Curbing the Epidemic Governments and the Economics of Tobacco Control Global Evidence and Indonesia By Ayda A. Yurekli, Ph.D Economics of Tobacco Control Seminar in Jakarta, Indonesia November 2000 Good Morning, Ladies and Gentlemen, it is a great pleasure to be here today and be a part of this timely and important seminar.

Why did the World Bank produce this report Why did the World Bank produce this report? Economic arguments for, or against, tobacco control are unclear and often debated Government Revenues from Tobacco Taxes Jobs in Agriculture, Manufacture etc. Possible smuggling Cost to individuals, especially the poor As you know there is no doubt that tobacco is harmful to health and curbing the epidemic will be essential. But the economic arguments for TC are complex, difficult and sensitive. Therefore, most governments avoided taking actions to control smoking due to the fear that the economy might suffer from loss of revenues due to lower consumption and increased smuggling, loss of tobacco related jobs, and the higher tobacco taxes would create burden on poor. But policy decisions need to be based on facts and evidence, not on fears. In 1999 the World Bank with a group of expert economists prepared the "Curbing the Epidemic". The purpose of the report is to examine the economic arguments for and against tobacco control. It is published in 1999 and now, in October 2000, published in Bahasa for the World Bank. The "bottom line" of the study is that tobacco control could save millions of lives, without damaging to most economies. Today, we are here to share the evidence we gathered from developing and developed countries on which interventions are effective to reduce demand without hurting the economy. We also would like to learn your experiences, knowledge and information so we could reach a consensus how we could work together to curbing the epidemic in Indonesia Policymakers want to see the evidence from their own country. First I would like to discuss why the Bank got involved in TC, and present global evidence on what TC policies are effective. Then I will concentrate in one of this policies, higher tobacco taxes.

Importance of Tobacco to Indonesian Economy in 1997 Produced 4% of global production 0.45 % of all export earnings, 2% of global tobacco export 10 million employment related to tobacco 172,000 Manufacturing tobacco employment, including 120,000 hand-made kreteks producers Government revenue Rp.10.3 trillion in 2000 We are aware that tobacco has a significant impact to Indoneian economy. Government earns significant revenue from tobacco taxes-95% of excise tax revenue-, Indonesia is a net tobacco exporter, has high employment rate, 170,000 employees in production, and based on some experts 10 million people has earning a living from tobacco.

Unless current smokers quit, smoking deaths will rise dramatically over the next 50 years We are worried about the increasing epidemic and its impact on the poor nations. It is expected that over the next 50 years deaths from tobacco related diseases will increase dramatically if the current smoking trend persist. Therefore the WB partnered with WHO, CDC, UNICEFF, IMF and other organizations and NGOs to work on global TC activities. Source: Peto and others, 1994; Peto, personal communication.

Currently tobacco kilss 4 million people annually Currently tobacco kilss 4 million people annually. Both developed and developing countries share the burden equally. But the burden is shifting dramatically towards the developing world. By 2030, there will be 10 million tobacco related deaths globally and 70% of these deaths will occur in the developing countries Smoking already caused 90% of all cancers of the mouth, troat, trachea, bronchia, and lungs. In 1995 6.4 million Indonesians suffered severe illness as a result of smoking

Deaths and diseases from tobacco will soar in the future unless we act today. Currently there are 1.1 billion smokers worldwide and 6.6% are Indonesians. Indonesia has been experiencing tremendous increase in cigarette consumption.

Higher Increase in Cigarette Consumption Even the economic crisis which reduced the purchasing power dramatically,did nothing to halt this trend. During the years of economic crisis in 1997 through 2000, cigarette consumption has increased by 13%. Not only are Indonesians smoking more, more and more people are smoking that is smoking prevalence is rising. In 1996 53% of men smoked. In 1995 69% of men and 3% of women were smokers

Which interventions are effective? Measures to reduce demand Higher cigarette taxes Non-price measures: consumer information, research, cigarette advertising and promotion bans, warning labels and restrictions on public smoking Increased access to nicotine replacement (NRT) and other cessation therapies There is clear evidence from many countries about the set of tobacco control measures that are effective (and very cost-effective) in reducing the demand for tobacco products. I will list three types of actions, and then provide some details on the first, higher tobacco taxes. Non-price measures, especially Ø Large warning labels on cigarette boxes that use direct and strong language (such as "Smoking kills" or "Smoking causes heart disease.") Ø Restrictions on smoking in public and work places Ø Better consumer information: research findings, counter-advertising Ø Comprehensive bans on advertising and promotion Help for smokers who wish to quit, including increased access to Nicotine Replacement (NRT) and other cessation therapies.

Taxation is the most effective measure Higher taxes induce quitting and prevent starting A 10% price increase reduces demand by: 4% in high-income countries 8% in low or middle-income countries Young people and the poor are the most price responsive Higher taxes on cigarettes and other tobacco products are probably the single most effective measure, especially to encourage young people and those with limited incomes to reduce their use of tobacco products. Evidence show that 10% increase in prices would reduce the consumption by 4% in high-income countries and 8% in low and middle-income countries. Most importantly, higher prices would deter youth to start smoking at early stages of their lives. Since the tobacco is highly addictive, early starters find it very difficult to quit smoking later in life.

There is one fact that economists are sure of and agreed on: if prices are higher, people tend to buy less. This is certainly true for cigarettes. Every country for which trend data exist shows that at higher prices, less tobacco products are bought, and if real prices fall, people smoke more. This seems to be the case for Indonesia. Indonesia has enjoyed tremendous increase in real income last decade. Between 1990-1996 real income per capita increased by 38% the average real prices of kreteks (most popular cigarette type) decreased by over 18%, kreteks consumption increased by 26%, and total cigarette consumption increased by 38%.

What is the “right” level of tax? Complex question Depends on various factors, degree to which society wishes to protect children, revenue considerations, etc. Useful yardstick: where comprehensive programs used, tax is at least 2/3 to 4/5 of retail price. It is difficult to answer to question what is the right level of tax? Because it is a complex issue which depends on several factors. A useful yardstick WB recommends that the share of tax should be 2/3 to 4/5 of the average price of cigarettes.

Cigarette tax levels are lower in low or middle-income countries This recommendation partly reflects the fact that low and lower-middle income countries have very low average cigarette price, average tax and the tax as a percentage of price are much lower than the upper-middle and high-income countries. Source: Authors’ calculations

Tax share in average retail price of cigarettes varies among countries Taxes as a percentage of the final selling price are quite lower in Indonesia than in many other countries in Asia (around 60% in Japan, Korea, Tahiland and the Phillippines, but only 30% in Indonesia) Average cigarette prices were also lower for Indonesia because of the low excise tax on tobacco products. Indonesia charges excise taxes based on the level of production and levy different tax rates for different tobacco products. In 1998, average cost of a pack of 20 white cigarettes or machine made kreteks costs $0.45.

The Share of Cigarette Excise Tax Revenues in Total and Excise Tax Revenues in Indonesia 1992-1996 Tobacco products are an important source of revenue in Indonesia, accounting more than 90% of total excise tax reveneus, and more than 4% of total tax revenues.

Real Cigarette Excise Tax Revenue and Its Rate of Increase from the Previous Year, Indonesia, 1993-2000 Government earned significant revenue from tobacco even during the economic crisis, real tobacco tax revenue had an increasing trend. From 1996 to 1998, real tobacco tax revenue increased by 25%, in 1999 by 4% from 1998 level, and in 2000, it is expected that 3% increase from 1999 level. Government revenues from tobacco excise taxes in 1999 budget year was Rp 10 trillion and they are expected to reach Rp. 10.3 trillion for April-December 2000.

As cigarette tax rises, revenues increase too Every country who increased tobacco tax rates enjoyed an increase in total tobacco tax revenues. Even thought the tax increases cause consumption to fall, the consumption fall is proportionately less than the overall price increase, so that the total amount of revenue rises.

Tobacco smuggling tends to rise in line with the degree of corruption Smuggling as a function of transparency index Smuggling is a problem in all countries whether they have higher or lower taxes. Evidence show that a country's tolerance for and general level of corruption is an even more important factor explaining in differences in the degree of smuggling across countries.

Canadian Government reduced tobacco tax rates dramatically in February 1993

Sweden decreased cigarette taxes (17%) due to fear of smuggling in 1998 When the governments of Swedena and Canada were persuaded to reduce tobacco tax rates in the hopes of reducing smuggling, they found that after reducing the tax rates, total revenues fell, and there were very large increases in consumption of cigarettes especially among young people.

Summary Tobacco deaths worldwide are large and growing, and have higher burdens in the poor Specific market failures support government intervention Demand measures, chiefly tax increases, information, and regulation are most effective to reduce consumption Control of smuggling is the major supply-side intervention Tobacco control is cost-effective