. It mixes facts with its authors’ own prejudices and cleverly
uses non sequiturs to trap the unwary. Furthermore, it reinterprets many
economic concepts for its own ends (such as the law of demand, the impact on the
poor of flat taxes, major parts of welfare economics and even concepts of
psychological economics – the mind/body phenomenon referred to by Professor Lal
in his preface). In short, if there is any valuable and reliable information in
the World Bank tobacco control report, it is masked by the apparent desire of
its authors to obfuscate and delude the reader into thinking there will only be
gain from the end of the use of tobacco.
One can only speculate on why the Report was published, since its
biases discount it from being a useful economic study. But perhaps it will
serve a useful political purpose by furthering calls for greater international
control of tobacco. Perhaps the World Bank and the Report’s authors may benefit from the earmarked tobacco taxes the Report advocates. Therefore the
incentive to overplay the impacts and externalities associated with tobacco
consumption is significant. Probably of greatest concern is that the Report’s recommendations will lead
to many measures being forced on developing countries that will not be
appropriate to their economic wellbeing. Developing country finance ministries
(to whom this report is evidently directed) should reject its findings because
they are based on numerous flaws and problems mentioned above and detailed in
the following critique.
Curbing the Epidemic:
Governments and the Economics of Tobacco Control, published in May 1999 by the World Bank, consists of
seven chapters. These are:
1. Global Trends in Tobacco Use
2. The Health Consequences of Smoking
3. Do Smokers Know Their Risks and Bear Their Costs?
4. Measures to Reduce the Demand for Tobacco
5. Measures to Reduce the Supply of Tobacco
6. The Costs and Consequences of Tobacco Control
7. An Agenda for Action.
This review will discuss the
issues raised in each of these chapters in turn, plus a short conclusion.
A visitor to the World Bank web
site (www.worldbank.org) will find
numerous documents and press releases dealing with tobacco. The majority of
these address the negative health effects of tobacco and seem to concentrate on
the alleged unsustainability of the tobacco industry. There are no fewer than
six separate publications that promote the
Report, five of which are press releases with sensationalist figures of the
health impact of tobacco consumption and on the need for tobacco control. This
wide coverage and promotion of the Report
demonstrates the high regard in which the Bank holds the Report and the conclusions that it reaches.
It is interesting to note that,
among the numerous anti-tobacco press releases and documents, is an abstract of
World Bank teaching notes entitled ‘Proposal for a Joint Venture between a
Multinational Company and a Local Tobacco Factory’. Although the authors of
this review have not read the teaching notes, the abstract makes no mention of
the negative health impacts of tobacco consumption or the supposed unsustainability
of the tobacco industry, rather it highlights the main decisions that should be
made in cases such as these. This could be a case of the left hand not knowing
what the right hand is doing, or perhaps genuine confusion as to the role the
Bank is supposed to be playing – promoting economic development or protecting
individuals’ health.
One might reasonably ask why a
Bank, which has economic development as its avowed mission, has chosen to
publish a report on tobacco and methods of controlling tobacco growing and
consumption. While one can agree with the authors that there is a relationship
between economic development and tobacco consumption, the same can be said of a
number of variables which indirectly affect economic growth and development,
such as religious practices and familial structures. Perhaps the World Bank is
set to expand its remit, or perhaps this foray into lifestyle choices is an
aberration.
A possible answer as to why the World
Bank would spend scarce resources on funding this study and its authors with
flights (and all other expenses) to Beijing, Cape Town, Lausanne, and
Washington, is the observation by Milton Friedman that: “Nothing is as
long-lived as a government program”. Tobacco control is in vogue and the World Bank
is following the trend.
Nevertheless, it is not too much
to suggest that this entire Report is a superb example of appeasement to
pressure groups by the Bank and successful rent-seeking by the Bank’s authors
and affiliates, which the Bank has supported. In recent years the Bank has come
under attack, from a mixture of grass roots activists to multinational pressure
groups, for financing ‘imperialistic’ projects in the third world. It is
therefore keen to find a mission which will serve to justify its continuing
existence and expansion, and gain support of the increasingly powerful global
consumerist and protectionist stakeholders (see Jeremy Rabkin and James Sheehan, ‘Global
Greens: Global Governance’, IEA, 1999, for a discussion of this
phenomenon). It is difficult to believe that John Maynard Keynes and his
contemporaries, envisioned that their creation – the World Bank – would come to
be particularly concerned with the personal decisions of consumers in
developing countries, as opposed to their general economic development.
A second major observation about
the Report concerns its objectivity
and independence. It has become good general practise among government agencies
to submit reports to independent review and criticism prior to their
publication, particularly if the findings are likely to prove controversial
and/or have significant policy implications. One might reasonably expect that
this Report was subjected to rigorous independent assessment, as indicated by
the Acknowledgements to a number of individuals, and the note that prior to the Report’s publication, there was an ‘External
Experts (sic) Review’ (see pp. 99-101). Indeed from reading the February draft,
substantial changes were made prior to the May publication. Yet a careful
reading of the Report casts doubt on
its ‘independence’. For instance, of the 23 participants at the external
experts’ review, six were listed as writers of the Report, while 11 were listed as having participated in the
planning. This leaves only six truly independent assessors at the experts’
meeting. These six may be independent, but their expertise is in doubt, as none
have been cited as authors of any works listed in the Report’s bibliography.
On the other hand, many of those
present at the economists’ technical meeting, and earlier reviewers of outlines
and the contents of papers are listed as authors of papers on which the Report is based (see pp 99-101). One
cannot but wonder as to the objectivity of the individuals who, in compiling
this Report, found it desirable to rely on their own works and those of
colleagues who were instrumental in the design of the Report itself.
These preliminary observations
noted, we now turn to the Report
itself.
The project team consists of
many analysts led by Prabhat Jha. The Report originated at the 10th
World Conference on Tobacco in Beijing, China, where it was considered that
insufficient economic analysis had been applied to tobacco control. At the same
time, economists at the University of Cape Town began a project on the
economics of tobacco control in Southern Africa. The project included a
conference in Cape Town in February 1998, the proceedings of which are entitled
‘The Economics of Tobacco Control: Towards an Optimal Policy Mix’, Abedian et
al, University of Cape Town, 1998.
The World Bank Report, which
draws on the work of many of the analysts who met in Cape Town, attempts to
tackle some of the weighty and difficult issues surrounding the use of tobacco,
health, economics, risk and development. The
Report is essentially an economic report, however it relies on
epidemiological and scientific studies into the effects of smoking. It is not
surprising that the economist authors do not question studies outside their
expertise, but as we have noted above, it is troubling to note that some of the
works on which the Report relies are
unpublished and thus do not allow easy independent enquiry.
The standpoint of the
researchers is obvious from the title of the
Report, ‘Curbing the Epidemic.’ In choosing the word epidemic, which is usually reserved for disease and not for a lawful everyday activity, prompts one to
question their approach. Individuals undertake hundreds of activities every day
that carry risks and dangers; smoking is just one of them. It is unheard of to
hear people discussing the driving epidemic, the drinking epidemic, or the
eating epidemic.
The first sentence of the Report sets its tone. The
affirmative statement is made that “500 million people now alive will
eventually be killed by tobacco use, if current smoking patterns are
maintained”. Such a statement cannot but alert the reader to what seems to be a
problem of enormous proportions.
Yet, the statement is terribly
flawed and indicative of the entire Report. It is an unsubstantiated statement.
Absolutely no footnotes or citations are provided for such a sweeping
allegation. And, it will not save the statement to say that various papers on
which the Report relied, by chapter,
are given in the Bibliographic Note. It is common practice among scholars that
statements require specific support, and not a generality that ‘you will find
support for my allegations in one of several of the following works’. The
reader is then left to read all such works, and ferret out the right reference for
himself –or he must accept the statement is true as a matter of faith.
Perhaps one can forgive this
lack of substantiation in a Foreword. But the first sentence of the Summary,
which appears at the beginning of the Report,
states that: “smoking already kills one in 10 adults worldwide”. There is no
citation for this statement. It is only in the Bibliographic Note, which
appears 100 pages later, that the interested reader is told, “the discussion on
consumption and epidemiology draws on [one or some of the five papers listed.”]
The reason we call attention to
this rather inferior form of citation and scholarship is that the Report is replete with it. More
importantly, the Report, either
through sloppy scholastic method, or by design (as one suspects), is not
specifically referenced so as to enable the reader to verify the validity of several
sweeping statements; statements which, if true, will have immense policy
significance. The writers of the
Report appear to have decided their conclusions in advance. Statements are
made which are clearly designed to support a particular point of view.
Lest it be thought
these observations are petty quibbles, it is important to note that the absence
of specific citations is important in a number of those areas which are
addressed by the Report’s authors. To
note but one and obvious example: the epidemiological statements are often
eye-catching and dramatic. Those noted above clearly are. Yet, there is much
controversy regarding, for example, the methodology employed in estimating the
incidence and death rate from smoking-related illnesses (see the much disputed
paper ‘Lies, Damned Lies and 400,000 Smoking
Related Deaths’ by Robert Levy and Rosalind Marimont, Regulation, 21.4.1998; for a more scholarly treatment of estimation
techniques see Ashford, ‘Problems in Assessing Smoking –Related
Mortality’, Journal of Smoking-related
Diseases 1992, 3,3, pp263-274). If a statement in the Report relies on a flawed technique or estimate, then without
knowing the source which gave rise to the particular statement, the reader is
hardly in position to affirm, or deny, the veracity of the Report’s statement.
The Report highlights
the fact that global patterns of smoking have changed, from predominantly men
in high-income countries, to women in high-income countries and men in
low-income countries. The Report
states that the “…upward trend may have slowed in these (low and middle-income)
countries a little since the early 1990s”. (p. 13.) Unfortunately, however, the
authors fail to include any data since 1992. It would seem unlikely that this
data is not available and one therefore has to question whether it has been
omitted simply because it may undermine their findings and conclusions.
One of the alleged causes of
increased consumption in low and middle-income countries is cited as the
relaxation of trade barriers, with greater competition, greater promotion and
advertising. The support for this allegation is “an econometric model developed
for this report” (p.14). Yet there is no citation of the model, and no way for
the reader to independently check the statement. At most, the reader might
discover on page 101 of the Report,
that “the discussion in the Report on
trade liberalisation draws on an article by Chaloupka” (who was one of the main
authors of the Report itself), and
his co-author, Laizuthai in a 1996 paper. Or the statement might be
attributable to a paper merely cited as “Taylor and others, background paper”,
which is not cited at all in the Bibliography. It is impossible to know
anything about the alleged econometric model, since we don’t know where, if at
all, it was published. The authors might have learned much from reading the
alleged article and/model, but the reader of this Report has no way of sharing
in this knowledge and is, then, reduced to merely accepting the Report’s allegation, or remaining in
the dark. As it is a truism in scientific circles that statements which cannot
be falsified are statements without merit, one can but assume this statement is
without merit; it is certainly without support.
The second point to make concerns
the benefits that the relaxation of trade barriers has brought to both high and
low-to-middle-income countries. The period during which cigarette consumption increased
in the Asian countries that the Report
cites (Japan, South Korea, Thailand and Taiwan) coincided with a period of
strong economic growth in those countries (with the possible exception of
Japan). During this period, the consumption of all goods would have increased,
including washing machines, televisions and alcohol.
Trade liberalisation would have
brought many economic benefits, as well as economic costs (such as increases in
the amount of waste). The Report
however fails to discuss the benefits to consumers of having a wider range of
cigarettes, at lower prices and also the introduction of low-tar and other
‘healthier’ cigarettes. Indeed, at least one scholarly economics paper on the
effects of trade liberalisation comes to precisely that conclusion; that
lowering tariff barriers permitted locals to consume more, and presumably
healthier, foreign low tar/low nicotine cigarettes (see Hsieh, C-R, Hu, T-W
& Lin, C-F J. ‘The Demand for Cigarettes in Taiwan: Domestic versus
Imported Cigarettes’. Contemporary
Economic Policy, Vol. 17, No. 2, April 1999, pp 223 to 234). In asserting
that “increased trade liberalisation contributed significantly to increases in
cigarette consumption, particularly in low and middle-income countries” (p.15),
they merely state the economically obvious: that, as long as the marginal
propensity to import is positive, when prices of any foreign goods are lowered,
domestic consumers will tend to consume rather more of them. This is true of
cigarettes, but it is also true of tea towels, CD’s and foreign magazines. To
make this statement is to belabour the obvious. One can only speculate as to
the reason the authors did so. In addition, no mention is made of the economic
benefits that arise when smokers have more money in their pocket (as a direct result
of cheaper cigarettes) and are able to spend that money on other goods and
services, perhaps even health care and education.
The Report highlights
the fact that smoking has changed from being a habit of the wealthy, towards
being a habit of the poor and less educated. The trend emerged in the 1950s and
60s when the health consequences of smoking became publicised. It is not
surprising that the poorer and less educated members of society should smoke
more than the wealthy and more educated. The same is true of the more harmful
eating and general living habits of the poor.
Furthermore, it must be
recognised that the poor in low and middle-income countries face risks and
uncertainties that are completely different to those living in high-income
countries. For example, the prevalence of diseases such as Tuberculosis (TB),
malaria and cholera in low and middle-income countries is far higher than in
high-income countries. This leads to people in low-income countries having
higher discount rates than people do in high-income countries, and this will
play an important part in their rational decision making of whether or not to
take up or continue smoking (see a discussion on discounting in Pearce, D.
Markandya, A. Barbier, E. 1989 Blueprint
for a Green Economy, Earthscan, London
pp 132 – 152).
This chapter concludes with a
‘boxed’ statement/estimate of the number of persons, to age 20, who begin
smoking daily. Quite apart from the quality of the estimates, one would think
that ‘parallelism’ in a chapter ostensibly concerned with global patterns of
tobacco use, would have also produced an estimate of the number of persons,
worldwide, who quit smoking, daily. Its absence is not only regrettable, and
well indicates the absence of parallel treatment of the issue of tobacco
consumption, but also indicates the authors’ willingness to ‘play to the
crowd.’ This is regrettable.
The Report explains that
tobacco contains nicotine, which is an addictive substance that can cause
addiction quickly thereby reinforcing the smoking habit. There is, of course,
no citation given, nor is any mention made of the rather extensive literature
on the very nature of addiction, nor is mention made of the fact that
pharmacologists, generally, do not speak of ‘addiction’ but of ‘degrees of
addiction’ and are among the first to note that the very term ‘addiction’ is
none-too-useful or descriptive (for an interesting series of papers see David
Warburton ed. Addiction Controversies,
Harwood Publishers 1990). The point of mentioning this is twofold. First,
psychopharmacologists have generally distinguished between drugs (such as
heroin) that have physiological impacts requiring increasing doses to maintain
the same effect for the taker, and drugs, which simply may be habit forming
(such as caffeine and nicotine). Second, that other food substances (such as caffeine
or chocolate) can commonly be thought of as ‘addictive’, that in and of itself
should not be a reason to recommend regulation.
The Report goes on to
estimate the disease burden of tobacco use and states that tobacco is
responsible for one in 10 adult deaths, and by 2030 the figure is expected to
be one in six. It is not possible to query these figures as no detail is given
as to how they are calculated or the underlying assumptions that were used. Furthermore,
the authors, in the same paragraph, assert that “500 million people alive today
will eventually be killed by tobacco, half of them in productive middle age,
losing 20 to 25 years of life” (p. 22). This dramatic statement rests on the Report’s very peculiar definition of
‘middle age’, about which we comment below. Essentially, the authors neglect to
inform the reader that this ‘middle age’ is decidedly greater than the life
expectancy of most of the world’s population. Moreover, the authors fail to
note that many of the estimates of ‘tobacco-related deaths’ rest on death
statistics which attribute death to tobacco if the deceased ever smoked and are
often filled with recollection inaccuracies (see Ashford op. cit.).
Later in the chapter in
discussing the health impacts of smoking, the authors refer to ‘low tar’ and
‘low nicotine’ cigarettes, stating that smokers believe these cigarettes are
safer than ordinary cigarettes. The
Report goes on to state that “… the difference in the risk of premature
death for smokers of low-tar or low-nicotine brands compared with smokers of
ordinary cigarettes is far less than the difference in risk between non-smokers
and smokers” (p. 24). It is not clear what point the authors are trying to make
here. Low-tar and low-nicotine cigarettes allow smokers to enjoy their habit at
a lower risk of disease. To state that it would be safer not to smoke at all is
fatuous. It should be clear to most people that the risks of flying in an old
Dakota aircraft are higher than the risks of flying in a modern Boeing, but
one’s risks of dying in an air accident are lowest when staying at home and not
flying at all. The introduction of the modern Boeing aircraft has reduced the
risks of air travel and increased welfare; the argument for low-tar and
low-nicotine cigarettes is surely the same. If the authors have some evidence
that low-tar, low-nicotine cigarettes are as potentially harmful as others,
they should cite it. That they have not is merely part of the continuing
problem with this Report.
In discussing smoking and the
health disadvantage of the poor, the
Report states on page 25 that tobacco is responsible for more than half of
the difference in adult male mortality between the highest and lowest
socio-economic status in four countries (Canada, Poland, United Kingdom and the
United States). There are many lifestyle differences between the highest and
lowest socio-economic groups, of which smoking is just one. In Scotland for
example, unhealthy eating by those of lower socio-economic status leads to
higher rates of heart disease than among those in higher socio-economic groups.
This has not, however, led to calls for the government to attempt to ban deep
fat frying, or to impose a cholesterol tax on black pudding. Likewise,
vehicular deaths are greater for high income earners than for low income ones –
for the simple reason that low-income earners are less likely to own a car. Furthermore,
the number of deaths from vehicular accidents, per thousand population, is
greater in high income countries than low – for like reasons (See John Adams, Risk, UCL Press, 1995). It is difficult
to understand why (a) this is not obvious; and (b) what is the source for the
authors’ statements, since it is not given and thus not verifiable (and thus we
don’t know whether the statement rests on raw data, or is adjusted for other
differences in income classes).
The Report also states
that “among white women in the United States, smoking alone has been found to
be responsible for 63 percent of the difference in birth weight between babies
born to college-educated women and babies born to those who received a high
school education or less”. It appears from this statement that the authors are
confusing the impact of smoking on birth weight and the impact of education on
birth weight. In the absence of any citation, we cannot further judge the
statement, but since it raises more questions than it answers, the reader might
well wonder why such an obtuse and narrow statement about college educated US
women is here at all, given the number of statements they might have made about
the more general issue. One is left with the impression the authors are groping
for something to say.
Figure 2.2 in the Report details deaths in middle-aged
males in Poland and the key assumes that middle age is between the ages of 35
and 69. While this may be an appropriate age span for middle age in a few
developed countries, it is certainly not a suitable age span in any developing
country. The United Nations Development Programme estimates that 65 years is
the longest a baby born in a non-industrialised Southern Hemisphere country
could expect to live. Without access to the unpublished report, from which
these figures are derived, it is not possible to judge how this age span has
been used elsewhere in the Report.
It is interesting to note that,
in the subsection ‘The Risks from others’ smoke’, the authors first make the
eye-catching statement that “smokers affect not only their own health but the
health of those around them” (p. 26). This is followed by a discussion, without
citation, of the weight at birth of babies born to mothers who smoke, and to
those who don’t smoke. This is followed by an equally dramatic statement that
“cigarette smoking accounts for much of the health disadvantage of babies born
to poorer women”(p. 26). Not only is there no citation for this assertion, but
the “health disadvantage” of being born to a poor woman is not discussed.
This impression is reinforced by
the glaring absence of any statements about ETS, or ‘second hand smoke’. This
would have been an obvious place to discuss this issue if it were perceived as
a danger. Presumably, in view of the evidence that has been mounted against
this once-widely denounced ‘danger’, the authors determined to ignore the
issue. We can, then, presume they do not find ETS, or ‘second hand smoke’, a
danger to others (see Gio Gori and John Luik, Passive Smoke, Frazer Institute, 1999).
Chapter 3 of the Report addresses three main issues,
firstly whether smokers are aware of the risks of smoking; secondly it deals
with issues of young people, addiction and the capacity to make sound
decisions; lastly it deals with costs imposed on others. These are each dealt
with in turn.
Awareness of risks
The Report states that
people’s knowledge of the health risks of smoking, particularly in developing
countries, is limited (again no supporting citations are given). But assuming
there is evidence to support this hypothesis, which seems plausible, there is a
strong argument for making the risks of smoking known to both smokers and non-smokers
so they can make informed decisions as to whether to smoke. However, adequate
information of the dangers of tobacco does not equate with rejecting smoking.
The fact that smokers perceive
the risks to themselves of smoking as lower than the risks to smokers of
smoking in general is not surprising. It is human nature to perceive risks
individually and also to assume that ‘it could never happen to me’ (see
Warburton op. cit.). The fact that, once made aware of the risks of
smoking, individuals choose to interpret the information differently, is not
sufficient justification for controlling tobacco. If it were, the door would be
open for government to regulate the production and sale of all manner of goods,
from butter and sugar to nylon clothing. Furthermore, there is evidence that
smokers and non-smokers significantly overestimate the risks to themselves from
smoking (see Kip Viscusi, Smoking, New
York: Oxford University Press, 1992).
Youth, addiction and the
capacity to make sound decisions
The Report explains that
teenage smokers do not understand the risks of smoking, underestimate the risks
of becoming addicted to nicotine and do not make informed choices. As before,
there is a strong motivation for making the risks of smoking known to all
smokers and potential smokers. However, it should not be surprising that the
young interpret risks differently and have difficulties in imagining old or
even middle age. There is some evidence, which appeals to intuition, that an
individual’s discount rate depends on his or her life expectancy (see Pearce, op.
cit. 132 – 152). Thus, those who anticipate many years of life ahead, as do
the young, often disregard present risks. This is a general phenomenon and
hardly confined to consumption of tobacco. More, this is certainly not
sufficient justification for controlling individual’s tobacco consumption (see
Warburton op. cit.).
The Report quite
rightly points out that young people are attracted to many different types of
risky behaviour “… such as fast driving or alcoholic binge-drinking” (p. 32),
to which one could add far more innocent yet risky activities, such as skate
boarding and rugby. The Report goes
on to say that much risky behaviour, such as driving under the influence of
alcohol, is controlled by law. This, however, seems to be an outlandish
comparison to make. It is disproportionate to compare the risks a drunk driver
imposes on his passengers, other drivers and pedestrians with the risks to
which a smoker exposes others. Furthermore, in most countries it is illegal to
sell tobacco to minors, so inasmuch as a law can control underage smoking,
curbs are already in place.
The Report states that
smoking is different to other risky behaviours, as over a lifetime it is much
more dangerous than other risky activities. Extrapolations from data on
high-income countries are used to estimate the number of 15-year-olds in low
and middle-income countries that will die from smoking and other causes (such
as road accidents and violence.) There are several difficulties in
extrapolating data from high-income countries and applying it to low-income
countries, not least the fact that such extrapolations are unlikely to pick up
other diseases prevalent in low-income countries, such as malaria, TB and
cholera, and will therefore give a biased outcome (see Ashford op. cit.).
Costs imposed on others
The Report explains
that external costs to smoking do exist and that if smokers took these costs
into account, they would smoke less. This concept of an optimal level of
smoking is not a new one and is accepted. The authors assert, without the
inconvenience of providing the reader with a citation and/or evidence, that
treating smoking-related diseases consumes between 6 per cent and 15 per cent
of total healthcare costs in high-income countries. The consumption of
healthcare services by smokers means that these resources cannot be used in
other healthcare areas. The Report
however states that smokers generally die earlier in life than non-smokers and
therefore tend to consume the same overall amount of healthcare resources. Quite
correctly, the authors note that “the assessment of these costs is complex, and
therefore it is not yet possible to conclude anything about how they may
influence smokers’ consumption choices” (p. 33). This quite correct and
judicious observation does not, however, prevent the authors from then
asserting that as taxpayers, non-smokers contribute to the healthcare costs of
smokers and this is unfair.
Furthermore, the question of fairness
prompts one to question whether taxpayers who do not eat fatty foods should be
exempt from contributing to the healthcare costs of those that need medical
treatment related to an unhealthy diet. By the same logic, it would be unfair
for cautious drivers to contribute to the healthcare costs that could be
incurred by reckless drivers. Smoking is an activity that carries with it
benefits and costs, just as eating fatty foods does, and it is not clear why it
should be treated differently to any other good that carries benefits and
costs.
Overall, this chapter is characterised
by a large measure of ‘indirection’. For example, the authors assert that “in
high income countries, public expenditure on health accounts for about 65 per
cent of all health expenditures, or about six per cent of GDP” (p. 33). Quite
apart from the fact this is an unsupported assertion, it is followed by the
observation that “if smokers have higher net lifetime healthcare costs, then
non-smokers will subsidise the healthcare costs of smokers” (p. 34). This is,
of course, true. But it is equally true if we reverse the statement to read “if
non-smokers have higher net lifetime healthcare costs, then smokers will subsidise
the healthcare costs of non-smokers”. Presumably the only reason it is included
is merely journalistic – not scholarly. This is especially the case in view of
the authors’ acknowledgement on the previous page that “assessment of these
costs is complex”.
The authors only briefly mention
the tax contribution that smokers make through tobacco duties and fail to
analyse the extent to which smokers place, or do not place costs on others.
Given that the rates of taxes on tobacco vary from below 40 per cent in
low-income countries and over 70 per cent in high-income countries of the total
price per pack, the contribution from smokers is likely to be significant. In
failing to include these tax contributions, save for stating that “… smokers
may not be imposing costs on others” (p. 34), the bias of the authors is
clearly illustrated (see Viscusi, op.
cit. for statistical analysis). Bias is again clearly indicated by the last
full paragraph of this section by a leap of logic in which the authors, having
earlier acknowledged the difficulty of measuring net costs, boldly assert “in
sum, smokers clearly impose direct costs, such as health damage, on
non-smokers”. Such an assertion most conveniently fails to include a statement
regarding ‘net’ costs.
It is accepted economics that
should externalities to smoking exist, policies could be introduced to
internalise those external costs and attempt to achieve an optimal level of
smoking. The Report tells us that the
size of the externalities is unknown and there are numerous reasons to suggest
that smokers do not actually impose costs on others at all. Despite not knowing
what the external costs might be, nor even whether they exist, the authors
propose numerous anti-smoking measures designed to repay these costs to
society. This has no economic rationale.
The following section of this
chapter is entitled ‘Appropriate responses for governments’. In the first
paragraph of this section, we are informed that since smokers might not know
the full extent of the risks they undertake, or to bear the full consequences
of their choices, “governments may therefore be justified in intervening to
adjust the incentives to consumers so they smoke less” (p. 34). This is a
refreshing admission that the authors’ real goal is to provide not more
information, but to give governments worldwide a rationale for dictating to
consumers.
The Report proposes
three main ways of reducing demand for tobacco, namely raising cigarette
taxation, non-price measures to reduce demand, such as consumer information,
bans on advertising and smoking restrictions and lastly, nicotine replacement
therapy (NRT).
Tobacco Taxation
The Report states that
increases in taxation will ensure that the demand for cigarettes decreases, but
need not decrease revenues. The Report
also makes the point that the revenues from tobacco taxes can be used for “…
anti-smoking activities or other specific activities”(p. 38). It is unfortunate
for society that the massive revenues at stake can lead to rent-seeking by anti-tobacco
campaigners, including the authors of this Report (see Mitchell and Simmons, Beyond Politics, Boulder: Westview, 1995,
for a discussion of rent-seeking). A wider example of this rent-seeking could
be pharmaceutical companies that produce anti-smoking devices such as nicotine
patches overstating the dangers of smoking or the size of the smoking ‘problem’
in order to increase the government subsidy on the sale of their products.
One of the major justifications for
intervention in the tobacco market is that tobacco consumers are addicted to
the substance and therefore are unable to make rational choices about the risks
involved. If this were so, demand for tobacco would be highly inelastic and the
price could rise to exorbitant levels, and smokers would continue to consume
the product because of their addiction. The
Report claims the contrary in saying “… demand for tobacco, while
inelastic, is nevertheless strongly affected by its price” (p. 39). If this is
the case, it cannot still be claimed that smokers are unable to make rational
decisions about how much tobacco to consume. The fact that smokers would react
to a price increase in tobacco, as they would in any other normal good
indicates that tobacco is not a special good, but should be treated just like
every other good that individuals choose either to consume or not to consume.
In asserting that an increase in
the price of cigarettes may well lead to a decrease in consumption, the authors
refer to the Canadian case in which tax increases between 1982 and 1992 led to
a “substantial decrease in consumption” (without, of course, a citation). This
assertion is accompanied by a graph which takes up half the page on which the
assertion is made (p. 39/40). However, the graph also shows that, while
consumption was allegedly falling as a result of the tax increase, smuggling
was rising. Eventually, the smuggling problem contributed to the Canadian
government’s decision to remove the extra tax. Put differently, while the
authors would have the reader believe that an increase in taxes is an effective
‘tool in the war against smoking’, they ignore the secondary effects of higher
taxes. And, of course, no mention is made at all as to the likelihood that
smokers may switch to cheaper, higher-tar, higher-nicotine brands. The authors
also assert that tax increases have led to decreased consumption in the UK
(again and typically, an assertion without citation), yet ignore the tremendous
increase in smuggling which is alleged to have occurred in the UK (‘One in five
cigarettes are bootlegged, says Gallaher’, The
Guardian 10th Sept. 1999; ‘Death and taxes’, Sunday Telegraph 31st
October 1999). Some contraband tobacco could have come from eastern European
countries which are important producers of high-tar, high-nicotine cigarettes
(Craemer Raoul and George Yarrow, ‘Effects of National Regulation in the Single
Market: The Case of Tobacco’, Oxford Regulatory Policy Institute Research
Paper, April 1997; ‘Romania approves new excise levels for cigarettes’, Reuters
News Service 28th October 1999).
If it is the case that
individuals perceive the risk of contracting a tobacco-related disease
incorrectly, the correct approach would be to recognise that it is human nature
to perceive risks differently, and then to inform the smoker or potential
smoker of the dangers of tobacco. Taxing a smoker because of his risk
perception is not only a crude instrument to use, but it is unfair.
The Report shies away
from proposing an optimal level of taxation (the level that equates the
marginal social cost of the last cigarette consumed with its marginal social
benefits) but then goes on to propose various methods of determining an
appropriate tax rate. First it suggests that the tax should be set so as to
achieve a specific reduction in cigarette consumption and meet a public health
target. Alternatively, the Report
suggests setting the tax level so as to maximise revenues. The first point to
make is that the authors of the Report
clearly have not understood that smoking is a lawful activity that brings
benefits to those who enjoy it. To tax it as they have suggested would in no
way reach the optimal level of consumption and shows a clear lack of
understanding of the nature of externalities. The second point refers to the
discussion earlier on rent seeking. If governments set tax rates to maximise
revenues for anti-tobacco activities, the incentive for any organisation that
has an interest in reduced smoking rates to promote anti-smoking scare stories
and to bias the debate, is enormous.
The Report then
suggests that countries should harmonise tax rates so that they are in line
with countries with “comprehensive and effective tobacco control policies” (p.
45). Again, the authors have shown a complete lack of understanding of the
external costs. For a low-income country to raise tax rates on tobacco in line
with a high-income country, where the levels of economic development are
different, the impacts on the economies will be different, the types of smoking
externalities are different, would be economic madness. From the statements
made in relation to tax rates, it is clear that the authors of the Report do not aim to achieve an
optimal level of smoking, rather they are striving to hamper a lawful activity,
a measure that will cause significant economic costs.
Non-price measures to reduce
demand
The Report proposes a
number of non-price measures to reduce demand, such as publicising findings on
the health effects of smoking, introducing warning labels, counter advertising,
educational programmes and banning cigarette advertising and promotion.
It would be difficult to argue
that increasing the amount of information that a consumer has about a product
is a bad thing. The more information that a consumer has, the better he or she
is able to exercise rational choices. The proposals, however, severely affect
commercial freedom of speech, which as a fundamental freedom should not be
limited.
The authors mention, without
citing, reports that purportedly show that aggregate consumption of tobacco is
affected by advertising. The authors seem to be trying to persuade the reader
that while no relationship between advertising and consumption has been found
or measured, even despite the authors’ own efforts, a relationship does
actually exist. This allows the authors to bypass a discussion of the evidence,
that advertising increases smoking, and move straight to discussing advertising
bans, using as support their own, unpublished, background papers.
However, the literature shows
that the alleged aggregate consumption/advertising relationship is
non-existent, (see Hugh High, Does Advertising Increase Smoking, IEA,
1998, for a review of the studies). The
Report’s authors seem to wish to totally ignore this with their assertion
that “cigarette advertising and promotion almost certainly does affect
consumption although the data are not straightforward”. This statement is most
surprising when, in the next paragraph the authors state that “[o]n the face of
it, empirical studies of the relationship between advertising and sales have
tended to conclude either that advertising has no positive effect on
consumption, or that it shows only a very modest positive effect” (p. 49).
Still, the authors are reluctant to rely on these studies and assert that,
since advertising expenditures are high, any increased consumption resulting
from increased advertising will be small and marginal and thus not ‘caught’ by
the studies; moreover, the effects might not be felt for long periods. They
refer to studies which do show a positive effect of advertising on consumption,
but do not cite them although there is implicit reference to the widely
discredited studies by Laugensen and Meads. Finally, the authors conclude that,
as it is so difficult to interpret the effects of increased advertising, it is
easier to look at post-ban consumption instead.
Having dismissed the empirical
evidence of studies showing no positive effect the authors, again resort to
‘indirection’. This is well illustrated by the statement (p. 50) that
modelling, within the authors’ possession, and which is based on the European
Union’s advertising ban, suggest that advertising bans like that of the EU
would be effective in reducing consumption. The authors provide an entire page
which summarises the EU ban, but this in no way allows the putative model to be
tested or evaluated. The reader would have been vastly better served by some
detail about the underlying model, or citations, or something.
In yet a further effort to
‘demonstrate by indirect evidence’, that advertising bans or restrictions would
curb consumption, the authors then assert that (again uncited) studies
demonstrate that children recognise tobacco adverts. So what? There is also
some evidence that men remember adverts for brassieres, but it is difficult to
know what this may suggest about consumption. To ‘bootstrap’ recollection into
consumption is hardly the basis for sound public policy decisions.
The authors conclude the section
on the ‘impact of non-price measures on global demand for tobacco’ with the
assertion that something between 5 & 23 million “lives could be saved”
(p.53). This sort of statement is indicative of the entire work. It is based on
a model which is very generally described, but not in sufficient detail to
permit replication, or even to understand its underlying assumptions. The model
is unavailable to the reader and uncited, yet the authors suggest various
public policy proposals based on the model’s results. This does not serve the
credibility of the authors, or of the World Bank, well.
Nicotine replacement therapy
and other cessation interventions
The Report promotes
the use of nicotine replacement therapy (NRT) as an effective way of helping
smokers reduce tobacco consumption. According to the Report, the use of NRT along with brief anti-smoking advice
increases the percentage of smokers abstaining for six months or more by 6 per
cent, compared with brief advice alone. If NRT is coupled with intensive
advice, a further 8 per cent will abstain for six months or more. While NRT is
widely available in high-income countries, it is far less widely available in
middle and low-income countries, and then only in the major urban centres.
The Report pushes for
the wider distribution of NRT, reducing the regulation on the products,
increasing the range of outlets through which they can be sold, increasing the
hours during which they can be sold and reducing the restrictions on packaging.
Alternatively, the Report proposed
subsidising the price of NRT for limited periods to smokers on low incomes.
NRT requires a significant
one-off payment to begin the course, which may be out of reach of many in
middle and low-income countries, and the governments in those countries may not
be in a position to offer subsidies. The
Report admits that no attempt has been made to test the cost effectiveness
of NRT, which should be done before it is recommended, especially to middle and
low-income countries.
The limited effectiveness of
supply-side interventions
The Report highlights
the incentives to supply tobacco. For example, in Zimbabwe it is approximately
6.5 times more profitable that the next alternative crop. The Report also highlights the impracticalities and undesirability
from an economic and political standpoint of introducing a tobacco prohibition.
Of the 8 048 000 metric tonnes
of tobacco produced in 1997, 6 272 800, or 78 per cent, was produced by middle
and low-income countries. For many of these countries, particularly Zimbabwe,
Malawi, India and Brazil, the tobacco industry forms a large and important part
of the economy. It is also a major foreign exchange earner for several
countries, notably Zimbabwe, Malawi and Brazil.
Any attempt to interfere
directly with the crop decisions of these countries would be met with strong
political opposition and accusations of imperialism. The Report is therefore careful not to propose any policies that
might directly interfere with a country’s decisions on what crops to grow. It
goes on to say that crop substitution attempts in the past have not succeeded
because of the significant incentives that exist to grow the crop.
The Report argues that
numerous high-income countries and China use price supports and subsidies in
order to support tobacco growers. The
Report further asserts that price supports, while raising the price of
tobacco, “have but a small effect on consumption”. This is a curious statement
to make since, earlier, the Report
asserted that taxes, by raising the price of tobacco products, would lead to a
decrease in consumption. Indeed, the discussion of these alleged effects in
Canada and the UK was extensive. Later, in their discussion of smuggling, the
authors assert that control of smuggling “helps the effective implementation of
price increases that reduce demand”(p. 63). It is as if the authors forgot what
they wrote both earlier and later. The reader is left confused as to whether
the authors think the Fundamental Law of Demand operates or not. It is widely
acknowledged that subsidies in the agricultural sector lead to misallocation
and inefficient use of resources, but reductions in tobacco subsidies should
happen in line with reductions in subsidies of all agricultural goods. Sudden
removal of subsidies to one, politically incorrect, crop, could cause
significant hardship in some of the poorest countries of the world.
The Report discusses the
impact of trade liberalisation on tobacco consumption and argues that, although
free trade brings with it economic benefits, the fact that tobacco is more
harmful to health than most goods should prompt trade restrictions. The Report then correctly highlights the
disadvantages of restricting free trade, such as retaliatory action. The Report, again, does not highlight
the benefits that smokers and the wider economy enjoy through trade
liberalisation. As pointed out above, these benefits include a wider choice of
cigarettes at lower prices and the introduction of new types of cigarettes such
as low-tar and low-nicotine cigarettes that carry reduced health risks. In
addition, with smokers spending less on cigarettes as a direct result of free
trade, there is more money available to be spent on other goods and services.
Firm action on smuggling
Tobacco smuggling occurs on a
wide scale and in almost all markets. According to the Report, 30 per cent of internationally exported cigarettes are
lost to smuggling. Smuggling has occurred on wide scale in developed and
developing countries alike, notably between Canada and the United States,
within Europe and in China. Smuggling occurs when the expected high-risk
returns of illegal trade are greater than the returns of selling tobacco
legally. The larger the product price differential between two countries, the
stronger the incentive to smuggle.
The Report goes on to
state that the determinants of smuggling are not based on price differentials
alone, but also on the degree of corruption in a country. That there should be
a relationship between the amount of smuggling and the degree of corruption
should not be surprising, however it is important to remember that smuggling
takes place in some of the least corrupt high-income countries of the world,
such as Canada. According to the Report,
the success of smuggling depends on cigarettes passing through a large number
of owners in a short time, so that the cigarettes are difficult to trace.
The Report states that
cigarette manufacturers will benefit from tobacco smuggling, as the average
price of cigarettes, taxed and untaxed, will fall and therefore overall sales
will increase. It is difficult to disagree with the statement that when the
average price of a good falls, average consumption should rise; however, it
should be recalled that is precisely what the authors did in their discussion
of the demand for cigarettes and taxation in the previous chapter, as we have
noted. Following this assertion is the trite statement on p. 65, that “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”. Self-evidently, introducing a new good to a
market will increase the good’s market share.
Smuggling will also pressurise
governments to keep tax rates low, according to the Report. Recommendations are made that could reduce the
incidence of smuggling, such as placing prominent stamps with the country of origin
on cigarette packs, licensing all parties involved in the tobacco trade,
placing serial numbers on cigarette packs and improved record keeping by the
cigarette manufacturers. These, plus the other measures proposed in the Report are likely to be very costly
and will add further to the price of cigarettes, but may indeed reduce
smuggling.
Successful prosecutions for
cigarette smuggling depend on effective policing and an efficient judicial
system, which are often lacking in middle and low-income countries. Smuggling
is likely to occur when one country raises its taxes significantly. When this
happens, not only is smoking reduced to levels that may be economically
inefficient, but also criminal activity is stimulated to the detriment of the
country as a whole. While the policies proposed in the Report may go some way to improving prosecution rates for
smugglers, it does not remove the underlying incentive to smuggle (see Mark Thornton,
The Economics of Prohibition, Utah University
Press, 1993, for a discussion). It is the incentives to smuggle, and
particularly the price incentives, which are relevant. As the price of a good
rises in a country, so does the incentive to smuggle that good, which is one
reason the Report advocates tax
harmonisation. However, the possibilities of at least one nation not agreeing
to tax harmonisation (and employing lower rates) is considerable, because the gain
for their treasury, in the form of tax ‘arbitrage’ advantages from purchases by
smugglers in their lower-tax country, are significant. But even if
harmonisation is achieved, the incentive for officials in each country is to
accept bribes from smugglers which are lower than the duty, rather than collect
taxes for the nation state. This is especially important for nations which are
major importers of tobacco products. Clearly, if a nation imports tobacco
products, and its taxes are identical with those of another nation, the only
way which consumers can avoid taxation is via bribery of the tax collectors. The
greater the tax rate on a given good the greater the incentive to smuggle and
evade that tax (see Thornton, op. cit., and Craemer and Yarrow, op. cit., for a discussion).
Tobacco control and
employment effects
The authors ask the question
whether tobacco control will result in job losses and conclude that for the net
and full importers of tobacco, more jobs are likely to be created than lost if
tobacco is controlled. For the agrarian economies that are dependent on
tobacco, the opposite is likely to be true, with net national job losses.
The Report reaches
this conclusion by arguing that money that would have been spent on tobacco
would be spent on other goods and services and therefore jobs need not be lost,
indeed they could be created. With a tobacco ban, the amount of money spent on
tobacco consumption will undoubtedly be spent on other goods and services but
since smoking is a singular pleasure ex-smokers may spend their money on other
politically incorrect activities (see Thornton op. cit., for a
discussion of the US alcohol prohibition). Without any detail on the underlying
assumptions, it is impossible to comment further on this point except to say
one thing. To achieve a reduction in smoking will require massive tax
increases, and much of the money (that could be used to buy other goods) will
be accrued to governments via tax, who do not have a superb record of job
creation.
The Report claims that
independent research of the UK market shows that if smokers spent their money
elsewhere, 100 000 full time jobs would be created. The Report does not detail the assumptions behind any of the models
used in their analysis and therefore it is not possible to fully assess their
findings, but equally, neither is it possible to give much credence to such
statements.
The Report claims that
the net change in employment as a percentage of the economy for Zimbabwe, if
all domestic tobacco consumption and production were eliminated, would be minus
12.4 per cent. The Report does not
model any other net exporters that are middle or low-income countries such as
Malawi, Turkey or Brazil, however, it would seem plausible that the effects on
these economies would be equally severe.
Our own research (to be
published in early 2000) into the economic impact of the tobacco industry in
South Africa, shows that an increase in excise taxes would lead to a
significant fall in employment (we expect the Reader to treat our assertions
sceptically since our report is not yet published). South Africa is termed a
balanced tobacco economy, in that it consumes about as much as it produces, yet
even so, the impacts on the economy are likely to be significant and negative.
If tobacco control measures are introduced
slowly, the impact on the economy is likely to be less severe, however there
will be an impact, and the low-income countries are likely to suffer the most.
It appears that the authors are content to allow low-income countries, such as
Zimbabwe, to pay for the health policies of high-income countries.
In the discussion of the effects
on national economies of eradication of a national tobacco industry, the
authors suggest that the impact would be small, since that money spent on
tobacco would be spent on other goods. This may be true, but provides no
insights or direction for public policy as regards tobacco. The same statement
could be made, with equal usefulness, that if a nation absolutely prohibited
the sale of – say – tomato soup, or rye bread, or nail polish, the money which
was previously spent on these goods would be spent on something else. But,
having made such a trite observation, the authors then, in what can only be
described as a most cavalier treatment of the effects on workers who may become
unemployed if sales of the good are prohibited, assert that “[o]f course,
industry transitions can be difficult and may create social and political
problems in the short term. But economies go through many such transitions, and
this one would not be exceptional”. One might add that those who are made
better off, and profit from tobacco abolition, such as the authors of the Report, manufacturers of nicotine
replacement devices, and a wide variety of rent-seekers in governmental,
inter-governmental and non-governmental organisations, can afford to be
cavalier about the ‘mere transition effects’.
Increased tobacco taxes and
government revenues
The Report claims that
increased tobacco taxes will not erode tax revenues, rather in the short and medium
term, tax revenues will increase. The
Report quotes a model developed for the study that shows “…modest increases
in cigarette excise taxes of 10 per cent world-wide would increase tobacco tax revenues
by about 7 per cent overall, with effects varying by country”. As before, no
further detail is given and therefore it is difficult to criticise or even
comment on the model.
It should be pointed out that
the researchers could have an incentive to promote higher excise taxes and to
downplay any negative impacts on tobacco revenues, as they could be the
beneficiaries of earmarked tax revenue. This rent-seeking behaviour is not
uncommon and when taken into account, shows that their research is no more
independent than industry-funded research.
Tobacco taxes and smuggling
While the Report claims that tobacco smuggling tends to increase when a
country increases its excise taxes, it underplays the effects of smuggling. For
example, Canada and South Africa introduced significant increases in excise
duties, and legal tobacco sales fell. However, the Report does not resolve whether smuggled cigarettes simply
displaced demand for the legal product.
The Report recommends
that, not only should policing activities be improved so as to reduce
smuggling, but tax rates should be harmonised between countries so as to remove
the incentives to smuggle. Firstly, many developing countries, such as South
Africa simply do not have the resources to devote to smuggling activities as
they are already stretched in keeping law and order in city centres. To
recommend “… a crack down on crime” shows little appreciation of the realities
facing low-income countries.
Secondly, the proposals for the
harmonisation of tax rates are problematic for several reasons. First, this
type of tax harmonisation is usually agreed upon by developing countries after
pressure by international bodies, such as the UN. Usually, this has followed
pressure by non governmental organisations (NGOs) and usually does not take
into consideration the needs or requirements of the particular country.
Frequently, the middle and low-income countries are under-represented among the
parties that reach harmonisation agreements, which is not only unfair, it is
undemocratic (see Rabkin and Sheehan, op. cit.).
Second, that a harmonisation of
tax rates is recommended, again shows a lack of understanding of the nature of
externalities and the methods that can be used to internalise them. Supposing
intervention in the tobacco market is required on the grounds that smokers do
not account for the full costs of their habit, the external costs are likely to
vary widely from country to country. Harmonised tax rates will in no way reach the
optimal level of consumption that is referred to in the Report.
Will poor consumers bear the
heaviest financial burden?
The Report correctly claims
that although tobacco taxes are regressive (in that poorer consumers spend more
of their income on tobacco) the fact that their consumption will fall faster
than a rich consumer’s consumption means that tax increases would, in actual
fact, be progressive. The Report
relies on two studies from the United States and the United Kingdom, which have
found that tobacco tax increases are progressive, even if the tax in itself is
regressive.
The logic of these statements is
absurd, and is reminiscent of that of the Red Queen in Alice in Wonderland. One
should be reminded that tobacco is a legal product, which is consumed because
people perceive benefits in consuming it and feel that their utility is
increased when it is consumed. Forcing poor consumers to consume less of the
product by penalising them financially is in no way progressive. If it were the
case that tax increases on goods such as tobacco were progressive, one has to
ask why governments have not applied tax increases on other goods. If
governments raise petrol taxes, no one would argue that this is actually being
kinder to poorer consumers because it means that they travel less and expose
themselves less to the risks of accidents and pollution.
Will tobacco control impose
costs on individuals?
The Report argues that
tobacco is not a typical consumer good because of addiction and information
problems. The avoidance of withdrawal is listed as one of the benefits of
smoking and the Report goes on to
state that “… if tobacco control measures reduce individual smokers’
consumption, those smokers will face significant withdrawal costs” (p. 75).
First, it is important to point
out that there are ‘information problems’ associated with the consumption of
any good, be it shoes or margarine. No consumer will have full information
about the risks associated with each good or of all the alternative possible
brands. While it is important that consumers make as informed a choice as
possible, it is unlikely to be the case that any consumer will have full
information on any good.
Secondly, as pointed out above,
the fact that the authors claim that tobacco consumption is strongly influenced
by price undermines their claim that it is not a typical consumer good. If
tobacco consumption rises when prices fall and falls when prices rise, this
indicates that it is a normal good and one has to question whether the special treatment
that it receives is justified. As we have noted, there seems to be confusion
among the authors as to just how the Fundamental Law of Demand operates.
The authors go on to justify the
fact that tobacco control measures will impose relatively and possible
absolutely bigger costs on poor individuals than richer individuals by
comparing it to any other health initiative, such as child immunisation. Child
immunisation or family planning programmes are often more costly to poor
households as they “may have to walk longer distances to clinics than rich
families, and may lose income in the process” (p. 76). The crucial point that
the authors miss is that child immunisation programmes and the like are in
place to prevent diseases such as measles and mumps. There are no economic
benefits to the victim or the economy associated with any of these diseases,
and the victim of such a disease does not contract it by engaging in a lawful
activity that he or she feels provides a welfare improvement.
The Report states that
“welfare losses are likely to be minimised if control interventions are
implemented as a package” (p. 76). It is not clear what this statement means.
If it implies that if tobacco taxes, advertising bans and restrictions on where
smokers can smoke are all implemented together, as a package, then it would
seem unlikely to minimise welfare losses in any way.
Is tobacco control worth
paying for?
The Report investigates the cost-effectiveness of the various tobacco control measures and uses a model described in a background paper to the Report. The Report concludes that, “depending on the assumptions made about the administrative costs of raising and monitoring higher tobacco taxes, the cost of implementing a tax increase of 10 per cent could be less than $5 per DALY (and is unlikely to be more than $17 per DALY) in low and middle-income countries”. The model estimates the cost effectiveness of non-price tobacco control measures to be between $68 and $272 per DALY for low/middle-income countries. Publicly provided NRT is estimated to cost between $276 and $297 per DALY for low/middle-income countries. Without any more information on the assumptions made, or any detail of the model, it is