Evan BlecherHealth Economics Unit, University of Cape Town

evan.blecher@uct.ac.za

The Economics of Tobacco Control in South Africa

Why regulate tobacco?

• Negative externality– Smokers– Non-smokers– Society– Physical, financial & caring

• Health consequences– Highly addictive– Highly dangerous– Most initiate use when they do not understand health

consequences or addictiveness

Why regulate tobacco?

• Some statistics (Jha & Chaloupka, 2000)– 100 000 people smoke for the first time each day– Half of all smokers die from tobacco use– About half of these die in middle age– Globally 4 million die each year– Will be 10 million by 2030, 70% in the developing world– In the 20th century 100 million were killed– In the 21st century 1 billion will be killed– 2 jumbo jets of people die each day in the US from tobacco!– In SA 8.5% of all deaths are a result of smoking (MRC 2007)– Greater than alchohol & air pollution combined (MRC 2007)

Tobacco control in South Africa

• Pre 1993– No tobacco control policy/strategy

• 1993 Legislation– Banned smoking on public transport– Introduced warning labels on packaging and advertising– Coupled with consistent increases in excise taxes– Strongly opposed by tobacco industry

Tobacco control in South Africa

Percentage changes in smoking indicators (1993 to 2000)

Real price per pack ↑ 92.7 %

Aggregate consumption ↓ 26.0 %

Per capita consumption ↓ 37.1 %

Smoking prevalence ↓ 16.9 %

Number of smokers ↓ 2.2 %

Average consumption per smoker ↓ 24.2 %

Source: van Walbeek (2002)

Tobacco control in South Africa

• 1999 Legislation– Bans smoking in workplaces & other public places– Bans all advertising, promotion & sponsorship of tobacco– Bans sale of tobacco products to persons younger than 16– Bans free distribution of products– Limits the maximum yield on tar, nicotine & other ingredients

• What did the 1999 legislation do?– Public debate raised the awareness about tobacco risks– Transferred the property rights of clean air to non-smokers– Non-smokers now have the right to demand clean air

Tobacco control in South Africa

Percentage changes in smoking indicators (1993 to 2003)

Real price per pack ↑ 115.6 %

Aggregate consumption ↓ 32.9 %

Per capita consumption ↓ 46.0 %

Smoking prevalence ↓ 26.4 %

Number of smokers ↓ 5.5 %

Average consumption per smoker ↓ 28.9 %

Source: van Walbeek (2005)

Tobacco control in South Africa

• In 1999 South Africa was a global leader in tobacco control– Department of Health awarded the Luther Terry Award in 2000 by

the American Cancer Society: “South Africa serves as a proven model for other low-income countries by showing what a determined and committed government can achieve for its people”

• However, we are no longer at the cutting edge of tobacco control & in fact we do no meet the minimum requirements as set out in the Framework Convention on Tobacco Control to which we are a party– We still do not have a total ban on advertising (Article 13)

– We still do not have a total ban on smoking in public places (Article 8)

– Since South Africa is to host COP3 in November 2008: this is the time to act!

Can increases in tax reduce government revenue?

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Input costs: raw tobacco

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Input costs: paper

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Merger

Is tobacco control failing farmers?

• The clear answer is no!• Agriculture on a whole has been in decline for nearly a century

& specifically since 1994• Tobacco Institute of South Africa (2004) lists the following

challenges the tobacco farming community faced in 1994:– Free market introduced in SA

– Tobacco in SA globalised– Farmers had to compete on world market– Manufacturers became multi-national players– World merchants entered SA– Growers declined from grater than 1000 to 630– Mergers & acquisitions took place in primary and manufacturing

industries– Very unsympathetic government: no assistance to farmers, very strict

tobacco control legislation

Illicit trade

• Illicit trade is a legitimate concern, we can break it down into two distinct types: smuggling & counterfeiting

• The industry argue that tax increases result in greater illicit trade, however they are equally responsible for the increases in the retail price of cigarettes

• The industry also argue that higher taxes will reduce total tax revenue to government since it will reduce the sales of legal cigarettes

• Warner (2000): “the tobacco industry itself appears to tolerate & actively encourage it, as indicated by recent court cases in which tobacco company executives have been found guilty of complicity in smuggling operations.”

• Warner (2000): “The industry certainly benefits from increased sales associated with smuggling. Worldwide, nearly a third of legally identified exports find their way into the contraband market.”

Illicit trade

• What causes illicit trade?• Joossens & Raw (1998), Joossens (1999):

– A countries’ general tolerance of corruption & the specific failure to police smuggling

– Smuggling more prevalent in low income countries; no correlation between price & size of a country’s smuggling problem

– Smuggling can be combated through better & complete record keeping, the use of tax stamps, greater penalties amongst other things

• Warner (2000): “the threat of smuggling is systematically exaggerated by the tobacco industry to combat increased taxes that will discourage purchase of its product. The author is aware of no documented instances of tax revenues declining when tax rates were raised.”

Restaurant restrictions

• Two options: become entirely smoke free or separated areas

• Original proposal was for a blanket ban– International Hotel & Restaurant Association Cape Town

Survey predicted revenue would fall 32%

• High compliance without police crackdowns despite the difficulty in enforcing– Federated Hospitality Association of South Africa indicated

85% non-compliance & sales down 37%– Saloojee & Ucko: “How can a law, that according to them

(FEDHASA), is being widely ignored result in a loss of more than a third of sales?”

Literature

• Scollo et al (2003)– Studies that do not meet Siegel’s criteria generally find that

legislation has had negative impacts in terms of financial performance; customer satisfaction & employment

– Studies that meet criteria find little impact or positive impact– Scollo & Lal (2004) support this with updated data

• Siegel’s (1992) methodological criteria– Control for economic conditions– Use of independent funding sources– Publication subject to peer review– Measurement of actual events rather than predicted

outcomes or assessments

A model for South Africa

• Blecher (2006): South African Journal of Economics• Econometric modelling: real per capita revenue

(proxied by VAT collections) is a function of– Real per capita income– Effect of the legislation– Efficiency of tax collection

• Fixed effects panel model– Aggregate data → no sample selection problem– Provinces (nine) as cross sections– 1995 to 2003

• Small positive impact of policy

Survey of restaurants

• Van Walbeek, Blecher & Van Graan (2007): South African Medical Journal

• Conducted by telephone during November 2004 & January 2005

• Sit down restaurants only, excluded takeaways & bars• Database included

– 1431 restaurants– 1011 completed (70.6 %)– 230 established after the implementation (20.7 %)

• Some problems– Sample is not random– Biased towards urban, tourist & business centres

• Positives: perceptions corroborates VAT data

Survey results

• Changes to restaurant layout– Prior

• 54% had specific smoking sections → 74% after• 75% had specific non-smoking sections → 97% after• A quarter have become entirely smoke free

– Occupancy not significantly different– Compliance: 92% believe they are in compliance– In retrospect

• 52% indicate they would not change the status quo• 23% entirely smoke free• 25% ignore

Survey results

• Financial Impact– Capital expenditure

• Mean = R 67 000 ($ 9 571)• Median = R 25 000 ($ 3 571)• Malls & franchises spent more than independents• Linked to restaurant size

– Revenues• Generally no significant impact• Franchises: generally positive• Independents: slightly negative

– Interesting: greater capital expenditure resulted in greater positive impact (franchises)

Change in revenues

4.5%6.1%

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Acceptance by customers

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International evidenceStudies using objective measures to assess economic impact of smoke-free policies in the hospitality industry: studies funded from sources other than the tobacco industry

No effect, positive effect

Negative effect

Taxable sales receipts 25 0

Sales data other 3 0

Employment levels 8 0

Number of establishments 2 0

Number of restaurant/bar permit applications 1 0

Bankruptcy data 2 0

Number of employment insurance claims 2 0

International evidenceStudies using objective measures to assess economic impact of smoke-free policies in the hospitality industry: studies funded from sources with links to the tobacco industry or by the industry itself

No effect, positive effect Negative effect

Taxable sales receipts 0 4

Sales data other 0 2

Employment levels 0 2

Number of establishments 0 1

International evidenceStudies using subjective measures to assess economic impact of smoke-free policies in the hospitality industry: studies funded from sources other than the tobacco industry

No effect, positive effect

Negative effect

Public self-reported intentions or actual patronage of restaurants/bars 18 0

Proprietor predictions/perceptions of sales changes 14 0

Proprietor predictions/perceptions of costs 3 0

Estimated number of overseas visitors 1 0

International evidenceStudies using subjective measures to assess economic impact of smoke-free policies in the hospitality industry: studies funded from sources with links to the tobacco industry or by the industry itself

No effect, positive effect

Negative effect

Public self-reported intentions or actual patronage of restaurants/bars 2 5

Public self-reported spending/time spent 0 2

Proprietor predictions/perceptions of sales changes 1 24

Proprietor estimates of impact on employment 0 9

Proprietor predictions/perceptions of costs 0 1

Conclusion: smoke free

• Legislation has had, if any, a small positive impact on restaurant revenues

• No systematic harm done to restaurant industry• Smoking & non-smoking customers have accepted the

policy well• Inline with international evidence• Implications

– Supports the current legislation– Supports further legislation– Supports the implementation in other developing countries

which do not yet have such policies

Tobacco demand & advertising

• Two arguments:– Anti tobacco lobby: Advertising increases consumption in the

aggregate & influences initiation in vulnerable populations– Tobacco industry: Advertising only influences brand market

share, removes important health messages, reduces competition & forces industry to compete on price

– Question: In Zambia, BAT have an absolute monopoly, yet they continue to advertise?

• The literature provides no convincing empirical suggestions– Time series: 9 no effect; 6 positive effect– Cross sectional: 3 no effect; 5 positive effect (negative

impact of ban)

Tobacco demand & advertising

• Methodologically we should not attempt to measure the influence of advertising on consumption

• Saffer (2000): high level of aggregation leave little variation to correlate to changing consumption & the marginal product of advertising is very low since cigarettes are highly advertised (where allowed)

• We have a natural experiement taking place globally: more and more countries are restricting & banning advertising

• Saffer & Chaloupka (2000): comprehensive bans work in reducing consumption in OECD countries

• Blecher (2008): bans work in reducing consumption in developing countries, bans may even be more effective in developing countries relative to developed countries

Advertising bans

• Advertising of cigarettes is banned in South Africa• An exception is the point of sale• Yet the industry has pushed the boundaries of this

ban & has stepped over the edge multiple times– The industry continue to advertise in magazines & at

nightclubs– The point of sale has become the “final solution”

Advertising bans

• It is necessary for a total ban on all advertising in South Africa

– This is the easiest & most efficient way to remove loopholes though which the industry operate

– It will also further help reduce consumption & bring South Africa inline with its obligations to the FCTC

• A final thought on advertising– Even if banning advertising does not reduce consumption

it is the final avenue in which the tobacco industry can normalise tobacco

– Banning advertising sends a clear message: tobacco is not normal