Applied Fiscal Research Centre (AFReC)
Submission on the proposed Tobacco Products Control Bill from the Economics of Tobacco Control Project in South Africa
A Research Project of AFReC, UCT
1. About The Economics of Tobacco Control in South Africa (ETCSA)
The Economics of Tobacco Control in South Africa is a research project sponsored by the Canadian IDRC and UCT. The Project commenced its research work in the first quarter of 1996 at the School of Economics, UCT. The Project is led by Professor Iraj Abedian, assisted by a team of post-graduate economists and researchers. The project’s final report was made public in June 1998.
It is important to note that ETCSA is not an anti-tobacco campaign. It is a scientific research project whose results and methodologies are made public and subject to scrutiny by all players on both sides of the debate.
2. Salient Findings of Our Research Pertinent to the Debate
1. There had been a decline in the real retail cigarette price over the 1971-95 period. In 1990 prices, the real price per packet in 1971 was around R2.58. In 1995 this had declined to R2.03, after a low of R1.48 in 1991. Despite this, the proportion of the retail price made up by excise taxes has declined by a greater amount. In 1971, 45 per cent of the retail price of cigarettes was made up by excise taxes; in 1995, this figure had fallen to 20 per cent. In effect, therefore, the profit margin for the industry has been rising over the period. At the same time, excise tax revenue has been declining. Simulation results of our estimated model of cigarette demand and supply have identified significant scope for the government to generate additional revenue from cigarettes. To illustrate, if the government had attempted to maximise its revenue from cigarettes, excise receipts could have been up to 129 per cent higher in 1995. In other words, the government could have earned R3330 million, as opposed to an estimated R1499 million, in revenue from cigarette excise tax. The lost revenue translates into a 1.2 per cent increase in total government revenue, or 8.4 per cent of the health budget in 1995.
2. However, maximising excise revenue would have led to an estimated 34 per cent fall in consumption of cigarettes over the period 1970-1995. This would have negative effects on cigarette production and employment, but would be offset by gains to society through, amongst others, job creation in the other sectors of the economy, and lower health costs from treating patients for smoking-related illnesses. There are, of course, leads and lags in the process of costs/benefits to the society.
3. The project has also investigated the role played by advertising (both by the tobacco industry and anti-tobacco groups) in the demand for cigarettes. The results suggest that advertising expenditure by cigarette companies does play a significant role in generating additional cigarette consumption. Our econometric estimates show that a 1 per cent increase in the growth of advertising expenditure will increase growth in consumer’s demand for cigarettes by between 0.18 and 0.24 percent. The results also suggest that anti-smoking advertising, although a relatively new programme, is becoming a significant factor in the consumer’s decision to smoke cigarettes.
4. On the impact of advertising on consumption, our findings concur with the mounting international evidence that advertising does have a positive impact on consumption of cigarettes. As stated in our Project Report (June 1998), similar international studies include professional papers such as Hu, Sung and Keeler’s 1995 paper published in American Economic Review Papers and Proceedings (Vol. 85 No. 2, pp.85-90), or Tremblay & Tremblay’s 1995 paper published in Contemporary Economic Policy (Vol. 13, pp.113-124). We invite the honourable members of the Committee to examine these scientific papers that are pertinent to the issues under consideration.
5. Even if tobacco advertising were totally banned, this would only put South Africa in line with other countries such as the member countries of the European Union, Australia, Canada, and the USA. It is common knowledge nowadays that by the industry’s own admission their product is designed to harm. The much-publicised court cases in the USA have made at least one thing clear-cut: the industry has knowingly been producing, and continues to produce and promote, a product that has harmful and lethal effects. The marketing machinery of the industry meanwhile targets the young and vulnerable in society. The welfare implication of this is immense. It is high time that we recognise that responsible governments have to take public health seriously. The Director-General of the World Health Organisation (WHO), in her acceptance speech earlier this month, pronounced tobacco control a global challenge for all governments. According to WHO, general social welfare, and in particular the welfare of children, is seriously at risk.
6. UCT’s project on the Economics of Tobacco Control in South Africa (ETCSA) has extensively researched and made public its findings since 1996. Despite repeated invitations to participate and provide data, TISA has refused to engage in policy development. We can only attribute this to their fear of the impact of transparency on their research work, and the dubious nature of their findings. Instead, TISA has chosen to engage in a process of ‘negative publicity’. They repudiate the results of research, be it medical, epidemiological, or economic, without offering any substantive input. They attempt to discredit any research that might be used by anti-tobacco activists. They query the data used and the data sources; they cling onto the unknowns of the peripheries of statistical methodology and techniques. These tactics, I dare say, are the desperate attempts of an industry that cannot possibly face the truth about its products, the impact of its products on the welfare of its clients, and the far-reaching implications of its sophisticated profit-making and advertising machinery on socio-economic life in the country.
7. ETCSA hosted an international conference on the Economics of Tobacco Control in February 1998 in Cape Town. The title of the conference was: The Economics of Tobacco Control: Towards an Optimal Policy Mix. This conference was the first of its kind in the world. Participants were from 26 countries and included representatives from the World Bank and WHO. TISA was represented at the Conference by, amongst others, its Chairman and Managing Director. They were party to the economic debates, models, and analysis presented, not only for South Africa but also for 17 other countries.
8. TISA is politicking around issues related to employment by the industry, its tax contributions, and its overall economic impact. ETCSA’s extensive research results, corroborated by the evidence from other countries, show that:
I) When tobacco control measures are introduced, their overall impact on job creation and economic growth is either insignificant or is in fact positive. This is because money not spent on cigarettes is spent on alternative products which are on the whole more labour-intensive and favourable to economic growth. This is particularly true for the developing countries that import all or part of their cigarette needs. Therefore, to create fear of unemployment, tax revenue loss, or loss of economic activity is false economics. ETCSA’s economic modelling of these scenarios for South Africa is available for public scrutiny.
II) There is no international evidence or theoretical support for the proposition that tobacco control measures have the potential to wipe out the industry in the short-term. The power of addiction to the substance dominates; therefore, there is no possibility of loss of jobs, income or tax revenues for the industry in the short-term. South Africa’s own experience over the past five years is living testimony in this regard. Note: government has raised taxes considerably and introduced limited advertising control via health warning measures, yet government revenue has increased and jobs have remained relatively stable. Limited job losses have had more to do with the industry’s modernisation and automation than anything else.
III) In any economic analysis of tobacco control, it is vital that the cost of smoking to society is also brought into the equation. It is true that the tobacco industry pays taxes, but government also has to pay for the medical expenses of those afflicted by numerous diseases caused by the industry. Productivity losses for the economy, and social costs in the form of lives lost and pain and suffering endured, all need to be costed. It is simplistic (to say the least) of the industry to highlight the benefits and ignore the socio-economic costs that tobacco imposes on the society. Even if 10% of the mortality that epidemiologists attribute to smoking were true, TISA and its manufacturers would be merchants of death! What benefits would match that social cost?
IV) Global economic and epidemiological modelling of tobacco addiction suggest that even with the full force of government anti-tobacco campaigns, the industry is here to stay and make handsome profits. The only effect of banning advertising or heavily taxing cigarettes would be to safeguard children, the youth and other vulnerable groups within society, thereby limiting the social illfare caused by the tobacco industry.
3. Conclusions: Comments on the proposed Bill:
In the light of the above findings, and in the absence of any credible evidence to the contrary, we submit that:
1. the proposed Bill is compatible with our own and similar international research findings;
2. from a public health perspective, the Bill is exactly on the right path; and
3. from a fiscal perspective, it is a sound and sustainable approach to improving social welfare, particularly that of children and the youth.
We therefore strongly support the Bill, and offer to provide Parliament with any further research support that they may need in this regard.
Prof. Iraj Abedian
& Project Leader: Economics of Tobacco Control in South Africa