Chapter 4
Economics of Tobacco Consumption
in the Americas

Preface   103

Economic Costs of the Health Effects of Smoking   105
Latency of the Health Consequences   105
Estimating the Economic Costs   105
General Considerations and Limitations   105
Prevalence- and Incidence-Based Studies   110
Application to Developing Countries   112
Financing of Health Care and Pension/Disability Funds   112
Costs of Smoking-Control Policies and Programs   114

Economics of the Tobacco Industry   214

The Tobacco Sector   114
Overview   114
Demand for Tobacco   115
Advertising   128
Supply of Tobacco   119
Manufacturing   122
Distribution   121
Trade   122
Subsidies to Tobacco Production   122
Contribution of Tobacco to Economic Growth and Development   125
Externalities   125
Price, Production, and Substitution   125
Future of Tobacco Production   127
Tobacco Taxation   127
Subnational Taxes   128
Effects of Excise Taxes on Smoking   129
Modeling Addiction   131
Analysis of Recent Tax Increases   132
Health Consequences of Tax Changes   133
Equity, Incidence, and Distribution of the Tax Burden   134
Use of Tobacco Taxes   135

Conclusions   136

References   137


Preface

Although the economic aspects of smoking in North America have been extensively
examined, detailed data are not availablefor Latin America and the Caribbean. For the latter
region, a definitive analysis of the health costs of smoking and the economic configuration
of the tobacco industry await more systematic reporting and collection of data.

In the first part of this chapter, a generic approach to assessing the costs associated
with the major adverse health effects of smoking is outlined. The background for this
approach, which uses concepts introduced in Chapter 3, is described. Data and examples
from the United States and Canada are provided, and the work done in these countries is
summarized.

In the second part, an overview of the tobacco sector of the economy is offered. Again,
more data are available from North America than from Latin America and the Caribbean,
but the economic issues (supply and demand, advertising, subsidies, taxation, and others)
are relevant to all countries of the Americas. This overview provides a framework for
weighing the relative costs and benefits of tobacco production and consumption.

Economics   703


Economic Costs of the Health Effects of Smoking

Latency of the Health Consequences

  Since 1964, when a report on the health conse-
quences of smoking was released by the Surgeon
General's Advisory Committee on Smoking and
Health (Public Health Service 19641, extensive re-
search has assessed the disability, morbidity, and pre-
mature mortality attributable to tobacco use. The
many effects of smoking on health were documented
in the Surgeon General's twenty-fifth anniversary re-
port on smoking and health (U.S. Department of
Health and Human Services IUSDHHSI 1989). A
detailed examination of smoking-attributable mortal-
ity (SAM) in the United States summarizes these asso-
ciations (Table 1). (See Chapter 3 for an assessment of
SAM in Latin American and Caribbean countries.)

  As an epidemiologic transition occurs in Latin
America and the Caribbean, noncommunicable dis-
eases are expected to become increasingly prominent
as causes of death. For example, although Brazil bears
a burden from certain infectious diseases (such as
Chagas' disease) and the growing incidence of human
immunodeficiency virus infection, many other infec-
tious and parasitic diseases have been brought under
control. Many cases of lung cancer are now antici-
pated in Brazil (The World Bank 1989a). Cardiovas-
cular disease is the leading cause of death in Brazil
(The World Bank 1989a), and the number of deaths
due to cardiovascular disease is likely to increase sig-
nificantly. Among Latin American women, for whom
prevalence of smoking appears to have increased (see
Chapter 3), an increased incidence of lung cancer may
soon become apparent (Crofton 1990).

  Numerous studies have reported a 20- to 30-year
latent period between the initiation of smoking on a
regular basis and the development of lung cancer
(USDHHS 1982), a phenomenon well documented in
North America. In the United States, many men
started to smoke as adolescents or young adults
around World War I, and many women started as
adolescents or young adults during or after World
War II. The incidence of lung cancer in the United
States began to increase for men around 1940 and for
women around 1960 (USDHHS 1989). A similar lag
occurred in Canada; from 1976 to 1986, the rate of lung
cancer doubled (Millar 1988). An epidemiologic and
economic result of latency is the continued rise in lung
cancer deaths despite a decline in the prevalence of

smoking. In the United States, the lung cancer mortal-
ity rate for men did not begin to level off until 1985
(USDHHS 1989). For women, deaths from lung can-
cer have not yet peaked, and lung cancer has become
the most common cause of cancer mortality, surpass-
ing breast cancer (USDHHS 1989).

  The correlation between the level of cigarette
consumption in a population cohort when it enters
adulthood and the lung cancer rate for that cohort
when it enters middle age provides further evidence
of the 20- to 30-year latency (Figure 1). In Brazil, lung
cancer mortality among adult males has increased as
a lagged response to the increase in tobacco consump-
tion (Figure 2) that began during World War II. Thus,
the consequences of tobacco consumption-including
economic consequences-are long in developing, and
the full impact of disease, disability, and death is
measured over decades.

Estimating the Economic Costs
  Many estimates have been made of the costs of
smoking in the United States and Canada. A similar
body of work is not available for Latin America and
the Caribbean-in part because the data required for
such analyses are often not available. In addition, a
single estimate would probably not serve adequately
because of the heterogeneity among countries of the
region. An approach to estimating the health costs of
smoking is described below, along with some esti-
mates that have been made.

General Considerations and Limitations

  Estimates of the economic effects of the health
consequences of smoking generally consist of three
components (U.S. Office of Technology Assessment
[USOTAI 1985):
o An attempt to identify an increased incidence of
smoking-related illness in current or former smok-
ers and attribution of that increase to smoking.
o An application of these attribution ratios to esti-
mates of the direct (health care) costs of caring for
persons with smoking-related illness-to obtain an
estimate of the direct costs of smoking.

o An estimate of the indirect costs of smoking-
related illness, which is made by measuring the
increased rate of morbidity and mortality in current
and former smokers and then valuing (1) time lost
due to morbidity by their current wage rate and
(2) excess mortality by discounted future earnings.

Economics   105


Table 1.  Relative risks* (RR) for death attributed to smoking and smoking-attributable mortality (SAM)
    for current and former smokers, by disease category and sex, United States. 1988

  Men
RR ~-_____-

Disease category (ICD-9-CM)+

Current Former
smokers smokers   SAM

Adult diseases (235 years of age)
Neoplasms
Lip, oral cavity, pharynx (140-149)  27.5
  Esophagus (150)              7.6
  Pancreas (157)                2.1
Larynx (161)               10.5
Trachea, lung, bronchus (162)     22.4
  Cervix uteri (180)            NA
Urinary bladder (188)          2.9
Kidney, other urinary (189)       3.0

Cardiovascular diseases
  Hypertension (401404)         1.9
  Ischemic heart disease (410-414)
   Persons aged 35-64 years       2.8
   Persons aged 265 years        1.6
  Other heart diseases (390-398,
   415-417,42&429)           1.9
  Cerebrovascular disease (43&438)
   Persons aged 35-64 years       3.7
   Persons aged 165 years        1.9
  Atherosclerosis (440)           4.1
Aortic aneurysm (441)          4.1
  Other arterial disease (442448)     4.1

Respiratory diseases
  Pneumonia, influenza (480-487)    2.0
  Bronchitis, emphysema (491-492)   9.7
Chronic airways obstruction (496)   9.7
Other respiratory diseases
   (Olcl-012,493)              2.0
Pediatric diseases (~1 year of age)
Short gestation, low birthweight (765)
Respiratory distress syndrome (769)
Other respiratory conditions of
  newborn (770)
Sudden infant death syndrome (798)
Burn death&
Passive smoking deaths5

   Total

Source:  Centers for Disease Control (1991).
*Relative to never smokers.

8.8    4,942     5.6       2.9     1,460   6,402
5.8    5,478     10.3      3.2     1,609   7,087
1.1    2,775      2.3       1.8    3,345   6,120
5.2    2,401     17.8      11.9      589   2,990
9.4   78,932     11.9      4.7    33,053  111,985
NA       0      2.1       1.9     1,246   1,246
1.9    2,951      2.6      1.9      963   3,914
2.0    2,729      1.4       1.2      363   3,092

1.3    3,441      1.7       1.2    2,254   5,695

1.8   29,263      3.0       1.4    9,105  38,368
1.3   41,821      1.6      1.3    27,990   69.811

1.3   27,503      1.7       1.2    14,638  42,141

1.4    5,121      4.8       1.4    4,504   9,625
1.3    11,554      1.5       1.0    5,134  16,688
2.3    4,644      3.0       1.3    3,612   8,256
2.3    5,798      3.0       1.3     1,435   7,233
2.3    1,874      3.0       1.3     1,111   2,985

1.6   11,580
8.8    9,670
8.8   29,838

1.6      828

2.2
10.5
10.5


2.2

1.4    8,098  19,678
7.0    5,269  14,939
7.0    16,884  46,722

1.4      690   1,518

1.8         344          1.8         261     605
1.8         351          1.8         233    584

1.8
1.5

  384
  422

  850

1,330

286,824

1.8
1.5

  277    661
  280    702

  453   1,303

2,495   3,825

147,351  434,175

      Women
      _____~-~~
     RR
Current   Former
smokers   smokers   SAM

Total
SAM

Tlnternational Classijication of Diseases, Nirlfh Revision, Clirzicnl Modificofiolr
`Data from the Federal Emergency Management Agency, 1990.
$Deaths among nonsmokers from'lung cancer attributable to passive smoking; hational Research Council (1986).

106 Economics


   Several estimates have been made for the United   with regard to the medical conditions attributed to
States (Rice et al. 1986; Hodgson 19881, Canada (Col-   smoking. Some studies include lung cancer only,
lishaw and Myers 1984; Forbes and Thompson 1983a),    while others include heart disease and chronic ob-
the United Kingdom (Atkinson 1974), Sweden (Hjalte   structive pulmonary disease (COPD). Other studies
19841, and Switzerland (Leu and Schaub 1984). Vari-   compare differences in the overall use of health care
ous factors should be included in a complete picture   by smokers and nonsmokers. However, these esti-
of the economic impact of smoking-related illness   mates do not include nonmedical components of di-
(Table 2), but few published studies have addressed   rect costs, such as the costs of transportation to health
all of these factors, and most studies have concen-   care providers or of modifying an environment to
trated on factors for which data are available.      accommodate a person with a severe chronic illness.

  Most estimates of the costs of smoking-related
illness calculate the direct costs of treating persons
with smoking-related diseases, including the costs of
hospital and nursing-home care, physicians` fees, and
medications (Table 3). The specific items included in
the estimates vary among studies, which also differ

  Estimates of the indirect costs of smoking-related
illness attempt to measure the productivity lost or
output forgone as a result of smoking-related illness
or death (Table 4). This so-called human capital ap-
proach has been criticized for placing a high value on
losses sustained by young adults, men, and more-

Figure 1.  Correlation between cigarette consumption per person who entered adult life in 1950 and lung
    cancer rate for that generation as it entered middle age in mid-1970

100 -

+ United States

so-

Source:  Doll and Pete (1981).

Number of manufactured cigarettes consumed
  f  Rate based on over 100 deaths.
    O  Rate based on 25-100 deaths.
  0 U.S. nonsmokers 1959-1972.

Economics   107


Figure 2.  Per capita rate of cigarette consumption in Brazil and lung cancer deaths for men in Rio
     Grande do Sul, Brazil

     t--
    /     7
   /         \
  /           \
/             \
/

              14           /'
                 /    \            /
                /       \
              /          \
             /             b-- d'
           /
          /
        /
       /
    / /*
   /
/        S-to 30-year lag
d   1

,            I            I            I            I

1940      1950       1960

Source:  The World Bank (1989a).

educated persons (Markandya and Pearce 1989). In
addition, earnings lost because of illness and mortality
may have little relationship to the value people place
on their life or health (Markandya and Pearce 1989).
A more appropriate measure of that value may be the
amount they are willing to pay to reduce the probabil-
ity of death or disease. Although several attempts
have been made to estimate willingness-to-pay for
non-smoking-related illness (Viscusi 19901, this ap-
proach has not been applied to cost-of-smoking stud-
ies. In addition, no value has been assigned to
intangible items, such as pain and suffering, prema-
ture death, and loss experienced by relatives; accord-
ingly, these intangibles have not been included in any
published estimates of the costs of smoking. Some
estimates include costs associated with the harmful
effects on the fetus and on newborns of maternal
smoking during pregnancy and of postnatal exposure
to environmental tobacco smoke (Forbes and Thomp-
son 1983b); however, most published estimates do not
incorporate measures of external costs (those borne by
persons other than smokers).

  The transfer payments (pension benefits and sick
benefits) associated with smoking-related illness have

/
I,

30





20





10





0

1970       1980

been a source of confusion and controversy. Transfer
payments reflect who pays for and who benefits from
smoking-related illness; these transfers are not, strictly
speaking, economic costs because they do not reflect
resources consumed or lost due to smoking. How-
ever, discussions of smoking-control policies have fre-
quently asked whether smokers in economically
advanced societies (with well-developed public or pri-
vate health care financing, disability, and pension sys-
tems) cover the costs of their own illness (Manning et
al. 1989; Schelling 1986; Garner 1977).

  Accurate estimation of the cost of smoking is
influenced by the quality of data available, current
demographic circumstances, and competing mortality
risks. Cost estimates require reliable data on smoking
behavior, the incidence of smoking-related illnesses,
and the prevalence of such illnesses at death. In many
developing countries, vita1 statistics are unreliable or
incomplete (see Chapter 3, "Smoking-Attributable
Mortality in Latin America and the Caribbean"), al-
though several Latin American and Caribbean coun-
tries have well-established national statistical
registries (World Health Organization [WHO] 1989)
from which reliable estimates can be constructed.

108   Economics


Table 2.  Components of the costs of the health effects of smoking
                -

Component          Definition

Direct costs
Medical care      Costs of treatment for smoking-related illness.
Other         Nonmedical costs of smoking-related illness.

Indirect costs
Morbidity costs
Mortality costs     Loss of earnings and/or housekeeping services due to smoking-related illness.
          Loss of earnings and/or housekeeping services due to premature death from
            smoking-related illness.

Intangible costs
Pain and suffering
Premature death
Relatives' loss

Cost to individual of pain and suffering from smoking-related illness.
Cost to individual of premature death due to smoking.
Cost to smoker's relatives and friends because of concern for smoker's health,
observation of sickness and suffering, and grief and suffering due to smoker's
premature death.

Transfer payments
Taxes
Pension benefits


Sick benefits

Reduced taxes paid by smokers due to illness-related reductions in earnings.
Value of transfer payments such as pensions paid or forgone due to premature
death.
Health care costs paid by public or private insurance plans. Sick pay and disability
benefits paid to smokers during illness.

External costs

Effects of smoking on nonsmokers, including deleterious health effects and the
annoyance of exposure to environmental tobacco smoke. Includes the deleterious
effects of maternal smoking on the fetus, on infants, and on children.

  A country's demographic configuration influ-
ences the degree to which smoking-related illness be-
comes manifest. Since many smoking-related
illnesses do not have an important impact on persons
under age 50, such illnesses do not significantly con-
tribute to mortality in countries where life expectancy
after infancy is low; however, low life expectancy
affects only a small proportion of the population in
Latin America and the Caribbean (Chapter 3, "Life
Expectancy and Mortality").

  The manifestation of smoking-related illness is
also a function of competing morbidity and mortality.
Latin American and Caribbean countries are at differ-
ent stages of epidemiologic transition, and the chronic
conditions associated with smoking may be obscured
by the continued presence of infectious diseases and
other disorders. Countries also vary in the extent to
which background conditions (nutritional, genetic, or
environmental) interact with smoking.

  Another limitation of cost-of-smoking studies is
the method used to calculate attributable risk (AR).'
Although quite useful, this calculation must be ap-
plied judiciously; it attributes all differences between
ever smokers and never smokers to smoking, and it

may overestimate the level of smoking-related illness.
Smokers and never smokers differ in several charac-
teristics, including diet and level of alcohol consump-
tion, exercise, and education KJSDHHS 1990), all of
which may be associated with differences in health
outcomes. Leu and Schaub (1983) developed the hy-
pothetical construct of the "nonsmoking smoker-
type," a person who is like a smoker in all ways except
smoking, to serve as the standard of comparison in
estimating costs of smoking. This construct was also
used by Manning and associates (1989) to calculate the
lifetime external costs of smoking in the United States.
However, the concept may not be useful in many
developing countries because of the variability of
competing factors in different settings.

  In attempting to estimate tobacco-related dis-
eases in developing countries, some researchers have
used a single measure of AR for each of the major
smoking-related illnesses, such as lung cancer, heart

A detailed discussion of the theory, limitations, and other
methodologic issues concerning the calculation of AR and
smoking-attributable disease and mortality is presented
in the Surgeon General's 1989 report KJSDHHS 1989).

Economics   109


Table 3.  Medical care costs for smokers, by study type and author

                                       Year of
Study type and author          Country         estimate

Annual costs (prevalence-based estimates)
Collishaw and Myers (1984)+        Canada           1979

Lute and Schweitzer (1978)         United States        1976

Rice et al. (1986)               United States        1984
Stoddart et al. (19861t5           Canada (Ontario)     1978
Thompson and Forbes (1983)+       Canada           1980

U.S. Office of Technology
  Assessment (1985)             United States        1985

Lifetime costs (incidence-based estimates)
Manning et al. (1989)"             United States        1983

Oster, Cold&, Kelly (1984)         United States        1980

Total cost
(billions)*




  1.64

52.02

24.85

  0.34

  3.04



12-35

  cost
per smoker*




  164

  868
444$

   127

  302



214-870



6,113
2,474-6,576:
1,147-4,138

Hodgson (1990)                United States        1985        501 .o     6,239++
Hjalte (1984)+                  Sweden           1980         0.18         73
*Converted to 1985 U.S. dollars by using U.S. Bureau of the Census (1988) Table 738 consumer price index.
+Markandya and Pearce (1989) report these estimates converted to 1980 U.S. dollars.
STotal cost divided by 56 million smokers in the United States in 1985; U.S. Department of Health and Human Services
(1989).
%ublic expenditure only.

110.33 cost per pack x 16,300 packs = $5,379 (1983 U.S. dollars).
_Men aged 4044 light (l-14 cigarettes per day) to heavy (235 cigarettes per day) smokers.
"Women aged 4&44 light (l-14 cigarettes pe; day) to heavy (235 cigarettes per day) smokers.
`+Lifetime cost for all smokers >25 years old.

disease, and COPD (90,26, and 75 percent, respectively)
(Pan American Health Organization [PAHOI 1989).
Such use of AR can be misleading because the propor-
tion of current and former smokers varies across
countries and over time, and the relative risk is a
function of smoking patterns (e.g., the number of
cigarettes smoked daily and the duration of smoking),
which also vary (USDHHS 1989). For example, Joly
and colleagues (1983) reported that of all lung cancers
for Cuba in 1984, 63 percent among women and 91
percent among men were caused by smoking; for U.S.
women and men in the mid-1980s, the attribution
proportions were 75 and 80 percent, respectively
(Centers for Disease Control [CDC] 1987). Moreover,
the relative risk for smoking is also determined by
nontobacco causes of illness, and these differ among
countries. Applying an exogenously determined set
of AR proportions to any country's population may

lead to unreliable estimates of the level and costs of
smoking-related illness. However, for countries that
lack endogenous data, this procedure is often the only
alternative (see Chapter 3, "Smoking-Attributable
Mortality in Latin America and the Caribbean").

Prevalence- and Incidence-Based Studies

  The prevalence-based approach to measuring
the economic costs of tobacco-related disease has fre-
quently been used, largely because of its relatively
simple methodology, the availability of the data
needed for the calculations, and the consistency of
carefully made estimates (Rice et al. 1986) (Table 3).

  Several of these prevalence-based studies (Lute
and Schweitzer 1978; USOTA 1985; Rice et al. 1986;
Collishaw and Myers 1984) indicate that the costs of
smoking in any one year are likely to be great and that
the economic costs of smoking should be taken

110 Economics


Table 4.  Value of productivity lost due to mortality and morbidity, by study type and author
                                                    _____ ___~~           .__

                               Mortality        Morbidity
                             Year of  Total cost    Cost er   Total cost  Cost  er
Study type and author      Country     estimate (billions)   l!
                                                              smo er    (billions)   K
                                                                           smo er

Annual costs (prevalence-based estimates)

Collishaw and Myers (1984)   Canada

U.S. Office of Technology
  Assessment (1985)       United States

Rice et al. (1986)          United States

Lifetime costs (incidence-based estimates)

1979     4.04       405       0.75      74



1985     27-61   484-1,080*+

1984     9.63     172t      21.74    388t

Leu and Schaub_ (1984)     Switzerland

Oster, Colditz, Kelly (1984)   United States

1976    0.28-0.35   149-183     0.14-0.25   76-132

1980       24,221-68,316+"
        5,894-21,765+'

*Total cost divided by 56 million smokers in the United States in 1985; U.S. Department of Health and Human Services
(1989).
`Range includes both mortality and morbiditv losses.
*Converted to 1985 U.S. dollars by using U.S.`Bureau of the Census (1988) Table 738 consumer price index.
_Markandya and Pearce (1989) report these estimates converted to 1980 U.S. dollars.
"Men aged 40-44 light (l-14 cigarettes per day) to heavy (235 cigarettes per day) smokers.
_Women aged 40-44 light (l-14 cigarettes per day) to heavy (235 cigarettes per day) smokers.

seriously. These studies estimate expenditures for
medical care for tobacco-related diseases, workdays
lost, and future productivity lost due to smoking-
related deaths during the year. However, these stud-
ies do not address other issues that most concern
policymakers, including the economic impact of de-
creased prevalence of cigarette smoking, the length of
time before economic effects are realized, the eco-
nomic benefits of not smoking, and a comparison of
the lifetime illness costs of smokers with those of
nonsmokers (Hodgson 1990). Health care expendi-
tures tend to increase just before death, but smoking
shortens life expectancy and changes the pattern of
health care expenditures. The question arises whether
the health care costs incurred by smokers, when ad-
justed for the altered temporal pattern, exceed costs
incurred by never smokers.

   Most cost-of-illness studies are based on esti-
mates of the prevalence of illness in a particular year.
Because many smoking-related illnesses are chronic
and the latent period between initiation of smoking
and onset of illness is long, prevalence-based cost
estimates reflect the consequences of historical trends
in smoking, which may differ among countries at
different times. Accordingly, prevalence-based cost
estimates cannot be used to predict the impact of

smoking-control policies or to predict the impact of
increases in smoking, except after long periods.

  For policymakers, incidence-based, or lifetime,
estimates of the costs of smoking-related illness may
be more useful than prevalence-based estimates (Leu
and Schaub 1983; Manning et al. 1989; Oster, Colditz,
Kelly 1984). In the incidence-based model, the eco-
nomic costs of smoking are estimated as the average
additional costs per smoker, due to smoking-related
illnesses, incurred over the smoker's lifetime. Esti-
mates can be made of direct (medical care expendi-
tures) and indirect (e.g., lost wages, salaries, and
housekeeping services) costs of smoking and of the
benefits of quitting. For lung cancer, coronary heart
disease, and emphysema, the discounted value of an-
ticipated lifetime costs has been estimated for smoking-
related diseases in persons who smoked in 1980 and
continued to smoke (Oster, Colditz, Kelly 1984). The
costs of the benefits of quitting can be estimated as the
difference between the cost-of-smoking estimate and
the expected costs of former smokers, which reflect the
gradual rate of decline in risk for smoking-related
diseases.

  Estimates of each smoker's lifetime cost of smok-
ing differ by the person's age, sex, and quantity
smoked (Oster, Colditz, Kelly 1984). For example, the


lifetime costs of smoking for a 45-year-old man who is
a heavy smoker are significantly greater than those of
a 65-year-old woman who is a light smoker ($46,334
vs. $2,462; in 1980 U.S. dollars). Oster and colleagues
suggest that estimates of the costs of the benefits of
quitting are less than the costs of smoking and that
benefits vary according to the characteristics of indi-
vidual smokers. The expected costs of both smoking
and the benefits of quitting were sizable for all groups
of smokers foster, Colditz, Kelly 1984).

  Recently, Hodgson (1990) analyzed data on use
and costs of medical care and on mortality for specific
age groups in cross sections of the U.S. population to
generate profiles of lifetime health care costs begin-
ning at age 17. Because expenditures are higher for
persons who die than for those who survive, the anal-
ysis distinguished between the two groups within a
given age range. The profiles, estimated for men and
women by age and amount smoked, include the costs
of inpatient hospital care, physician services, and
nursing-home care. However, the cost of drugs and
dental care, as well as morbidity and mortality costs,
are excluded. Hodgson concluded that, despite the
higher death rate for smokers, the cumulative impact
of the excess medical care used by smokers while alive
outweighs their shorter life span and that smokers
incur higher medical care costs during their lifetime.
For all smokers, excess medical care costs increase
with the amount smoked. Hodgson (1990) estimated
that the U.S. population of civilian, noninstitutional-
ized persons aged 25 years or older who ever smoked
cigarettes will incur lifetime excess medical care costs
of $501 billion (1990 U.S. dollars discounted at 3 per-
cent) or $6,239 per current or previous smoker
(Table 3). This excess is a weighted average of the
costs incurred by all smokers, whether or not they
develop smoking-related illness. For smokers who do
develop such illnesses, the personal financial impact
is much higher.

  Lifetime or incidence-based cost-of-illness esti-
mates are preferred over prevalence-based estimates
for measuring the costs of changes in, and trends
affecting, the incidence of disease. However, lifetime
cost estimates require knowledge of the natural his-
tory of disease, the pattern of medical care use, and the
occurrence of co-morbidity. Lifetime costs are often
estimated from current profiles for cross sections of
populations at different ages and at different stages of
disease. To measure the potential impact of changes
in public policies and demographics on future health
care costs, projections of cost estimates must be made.
Changes in parameters, such as technologic change
and its rate of diffusion, must be considered, or esti-
mates may be biased and misleading (Hodgson 1988).

  The incidence-based approach is better suited
than the prevalence-based approach for estimating the
costs of smoking because the former relates current
changes in smoking behavior to future changes in the
costs of smoking-related illness. The incidence-based
approach, however, suffers from the limitations of
transferability between countries (mentioned above);
it does not directly address intangible costs and
externalities; and it values mortality and morbidity by
measuring forgone earnings rather than willingness-
to-pay. Moreover, even for economically advanced
countries, including the United States, the incidence-
based approach is limited by the lack of adequate and
comprehensive data; for less-developed countries,
this limitation may be exacerbated.

Application to Developing Countries

   The cost-of-illness studies conducted in the
United States and other developed countries reflect
health care rendered in technologically sophisticated,
expensive health care systems. In many other parts of
the world, health care delivery systems are less tech-
nologically advanced, and access to sophisticated
therapy is frequently limited to residents of large met-
ropolitan areas. Thus, the costs and benefits of health
care services in one area may differ significantly from
those found in other areas. Using the experience of
North American and European countries to predict
trends in health care for much of the rest of the world
is speculative because both the future development of
medical technology and the rate of its transference
across national boundaries are largely unknown.

  Few estimates are available on the costs of smoking-
related illness in Latin American and Caribbean coun-
tries. In one report, an average of 19,000 deaths were
attributable to smoking-related diseases in Venezuela
during 1980 to 1984 (PAHO 1992). The costs of medi-
cal care and employee absenteeism associated with
smoking-related illness in Venezuela increased signif-
icantly from 1978 to 1985 (from US$69 million to
US$llO million). Because of the wide variation among
countries in demographic structure, morbidity and
mortality, health care systems, and prevalence of
smoking, these results cannot be generalized to all of
Latin America and the Caribbean.

Financing of Health Care and Pension/
Disability Funds

   Considerable attention has been focused on not
only the size of the economic burden of smoking-related
illness but also on how societies will bear that burden.
Miscalculations of economic burden have been de-
rived by dividing prevalence-based estimates of the
costs of smoking-related illness by the quantity of

112   Economics


cigarettes sold. The resultant quotient has been re-
ported as the per cigarette cost of smoking borne by
society. For example, in the United States, $2.17 is
frequently quoted as the cost of smoking per pack of
20 cigarettes (USOTA 1985). This overall cost fails to
distinguish between the costs of smoking borne by
smokers (internal costs) and those borne by others
(external costs). The discussion of taxation (later in
this chapter) explains how the magnitude of the bur-
den imposed on nonsmokers by smokers is as much a
function of the institutional arrangements for financ-
ing health care, sick pay, disability, and retirement
pensions as it is of the costs of smoking-related illness.
Therefore, the incidence of the health costs of smoking
varies among countries depending on the structure
and scope of each country's social insurance system.

  Different national systems finance health care,
disability, and retirement within the Americas. In
some countries, participation in benefit programs is
financed by payroll taxes or job-related insurance pre-
miums. These types of programs are limited to per-
sons who participate in the formal economy.
Although national health insurance systems are man-
dated in some countries, a Iow level of funding may
limit the scope of public systems and lead to the cre-
ation of private markets for health services. Informa-
tion on the formal health care system may be
inadequate for measuring the external costs of smok-
ing-related illness; data may be needed on the actual
source and disposition of funds.

  The U.S. health care system is financed by vari-
ous government and private payment sources. In the
United States in 1985, direct payments accounted for
24 percent and private insurance-principally pro-
vided by businesses for their employees-ac-
counted for 33 percent of the total personal health care
expenditures. The federal government paid for 30
percent, mostly through Medicare (a federal program
for disabled persons and persons aged 65 or older) and
Medicaid (a program that provides health care for the
poor). State and local governments paid for 11 percent
of health care expenditures, largely through contribu-
tions to the Medicaid program. Government health
programs are financed by various mechanisms, in-
cluding a payroll tax. The cost of employer-financed
health insurance is included in total payroll costs and
is reflected in prices; profits, and wage rates. Public
old-age pensions and disability payments are financed
through the federal Social Security Administration for
most persons in the work force, but private plans
account for a substantial proportion of benefits
(Lazenby and Letsch 1990).

  In Canada, health care is financed through a
national system separately administered by each
province, with some direction and funding from the

federal government.  The Canadian government
finances a comprehensive set of medical benefits and
restricts funding by private sources, but Canadian
citizens can select their own health care providers.
Physicians' fees and hospital budgets are negotiated
by the government, and savings are achieved in part
through the administrative simplicity of the insurance
plans. In 1987, Canada spent US$1,483 per person for
personal health services, and the United States spent
US$2,031 (Igelhart 1989). In 1987, personal health ser-
vices accounted for 8.6 percent of the total gross do-
mestic product (GDP) in Canada and 11.2 percent in
the United States (Igelhart 1989). These comparisons
suggest that, on a per capita basis, Canada spends less
on smoking-related illness than the United States
does.

  Brazil has a mixed public and private system for
financing health care but is moving toward a new
constitutionally mandated, unified, and decentralized
health system (The World Bank 1989a). Brazil spends
approximately 5 to 6 percent of its total GDP on health
care, an amount divided almost equally between the
private and public sectors. About half of all public
financing for health care is channeled through the
National Institute for Medical Assistance and Social
Security and is tied to employment (The World Bank
1989a). Health services, primarily basic services for
the urban and rural poor, are funded by the Ministry
of Health through the general budget. State and local
governments, which also finance health care, ac-
counted for 27 percent of public expenditures on
health in 1986. Private health care is financed by indi-
vidual persons, who directly pay fees for services, and
private insurance, largely financed by employers,
which features various capitation and reimbursement-
for-expenditures insurance plans. In a recent survey
of the Brazilian health care system, The World Bank
concluded that "resources have been poorly allocated;
little is spent on prevention and much on curative care
(70 percent on hospitals alone); little is spent on the
poor, and much on the middle class" (The World Bank
1989a, p. 44).

  In Venezuela, as in Brazil, access to health care is
constitutionally guaranteed, but care is delivered both
privately and through various government programs
(Morgado 1989). The Ministry of Health is responsible
for providing health care, and approximately two-
thirds of the country's physicians are employed by the
Ministry in some capacity. In addition, largely unreg-
ulated private insurance reimburses both physicians
and private hospitals on a fee-for-service basis. The
physician-to-population ratio is high; however, as in
other Latin American countries, physicians are con-
centrated in the large urban centers.

Ecolromics   113


  The costs of smoking-related diseases may be
substantial in Brazil, Venezuela, and other countries
of the Americas with similar health care systems. The
concentration of health care resources for curative care
(mainly hospital and fee-for-service physicians' care)
in urban, middle- and upper-class areas suggests that
these groups consume a disproportionate share of the
resources and that smoking-related diseases in these
groups are treated aggressively. Smoking-related dis-
eases may also be a more important source of illness
in urban, high-income groups than in low-income
groups because persons of high income are likely to
have a longer, more intense exposure to tobacco
use and a longer life span during which smoking-
associated diseases may become manifest.

Costs of Smoking-Control Policies
and Programs

  Knowledge of the dangers of tobacco use and
concern for public health have led to the development
of smoking-control policies in several countries. (See
Chapter 6 for a discussion of control efforts.) Many of
these policies-such as restrictions on advertising,
warning labels on tobacco packages and in advertise-
ments, restrictions on smoking in public places, and
increases in tobacco taxes-use few direct resources,
but hidden or intangible costs may be associated with
such policies.  However, other smoking-control
policies-such as public and school education pro-
grams, lobbying efforts of smoking-control advocates,
and enforcement of restrictions on cigarette sales, ad-
vertising, and smoking in public places-use re-
sources that can be considered part of the costs of
smoking.

  The 1989 report of the Surgeon General presents
a detailed analysis of smoking-control activities in the
United States (USDHHS 1989). Such activities have

Economics of the Tobacco Industry

recently increased significantly in Canada, where the
federa& provincial, and municipal governments have
moved to increase tobacco taxes, restrict tobacco ad-
vertising, strengthen product warnings, restrict smok-
ing ir public places, and help tobacco growers
diversify and produce other crops (Collishaw, Kaiser-
man, Rogers 19901. Except for the program to dis-
courage tobacco cultivation, these policies and
programs use few direct resources. These programs
reflect, in part, the health advocacy of more than 30
voluntary agencies working individually and collec-
tively (as the Canadian Council on Smoking and
Health). Such advocacy activities, although rarely
costed-out, consume resources that should be in-
cluded in estimates of the costs of smoking-control
activities.

  Through the initiative of local medical leaders
and health and education authorities, Brazil's first
antismoking campaign began in Port0 Alegre in 1976
(The World Bank 1989a), spread to other regions, and
gained support. In 1985, the Ministry of Health began
to develop a national program to control smoking. A
recent evaluation by The World Bank (1989al cited the
Brazilian program as a success, although the effects of
the program on smoking patterns have not been for-
mally assessed.  Health planners from The World
Bank found that "public information and personal
smoking-cessation services," which cost only 0.2 to 2
percent of per capita gross national product (GNP) for
each year of life gained, were the most cost-effective
of the preventive and therapeutic interventions re-
viewed. In contrast, treatment for lung cancer cost 200
percent of per capita GNP per year of life gained. This
comparison suggests that public information pro-
grams designed to control smoking in Brazil are ex-
tremely cost-effective.

The Tobacco Sector

Overview

  From an economic perspective, the existence of
a market for tobacco indicates that tobacco produces
some economic benefits, including (1) consumer satis-
faction from smoking and other forms of tobacco use
and (2) income to producers in excess of the cost of

resources for tobacco production. Tobacco produc-
tion also generates costs-principally the value of re-
sources used to manufacture tobacco products.
Confusion about the costs and benefits of tobacco pro-
duction has been spawned by tobacco industry ana-
lysts who label the value of the land, labor, and capital
used in tobacco production as a benefit of such pro-
duction (Tobacco Growers' Information Committee, nd.;

114 Economics


Agro-economic Services Ltd. and Tabacosmos Ltd.
1987). In fact, because the resources used in tobacco
production are not being used for other products, the
cost of these resources is the true resource cost of
tobacco production.  The value of the alternative
goods that could be produced with the resources allo-
cated to tobacco production is a measure of the oppor-
tunity costs of producing tobacco. A tobacco industry
may also generate tax revenues, which are neither
benefits nor costs to a society. Rather, taxes are trans-
fers of resource claims from one segment of society to
the government for redeployment. Subsidies, such as
agricultural support programs, are also transfer
payments.

  The cultivation of tobacco is prima facie evi-
dence of tobacco's net contribution to growers' in-
comes. Although tobacco production may be very
profitable for the individual producer, it is not neces-
sarily beneficial economically. Subsidies and exter-
nalities associated with the production of tobacco may
lead to a divergence between what is best for produc-
ers and what is best for society as a whole.

Demand for Tobacco

  Worldwide consumer demand for tobacco prod-
ucts drives the market for tobacco. In the economist's
view, this demand originates from consumer efforts to
satisfy exogenously determined wants, which are sub-
ject to constraints on consumer resources. Such con-
straints include limits on time and disposable income.
By using information about products and prices, each
consumer purchases a mix of goods to maximize con-
sumer satisfaction.

   One of tobacco's benefits is the avoidance of
nicotine withdrawal symptoms by addicted smokers.
This benefit and other pleasurable sensations, called
"utility" by economists, may have many components,
including status, enjoyment, relaxation, a sense of se-
curity, affihation with other smokers, and perhaps in
certain cultures, a sense of being modern or progres-
sive. However difficult these attributes are to mea-
sure, economists posit that when consumers choose to
spend some of their own limited resources on tobacco,
they reveal their preference for purchasing tobacco
than for engaging in other forms of consumption or
savings.

   Price is a measure of the amount of alternative
goods forgone to purchase tobacco products. (The
effects of variation in cigarette price on tobacco con-
sumption are discussed later in this section.) Tobacco
products, as well as most consumer goods, tend to
obey the law of downward sloping demand-as price
falls (rises), quantity demanded increases (decreases).

Factors that increase the retail price of cigarettes, in-
cluding taxes, tariffs, and import quotas decrease con-
sumption. The cost of raw tobacco is generally not an
important factor in the retail price of tobacco products.
In addition, although the supply of cigarettes does not
affect demand directly, supply influences consump-
tion through the market price: as supply increases,
price tends to decrease, which stimulates consump-
tion until the additional sales clear the market. Factors
other than price that influence the demand for ciga-
rettes and other tobacco products are cited in Figure 3.
   Income determines a consumer's command over
resources and limits consumption options. In general,
the consumption of most goods increases as income
increases, but at a decreasing rate as consumers reach
satiety for a particular good. The income elasticity of
demand is defined as the percent change in the quan-
tity demanded divided by the percent change in in-
come that caused the demand change. The relation of
consumption to income can be observed for individu-
als, groups, and countries, for which income and con-
sumption fluctuate over time, and for variations in
income and consumption among groups at a particu-
lar time.

  For countries in the Americas, the correlation is
positive between per capita cigarette consumption
and per capita GNP (Figure 4 and Table 5). This
relation is stronger in less-developed countries in

Figure 3.  Factors, other than price, that affect the
     demand for tobacco products

       Reducing Factors

     Restrictions on sales to minors

   Restrictions on places for smoking

Public education on harmful effects of tobacco use

Health warnings on packaging and in advertising

I    Perception of harm from tobacco use
         1
            Demand
         t

Augmenting Factors

Disposable income of smokers and potential smokers
Smokers preference for attributes of tobacco products
     Advertising and promotion

         Addiction to nicotine

Economics   115


Figure 4. Per capita cigarette consumption and annual per capita gross national producF (GNP) in 24
    countries of the Americwt 1985

r

.

.

O       ?
   o ?
  ?
          ?

0   2poO 4poO 6poO ~Poo  10,000 12,000 14poO 16JXKl 18,000 20,tUbO
                Per capita GNP

*Using a model that compares the annual per capita consumption of cigarettes to the log of the GNP, the n$ationship is
expressed by the following linear regression equation: Consumption = -3241+ 616 ln(GNP per capita) (I? = 68). This
equation was used to calculate the elasticities discussed in the text.
`See Table 5.

which rising incomes frequently lead to increased
cigarette consumption due to an increase in the per-
centage of the population that smokes and in the
amount each smoker smokes and to a shift from
homemade and roll-your-own cigarettes to more-
expensive, factory-made, higher-quality tobacco
products.

  Several studies indicate that income elasticity
measured for multiple countries is higher than that
measured for a single country (Table 6). The estimates
reported by Chapman and Richardson (1990) and
Townsend (1990), and the estimate based on the data
in Figure 4, cluster around 0.50 (0.45 to 0.55). How-
ever, elasticity tends to fall as income rises, and near-
zero estimates have been reported for developed
countries (Table 6). In the model that compared

consumption to the logarithm of GNP (Figure 41, esti-
mated income elasticity of demand is approximately
2.0 at the lower end of GNP but falls to almost zero
(0.04) at the upper end.

  Restrictions on cigarette sales or on where smok-
ing is permitted make smoking more difficult. These
restrictions raise the total effective price of cigarettes
for consumers and reduce cigarette consumption. In-
creased perception of the harm of cigarette smoking
also depresses demand by increasing the total price of
cigarettes (including health-associated costs) or by
affecting taste.

  Physical characteristics of cigarettes, such as fil-
ters, and aspects of taste, which include strength,
flavor, and smoothness, augment demand. In many
countries, the modern tobacco industry developed

116 Economics


Table 5.  Per capita* cigarette consumption and income in the Americas

              Per capita
              cigarette    GNP+ per capita    Change in    Average annual
                                           growth in
             consumption       KJS$)     consumption (%)     GNP (%I
Country              (1985)         (1987)        (1970-1985)    (1965-1987$

North America
United States          3,370         18,530           -15              1.5
Canada             2,392         15,160           -30             2.7

Latin America
Argentina            1,780         2,390             3             0.1
Bolivia                 330            580            10             -0.5
Brazil              1,700         2,020           30             4.1
Chile              1,000         1,310             -7             0.2
Colombia            1,920         1,240            15              2.7
Costa Rica            1,340         1,610           -20             1.5
Cuba              3,920                          -2
Dominican Republic         930           730           -11              2.3
Ecuador                880         1,040            26             3.2
El Salvador              750            860           -21             -0.4
Guatemala              550            950           -26              1.2
Haiti                  240            360           -55             0.5
Honduras             1,010            810             7             0.7
Mexico              1,109         1,830                         2.5
Nicaragua            1,380           830            10             -2.5
Panama                894         2,240                          2.4
Paraguay            1,000            990             4             3.4
Peru                  350         1,470           -10             0.2
Uruguay             1,760         2,190            14              1.4
Venezuela            1,890         3,230            -4             -0.9

Caribbean
Barbados            1,380                         20
Guadeloupe           1,080                           -1
Guyana             1,000            390           -26             -4.4
Jamaica              1,190            940           -34             -1.5
Suriname            1,660                         60
Trinidad and Tobago      1,600         4,210           -16             1.3
Source:  The World Bank (1989b); U.S. Department of Health and Human Services (1989); Chapman and Wong (1990).
Aged 18 years or older.
`GNP = Gross national product.
$1982-1988 data.

because of a shift in consumption from traditional
forms of tobacco to modern, machine-made, quality-
controlled, flavored cigarettes made from blends of
tobacco, including fabaco rubio, a flue-cured tobacco.
Some authorities have suggested that the develop-
ment of filter-tipped cigarettes and long, slim ciga-
rettes has increased smoking among women (see
Chapter 2, "The Emergence of the Tobacco Compa-
nies"). The addictive nature of tobacco, another
demand-augmenting factor, is discussed in a prior
report (USDHHS 1988).

  The degree of competitiveness or structure of the
market for tobacco products can also affect the de-
mand for cigarettes by operating on retail price, prod-
uct differences, and product promotion. In many
countries, the market for tobacco products may be
reserved for a government-operated or sanctioned
monopoly, but cigarette markets in the Americas are
characterized by oligopoly-dominance of the market
by several large firms (see Chapter 2, "The Emergence
of the Tobacco Companies"). Prices tend to be lower
and aggregate advertising and promotion expenditures

Economics   117


Table 6.  Estimates of income elasticity of
     demand for cigarettes

Study
Chapman and
Wong (1990)

Chapman and
Wong (1990)

Walsh (1980)

Witt and Pass
(1981)

Lewit and Coate
(1982)

Townsend (1990)

Data in Figure 4

Data

Worldwide, 1980

Countries with
gross national
product ~$5,000
per capita, 1980

.55*

Ireland, 1953-1976

United Kingdom,
1955-1975

.33

.13

United States, 1976    .08

Europe, 1987-1988

24 countries of the
Americas, 1985

Elasticity
.45*

.46

.49

`Estimates calculated for this report from data provided in
Chapman and Wong (1990).

tend to be higher in oligopoly markets than in monop-
oly markets, because of competition. In addition, oli-
gopoly markets are characterized by greater variety as
firms attempt to capture market niches for specific
products.

  Cigarette advertising and the sponsorship of en-
tertainment, sporting, and cultural events are intended to
increase the demand for particular cigarette brands.
Measuring the effect, if any, of such advertising on
aggregate demand is problematic. Accordingly, pub-
lic policy toward cigarette advertising and promo-
tional activities is controversial in many countries.
Assessment of the impact of tobacco advertising and
advertising restrictions was presented in the Surgeon
General's 1989 report (USDHHS 1989) and is updated
below.

Advertising

  In the United States, cigarettes are one of the
most heavily advertised products, and the mix of ad-
vertising and promotion has changed over time. Cig-
arette commercials have been prohibited from
television and radio since 1971. In 1975,75 percent of
expenditures were directed toward traditional print
advertising media (newspapers, magazines, bill-
boards, and point-of-sale posters) and 25 percent to-
ward promotional activities, such as coupons, free

samples, public entertainment, and allowances to re-
tailers (CDC 1990). By 1988, when total expenditures
reached $3.27 billion, promotional activities ac-
counted for more than two-thirds of all advertising
and promotional expenditures. Despite the sizable
decline in the use of traditional print media from 1975
to 1988, cigarettes were in 1988 the product most heav-
ily advertised on outdoor media, the second most
heavily advertised in magazines, and the sixth most
heavily advertised in newspapers (CDC 1990).

  In many other countries of the Americas, tobacco
advertising expenditures are substantial (Table 7),
despite restrictions on advertising activities (see
Chapter 5). The Canadian Tobacco Products Control
Act banned all tobacco advertising in the Canadian
print media beginning January 1,1989, and required
that outdoor advertising on billboards and spon-
sorship of sporting and cultural events be phased out
(Collishaw, Kaiserman, Rogers 1990). This advertis-
ing ban is currently being contested by Canadian
tobacco companies in a protracted court case (Col-
lishaw, Kaiserman, Rogers 1990).

  Advertising aims to increase profit by increasing
demand for a particular product (Scherer 1980). In
oligopoly markets, advertising is used to differentiate

Table 7.  Estimated advertising expenditures* of
    tobacco industry in selected countries of
      the Americas

Country

Cost

United States            $3,270.0
Canada              88.0+
Argentina                   18.5
Brazil                     68.0
Costa Rica                    1.8
Dominican Republic              2.4
Ecuador                    1.0
El Salvador                   0.9
Guatemala                    1.8
Mexico                     19.8
Panama                     1.8
Uruguay                     0.7

Source:  Philip Morris International Inc. (1988); ERC Sta-
tistics International Limited (1988); Centers for Disease
$2ontrol(1990); Chapman and Wong (1990).
Estimates are for 1986,1987, or most current year available;
in millions.
`A phased-in ban on tobacco advertising began in January
1989 and is scheduled for completion by January 1993.
A court ruling declared the law unconstitutional, but it
remains in effect pending appeal (RJR-Macdonald Inc. v.
Attorney General of Canada 1990; Imperial Tobacco Limited
v. Attorney General of Canada 1990).

228 Economics


among similar products and to build sales or to sustain
the price of a particular product (Scherer 1980). Ad-
vertising attempts to associate smoking with attri-
butes generally considered positive, such as high-style
living, healthful activities, and economic, social, and
political success; it fails to voluntarily provide infor-
mation on the substantial hazards of cigarette con-
sumption. In emphasizing the positive attributes of a
product, advertising may increase demand for both a
particular brand and a class of products. Much of the
debate over tobacco advertising has focused on
whether such advertising increases cigarette sales and,
consequently, has a negative impact on public health,
or whether advertising is strictly a competitive device
tobacco companies use to determine relative market
share in a stable or declining market, in which case
such advertising would have little effect on public
health (USDHHS 1989). The results of many analyses
of the effects of advertising on cigarette consumpt-ion
were reviewed in the Surgeon General's 1989 report,
which cited the conclusion that it is "more likely than
not that advertising and promotional activities do
stimulate cigarette consumption" (Warner et al. 19861,
although precisely quantifying the influence of these
activities on the level of consumption may not be
possible.

  Evidence from the Canadian advertising ban
and the continuing debate over increasing restrictions
on advertising in the United States (Koop 1989) and
other countries suggest that focus has shifted from the
impact of advertising per se to the effects of advertis-
ing restrictions on consumption. An extensive study
of this issue was performed by the New Zealand Toxic
Substances Board (1989) in support of its recommen-
dation for a total ban on tobacco promotion in that
country. The relation between tobacco advertising
bans and tobacco consumption was examined from
1976 to 1986 in 33 countries. The study demonstrated
that "government tobacco advertising bans and con-
trols are accompanied by enhanced rates of fall in
tobacco consumption" (page xxiii) and that "the
greater a government's degree of control over tobacco
advertising and promotion, the greater the annual
average faI1 in tobacco use in adults and young
people" (page xxiv). As a follow-up to the New
Zealand report, Laugesen and Meads (1990) examined
the effects of tobacco advertising restrictions, price,
and income on tobacco consumption between 1960
and 1986 in 22 economically developed countries.
They found that a total ban on tobacco advertising
would have lowered average consumption by 5.4 per-
cent in 1986 in countries without a total ban at that
time.

  However, these studies have limitations-pri-
marily a failure to account for the potential bias that
antitobacco sentiment may be stronger in countries
that ban advertising than in countries that do not.
Accordingly, restrictions on tobacco advertising are,
to some extent, markers of antitobacco sentiment, and
a portion of the decline in consumption in countries
with bans may be attributable to this sentiment rather
than to advertising restrictions. In addition, both
studies primarily included developed countries with
a high but declining level of tobacco consumption.
Extrapolation of these findings to less-developed
countries with different patterns of tobacco consump-
tion may be inappropriate.

Supply of Tobacco

  Tobacco, which is grown in more than 120 coun-
tries, is the most widely grown nonfood crop. It is
grown in most developing countries, and the share of
tobacco production in developing countries has in-
creased steadily from 50 percent of world production
in 1961 to 1963 to 58 percent in 1972 to 1974 to 69
percent in 1987 (Stanley, in press) (also discussed in
Chapter 2, "The Emergence of the Tobacco Compa-
nies"). In the past decade, most of the increase in
worldwide tobacco production has been in China,
which accounts for about 34 percent of total world
production (Table 8). Major producers in the Ameri-
cas include the United States (almost 10 percent of

Table 8.  Share of world tobacco production, 1990

Country

Major producers
China
United States
India
Brazil
USSR

Other producers in the Americas
Canada
Argentina
Mexico
Cuba
Colombia
Dominican Republic
Paraguay
Venezuela
Chile

Production*

33.5
9.8
7.3
6.3
5.4

1.1
1.0
0.9
0.6
0.6
0.4
0.3
0.2
0.1

Source:  Food and Agriculture Organization of the
United Nations (1990).
*As percentage of world output; computed from weight of
crop.

Economics   119


total world production) and Brazil (about 6 percent).
Worldwide, about 22 percent of tobacco leaf by weight
is grown in the Americas. Tobacco production is in-
creasing more rapidly in developing than in devel-
oped countries and is expected to increase in
developing countries to more than 72 percent of world
production by the year 2000 (Food and Agriculture
Organization of the United Nations [FAO] 1990). In
the Americas, tobacco production is expected to de-
cline from 23 percent of world production in 1984 to
1986 to 21 percent by the year 2000 (FAO 1990).

  Considerable differences exist between the
quality and, hence, the price of tobacco leaf produced
in different countries. For example, tobacco grown in
the Americas is worth almost four times as much as
tobacco produced in China, although by weight,
the American crop is only 65 percent of the Chinese

crop (Agro-economic Services Ltd. and Tabacosmos
Ltd. 1987).

  Tobacco production is mainly concentrated on
small farms in limited geographic areas. The value of
the typical tobacco crop frequently makes tobacco an
important source of income not only for growers but
for local agricultural workers, even though tobacco is
often grown in rotation with other crops. Compared
with most other crops, tobacco uses little arable land
(about 0.3 percent worldwide), but tobacco cultivation
is labor intensive (Table 9) (Muller 1978). The tobacco
industry's ability to create employment is valued in
areas where labor is plentiful and production alterna-
tives are few. Millions of persons are involved in or
dependent on some stage of the tobacco-production
process for a portion of their livelihood (Agro-
economic Services Ltd. and Tabacosmos Ltd. 19871,

Table 9. Labor* and land use in tobacco growing, processing, and manufacturing in the Americas, 1983
                           -

Country

North America
United States
Canada

Latin America
Argentina
Bolivia
Brazil
Costa Rica
Chile
Colombia
Cuba
Dominican Republic
Ecuador
El Salvador
Guatemala
Haiti
Honduras
Mexico
Nicaragua
Panama
Paraguay
Peru
Uruguay
Venezuela

Caribbean
Tamaica

  Growing
No.     FTE+

66.80

105.40

43.90

600.00

288.90

3.76       1.93
302.00     100.50
20.00      17.00

24.20       6.55
1.23      1.23

351.00

117.00

10.00

95.00

59.68$      77.00      228.08      75.80
20.40       8.10       31.18       9.58

3.50

22.90

9.73


43.87


1.95
9.35
40.10

1.48
0.44

4.81

1.44

3.57

215.76

352.00

42.00
108.00
23.20

55.02
12.20

197.50

22.00


100.00

Processing and
manufacturing     Distribution
FTE - No.       FTE

7.70

120.20


2.60
30.30
13.40

0.93
1.52


25.90

1.90

6.70

Arable land
used (%I

0.21$




0.20
1 .oo
0.50
0.20
0.10
0.40
2.10
1.10
0.10
0.50
0.40
0.10
0.50
0.10
0.20
0.20
1.70
0.10
0.10
0.20



0.40

Source: Agro-economic Services Ltd. and Tabacosmos Ltd. (1987); Chapman and Wong (1990).
*In thousands of workers.
+FTE = Full-time equivalent.
SFor 1989; U.S. Department of Agriculture unpublished estimates.

120 Economics


and persons in certain regions may substantially de-
pend on tobacco.

  Tobacco farming is also highly seasonal. If the
work could be spread evenly throughout the year, the
average-sized tobacco farm could be managed by one
full-time farmer, with some time remaining (Stanley,
in press). However, because many workers are
needed for harvesting and planting, tobacco farming
provides many countries with part-time, seasonal em-
ployment for many laborers (Table 9). The average
number and full-time equivalent (FTE) number of
workers employed in tobacco growing and other
aspects of the tobacco industry vary widely in the
Americas.

  After tobacco is harvested, the crop is processed
in various ways before being made into cigarettes and
other consumer products. This processing includes
sorting and grading, curing and drying, and destemm-
ing the raw tobacco leaves. In most countries, these
activities occur in agricultural areas and are included
in statistics for the agricultural sector. In other coun-
tries, some of these activities are associated with the
initial stages of the manufacturing process and are
included in statistics for that sector.

  Many features of the tobacco market make to-
bacco particularly attractive to growers in many coun-
tries.  First, and most important, when tobacco is
grown extensively, it yields a higher net income per
unit of land than most other cash crops and substan-
tially more than most food crops. In addition, price
does not fluctuate substantially for tobacco as it does
for other cash crops.  Moreover, in most countries,
tobacco growers protect themselves from the unex-
pected price fluctuations that plague other crops by
negotiating sales prices for crops before planting;
growers are paid in cash immediately upon sale (Econ-
omist Intelligence Unit 1983). The combination of
prenegotiated price and quick sale makes tobacco
growing easy to finance. The extremely favorable
conditions of sale offered to tobacco farmers are not
usually offered to growers of other crops. Various
combinations of government and transnational tobac-
co company activities, including controls on planting,
production quotas (guaranteed prices, incentives, and
subsidies), import duties, state tobacco monopolies,
state trading in tobacco, foreign aid programs, and
limitations on marketing, benefit tobacco growers in
many countries. As a result, much of the risk of tobac-
co growing is shifted from the farmer to the purchaser.

  Although tobacco provides most farmers with
higher gross returns per hectare than many other
crops do, considerable costs are associated with to-
bacco growing. In addition to being labor intensive,

tobacco cultivation requires large amounts of fertiliz-
ers and pesticides, and in many areas, fuel (wood, gas,
or oil) is needed for tobacco curing. The U.S. Depart-
ment of Agriculture (USDA) estimated that, excluding
land and quota cost, the cost of growing flue-cured
tobacco in the United States in 1990 amounted to 70
percent of the value of the crop produced (Clauson
and Grise 1990). In examining the opportunity costs
of tobacco growing in Brazil in terms of alternative
crops, Barrows (unpublished) found that the value that
labor employed in tobacco growing would have in alter-
native activities is the most important factor in deter-
mining the profitability of tobacco.  Barrows
estimated that in 1986 in Rio Grande do Sul, total
returns to land, labor, and management for tobacco
were 130 percent of those for maniac and 118 percent
for potatoes. However, cultivation of tobacco re-
quired 7.5 times as many man-hours of labor as man-
ioc did and 5.3 times as many man-hours as potatoes
did. Accordingly, all of the apparent additional re-
turns to the tobacco grower were in fact returns to the
additional labor invested, and the actual profitability
and net social benefit of the tobacco crop depended on
the wage rate and the potential alternative uses of the
labor employed in tobacco growing.

Manufacturing

  Most of the tobacco grown worldwide is flue-
cured and processed on the farms. Tobacco is then
manufactured into cigarettes, cigars, smokeless tobac-
co products, and loosely cut smoking tobacco. About
85 percent of worldwide tobacco production is used
for cigarettes. Flue-cured tobacco accounts for almost
60 percent of the tobacco in American-style cigarettes
and all of the tobacco in British-style cigarettes.

  The manufacturing of cigarettes provides sub-
stantial employment in many countries, but the labor
intensity of cigarette manufacturing varies consider-
ably by country. In the United States, production is
highly automated; seven factories produce enough
cigarettes for the domestic market and for the large
and growing export market. In Latin America, ciga-
rette manufacturing is less automated and more labor
intensive (Table 9). Cigar manufacturing is more
labor intensive than cigarette manufacturing, which is
reflected in the employment figures for countries that
are important producers of cigars (e.g., Cuba and the
Dominican Republic).

Distribution

  Tobacco is distributed in many forms. Ciga-
rettes are sold in cartons of 10 packs and in packs of 10,
15,20, and 25 cigarettes. In many areas, street vendors

Economics   121


sell cigarettes individually from broken packs. In
some countries, cigarettes are sold by tobacconists;
however, cigarettes and other tobacco products are
typically sold by retail merchants who also sell a
variety of other consumer goods. Accordingly, in
most countries, total employment in tobacco distribu-
tion is many times FTE employment because tobacco
sales represent a small part of the employees' jobs
(Table 9).

   Distribution in the tobacco sector is a small com-
ponent of larger distribution activities in most econo-
mies. Although attributing some proportion of
employment to tobacco distribution activities is statis-
tically appropriate, such attribution may be inappro-
priate for analytic reasons. In the absence of tobacco
products, consumers would purchase alternative
goods, and the production of these goods would result
in employment-not only in the distribution sector
but in the manufacturing and farming sectors as well.
Although the level and type of employment generated
by alternative consumption patterns may change with
changes in the tobacco sector, total employment
would not change significantly. Some persons, how-
ever, may be affected by shifts in consumption pat-
terns; some persons may become unemployed, and
some may change jobs or job activities.

  The tobacco industry also creates output in other
parts of the economy-both directly, by creating de-
mand for products such as fertilizers, fuel, and paper
used in the manufacture of tobacco products, and
indirectly, when persons employed in the industry
spend their earnings for their own consumption.
Every economic activity, however, has both direct and
indirect links to other economic activities. The exact
nature of the links differs among industries and coun-
tries, but the net aggregate effect of shifts in demand
into or out of specific industries is small, except per-
haps for some transitional costs. Exceptions may
occur, however, for factors that receive higher-than-
normal returns (called "rents" by economists) from a
specific activity. Such factors are particularly disad-
vantaged by a reduction in rent-producing activity;
however, even their losses are balanced by gains to
other factors of production or to consumers.

Trade

  Most tobacco is consumed within the country of
production; only 25 percent of world production is
traded internationally, primarily as a raw commodity.
Only the United States, the United Kingdom, and the
Netherlands are important exporters of cigarettes, and
the United States is the leading cigarette exporter-at
25 percent of the worldwide total. In addition, the

United States exports much high-quality tobacco,
which in several countries, is blended with tobacco
from other sources to make the increasingly popular
American-style cigarettes. The United States imports
oriental tobaccoand other less-expensive filler tobacco
to blend with U.S.-produced tobacco to make ciga-
rettes for domestic consumption and export. Brazil,
another major tobacco exporter sells much of its crop
in Europe. On the whole, countries in the Americas
have a substantial balance-of-trade surplus in tobacco
(Table 10).

Subsidies to Tobacco Production

  Subsidization may be used in an attempt to de-
velop or protect a domestic tobacco industry or to
control the importation of cigarettes or tobacco to
conserve foreign exchange. The growing and curing
of tobacco is frequently controlled and directed by the
main tobacco purchasers-either large, private com-
panies or government agencies. In many areas, these
organizations set the price of tobacco before planting
and provide seeds or seedlings to tobacco farmers,
who are thus guaranteed a minimum income for their
crop at harvest time. These production controls are
primarily designed to encourage the production of a
limited amount of high-quality, marketable tobacco
(Lewit 1988).

  The situation in southern Brazil exemplifies an
industry-sponsored support program for tobacco
growers that has fostered the development of a tobacco-
growing sector. The cigarette manufacturers provide
the growers with all purchasable inputs-including
seed, pesticides, and fertilizers-at wholesale prices,
and maintain agricultural extension programs to de-
velop tobacco plants and technology appropriate for
the area. Farmers are visited regularly by technical
advisers provided by the tobacco companies. The
purchasers also control the chemicals used in growing
tobacco so that the crop will conform to U.S. and
European standards and be exportable (about 37 per-
cent of the Brazilian crop is exported) (Economist
Intelligence Unit 1983). The value of the extension
services rendered to farmers is estimated at 30 to 35
percent of the prices paid to farmers for the tobacco
(Economist Intelligence Unit 1983).

  A similar relationship exists in Venezuela among
the government, two tobacco processors, and several
hundred tobacco farmers. The farmers receive finan-
cial and technical aid from the companies, along with
guaranteed prices for crops. As a result, the compa-
nies have some control over the quality and quantity
of the tobacco crop, but the companies can also set
retail cigarette prices. The Venezuelan government

122 Economics


Table 10.  International trade in tobacco, 1984 and 1985*

Country

   Imports              Exports
Total    Percentage of      Total    Percentage of     Trade
value    all imports       value    all exports     balance

0.1
1.3

0.6
1.7
0.1
0.6
<O.l
1.0
3.5
<O.l
<O.l
1.4

North America
Canada+            51,066        0.1         97,579
United States+         734,082       0.3       2,658,053
    Subtotal         785,148              2,755,632

Latin America
Argentina            1,210       <O.l         46,310
Brazil                  140       <O.l        468,570
Chile                 800       <O.l         4,200
Colombia            9,681        0.2         22,243
Costa Rica               312       <O.l            521
Cuba                  375       <O.l         64,866
Dominican Republic       1,687       0.1         30,872
Ecuador             1,900        0.1            993
El Salvador            1,041        0.1            510
Guatemala            1,000       <O.l         16,099
Haiti               4,100        0.9               -
Honduras            3,170        0.3         15,562
Mexico              6,290       <O.l         30,420
Nicaragua               137       <O.l          4,222
Panama             1,458       0.1         1,873
Paraguay            8,964        1.7         14,653
Peru               3,173       0.1            292
Uruguay             4,842       0.6         1,136
Venezuela            1,140       <O.l         14,380
    Subtotal          51,420                737,722

Caribbean
Guyana                695       0.1
Jamaica             4,868        0.4         14,750
Trinidad and Tobago      6,723        0.4            318
    Subtotal          12,286                15,068

    Total           848,854              3,508,422
Source: Agro-economic Services Ltd. and Tabacosmos Ltd. (1987); Chapman and Wong (1990).
Unmanufactured tobacco only; in U.S. dollars.
`1983 data.

2.1
1.3
1.1
0.7
4.4
<O.l
0.1
0.1

-
1.9
<O.l

provides tobacco farmers with subsidized inputs and
low-inteiest loans but receives a steady stream of tax
revenues from a 50 percent tax on retail cigarette sales
(Tobucco International 1989).

  Canadian tobacco manufacturers offer subsidies
to Canadian tobacco growers, which allow growers to
competitively price Canadian leaf for export (Col-
lishaw, Kaiserman, Rogers 1990). But in a unique turn
of events, the Canadian government developed a sub-
sidy program to downsize the Canadian tobacco in-
dustry (Collishaw, Kaiserman, Rogers 1990).

+46,513
+1,923,971
+1,970,484

+45,100
+468,170
+3,400
+12,562
  +209
+64,491
+29,185
  -907
  -531
+16,753
-4,100
+12,392
+24,130
+4,085
  +415
+5,689
-2,881
-3,706
+13,240
+686,302

-695
+9,882
-6,405
+2,782

+2,659,568

  In Argentina, a levy on cigarette sales is used to
finance a fund to support tobacco prices, but the fund
is fairly static. Support prices have tended to fall as
output increased, which has resulted in inadequate
incentives to sufficiently increase crop quality for an
export market (FAO 1990).

  In other countries, such as the United States,
tobacco production is encouraged by the establish-
ment or support of high prices and the institution of
production controls to avoid excess supplies. Since
1933, USDA has operated a tobacco price-support

Economics   123


program to increase the returns to tobacco cultivation
(Warner 1988; Congressional Research Service 1989).
Although the program was revised substantially in
1986, it still controls supply to reduce U.S. production
and supports higher-than-free-market prices of U.S.
tobacco for both domestic and foreign consumption.
The current program also restricts the location of to-
bacco farms in the United States (Grise 19881, which
probably makes U.S. tobacco production more costly
than it might otherwise be.

  Subsidization may introduce distortions into the
tobacco market. By making tobacco growing more
profitable to the farmer than it would be if prices were
determined solely by market forces, subsidization en-
courages a shift of resources from other crops to to-
bacco. In competitive markets, such a resource shift
would lead to an expansion in supply and an equili-
brating fall in price. When supply is controlled and
unable to expand, price does not fall, and farmers earn
excess profits for their production. Many developing
countries also attempt to discourage importation of
foreign tobacco (either in raw form or as cigarettes) by
setting bans, quotas, or high tariffs. Consequently,
prices received by tobacco growers in these countries
are likely to be above free-market prices; domestic
production becomes stimulated; and tobacco farmers'
incomes increase.

  Excess profits, or rents, encourage producers to
organize politically to protect themselves against in-
creases in supply, falling prices, and government cam-
paigns designed to discourage smoking. Such
rent-seeking behavior has been observed in markets
for many products around the world (Tollison 1982)
and should be considered a consequence of most reg-
ulatory and subsidy policies. Furthermore, the net
effect of programs that limit tobacco importation or
production is beneficial to domestic producers but at
the expense of consumers. These programs do not
confer a net benefit on the country as a whole and only
transfer income between groups. However, because
such measures usually increase cigarette prices and
may decrease cigarette quality, consumption may be
reduced. But high tariffs and import restrictions can
encourage the growth of an illegal market in smuggled
cigarettes.

  Although no official trade statistics estimate the
size of the world market in illegally traded tobacco
products, these statistics indicate that from 1984
through 1986, exports were 13 percent greater than
imports (FAO 1990) (see also Chapter 2, "The Emer-
gence of the Tobacco Companies"). Cigarettes smug-
gled from the United States have been a problem in
several Latin American countries over the years, most

recently in Colombia (Nares 1984). Cigarette smug-
gling also appears to be a problem in Uruguay and
Paraguay, and the growing disparity in cigarette taxes
between the United States and Canada has increased
the incidence of border crossings to purchase ciga-
rettes in conveniently located duty-free shops in the
United States (USDA 1990). Illegal reimportation of
Canadian cigarettes is also becoming increasingly
common. Canadian cigarettes smuggled back into
Canada from the United States accounted for an esti-
mated 1 to 4 percent of total Canadian cigarette con-
sumption in 1990 (Collishaw, personal communication
1991).

  The United States is the world's second largest
tobacco producer (after China) and the largest ex-
porter of tobacco. U.S. tobacco exports accounted for
18 percent of all nonmanufactured tobacco traded
internationally in 1984 to 1986, down substantially
from the 35 percent market share held in 1955 to 1959
(FAO 1990). Spillover effects of the U.S. tobacco price-
support program affect the development of tobacco-
growing sectors in many developing countries.
Higher-than-free-market prices, received by U.S. to-
bacco growers as a result of the U.S. tobacco program,
benefit the growers and entitlement holders (those
with permits to grow tobacco) at the expense of do-
mestic and foreign consumers. These high prices also
create opportunities for foreign producers to profit-
ably produce tobacco for both domestic consumption
and export (sometimes to the United States). U.S.
tobacco, although very expensive, is perceived to be of
high quality. Accordingly, a substantial fall in the
price of U.S. tobacco could have a significant impact
on the world market.

   Sumner and Alston (1984) have estimated that
elimination of the U.S. tobacco-support program
would very conservatively result in a 50 percent in-
crease in U.S. tobacco production and a 25 percent
reduction in the price of U.S. tobacco. Very little of this
increased production would be absorbed in the United
States or abroad through increased consumption of
cigarettes. Some of the tobacco (27 percent) would
substitute for that currently imported by the United
States, but most (73 percent) would be exported (Sum-
ner and Alston 1984). The excess U.S. tobacco would
be highly competitive with tobacco produced in other
countries, and as a result, tobacco growing would
become much less profitable in other countries. In
fact, an increase in U.S. tobacco exported or substi-
tuted for imports could be devastating to developing
countries that depend on tobacco export earnings for
foreign exchange. Tobacco exported by developing
countries amounts to over one-third of the current
export market (Lewit 1988).

124   Economics


  The various subsidies provided to many tobacco
producers make the evaluation of tobacco-production
policies complex, and each case should be examined
individually to determine the true "benefits" of to-
bacco production. The vulnerability of tobacco expor-
tation and prices to changes in U.S. farm policy is
difficult to value, but tobacco-development projects
should be evaluated in terms of potential changes to
this policy. Tobacco production is profitable in many
countries primarily because it allows participation in
a subsidized market established by USDA. Thus, the
subsidization of U.S. producers has created an oppor-
tunity for subsidization in other tobacco-producing
countries as well.

Contribution of Tobacco to Economic
Growth and Development

  Tobacco production can contribute to economic
growth and development directly by raising national
income and investment and indirectly through
various spillover effects. Heavily subsidized tobacco
production enables transfer of resources from tobacco
consumers to producers. When producers are con-
centrated in developing countries and consumers are
concentrated in the developed world, this transfer
tends to raise incomes and stimulate growth and in-
vestment in the developing countries. For example,
Brazil, the second largest tobacco exporter in the world
(after the United States), accounted for more than 14
percent of all tobacco exported in 1989. Most of
Brazil's tobacco exports are sent to the United States
and Western Europe (USDA 1985). Brazil obtains an
above-market price for tobacco exports, due to sub-
sidy programs in other countries, and profits from this
exportation.

  Because tobacco is readily marketable, invest-
ments in agricultural projects supporting tobacco
production are usually self-liquidating, and in the
past, such investments may have been thought attrac-
tive by international development agencies, which
financed projects designed to enhance tobacco pro-
duction in Latin America and the Caribbean (Chap-
man and Wong 1990). Such financing is currently
under review by some international lenders because
of concerns about the long-term health effects of en-
couraging tobacco-industry growth in developing
countries.

Externalities

  Several positive externalities, or technologic spill-
over effects, have been associated with both tobacco
growing and manufacturing. Improvements in farm-
ing practices, for example, have increased yield from

not only tobacco but other crops as well because many
of the modern farming procedures introduced for to-
bacco growing can also be applied to other crops
grown in rotation with tobacco (Sofranko, Fliegel,
Sharma 1976; Economist Intelligence Unit 1983). Pro-
ducing a tradable tobacco crop requires a high degree
of quality control, and in many countries, tobacco
purchasers provide the technical support and inputs
necessary for a high-quality crop. Furthermore, man-
ufacturing and marketing of tobacco products may
require highly trained workers to maintain and sup-
port modern factories in developing countries (Philip
Morris International Inc. 1988). The training, except
for that specific to tobacco production, helps to in-
crease the supply of sophisticated managers and tech-
nicians. These positive externalities, however, could
probably be achieved for many other commodities as
well.

  One potentially negative externality is deforesta-
tion associated with curing tobacco. Several early re-
ports indicate that curing with wood requires felling
one tree per 300 cigarettes (Muller 1978). Stated in
other terms, one hectare of woodland is required to
cure either one hectare (Eckhold et al. 1984) or one-half
hectare (International Agricultural Development
1984) of tobacco. The latter source also estimates that
one in 12 trees cut worldwide is used for curing to-
bacco. These estimates correspond to a specific fuel
consumption (SFC) of between 100 and 230 kg of wood
per 1 kg of tobacco.

  The only multicountry analysis of deforestation
associated with the curing of tobacco was commis-
sioned by the International Tobacco Information Cen-
tre (an industry-sponsored group) and was performed
by the International Forest Science Consultancy (Fra-
ser 1986). For the few countries examined, the re-
searchers estimated that the SFC for individual farms
ranged from 2.5 to 40 kg/kg (average of 7.8 kg/kg)
and that the SFC for Brazil was 15 to 20 kg/kg. Over-
all, the report estimated that in tobacco-growing, de-
veloping countries, only 0.7 percent of trees cut for all
purposes are cut for tobacco curing. Because no avail-
able data question these findings, deforestation asso-
ciated with tobacco curing cannot currently be
considered a significant negative externality, although
deforestation in general is a major concern in many
parts of Latin America.

Price, Production, and Substitution

  A decline in the price of tobacco, which would
discourage production, would occur if demand for
tobacco were significantly reduced or if the subsidies
and tariffs that support tobacco production were

Ecotlomics   125


reduced. Worldwide, a significant excess supply of
tobacco would result if production controls were
relaxed (FAO 1990). The substantial price reduction
that would probably result from this excess supply
would make tobacco growing less profitable than it
currently is.

  As described earlier, tobacco produced for ex-
port allows a country to participate in a subsidized
international market and capture some of the eco-
nomic transfers between consumers and producers
that occur in such markets. Such participation may
benefit a country's net income, provided that no seri-
ous externalities are associated with tobacco produc-
tion. When tobacco is produced for domestic
consumption, however, most subsidies enjoyed by
domestic producers are financed by domestic con-
sumers, and domestically financed subsidies are likely
to encourage rent-seeking behavior. Such behavior
may in turn lead to increased efforts to protect the
domestic market from foreign competition. It may
also result in attempts to encourage tobacco consump-
tion and restrain policies designed to discourage con-
sumption for health reasons. However, the higher
prices that result from controls on supply may alone
reduce consumption.

  Tobacco production has also been encouraged to
allow substitution for imported tobacco. Economic
development through import substitution was a pop-
ular economic policy in South America in the 1950s
(Fishlow 1990). For the tobacco sector, this policy may
appear attractive in the short term because import
substitution saves on foreign exchange, creates em-
ployment, and shifts the subsidy paid by consumers
from foreign suppliers to domestic producers. The
development of a domestic tobacco sector almost cer-
tainly results in increased tobacco use because of a
decline in tobacco's real price. In addition, develop-
ment of a domestic sector makes it more difficult for a
country to mount successful antitobacco campaigns
because domestic producers rather than foreign sup-
pliers are affected. Because of these conflicting inter-
ests, the measurement of the net costs or bene-
fits associated with developing a domestic sector is
difficult and must reflect the idiosyncrasies of each
country.

  Increased support for the production of crops
other than tobacco might effectively control tobacco
production (Warner et al. 1986). For example, some
farmers in the tobacco-growing area of southern Brazil
choose not to grow tobacco because of the large labor
input required (Economist Intelligence Unit 1983),
which suggests that tobacco may be only marginally
advantageous for many growers in that area. But a

policy of support for other products must be carefully
considered for each country. In some areas, alterna-
tives to tobacco growing are feasible. For example,
vegetables (such as tomatoes1 have been suggested as
alternatives in North Carolina. However, because of
soil and climatic conditions, the cultivation of other
crops in other areas may not be economically viable.

  Market response to attempts to substitute other
crops for tobacco may complicate this policy. In-
creased production of alternative crops may lead to a
fall in their prices, which not only makes them less-
attractive substitutes for tobacco, but also harms tra-
ditional producers of these crops. Similarly, a decline
in tobacco production by established producers may
merely produce opportunities for competitors to initi-
ate or increase production. Given the potential excess
supply of tobacco in many countries, programs that
encourage production of alternative crops will proba-
bly require strict controls to successfully reduce to-
bacco production. The main attraction of such policies
may be that they provide a politically acceptable way
to "buy off" tobacco growers. By offering growers an
acceptable, profitable alternative to tobacco, policies
designed to reduce the demand for tobacco may be
easier to implement.

  In 1987, Canada instituted a C$30 million to-
bacco diversification plan, and by 1990, about C$80
million had been allocated to the plan. One compo-
nent of the plan, the Alternative Enterprise Initiative
Program, focuses on the development of alternative
crops and production technologies to benefit tobacco-
growing regions (predominantly Ontario). A second
part of the program offers cash incentives to encour-
age tobacco farmers to retire from the industry (USDA
1987a,b). The Canadian government has only recently
begun to evaluate this program; anecdotal evidence
suggests, however, that most retired Canadian to-
bacco growers have found alternative employment
and that the local economy in the tobacco-growing
area of Ontario is flourishing (D&i News-Record 1990).
This trend in Canada is consistent with trends in the
United States where, even without a program de-
signed to underwrite downsizing, tobacco agricul-
tural employment declined by 20 percent between
1977 and 1985 (U.S. Bureau of the Census 1988). From
1979 to 1989, U.S. tobacco acreage declined by 16
percent, but because of an increase in yield per acre,
production fell by only 4 percent. To some extent, the
shifts in U.S. tobacco production during the 1980s
reflected changes in the USDA crop-support program,
which reduced prices to make U.S. tobacco more com-
petitive in international markets and bring supply and
demand into better balance.

126   Economics