Corporation for Economic Research


In this study an attempt was made to quantify the overall economic impact of the tobacco industry on the South African economy. This was done in terms of the industry’s contribution to gross domestic product (GDP) - or value added - and its contribution to formal-sector employment and government revenue.

Our analysis went well beyond the direct contributions made by the so-called core' sector, comprising tobacco farming, Coops manufacturing and wholesale and retail sales. In addition to this direct effect, we also considered tile indirect' and induced' effects. The former refers to the backward linkage effects that core' activities have on a range of supplier industries, i.e. those industries that supply material and other inputs to the core sector on a more or less regular basis. Induced effects refer to the multiplier process proper, and are felt throughout the entire economy: wages and salaries earned by core workers", and by "supplier workers" effectively supported by the core sector. are spent in the rest of the economy, boosting incomes there, and triggering further rounds of spending . It is the net effect of this additional spending that we are trying to capture here.

Our chief findings can be summarised in terms of the three macroeconomic magnitudes mentioned above.

2.1 Tables 1 and 2 give the total (direct. indirect and induced) contributions to GDP made by cigarette tobacco and pipe tobacco. respectively.

Table 1. Total Value Added by Tobacco Industry: Cigarettes
[Ed. note: the above-mentioned table has not been included.]

Table 2. Total Value Added by Tobacco Industry: Pipe Tobacco
[Ed. note: the above-mentioned table has not been included.]

It can be seen from the two tables that the total value added by cigarette tobacco (and related industries) increased from R 7 092 3 million in 1995 to R9 290,4 million in 1997, or at a rate of 15,5% per year. Value added by pipe tobacco increased from R 456 8 million in 1995 to R 595, 8 million in 1997, giving a total value added by tobacco and related industries of R 9 886, 2 million in 1997. The direct and indirect contributions accounted for approximately 71 % of total value added while the induced contribution came to 29 % of the total.

2.2 Table 3 below gives the total number of employment opportunities supported by the tobacco sector

Table 3. Total Employment Supported by the Tobacco Industry
[Ed. note: the above-mentioned table has not been included.]

Table 3 shows that the number of jobs created and supported by the tobacco industry increased from 86 754 in 1995 to 99 489 in 1997. or at an annual rate of about 7%. While tobacco farming and manufacturing supported by far the highest proportion of total jobs (78%), it is worth noting that some 25% of the total were created in the expenditure-induced sector in 1997.

2.3 Finally, table 4 gives the total contribution made by tobacco and related industries to government revenue - i.e. company taxes. personal income taxes and indirect taxes (VAT. customs and excise).

Table 4. Total Contribution of Tobacco Sector to Government Revenue
[Ed. note: the above-mentioned table has not been included.]

According to Table 4, the total (direct. indirect and induced) contribution made to government revenue increased from R 3 316 5 million in 1995 to R 4 589, 1 million in 1997 representing an average annual rate of increase of l9%. The most significant component of this contribution was indirect taxes (79%), followed by personal income taxes (12 %) and company taxes (8%).

Table 4 also shows the effective tax burden carried by each of the components making up the tobacco sector. Tobacco manufacturing (and related industries) contributed R 3 919,2 million to government revenue. or 85 99 of the tobacco total. While tobacco retailers added 6% and wholesalers, tobacco farmers and co-ops the rest.

Compiled by:
Prof. P Black, Director
October 1998