Chapter 1. Introduction. Teh-wei Hu

Chapter 1 Introduction Teh-wei Hu China is the world s largest tobacco consumer, with over 350 million smokers, accounting for nearly one-third of the world s annual tobacco consumption. Smoking is one of the leading causes of preventable premature deaths. An estimated 1 million premature deaths annually are attributable to smoking-related illnesses in China. From a public health standpoint, policy-makers in China should have undertaken active and effective tobacco control interventions to reduce cigarette consumption. These policies include banning cigarette advertisements, banning smoking in public places, prohibiting sales of cigarettes to teenagers, and raising the tobacco tax. The tobacco industry in China, however, has a unique role in the economy. As a government-owned monopoly, the tobacco industry has provided 8 11 percent of its revenue (profit and tax), over the past decade. During the past 15 years, tobacco industry has been the top government revenue contributor among all industries in China. Thus government policy-makers have been reluctant to initiate tobacco control policies. They have been particularly worried about the negative economic consequence of the most effective tobacco control policy, raising the tobacco tax, fearing that 1

2 Teh-wei Hu tobacco farmers income and tobacco industry employment will be adversely affected. Policy-makers also worry about the regressiveness of the tobacco tax, i.e., that low-income smokers would incur a relatively higher financial burden or might switch to a lower price brand with higher nicotine/tar content. In other words, policymakers are using economic considerations as an argument to avoid these tobacco control policy instruments. Therefore, tobacco control in China is not only a public health issue, but also an economic issue. The purpose of this book is to provide conceptual and empirical evidence on the health burden of smoking and the economics of tobacco control for policy-makers and professionals interested in the Chinese tobacco control issues. This issue of health versus economics is not unique to China, but also exists in other major tobaccoproducing countries, such as India, Indonesia, Brazil, and Zimbabwe. The purposes of policy research are: (1) to inform policy-makers about the consequences of alternative policy options and (2) to provide the essential information upon which to build the specifics of the policy that is adopted. To make research findings policy-relevant, one needs to identify the issues most relevant to policy-makers. In this case, the authors of this book have held numerous meetings and discussions with the Chinese government policy-makers on tobacco control. For policy relevance, one also needs to establish a conceptual model for macrochanges, ranging from epidemiology, health economics, data collection, statistical analysis, and understanding the infrastructure of relevant government agencies. For policy research recommendations to be adopted by policy-makers, information dissemination and knowledge transfer, taking into account political, economic, and scientific considerations, are required. Not all policy research and policy recommendations get implemented. However, even if not implemented, research findings represent an accumulation of knowledge. They make a scholarly contribution to the field, and are available if policy development is needed. Research findings can be used for information dissemination through media or personal contacts more effectively than opinions. Finally, research itself is capacity building for future generations and can arouse the world to increase the pool of research experts.

Introduction 3 Research from our tobacco control project in China has been instrumental in China s recent tobacco control policies. The biggest recent policy change has been ratification of the World Health Organization s Framework Convention on Tobacco Control (FCTC). From 2003 to 2005, project researchers annually presented findings to the Chinese FCTC delegation, particularly on the magnitude of economic costs of smoking in China and the health burden of smoking (measured in Disability Adjusted Life Years Lost). In addition, project researchers have provided China s Ministry of Health with findings for the People s Congress to help with FCTC ratification activities. Also, project researchers have worked closely with China CDC office to conduct a survey on smoking behaviors among 3,600 physicians in six cities. Findings from this survey prompted China CDC to initiate smoke-free hospitals and medical schools campaign during the 2005 World Smoke-Free day. Finally, research findings on the economic status of Chinese tobacco farmers were highlighted twice in 2004 and 2005 in China s Health News, the only nationally distributed newspaper related to health care. These findings contradicted the government s belief that farming tobacco leaves could alleviate poverty. This book is a systematic analysis of all these health and economic issues related to tobacco control issues in China. In 2002, the World Bank and World Health Organization (WHO) jointly published a book Tobacco Control in Developing Countries (edited by Prabhat Jha and Frank Chaloupka, Oxford University, 2002). It includes topics ranging from tobacco consumption, demand and supply of tobacco, to policy direction. The World Bank and WHO book covers experiences mostly from developed countries with some findings from developing countries. It is very useful for a general understanding of overall policy issues related to the economics of tobacco control. However, it does not provide a country-specific systematic analysis. Each country has its own economic, political, and social context. For more effective policy input, using country-specific information for specific policy recommendations is most useful. This book addresses the economics of tobacco control in China, while also providing a comprehensive analytical and empirical framework addressing key debated issues of tobacco control in China.

4 Teh-wei Hu The book is divided into five sections. Section I describes and analyzes tobacco use and its consequences in China. Section II provides the demand for cigarette and household expenditure analyses. Section III addresses the supply of tobacco. Section IV presents cigarette tax issues, and policy directions are discussed in Section V. There are 14 chapters in the book, besides this introductory chapter. Chapter 2 provides an overview of the prevalence of smoking in China. Citing the 2002 National Smoking Prevalence Survey, China s Ministry of Health published a report entitled Smoking and Health 2006 Report that indicated that 350 million people, or 35.8 percent of China s population above 15 years, are smokers (66 percent of men and 3.1 percent of women). Chinese smokers make up onethird of the world s smoking population. Comparing the figures for 2002 with these of 2006, the number of smokers increased by 30 million, because of China s population growth during that period. The 2002 survey indicated that the smoking prevalence for the 15 24 age group rose, while the age of smoking initiation decreased from 22.4 in the 1980s to 19.7 in 2002. Given this increase in smoking prevalence over time, it would be useful to review the recent history of tobacco control programs in China. This is provided in Chapter 3. The Chinese government began enacting legislation banning teen smoking and public smoking in 1980. The Ministry of Health in 1984 issued the strongest public statement that smoking harms health. The China Association of Smoking and Health was established in 1990, followed by legislation banning news media cigarette advertisements and smoking in schools. However, there has been a lack of compliance with this legislation. In 2003, the Chinese government signed the World Health Organization s Framework Convention on Tobacco Control, and the China People s Congress ratified the treaty in 2005. China is becoming a visible player on the world stage in addressing tobacco control problems. Chapter 3 examines the achievements and difficulties, and discusses how tobacco control in China can be more effective and support future initiatives. Since physicians are a role model of health behavior, a special chapter, Chapter 4, reports on the prevalence of smoking among

Introduction 5 Chinese physicians. In 2004, China Center for Disease Control conducted a six-city survey of 3,652 physicians knowledge, attitudes, and practices with respect to smoking. Smoking prevalence was 41 percent for male physicians and 1 percent for female physicians. Only 30 percent reported good implementation of smoke-free workplace policies, and 37 percent of currently smoking physicians reported smoking in front of their patients. Although 95 percent and 89 percent, respectively, know that active and passive smoking causes lung cancer, only 66 percent and 53 percent, respectively, know active or passive smoking causes heart disease. Thus, physician smoking cessation techniques need to be increased among Chinese physicians. These improvements can help reduce the health burden from smoking in China. Health consequences of smoking can be measured not only by morbidity and mortality, but they can also be translated into two other measurements. One is to estimate the health burden of disease of smoking and passive smoking in terms of Disability Adjusted Life Years (DALY). These are presented in Chapter 5. According to the 2002 WHO report, tobacco smoking was responsible for about 10 million DALYs in China and ranked third in leading risk factors after high blood pressure and alcohol use. Including lung cancer and ischemic heart disease, the effects of secondhand smoking were estimated by the DALY method. In 2002, an additional 450,000 DALYs were lost because of secondhand smoking around 15 percent of the burden of the same diseases caused by active smoking. Chapter 6 presents the monetary cost of smoking including both the treatment cost (direct costs) and loss of productivity (indirect costs). The study used the 1998 China National Health Services Survey to estimate the smoking-attributable total costs at US$5.0 billion measured in 2000 value, about $25.43 per smoker ( 35 years of age). The share of the economic costs was greater for men than women and greater in rural areas than in urban areas. Of the US$5.0 billion, direct costs were $1.7 billion (34 percent of the total), indirect morbidity costs were 0.4 billion (8 percent), and indirect mortality costs were $2.9 billion (58 percent). The direct costs of smoking accounted for 3.1 percent of China s national wealth expenditures in 2000. To reduce this cost burden in the future, effective tobacco

6 Teh-wei Hu control programs and sustained efforts are needed to curb the tobacco epidemic and economic losses. Section II contains three chapters. Chapter 7 discusses the demand for cigarettes in China and estimates the quantitative relationship between cigarette price and cigarette consumption, usually measured by price elasticity, and different magnitudes of price elasticities among different income groups in China. This chapter used the 2002 National Smoking Prevalence Survey to estimate an overall price elasticity of 0.16, meaning a 10 percent increase in the price of cigarettes would lead to a 1.6 percent reduction in cigarette consumption. The price effect varies by income level, the highest (in absolute term) at 0.634 for the poor group, and was positive at 0.316 for the high-income groups. The poorest group was most responsive to reducing cigarette consumption because cigarette expenditures comprise a greater percentage of their income than that of the wealthiest smokers. The simulation results indicated that a 10 percent income in cigarette price would lead to an increase of 27 percent in cigarette tax revenue (32 billion yuan, or US$4 billion) inducing 2.1 million smokers to quit, and reducing the annual total cigarette consumption by 1.2 billion packs. As supported by the international literature on tobacco control, increased tobacco tax is often the most effective policy in tobacco control. One of the major concerns among government policy-makers is the impact of additional tobacco tax on the economic burden to low-income smokers. Both Chapters 8 and 9 address the issue of the effect of smoking on the Chinese household standard of living and its effect on poverty. Chapter 8 reports on interviews and analysis of around 3,400 urban and rural households from 36 townships/districts in Southwest China in 2002. Lower income households with smokers paid less per pack and smoked fewer cigarettes than highincome households with smokers. Poor urban households spent an average of 6.6 percent of their total expenditures on cigarette; poor rural households spent 11.3 percent of their total expenditures on cigarettes. Thus, reducing cigarette expenditures could release household resources to spend on food, housing, and other goods that improve their living standard.

Introduction 7 Chapter 9 draws from the 1998 China National Health Services Survey data and estimates the excessive medical spending attributable to smoking may be responsible for the 30.5 million impoverished urban residents and 23.7 million rural residents in China. Smoking-related expenses pushed a significant proportion of lowincome families into poverty in China. Therefore, reducing the smoking rate appears to be not only a public health strategy, but also a poverty reduction strategy. The economics of tobacco production is a major argument that tobacco producing countries use against implementing tobacco control policies. China is the largest tobacco leaf and cigarette producing country in the world. To succeed in tobacco control, it is extremely important to understand and address the tobacco supply issues. Researchers need to develop policy options and predict future outlooks for the tobacco industry under tobacco control programs. Section III contains two chapters. Chapter 10 analyzes the role of government in tobacco leaf production in China. China s tobacco production and cigarette marketing are all under the control of the State Tobacco Monopoly Administration (STMA). The STMA has delegated authority to the China National Tobacco Company (CNTC) for the administration of all aspects of tobacco, from setting tobacco leaf production quotas, procuring tobacco leaf, transporting and storing tobacco leaf, and producing and selling cigarette products. Surveys among more than 1,000 tobacco farmers in southwest China found that compared to other cash crops, tobacco leaf has the lowest economic rate of return. Currently, China has a large surplus of tobacco leaf. One of the factors contributing to this surplus is local governments encouraging farmers to plant tobacco leaves, with the aim of collecting tax revenue from tobacco leaf sales. Thus, to remove the perverse incentive it would be important to remove the local tobacco leaf tax and simultaneously raise the tax on cigarette products at the national level. The central government could redistribute part of the additional tax revenue to subsidize local governments. Crop substitution should be encouraged with technical, financial, and marketing assistance to assist tobacco farmers in this effort.

8 Teh-wei Hu Chapter 11 provides an analysis of the China tobacco industry and the World Trade Organization. China s state-owned tobacco monopoly has been highly profitable, producing 1.7 trillion cigarettes in 2002 and contributing to 8 percent of the central government revenue about US$20 billion. In 2001, China joined the World Trade Organization (WTO), which lowered international trade tariffs and opened the market gateway for transnational tobacco companies (TTCS), such as Phillip Morris, British American Tobacco Company, and others. Facing potential international competition within China, CNTC has made steady progress toward consolidation and mergers from 185 companies in 2000 to 44 companies in 2005. Introduction of TTCs into China s tobacco market may lead the Chinese government to recognize the declining contributions of the tobacco sector and present new opportunities for more tobacco control solutions. Tobacco tax is the most effective policy instrument in tobacco control. Section IV devotes three chapters on this topic. Chapter 12 examines the effect of cigarette tax on cigarette consumption in the Chinese economy. This chapter analyzes the policy dilemma in China, i.e., on public health versus the tobacco economy. Using published statistics from 1980 through 1997, the chapter estimates the impact of tobacco production and consumption on government revenue and the entire economy. It is estimated that with an additional 10 percent increase in cigarette tax, the central government tax revenue would twice exceed total losses in industry revenue, tobacco farmers income, and local tax revenue. In addition, between 1.4 to 2.16 million lives would be saved by this tax increase. Chapter 13 draws upon the international experiences in implementing tobacco taxation to provide lessons the Chinese government can use when considering the feasibility of raising additional taxes on cigarettes. Based on the current international data and Chinese published data, this chapter concludes that there is still leeway to raise existing taxes. The Chinese government should consider conducting some pilot experiments in tobacco tax increases, with some of the new revenues allocated for tobacco control programs as well as for financing health care services among the poor.

Introduction 9 The question as to why and how cigarette tax revenue should be allocated for health promotion and anti-smoking programs to complement the goal of tobacco control is the subject of Chapter 14. Although a earmarked tax is not always an ideal tax-expenditure fiscal instrument (since it introduces rigidities and does not permit proper expenditure allocation criteria for general revenue among competing uses), international evidence and experiences have shown that the use of tobacco tax for health promotion and disease prevention may be quite appropriate, in line with the benefit taxation principle. This chapter is drawn from the United States experience with earmarking tobacco tax for future cigarette tax implementation in China. Section V, policy directions, is included in Chapter 15, entitled China at the Crossroads: The economics of tobacco and health. It also serves as a concluding chapter to the book. This chapter summarizes the economic aspects of tobacco control policy issues in China by providing arguments for and against the health benefits and costs of tobacco control on the Chinese economy. It indicates that economic gains become less important as the negative health impact of smoking on the population garners more awareness. China stands at a crossroads to implement the economic promises of the World Health Organization s Framework Convention on Tobacco Control and promote the health of its population.