Price & income elasticities of demand in Uganda Grieve Chelwa Economics of Tobacco Control Project School of Economics University of Cape Town

Presentation Outline Introduction & motivation Brief review of literature Method Data Results Conclusion

Introduction & motivation Consensus that tax and price measures are very effective at reducing consumption (IARC, 2011) From international literature we know that tobacco consumption is on average price inelastic Unfortunately there is little evidence from African countries

Introduction & motivation And this matters for policy – There is often a demand for local evidence before anything of note can happen On the other hand, work by Blecher and Ross shows that tobacco consumption in SSA is increasing and projected to increase further in the 21 st Century. These two factors necessitate the generation of local evidence

Brief review of the literature Large literature summarised in Chaloupka and Warner (2000) – The price elasticity of demand ranges between to with most studies in the -0.3 to -0.5 range Predominant approach to demand estimation has been time series approach A drawback of time series studies is the issue of simultaneity bias – Often dealt with by exploiting quasi experiments In Africa, time series data is often non-existent nor are quasi experiments

Brief review of the literature Cross sectional studies – Ideal in developing countries because of the plethora of IES surveys & shortage of time series data – Simultaneity bias not much of a problem Individual units too small to influence price Price often varies for independent reasons (more on this later) – Possibility of estimating elasticities for different segments of the population + different types of tobacco products Recent studies use IES + method pioneered by Deaton (1988, 1989). This is the approach I use in this study

Brief review of the literature John (2008) uses this method to estimate elasticities for bidis, leaf tobacco & cigarettes in india – Elasticities range between & Guindon et al.(2011) use several rounds of India’s NSS – Find elasticities in line with previous work – Higher elasticities for cigarettes than previous work – Find low SES groups respond more – Uncover interesting cross-price elasticity patterns between tobacco products & between tobacco products & alcohol

Brief review of the literature Chen & Xing (2011) use Deaton’s method & IES data for China – Find elasticies for cigarettes between and – Confirm these elasticities by an alternative method

Method

Data I use the expenditure module of the 2005/2006 Uganda National Household Survey Surveyed about 3,100 households across Uganda Importantly, the survey asks households information on expenditures and quantities for cigarettes & “other tobacco”

Data Characteristics About 20% of the households report expenditure on tobacco – About 9% on cigarettes – About 11% on other tobacco Suspect that “other tobacco” mostly purchased by lower SES:

Results: Spatial variation hypothesis

Results: checking for quality effects

Results: “demand” regressions

Results: Price elasticities

Income elasticities

Conclusion Overall elasticity inline with int’l evidence – Increased taxes/prices will reduce consumption + increase govt revenue Cigarettes are highly inelastic – SES reasons? – Need to increase taxes more aggressively Other tobacco – Price elastic: SES reasons? – Unfortunately informally sold. Little by way of taxation Economic growth will +vely impact consumption overall & especially so for cigarettes