The Economics of Tobacco Control

in South Africa

Evan Blecher
Health Economics Unit, University of Cape Town
evan.blecher@uct.ac.za
 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!
 Real excise rate
(in constant 2000 cents)

100
200
300
400

0
1961

1965

1969

1973

Real excise rate

1977

1981

1985

1989

1993

1997
Real excise revenue
2001
government revenue?

2005
Can increases in tax reduce

0
1000
2000
3000
4000
5000

Real excise revenue

(R million, 2000 prices)
 Real price per pack of 20
( in constant 2000 cents)

1000
1200

200
400
600
800

0
1960

1964
1968

1972

1976

Real price of cigarettes

1980

1984
1988

1992

1996
2000
Prices & consumption

2004
Consumption of cigarettes
0
200
400
600
800
1000
1200
1400
1600
1800
2000

Cigarette consumption
(millions of packs)
 Cents/pack (constant 2000 prices)

200
400
600
800
1000

0
1961

1964

1967

1970

1973

1976

1979

Industry price
1982

1985

Excise tax
1988
Who gets what?

Sales tax 1991

1994

1997

2000

2003
 Industry revenue: shouldn’t it have
been falling?
7000 2100

Quantity of cigarettes sold, millions of

R million, constant 2000 prices

6000 1800

5000 1500

4000 1200

packs
3000 900

2000 600

1000 300

0 0
1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003
Excise revenue (R million, constant 2000 prices, left-hand scale)
Industry revenue (R million, constant 2000 prices, left-hand scale)
Cigarette consumption (millions of packs, right-hand scale)
 Input costs: raw tobacco
3000

Flue-cured (AAS)
2500
Cents/kg (constant 2000 prices)

2000
Flue-cured (T B)

1500

1000

Dark air-cured (T B) Dark air-cured (AAS)

500

0
66/67

68/69

70/71

72/73

74/75

76/77

78/79

80/81

82/83

84/85

86/87

88/89

90/91

92/93

94/95

96/97

98/99

00/01
Marke ting ye ar

Flue-cured (AAS) Flue-cured (T B) Dark air-cured (AAS) Dark air-cured (T B)

 Input costs: paper

120 600
Real producer price of paper and paper

Real industry price of cigarettes

100 500

(cents/pack, 2000 prices)

products (2000 = 100)

80 400

60 300

40 200

20 100

0 0
1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004
Real producer price of paper and paper products (index value, 2000 = 100, left-hand scale)
Real industry price of cigarettes (cents/pack, base 2000, right-hand scale)
 Employment: why has it been falling?

Peak employment

Average monthly wage bill (R millions,

6000 25
Peak consumption
5000
20
Number of employees

constant 2000 prices)

4000
15
Merger
3000
10
2000

5
1000

0 0
1977

1980

1983

1986

1989

1992

1995

1998

2001
Number of employees (left-hand scale)
Average monthly wage bill (R millions, constant 2000 prices, 3-year moving average, right-hand scale)
 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

70.0%

59.3%
60.0%

50.0%

40.0%

30.0%

20.0%

12.2%
10.0% 8.3%
6.1% 5.2%
4.5% 4.3%

0.0%
Decreased by more Decreased by Decreased by less No change Increased by less Increased by Increased by more
than 20 % between 10-20 % than 10 % than 10 % between 10-20 % than 20 %
 Acceptance by customers

90%

80% 76.7%

70%

60%
56.2%

50%

40%

31.0%
30%
Smokers

smokers

20% 18.0%
Non

10% 7.1%
3.7% 4.9%
1.1% 0.9% 0.5%
0%
Very Well Fairly Well Not Very Well Not Well At All Don't Know
 International evidence
Studies 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 Negative

effect 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 evidence
Studies 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 evidence
Studies 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, Negative
positive effect 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 evidence
Studies 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, Negative
positive effect 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