Think Again

Think Again: Tobacco

For tobacco control advocates, the tobacco industry is public health enemy number one: It sells a commodity that will kill 500 million of the 6 billion people living today. For governments, tobacco is both a health threat and a powerful economic force that annually generates hundreds of billions of dollars in sales and billions more in tax revenues. That clash of interests fuels a debate ensnarling everything from farm subsidies and export controls to healthcare spending, taxation, law enforcement, and free speech.

"Antismoking Policies Are Hazardous to a Nation’s Economic Health"

Not true, for all but a handful of countries. The tobacco industry accounts for significant economic activity in many countries through farming and product manufacture, distribution, and sales. According to a recent World Bank study, an estimated 33 million people worldwide farm tobacco either full or part time. About another 10 million workers provide materials and services to the tobacco industry (harvesting equipment, cigarette papers, insurance, shipping, etc.). China, the world’s largest consumer and producer of tobacco, has an estimated 15 million tobacco farmers. Substantial tobacco sectors also exist in India, Indonesia, Thailand, Turkey, Egypt, Bangladesh, and the Philippines. Malawi and Zimbabwe are major net exporters of tobacco and depend on tobacco leaf for a far larger share of total exports (60 percent and 23 percent, respectively) than any other nation.

But typically, in the vast majority of countries, tobacco represents no more than a small fraction of gross domestic product. And in those nations with large tobacco sectors, significant economic presence does not necessarily imply significant economic dependence. If money is not spent on cigarettes, it will be reallocated to other goods and services. This alternative spending pattern, in turn, will produce essentially the same number of jobs as would spending on tobacco. The only real cost of moving from spending on tobacco to spending on other products and services is the cost of transition from one economic activity to others. But since smoking is so addictive and policies designed to reduce smoking work so gradually (over a period of many years), transition costs will be tiny. Indeed, reductions in smoking won’t throw tobacco farmers out of work. Rather, fewer of their children will go into tobacco farming as a career. The transition to non-tobacco economic activity will occur through normal attrition, such as retirement and death.

Tobacco industry executives shed crocodile tears for farmers and factory workers allegedly harmed by antismoking policies, but the industry itself is frequently responsible for their economic woes. The purchase of imported tobacco cuts into domestic farming. Mechanization of cigarette production plants costs factory workers their jobs. And wholesale price hikes that enhance companies’ bottom lines reduce cigarette sales, thereby threatening tobacco jobs every bit as effectively as do the tax hikes the industry so vigorously opposes.

"Smoking Causes Healthcare Costs to Skyrocket"

False. Last year, a study commissioned by tobacco giant Philip Morris made headlines worldwide when it boasted that smoking saves money for the treasury of the Czech Republic, thanks in part to the early demise of smokers, which reduces the government’s obligations in healthcare, pensions, and housing costs for the elderly. The study is filled with mistakes that invalidate its finding, but it still contains a grain of truth: Smokers’ shorter lives do compensate partly for their excess healthcare costs while alive.

Adult smokers experience a life expectancy reduction on the order of six years. Those smokers who die as a direct result of their habit — close to half of all smokers — are victims of a drop in their life expectancy of more than twice that amount. In the world’s affluent nations, smoking is responsible for 4 to 10 percent of all healthcare spending. However, by dying earlier than their nonsmoking compatriots, smokers often avoid expensive chronic illnesses associated with old age. Consequently, a Dutch study concluded that if everyone quit smoking in the Netherlands, healthcare expenditures after 15 years would actually be higher than if people kept smoking. Likewise, a study in Switzerland reported that smokers’ higher costs and shorter lives amounted to almost a complete "wash" in terms of their net effects on healthcare spending.

The evidence is mixed, however. A recent analysis of all smoking-related healthcare costs in the United States (including those associated with secondhand smoke) concluded that smokers do increase U.S. healthcare costs on balance, although certainly not enough to warrant the frequently invoked label of a healthcare cost "crisis." Advocates and policymakers will have to look beyond antismoking campaigns to get a handle on healthcare costs.

"Declining Profits Have Driven Big Tobacco Into Developing Countries"

Wrong. As smoking has declined in the developed world, multinational tobacco companies have moved aggressively into middle- and low-income nations in recent years, especially in Asia and Eastern Europe. They also have established strongholds in Latin America and Africa. In all such countries, the industry employs sophisticated marketing techniques to compete with domestic brands, increase daily consumption among existing smokers, and encourage traditionally low-smoking groups (e.g., young women in many Asian societies) to "modernize" by becoming smokers. According to one study, Western marketing of cigarettes increased cigarette consumption in four Asian countries by about 10 percent.

Tobacco consumption in the West has declined at the same time that the industry has expanded into the East. But correlation is not causation. The decline in smoking in the developed world has not led to a decline in profits, since sales have fallen proportionately much slower than prices have risen. Indeed, the multinational companies’ foray into new markets is a natural, inevitable outcome of conventional economic behavior. The urge to enter new markets was irresistible and independent of successes or failures in Western markets. A fortuitous set of economic circumstances created the opportunity: the bulging treasuries of multinational corporations, which permitted their overseas expansion; the general easing of trade barriers for all international commerce; and the emergence of a level of consumer income in targeted countries adequate to support consumption of Western cigarettes.

Understanding the economic causes of the industry’s global expansion should allay the concerns of Western tobacco control advocates, fearful that their successes at home will create a legacy of addiction and disease abroad.

"Higher Cigarette Taxes Curb Smoking"

Absolutely. The law of demand — raise prices and quantity demanded will fall — holds for all commodities, even the most addictive. In fact, that law applies to all species. Consider laboratory rats: If forced to push a lever more times to get a dose of drug — the number of lever pushes constituting the price they face — addicted lab rats decrease the amount of drug they administer to themselves. In the case of humans and cigarettes, a 10 percent increase in price will prompt a decrease in quantity demanded by about 4 percent in rich countries and twice as much in low- and middle-income countries. Price increases are particularly effective in discouraging smoking by youth. In the handful of countries in which it has been measured, young people’s price responsiveness appears to be at least twice that of their seniors.

The principal vehicle by which countries can raise tobacco prices is through taxation. Virtually all nations impose product-specific taxes on cigarettes, although these range from a small amount in many developing countries to as much as three quarters of retail price in some rich nations. Within the public health community, there is almost universal agreement that raising taxes is one of the most potent policy tools available to governments dedicated to reducing the health toll of smoking. Coincidentally, and conveniently, tax rate hikes increase tax revenues, even while smoking falls. So governments contemplating tobacco tax increases find themselves with the rare opportunity to do good while bringing home the bacon.

"Higher Cigarette Taxes Encourage Smuggling"

True, all other things being equal (but they’re not). The thriving black market in cigarettes is represented by two kinds of smugglers. One group consists of individuals and gangs who bootleg cigarettes from low-tax (hence low-price) countries to nearby high-tax (high-price) countries, generally covering small distances. These so-called buttleggers are responsible for a relatively small fraction of the illicit trade in cigarettes. The other criminal element, responsible for the majority of illicit trade, worth $25 billion to $30 billion annually, consists of large-scale enterprises smuggling huge consignments of cigarettes over great distances. Buttleggers pay taxes in low-tax countries and move their product to nearby higher-priced countries. Organized smugglers avoid all taxes. Astonishingly, nearly a third of the world’s legally identified cigarette exports are never registered as having been imported.

Whenever governments contemplate tobacco tax increases, the tobacco industry and its allies vigorously promote the specter of a criminal black market forged by government policy itself: Tax increases raise cigarette prices and create enticing incentives for criminal organizations to smuggle cigarettes. Proposed tax increases have been defeated by appeals to this argument and prompted Canada and Sweden to rescind previous tax hikes.

But black market trade in cigarettes has less to do with taxes than with a country’s tolerance of corruption and its failure to police smuggling. Ironically, in Western Europe, smuggling problems appear to be most serious in countries with low cigarette prices. In Norway, for example, prices are high and smuggling is uncommon. In Spain, by contrast, prices are low and smuggling was pervasive until Spanish law enforcement agencies cracked down on the problem and cut smuggling from 20 to 30 percent of the market to about 2 to 3 percent.

And while the tobacco industry attempts to blame high taxes for smuggling, the industry itself appears to tolerate and actively encourage smuggling, as indicated by recent court cases in which tobacco company executives were found guilty of complicity in smuggling operations. In 1998, for instance, Northern Brands International, Inc. (an affiliate of R.J. Reynolds Tobacco Holdings), pled guilty to smuggling-related charges and paid $15 million in fines and forfeitures. The industry benefits from the increased sales associated with smuggling, and the multinationals benefit in particular by increased consumption of their prominent brands.

"Tobacco Subsidies Encourage Smoking"

Correct, though not always for the obvious reason. Numerous governments around the world support farmers who grow tobacco. In some countries in Africa, both governments and multinational tobacco companies assist farmers in acquiring seed and farming equipment. In many European countries, farmers receive direct governmental subsidies for their tobacco production. Export subsidies are also in effect in Europe. The result is more abundant supplies of tobacco at lower prices. However, the net effect on cigarette consumption is often remarkably small. In many developed countries, where cigarettes are highly engineered products and where taxes account for a large portion of retail price, tobacco costs constitute only a small fraction of total cigarette price, often on the order of 2 to 4 percent. The remaining cost comes from marketing and distribution of the final product, and of course its manufacture, which includes the expenses of cigarette paper, filters, and the hundreds of additives that end up in the tobacco.

Whether or not tobacco farm subsidies directly lower cigarette prices, the very existence of a governmental support system does inadvertently encourage smoking. In several countries, such as the United States and the United Kingdom, subsidies create a powerful political constituency that opposes both national and global efforts to restrict smoking.

"Cigarette Tax Increases Burden the Poor"

Not necessarily. In most nations, a larger proportion of the poor smoke than is the case for the rich. As a result, the poor often spend a substantially larger proportion of their income on cigarettes and bear a disproportionate share of the burden of a cigarette tax. However, while taxes hurt the poor more, tax increases may well hurt them relatively less. A British study found that a price hike of 10 percent would prompt a nearly equivalent proportional decline in smoking among the lowest social class. By contrast, among smokers in the highest social class, the price increase had virtually no impact on smoking rates. The lesson here is that the burden of a tax increase is actually experienced disproportionately by the social class most able to afford it. In addition, the poor — the group most harmed by the health consequences of smoking — benefit most from a tax increase in terms of improved health.

Meanwhile, legislators can ease the burden of an existing cigarette tax on the poor by dedicating part of the revenues from a tax increase to help low-income smokers quit. A sizable majority of low-income smokers in developed countries report that they would like to stop smoking, but they likely have limited access to professional help. The mix of greater price responsiveness among the poor and allocation of revenues toward smoking cessation can make a tax increase truly progressive, in terms of fiscal policy and public health.

"Advertising Encourages Children to Smoke"

Probably, but we don’t know for sure. The targeting of children by the tobacco industry has given substantial ammunition to tobacco control activists. Stories abound of shameless marketing, whether it is Philip Morris underwriting the popular radio program "Marlboro American Music Hour" in Beijing or R.J. Reynolds sponsoring teenage tennis idols in tournaments in Hong Kong and Malaysia.

Yet the connection between cigarette advertising and increased rates of smoking remains unclear. Even when researchers do find a link, the impact of advertising tends to be modest. For instance, studies of the Joe Camel campaign in the United States demonstrate that the cartoon mascot secured a huge army of young recruits for that R.J. Reynolds brand. But nobody can prove that many of those Camel loyalists would not have started smoking — perhaps a different brand — in Joe’s absence. Similarly, the emergence of aggressive Western advertising of cigarettes in many Asian countries has coincided with a rapid and unprecedented growth in the number of young female smokers. (In South Korea, for example, the smoking rate among teenage girls jumped from 2 to 9 percent just one year after the government allowed U.S. cigarette imports.) Such growth might have accompanied modernization anyway, although it strains credulity to believe that such a sizable increase was not influenced by the barrage of advertising targeted at Asian girls and young women. In contrast, while public health authorities express understandable concern about the emergence of Western cigarette advertising in former Eastern bloc nations, high rates of smoking characterized all those countries well before the fall of the Berlin Wall.

Other factors — perhaps more mundane, certainly more difficult to control, and virtually immune from policy — are at least equally responsible for children smoking. Young people who smoke might be emulating parents, friends, movie and rock stars, and, on increasingly rare occasions, athletes.

A truly effective tobacco control program uses multiple policy measures (including tax increases and bans on smoking in public places) and public education initiatives (including creative, aggressive countermarketing). A ban on all tobacco advertising and promotion is essential for a truly comprehensive approach, since even a modest decrease in smoking (a 7 percent decline, according to one study on the impact of an advertising ban) is better than none at all. An advertising ban will not be a panacea, but it must be part of the solution.

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