Development In Practice
Curbing the Epidemic : Governments and the Economics of Tobacco Control.
(c) 1999 THE WORLD BANK, WASHINGTON D.C.

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First printing May 1999

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1. Tobacco habit-Government policy. 2. Tobacco habit-Government policy-Cost effectiveness. I. Chaloupka, Frank J. II. Title. III. Series: Development in practice (Washington, D.C.) HV5732.J43 1999 363.4-dc21 99-29266 CIP.V

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CONTENTS

FOREWORD

PREFACE

SUMMARY

1. Global Trends in Tobacco Use

• The Costs and Consequences of Tobacco Control
• Rising consumption in low-income and middle-income countries
• Regional patterns in smoking
• Smoking and socioeconomic status
• Age and the uptake of smoking
• Global patterns of quitting

2. The Health Consequences of Smoking

• The addictive nature of tobacco smoking
• The disease burden
• Long delays between exposure and disease
• How smoking kills
• The epidemic varies in place as well as in time
• Smoking and the health disadvantage of the poor
• The risks from others' smoke
• Quitting works

3. Do Smokers Know Their Risks and Bear Their Costs?

• Awareness of the risks
• Youth, addiction, and the capacity to make sound decisions
• Costs imposed on others
• Appropriate responses for governments
• Dealing with addiction

4. Measures to Reduce the Demand for Tobacco

• Raising cigarette taxes
• Nonprice measures to reduce demand: consumer information, bans on advertising and promotion, and smoking restrictions
• Nicotine replacement therapy and other cessation interventions

5. Measures to Reduce the Supply of Tobacco

• The limited effectiveness of most supply-side interventions
• Firm action on smuggling

6. The Costs and Consequences of Tobacco Control

• Will tobacco control harm the economy?
• Is tobacco control worth paying for?

7. An Agenda for Action

• Overcoming political barriers to change
• Research priorities

Recommendations

Appendixes

Appendix A Tobacco Taxation: A View From The International Monetary Fund

Appendix B Background Papers

Appendix C Acknowledgments

Appendix D The World By Income And Region (World Bank Classification)

Bibliographic Note

Bibliography

Index

Figures 1.1 Smoking is increasing in the developing world 1.2 Smoking is more common among the less educated 1.3 Smoking starts early in life 2.1 Nicotine levels climb rapidly in young smokers 2.2 Education and the risk of smoking-attributable death 2.3 Smoking and the widening health gap between the rich and the poor 4.1 Average cigarette price, tax, and percentage of tax share per pack, by World Bank income groups, 1996 4.2 As cigarette price rises, consumption falls 4.2.a Real price of cigarettes and annual cigarette consumption per capita, Canada 1989-1995 4.2.b Real price of cigarettes and annual cigarette consumption per adult (15 years of age and above), South Africa 1970-1989 4.3 A strong warning label 4.4 Comprehensive advertising bans reduce cigarette consumption 5.1 Tobacco smuggling tends to rise in line with the degree of corruption 6.1 As tobacco tax rises, revenue rises too 7.1 Unless current smokers quit, tobacco deaths will rise dramatically in the next 50 years TABLES 1.1 Regional patterns of smoking 2.1 Current and estimated future deaths from tobacco 4.1 Potential number of smokers persuaded to quit, and lives saved, by a price increase of 10 percent 4.2 Potential number of smokers persuaded to quit, and lives saved, by a package of nonprice measures 4.3 Effectiveness of various cessation approaches 5.1 The top 30 raw-tobacco-producing countries 6.1 Studies on the employment effects of reduced or eliminated tobacco consumption 6.2 The cost-effectiveness of tobacco control measures BOXES 1.1 How many young people take up smoking each day? 4.1 Estimating the impact of control measures on global tobacco consumption: the inputs to the model 4.2 The European Union's ban on tobacco advertising and promotion 6.1 Help for the poorest farmers 7.1 The World Health Organization and the Framework Convention for Tobacco Control 7.2 The World Bank's policy on tobacco

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FOREWORD

WITH current smoking patterns, about 500 million people alive today will eventually be killed by tobacco use. More than half of these are now children and teenagers. By 2030, tobacco is expected to be the single biggest cause of death worldwide, accounting for about 10 million deaths per year. Increased activity to reduce this burden is a priority for both the World Health Organization (WHO) and the World Bank as part of their missions to improve health and reduce poverty. By enabling efforts to identify and implement effective tobacco control policies, particularly in children, both organizations would be fulfilling their missions and helping to reduce the suffering and costs of the smoking epidemic.

Tobacco is different from many other health challenges. Cigarettes are demanded by consumers and form part of the social custom of many societies. Cigarettes are extensively traded and profitable commodities, whose production and consumption have an impact on the social and economic resources of developed and developing countries alike. The economic aspects of tobacco use are therefore critical to the debate on its control. However, until recently these aspects have received little global attention.

This report aims to help fill that gap. It covers key issues that most societies and policymakers face when they think about tobacco or its control. The report is an important part of the partnership between the WHO and the World Bank. The WHO, the principal international agency on health issues, has taken the lead in responding to the epidemic with its Tobacco Free Initiative. The World Bank aims to work in partnership with the lead agency, offering its particular analytic resources in economics. Since 1991, the World Bank has had a formal policy on tobacco, in recognition of the harm that it does to health. The policy prohibits the Bank from lending on tobacco and encourages control efforts.

The report is also timely. In light of the rising death toll from tobacco, many governments, nongovernmental organizations, and agencies within the United Nations (UN) system, such as UNICEF and the Food and Agricultural Organization, and the International Monetary Fund are examining their own policies on tobacco control.

This report draws on many productive collaborations that have arisen from such reviews at national and international levels. This report is intended mainly to address the concerns raised by policymakers about the impact of tobacco control policies on economies. The benefits of tobacco control for health, especially for the world's children, are clear. There are, however, costs to tobacco control, and policymakers need to weigh these carefully. In cases where tobacco control policies impose costs on the poorest in society, governments clearly have a responsibility to help reduce these costs through, for example, transition schemes for poor tobacco farmers.

Tobacco is among the greatest causes of preventable and premature deaths in human history. Yet comparatively simple and cost-effective policies that can reduce its devastating impact are already available. For governments intent on improving health within the framework of sound economic policies, action to control tobacco represents an unusually attractive choice.

David de Ferranti Vice President Human Development Network
The World Bank

Jie Chen Executive Director Noncommunicable Diseases World Health Organization

Report team: This report was prepared by a team led by Prabhat Jha, and included Frank J. Chaloupka (co-lead), Phyllida Brown, Son Nguyen, Jocelyn Severino-Marquez, Rowena van der Merwe, and Ayda Yurekli. William Jack, Nicole Klingen, Maureen Law, Philip Musgrove, Thomas E. Novotny, Mead Over, Kent Ranson, Michael Walton, and Abdo Yazbeck provided valuable input and advice. This report benefited from substantive early work on tobacco at the World Bank by Howard Barnum. Input from the World Health Organization was provided by Derek Yach, and input from the U.S. Centers for Disease Control and Prevention was provided by Michael Eriksen. The work was carried out under the general direction of Helen Saxenian, Christopher Lovelace, and David de Ferranti. Richard Feachem was instrumental in initiating this report. Any errors are the report team's own.

The production staff of the report included Dan Kagan, Don Reisman, and Brenda Mejia.

The report benefited greatly from a wide variety of consultations (see Acknowl-edgments in Appendix C). Support for this report came from the Human Development Network of the World Bank, the Institute for Social and Preventive Medicine, Univer-sity of Lausanne, and the Office on Smoking and Health at the U.S. Centers for Dis-ease Control and Prevention. Their assistance is warmly acknowledged.

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PREFACE

THIS report has its origins in the converging efforts of several partners to address a shared problem: the relative neglect of economic contributions to the debate on tobacco control. In 1997, at the 10th World Conference on Tobacco in Beijing, China, the World Bank organized a consultation session on the economics of tobacco control. The meeting was part of an ongoing review of the Bank's own policies. There was clear recognition at this meeting that insufficient global attention was being paid to the economics of the smoking epidemic. The meeting's participants also agreed that the discipline of economics was not being applied to tobacco control in many countries, and that even where economic approaches were being used, their methodology was of variable quality.

At the same time that the World Bank began reviewing its policies, economists at the University of Cape Town, South Africa, had begun a project on the economics of tobacco control for Southern Africa. These initiatives were brought together, in partnership with economists at the University of Lausanne, Switzerland, and others, to form a wider review. The work culminated in a conference in Cape Town in February 1998. The proceedings of that conference are published separately.1 The collaboration led to a broader analysis of the economics of tobacco control, involving economists and others from a wide range of countries and institutions. Some of the studies resulting from this analysis will be published shortly.2 This report summarizes the findings of those studies that are relevant to policymakers.

Notes 1. Abedian, Iraj, R. van der Merwe, N. Wilkins, and P. Jha. eds. 1998. The Economics of Tobacco Control: Towards an Optimal Policy Mix. University of Cape Town, South Africa. 2. Tobacco Control Policies in Developing Countries. Jha, Prabhat and F. Chaloupka, eds. Oxford University Press, forthcoming.

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SUMMARY

SMOKING already kills one in 10 adults worldwide. By 2030, perhaps a little sooner, the proportion will be one in six, or 10 million deaths per year-more than any other single cause. Whereas until recently this epidemic of chronic disease and premature death mainly affected the rich countries, it is now rapidly shifting to the developing world. By 2020, seven of every 10 people killed by smoking will be in low- and middle-income nations.

Why this report?

Few people now dispute that smoking is damaging human health on a global scale. However, many governments have avoided taking action to control smoking - such as higher taxes, comprehensive bans on advertising and promotion, or restrictions on smoking in public places-because of concerns that their interventions might have harmful economic consequences. For example, some policymakers fear that reduced sales of cigarettes would mean the permanent loss of thousands of jobs; that higher tobacco taxes would result in lower government revenues; and that higher prices would encourage massive levels of cigarette smuggling.

This report examines the economic questions that policymakers must ad-dress when contemplating tobacco control. It asks whether smokers know the risks and bear the costs of their consumption choices, and explores the options for governments if they decide that intervention is justified. The report assesses the expected consequences of tobacco control for health, for economies, and for individuals. It demonstrates that the economic fears that have deterred policymakers from taking action are largely unfounded. Policies that reduce the demand for tobacco, such as a decision to increase tobacco taxes, would not cause long-term job losses in the vast majority of countries. Nor would higher tobacco taxes reduce tax revenues; rather, revenues would climb in the medium term. Such policies could, in sum, bring unprecedented health benefits without harming economies.

Current trends

About 1.1 billion people smoke worldwide. By 2025, the number is expected to rise to more than 1.6 billion. In the high-income countries, smoking has been in overall decline for decades, although it continues to rise in some groups. In low- and middle-income countries, by contrast, cigarette consumption has been increasing. Freer trade in cigarettes has contributed to rising consumption in these countries in recent years.

Most smokers start young. In the high-income countries, about eight out of 10 begin in their teens. While most smokers in low- and middle-income countries start in the early twenties, the peak age of uptake in these countries is falling. In most countries today, the poor are more likely to smoke than the rich.

The health consequences

The health consequences of smoking are twofold. First, the smoker rapidly becomes addicted to nicotine. The addictive properties of nicotine are well documented but are often underestimated by the consumer. In the United States, studies among final-year high school students suggest that fewer than two out of five smokers who believe that they will quit within five years actually do quit. About seven out of 10 adult smokers in high-income countries say they regret starting, and would like to stop. Over decades and as knowledge has increased, the high-income countries have accumulated a substantial number of former smokers who have successfully quit. However, individual attempts to quit have low success rates: of those who try without the assistance of cessation programs, about 98 percent will have started again within a year. In low- and middle-income countries, quitting is rare.

Smoking causes fatal and disabling disease, and, compared with other risky behaviors, the risk of premature death is extremely high. Half of all long-term smokers will eventually be killed by tobacco, and of these, half will die during productive middle age, losing 20 to 25 years of life. The diseases associated with smoking are well documented and include cancers of the lung and other organs, ischemic heart disease and other circulatory diseases, and respiratory diseases such as emphysema. In regions where tuberculosis is prevalent, smokers also face a greater risk than nonsmokers of dying from this disease.

Since the poor are more likely to smoke than the rich, their risk of smoking- related and premature death is also greater. In high- and middle-income countries, men in the lowest socioeconomic groups are up to twice as likely to die in middle age as men in the highest socioeconomic groups, and smoking accounts for at least half their excess risk.

Smoking also affects the health of nonsmokers. Babies born to smoking mothers have lower birth weights, face greater risks of respiratory disease, and are more likely to die of sudden infant death syndrome than babies born to nonsmokers. Adult nonsmokers face small but increased risks of fatal and disabling disease from exposure to others' smoke.

Do smokers know their risks and bear their costs?

Modern economic theory holds that consumers are usually the best judges of how to spend their money on goods and services. This principle of consumer sovereignty is based on certain assumptions: first, that the consumer makes rational and informed choices after weighing the costs and benefits of purchases, and, second, that the consumer incurs all costs of the choice. When all consumers exercise their sovereignty in this way-knowing their risks and bearing their costs-then society's resources are, in theory, allocated as efficiently as possible. This report examines consumers' incentives to smoke, asks whether their choice to do so is like other consumption choices, and whether it results in an efficient allocation of society's resources, before discussing the implications for governments.

Smokers clearly perceive benefits from smoking, such as pleasure and the avoidance of withdrawal, and weigh these against the private costs of their choice. Defined this way, the perceived benefits outweigh the perceived costs, otherwise smokers would not pay to smoke. However, it appears that the choice to smoke may differ from the choice to buy other consumer goods in three specific ways.

First, there is evidence that many smokers are not fully aware of the high risks of disease and premature death that their choice entails. In low- and middle-income countries, many smokers may simply not know about these risks. In China in 1996, for example, 61 percent of smokers questioned thought that tobacco did them "little or no harm." In high-income countries, smokers know they face increased risks, but they judge the size of these risks to be lower and less well established than do nonsmokers, and they also minimize the personal relevance of these risks.

Second, smoking is usually started in adolescence or early adulthood. Even when they have been given information, young people do not always have the capacity to use it to make sound decisions. Young people may be less aware than adults of the risk to their health that smoking poses. Most new recruits and would-be smokers also underestimate the risk of becoming addicted to nicotine. As a result, they seriously underestimate the future costs of smoking- that is, the costs of being unable in later life to reverse a youthful decision to smoke. Societies generally recognize that adolescent decision-making capacity is limited, and restrict young people's freedom to make certain choices, for example, by denying them the right to vote or to marry until a certain age. Likewise, societies may consider it valid to restrict young people's freedom to choose to become addicted to smoking, a behavior that carries a much greater risk of eventual death than most other risky activities in which young people engage.

Third, smoking imposes costs on nonsmokers. With some of their costs borne by others, smokers may have an incentive to smoke more than they would if they were bearing all the costs themselves. The costs to nonsmokers clearly include health damage as well as nuisance and irritation from exposure to environmental tobacco smoke. In addition, smokers may impose financial costs on others. Such costs are more difficult to identify and quantify, and are variable in place and time, so it is not yet possible to determine how they might affect individuals' incentives to smoke more or less. However, we briefly discuss two such costs, healthcare and pensions.

In high-income countries, smoking-related healthcare accounts for be-tween 6 and 15 percent of all annual healthcare costs. These figures will not necessarily apply to low- and middle-income countries, whose epidemics of smoking-related diseases are at earlier stages and may have other qualitative differences. Annual costs are of great importance to governments but, for individual consumers, the key question is the extent to which the costs will be borne by themselves or by others.

In any given year, smokers' healthcare costs will on average exceed non-smokers'. If healthcare is paid for to some extent by general public taxation, nonsmokers will thus bear a part of the smoking population's costs. However, some analysts have argued that, because smokers tend to die earlier than non-smokers, their lifetime healthcare costs may be no greater, and possibly even smaller, than nonsmokers'. This issue is controversial, but recent reviews in high-income countries suggest that smokers' lifetime costs are, after all, some-what higher than nonsmokers', despite their shorter lives. However, whether higher or lower, the extent to which smokers impose their costs on others will depend on many factors, such as the existing level of cigarette taxes, and how much healthcare is provided by the public sector. In low- and middle-income countries, meanwhile, there have been no reliable studies of these issues.

The question of pensions is equally complex. Some analysts in high-in-come countries have argued that smokers "pay their way" by contributing to public pension schemes and then dying earlier, on average, than nonsmokers. However, this question is irrelevant to the low- and middle-income countries where most smokers live, because public pension coverage in these countries is low.

In sum, smokers certainly impose some physical costs, including health damage, nuisance, and irritation, on nonsmokers. They may also impose financial costs, but the scope of these is still unclear.

Appropriate responses

It appears unlikely, then, that most smokers either know their full risks or bear the full costs of their choice. Governments may consider that intervention is therefore justified, primarily to deter children and adolescents from smoking and to protect nonsmokers, but also to give adults all the information they need to make an informed choice.

Governments' interventions should ideally remedy each identified prob-lem specifically. Thus, for example, children's imperfect judgments about the health effects of smoking would most specifically be addressed by improving their education and that of their parents, or by restricting their access to cigarettes. But adolescents respond poorly to health education, perfect parents are rare, and existing forms of restriction on cigarette sales to the young do not work, even in the high-income countries. In reality, the most effective way to deter children from taking up smoking is to increase taxes on tobacco. High prices prevent some children and adolescents from starting and encourage those who already smoke to reduce their consumption.

Taxation is a blunt instrument, however, and if taxes on cigarettes are raised, adult smokers will tend to smoke less and pay more for the cigarettes that they do purchase. In fulfilling the goal of protecting children and adolescents, taxation would thus also be imposing costs on adult smokers. These costs might, however, be considered acceptable, depending upon how much societies value curbing consumption in children. In any case, one long-term effect of reducing adult consumption may be to further discourage children and adolescents from smoking.

The problem of nicotine addiction would also need to be addressed. For established smokers who want to quit, the cost of withdrawal from nicotine is considerable. Governments might consider interventions to help reduce those costs as part of the overall tobacco control package.

Measures to reduce the demand for tobacco

We turn now to a discussion of measures for tobacco control, evaluating each in turn.

Raising taxes

Evidence from countries of all income levels shows that price increases on cigarettes are highly effective in reducing demand. Higher taxes induce some smokers to quit and prevent other individuals from starting. They also reduce the number of ex-smokers who return to cigarettes and reduce consumption among continuing smokers. On average, a price rise of 10 percent on a pack of cigarettes would be expected to reduce demand for cigarettes by about 4 percent in high-income countries and by about 8 percent in low- and middle-income countries, where lower incomes tend to make people more responsive to price changes. Children and adolescents are more responsive to price rises than older adults, so this intervention would have a significant impact on them.

Models for this report show that tax increases that would raise the real price of cigarettes by 10 percent worldwide would cause 40 million smokers alive in 1995 to quit, and prevent a minimum of 10 million tobacco-related deaths. The price rise would also deter others from taking up smoking in the first place. The assumptions on which the model is based are deliberately conservative, and these figures should therefore be regarded as minimum estimates.

As many policymakers are aware, the question of what the right level of tax should be is a complex one. The size of the tax depends in subtle ways on empirical facts that may not yet be available, such as the scale of the costs to nonsmokers and income levels. It also depends on varying societal values, such as the extent to which children should be protected, and on what a society hopes to achieve through the tax, such as a specific gain in revenue or a specific reduction in disease burden. The report concludes that, for the time being, policymakers who seek to reduce smoking should use as a yardstick the tax levels adopted as part of the comprehensive tobacco control policies of countries where cigarette consumption has fallen. In such countries, the tax component of the price of a pack of cigarettes is between two-thirds and four-fifths of the retail cost. Currently, in the high-income countries, taxes average about two-thirds or more of the retail price of a pack of cigarettes. In lower-income countries taxes amount to not more than half the retail price of a pack of cigarettes.

Nonprice measures to reduce demand

Beyond raising the price, governments have also employed a range of other effective measures. These include comprehensive bans on advertising and pro-motion of tobacco; information measures such as mass media counter-advertising, prominent health warning labels, the publication and dissemination of research findings on the health consequences of smoking as well as restrictions on smoking in work and public places.

This report provides evidence that each of these measures can reduce the demand for cigarettes. For example, "information shocks," such as the publication of research studies with significant new information on the health effects of smoking, reduce demand. Their effect appears to be greatest when a population has relatively little general awareness of the health risks. Comprehensive bans on advertising and promotion can reduce demand by around 7 percent, according to econometric studies in high-income countries. Smoking restrictions clearly benefit nonsmokers, and there is also some evidence that restrictions can reduce the prevalence of smoking.

Models developed for this report suggest that, employed as a package, such nonprice measures used globally could persuade some 23 million smokers alive in 1995 to quit and avert the tobacco-attributable deaths of 5 million of them. As with the estimates for tax increases, these are conservative estimates.

Nicotine replacement and other cessation therapies

A third intervention would be to help those who wish to quit by making it easier for them to obtain nicotine replacement therapy (NRT) and other cessation interventions. NRT markedly increases the effectiveness of cessation efforts and also reduces individuals' withdrawal costs. Yet in many countries, NRT is difficult to obtain. Models for this study suggest that if NRT were made more widely available, it could help to reduce demand substantially.

The combined effect of all these demand-reducing measures is not known, since smokers in most countries with tobacco control policies are exposed to a mixture of them and none can be studied strictly in isolation. However, there is evidence that the implementation of one intervention supports the success of others, underscoring the importance of implementing tobacco controls as a package. Together, in sum, these measures could avert many millions of deaths.

Each society makes its own decisions about policies that concern individual choices. In reality, most policies would be based on a mix of criteria, not only economic ones. Most societies would wish to reduce the unquantifiable suffering and emotional losses wrought by tobacco's burden of disease and premature death. For the policymaker seeking to improve public health, too, tobacco control is an attractive option. Even modest reductions in a disease burden of such large size would bring highly significant health gains.

Some policymakers will consider that the strongest grounds for intervening are to deter children from smoking. However, a strategy aimed solely at deterring children is not practical and would bring no significant benefits to public health for several decades. Most of the tobacco-related deaths that are projected to occur in the next 50 years are among today's existing smokers. Governments concerned with health gains in the medium term may therefore consider adopting broader measures that also help adults to quit.

The report has two recommendations:

1. Where governments decide to take strong action to curb the tobacco epidemic, a multi-pronged strategy should be adopted. Its aims should be to deter children from smoking, to protect nonsmokers, and to provide all smokers with information about the health effects of tobacco. The strategy, tailored to individual country needs, would include: (1) raising taxes, using as a yardstick the rates adopted by countries with comprehensive tobacco control policies where consumption has fallen. In these countries, tax accounts for two-thirds to four-fifths of the retail price of cigarettes; (2) publishing and disseminating research results on the health effects of tobacco, adding prominent warning labels to cigarettes, adopting comprehensive bans on advertising and promotion, and restricting smoking in workplaces and public places; and (3) widening access to nicotine replacement and other cessation therapies.

2. International organizations such as the UN agencies should review their existing programs and policies to ensure that tobacco control is given due prominence; they should sponsor research into the causes, consequences, and costs of smoking, and the cost-effectiveness of interventions at the local level; and they should address tobacco control issues that cross borders, including working with the WHO's proposed Framework Convention for Tobacco Control. Key areas for action include facilitating international agreements on smuggling control, discussions on tax harmonization to reduce the incentives for smuggling, and bans on advertising and promotion involving the global communications media.

The threat posed by smoking to global health is unprecedented, but so is the potential for reducing smoking-related mortality with cost-effective policies. This report shows the scale of what might be achieved: moderate action could ensure substantial health gains for the 21st century.

Note

1. All dollar amounts are current U.S. dollars.