1. Assessing the causal impact of tobacco expenditure on households’ spending decisions in Zambia Grieve Chelwa Economics of Tobacco Control Project School of Economics University of Cape Town

2. Presentation Outline Introduction & motivation Brief review of literature Conceptual framework Empirical strategy Data Results Summary & conclusion

3. Introduction & motivation 5 million people die p/a directly (WHO, 2010) & 600,000 passively (Oberg et al., 2010) Additional cost of tobacco which until recently received little attention – Tobacco consumption might displace other goods & services – Likely to be more severe among income- constrained households

4. Introduction & motivation Why Zambia? Tobacco increasingly becoming important in households’ budgets Important to find out which goods & services tobacco displaces, if at all any Source: ERC, 2010

5. Contribution Use expenditure data from SSA – Only other study I am aware of is Koch and Tshiswaka-Kashalala (2008) Use the standard instrumental variable from the literature, adult-sex ratio, but relax the strict exogeneity assumption using Nevo and Rosen (2012)

6. Preview of findings Even after relaxing the strict exogeneity assumption, confirm many of the findings in the literature – Tobacco expenditure crowds out food, schooling, clothing, water, transportation & equipment maintenance But unlike previous studies, I do not find instances of crowding in – More likely to be correlations than causal relationships

7. Literature review Tobacco costs conceptualized in two ways Costs on the macroeconomy via death, increased health care expenditure & lost productivity (Chaloupka & Warner; Kang et al, 2003; Max et al, 2004; Liu et al, 2006) Displacement costs (crowding out)

8. Literature review 1 st round of studies – Simple comparison of expenditure profiles Efroymson et al. (2001) Second round – Control for observable confounders Busch et al. (2004); Wang et al (2006)

9. Literature review 3 rd round – Control for observable and unobservable confounders using the method of instrumental variables John (2008); Koch and Tshiswaka-Kashalala (2008); Pu et al (2008) Block & Webb (2009) My approach aligned with 3 rd round, except I use the standard instrumental variable with less stringent assumptions

10. Conceptual framework Following John (2008), assume each household maximizes a single utility fn s.t. income constraint: Suppose that a hhold first spends on tobacco and then allocates expenditure to other goods:

11. Empirical strategy

12. Data Use 2006 round of the LCMS About 18, 000 Households Nationally representative

13. Data

14. Results

15. Results: OLS

16. Results: Instruments

17. Results: 3SLS

18. Relaxing the exclusion restriction Accept But assume: – These assumptions much less stringent that std IV assumptions

19. Relaxing the exclusion restriction

20. Results: Bounds

21. Summary & conclusions Expenditure on tobacco crowds out: – Food, schooling, clothing & water – Transportation, equipment maintenance, remittances & entertainment No evidence of crowding in Broader accounting of tobacco’s costs in Zambia should include: – Under nutrition – Underinvestment in education