The Malaysian Tobacco Industry

The Malaysian Tobacco Industry CHAPTER 1 The Malaysian tobacco industry is a copious industry which comprehends leaf production and curing, product manufacturing to product marketing and distribution. Tobacco is the countrys most widely cultivated non-food crop (British American Tobacco Malaysia). Malaysia is not considered as a large tobacco leaf producer by world standards. Neither is a major contributor to the Malaysian economy. However, tobacco farmers are used politically by the tobacco industry. According to a study conducted by Ernst and Young in June 2005 for the Confederation of Malaysian Tobacco Manufacturers, the industry contributes extensively to the countrys economy with more than 190,000 people depending on it for employment in 2003. Tobacco production has increased due to a rise in the demand for tobacco from cigarette manufacturers. (See Table 1.0) 1.1 Impact of Tobacco Use Cigarette demand has long been a crucial issue and has become especially prominent in the wake of the recent colossal settlements between government and cigarette companies ( Huang and Chin, 2006). According to the press statement by the Minister of Health, the Hon Dato Chua Jui Meng on Tobacco Control in Malaysia on 7th November 1996, cigarette smoking is an avoidable addiction which hold responsible for a massive 25% of all deaths in Malaysia. Smoking is a deadly and expensive pastime which is dangerous to both smokers and the second hand smokers (Costa and Mossialos,2006). Studies showed that 30% of cancer deaths and 90% of chronic obstructive pulmonary disease in Malaysia were associated to smoking (The Star). According to World Health Organization (WHO), tobacco is going to be the biggest cause of death in the world if current pattern of smoking continue, with no changes in cessation rates or significant declines in initiation rates by 2020. There are more than one billion smoke rs in the world and 5.4 million people were killed by tobacco use a year. Moreover, smoking is not only destroying the health of the smoker but it is also an economic burden. These include primarily direct or indirect medical costs to the smokers and also productivity losses. Indoor places where smoking is allowed will incur a higher renovation and cleaning costs. The management will have to pay a lot to maintain the cleanliness in the workplaces. Furthermore, it increased the risk of fire and may acquire higher insurance premiums. Since the first report on tobacco by Surgeon General was released in 1964, awareness relative to the negative effects of tobacco use has increased. Smoking cigarettes during pregnancy can cause impromptu miscarriage, underweight babies and premature delivery. Most importantly, it will also cause sudden infant death (SID) syndrome. At the same time, it is also very dangerous for the people who do not smoke but breathing in a smoke-filled room. Second-hand smoke is a major source of indoor air pollution which can damage the health of both the children and adults. There are almost half of the worlds children breathe second-hand smoke today. In recent times, the smokers are increasing from day to day (See Table1.1). Despite of all the negative effects, smokers dont seem to be affected by the side effects. Teenage smoking is a severe problem in Malaysia and according to the World Tobacco Marketfile, the number of youth smokers are increasing (See Table 1.2). The risk of youth commencing tobacco use by socio-demographic, environmental and personal factors is increasing. Family with low socioeconomic status is an example of socio-demographic factor. There are more young people who smoke nowadays because tobacco products are easily accessible and available everywhere. Young people who are lack of parental guidance will be easily influenced by peers. These are the examples of environmental risks factor. While personal risk factors include low self-esteem and the belief that tobacco use provides an advantage which can help them to reduce stress. People who get older should understand the danger of smoking better than the youth . They should be able to experience the side effects if they have been smoking for quite some time. Some people may not be aware of the specific health risks of tobacco use as they are not exposed to the side effects. If the smokers are aware of the dangers of tobacco, most want to quit. 1.2 Governments Regulation towards Cigarette Demand The Malaysian government has done various efforts and implemented regulations restricting people to smoke. Government policy is divided into price and tax measures; and also non-price measures such as Protection from exposure to tobacco smoke; Regulation of contents of tobacco product; Regulation of tobacco product disclosures; Packaging and labelling of tobacco products; Education, communication, training and public awareness; Tobacco advertising, promotion and sponsorship; and Tobacco cessation (Zain, 2007). National Tobacco Control Program is one of the strategies taken to reduce tobacco use. The general objective of this program is to provide comprehensive support and assistance to help smokers quit smoking. The programs include legislative control; health promotion and public advocacy; tobacco tax policy; smoking cessation services; research, monitoring and evaluation; multi-sectoral collaboration and capacity building. In legislative control, under the section on the Prohibition on Tobacco Product Advertisement of Control of Tobacco Product Regulations 2004 restricts printing, publishing or distributing of any tobacco product advertisement. It bans on cigarette advertisement on television and radio. Health warning messages are placed on every cigarette pack to raise peoples awareness. Furthermore, government has legislated smoke-free policy in Malaysia to curb smoking. There is total ban on smoking in government meetings. Places like health and educational facilities, governmental offices, public transport, shopping complex, cinemas and places of worship are smoke-free zone. Besides that, health promotion and advocacy covers campaigns such as Tak Nak Campaign; Healthy Lifestyle Campaign; Kempen Nafas Baru Bermula Ramadhan; World No Tobacco Day and also events by other agencies. On top of that, government also introduce excise duties on imported cigarette and further increase in sales and import tax . Increase tax will reduce the consumption on cigarettes without negative impact on revenue. At the same time, National Smoking Cessation Program was introduced to provide comprehensive support and assistance to help smokers to quit smoking. Under this program, it helps to inform and educate the smokers regarding the advantages of quitting smoking. Government has created a lot of awareness program to help people to quit smoking and the most effective strategy to reduce smoking is raising the price of the cigarettes. So as all these efforts and accumulation of knowledge are done, the demand for cigarettes and smoking should be reducing. 1.3 Problem Statement Tobacco use in Malaysia has escalated over the past years in spite of the numerous health warnings. Despite the various implementations of mass anti-smoking campaigns by the government, smoking is still a popular activity among the people. In the past there is a lot of domino effect of smoking leading to health problems yet it can seem surprising that some people still choose to smoke. Tobacco users still continue with it in pursuance of the risks or the expense because smoking is a habit hard to break for the reason that it contains an addictive drug called nicotine. In addition to that, the effect will be amplified this time around as the price of cigarettes increase simultaneously. Subsequently, the price affects the middle and lower income group of wage earner adversely because smoking is an expensive activity. The rising of cigarettes price will cause them to be overburdened by the rising living cost. People start smoking for a variety of different reasons. Although most of the people is aware that smoking is dangerous and harmful to the people around them but there are still 40-50 new smokers created everyday and the smoking popularity among the youth are increasing. There is about 9 out of 10 smokers start before the age of 18 years old (See Table 1.2). Most of the youth started to smoke as an act of rebellion and also because of peers pressure. The teenagers may not be conscious about the effects but it will become apparent later on in their life. Furthermore, survey has shown that the trend of young female smokers is increasing at such an alarming rate. According to the statistics by Healthy Living, it shows that there are 22% of smoker ages around 18 to 24 years old, 22.8% of smoker ages around 25 to 44 years old, 21% of smoker ages around 45 to 64 years old and 8% of smoker ages above 65 years old. 1.4 Research Question The questions arise in this study is: Will the people above the age of 65 years old decrease the consumption of cigarettes? Will the implementation of the government policy towards the cigarettes reduce the number of smokers in Malaysia 1.5 Objectives of the Study The general objective of this study is to determine the demand for cigarettes. More specific, this study tends to Determine the price and income elasticity towards the demand for cigarettes. Determine the impact of demand for cigarettes on aging population. 1.6 Significance of the Study This research on the aging population is important in the attempt to reduce the overall demand for cigarettes in Malaysia. This study will test the level of awareness of population of Malaysia on the impact of smoking between different age groups. Most of the diseases caused by tobacco use will only be noticeable when the users reach the later stage in life. This study will justify why policy makers should take into consideration people of all age groups when coming up with new policies regarding tobacco use, instead of focusing only on the younger population. CHAPTER 2 LITERATURE REVIEW This chapter is to review the existing literature on the demand for cigarette. There is a large volume of published studies describing the price and income elasticity on cigarette consumption. Furthermore, there is also a large and growing body of literature has investigated the effects of taxes and anti-smoking regulations on the demand for cigarettes. So far, there are only a few studies regarding the relationship between aging population and the consumption of cigarette. 2.1 Theoretical Studies of Demand for Cigarettes The law of demand is an important law in microeconomic theory. In theoretical economics, economists develop models to explore economic activity and outcomes. Reliable statements about economic behavior enable the prediction of probable effects of specific actions. The law of demand is an economic law that states that, all other factors being equal, as the price of good increases, demand for the good will decrease. This law summarizes the effect price changes have on consumer behavior. The negative relationship between price and quantity demanded is caused by two reasons. One of the reasons is the income and substitution effects. Income effect means that for a lower price product, a consumer can buy more than they could at the higher price point. Other similar products now seem more expensive compared to the lower priced product is the substitution effect. The second reason is the diminishing marginal utility for the inverse relationship between price and quantity demanded. Consumers get less satisfaction from each additional unit of product they consume over a specified period of time. They will only continue to buy if the price is reduced at each point. By increasing the real price of tobacco, a tax increase has colossal potential to be an effective policy lever to decrease tobacco consumption. The impact of taxes on tobacco consumption depends on the extent to which changes in taxes are reflected in tobacco prices and the responsiveness of consumers to changes in prices. People tend to reduce their consumption on tobacco use as the price increase. The demand functions show that cigarette consumption is related to the price of cigarettes, prices of related goods, income, and individuals tastes. A general conclusion from the precious studies is that tobacco prices and the demand are inversely related. Marshall illustrated the law of demand with both a table and a demand curve by assuming that the period of time is sufficiently short to justify a ceteris paribus assumption. 2.2 Empirical Studies of Demand for Cigarettes Several studies conducted have reported that there is an inverse relationship between the price and cigarette consumption and positive effect of income. Franke (1994) reveals that Granger Causality is significant from price and income to cigarette consumption in the United States. No significant change is observed in the estimated demand elasticity which occurred during the period studied. In order to test a model of the demand for cigarettes in the United States from the period of 1961 to 1990, he uses quarterly data and multiple analyses. The outcome of the study illustrates a positive effect of income and negative effects on price. Likewise, Zheng, Zhu and Li (2008), in a separate study also finds that there is indeed a positive income elasticity but negative cigarette price elasticity based on the best fixed-effects spatial-temporal model. They construct a demand equation to study on the elasticity of per pack cigarette price and per capita disposable income in 2008. This is done by considering the cigarette demand in a spatial panel of 46 states of the United States over a period of 30 years which ranged from 1963 to 1992. They then propose a new spatial panel model and implement a fully Bayesian approach for model parameter inference and prediction of cigarette demand at future time points using the Markov chain Monte Carlo (MCMC) algorithms. Chaloupka et al. (2002) examines data from documents of the tobacco industry to discover what tobacco companies know of the impact that cigarette prices has on smoking among youth, young adults and also adults. They assess on how this understanding would affect their pricing and price related marketing plans. The tobacco company documents provides velar evidence on the consequence of change in cigarette prices on cigarette smoking habits, relating how tax and other increases in price led to significant decline in smoking, predominantly among the younger people. They conclude that future efforts towards tobacco control which targets to increase prices and limit price related marketing efforts are critical in achieving reductions in tobacco use and public health toll caused by tobacco. This view is supported by Fernà ¡ndez et al. (2004) which shows that between the period of 1965 and 2000, there is indeed an inverse relation between the prices and consumption of cigarette in Spain, wh ich indicates that involvement at the economic level, for instance real increases in price may have an important public health impact in control of tobacco. Correspondingly, Gallus et al. (2006) present a similar study to determine the influence that cigarette prices has on tobacco consumption in Italy. A survey is conducted on 3050 individuals aged 15 and above which suggests that prices had an intermediate to high influence on cigarette consumption in the young. Younger people as well as less educated smokers are more susceptible to an influence of prices. They conclude that cigarette prices have substantial influence on tobacco consumption in the younger people. On the contrary, Raptou et al (2005) argues that cigarette demand is extremely insensitive to changes in price. They employ data collected via questionnaires which was administered by personal-in-home interviews and estimate a two part model of cigarette demand (Cragg, J. G. B Some Statistical Models for Limited Dependent Variables with Application to the Demand for Durable Goods, Econometrica, 39, 5, 1971, pp. 829Y44). They conclude that cigarette price measures would not affect cigarette demand. However, it is discovered that smoking restrictions in workplace areas as well as educational establishments, and also most of the psychosocial variables will affect the demand of cigarette. According to Huang and Yang (2006), current estimates of the income elasticity to cigarette demand have shown a troubling result which is nearly zero or sometimes negative income elasticity. They engage in a four-regime panel model (dynamic fixed effect) which is use to predict the function of cigarette demand within the United States with intentions to investigate the nonlinearity embedded in the cigarette demand structure. They apply a multi-regime model to 47 states using data from 1963 to 1997. They claim that there is a nonlinear relationship between personal income and cigarette consumption. Evidently, as income rises, cigarette has become an inferior good. The results from the four-regime model suggest that income elasticity is negative when per capita income is greater than US$ 8,568 but become is positive though insignificant when income is above US$ 18,196. In the income ranging from US$ 8,568 and US$ 18,196, the income elasticity is significantly negative. There is a nonli near relationship which prevailed for the price elasticity. Furthermore, Martinez, Mejia, and Estable (2008) claims that the demand for cigarettes in Argentina over the long term is influenced by the changes in real average price and real income of the cigarettes in Argentina. They analyse the data based on monthly time-series data between the periods of 1994 to 2004. The results that they obtain show that when the prices are increased at 120%, a maximum of revenues from the cigarettes tax can be attained and also there is a big effect on the reduction of the total consumption of cigarettes within the country. Similarly, Abedian (2000) also states that there is an inverse relationship between the price and consumption of any good which include cigarettes. This negative relationship is further affected by other factors such as income levels and the degree of addiction. He argues that increasing tobacco consumption is a problem faced in a developing country and it could bring harm to the people. He also argues that there are no adverse economic consequences following such policy framework. In 2000, Joni Hersch in his studies states that smoking behavior relates to the changes in price, which is not unlike many other economic commodities. He finds that a higher price would reduce demand for cigarettes in both men and women with regard to smoking participation and cigarette consumption levels, with elasticity ranging from -0.40 to -0.60. In distinction to other studies, he finds that the price elasticity is alike for both men and women. Income also has negative effects on smoking behavior. He also states that excise tax policies can dissuade smoking, but their effects will be largely restricted to the low income segment of the population. This finding suggests that there might be constructive responses by smokers to informational efforts which warn about the dangers of smoking and also the environmental tobacco smoke poses to others, especially when it is a member of ones household. Further observations suggest that increase in taxes also play an essential role in reducing cigarette consumption. Following recent years, there has been a growing amount of literature on higher prices that result from increased tax leading to significant reductions in cigarette smoking. A recent study by Chaloupka et al (2010) which performs to supply empirical evidence on the consequence of the cigarette excise tax structure towards three outcomes which are the government revenue, cigarette prices, and cigarette consumption. A cross-sectional time-series data for 21 European Union (EU) countries is composed from year 1998 to 2007 out of various data resources. The estimates suggest that the greater reliance on the ad valorem excise tax leads to lower average cigarette prices and larger price gaps between premium and low-priced cigarette brands. In addition, these impacts from the tax structure are smaller in more concentrated or less competitive markets. They also propose that a la rger reliance on a specific tax will have a greater impact on cigarette smoking, but the impact lessens with the growth of manufacturers market power. In view of this, Peng and Ross (2009) estimates the Ukraine population in its sensitivity to prices of cigarettes and the cigarettes affordability using the macro level data with the aim to compute the efficiency of cigarette tax policy. They use a monthly time-series data from 1997 to 2006 in Ukraine to estimate the generalized least square (GLS) model with an AR(1) process. The result shows that the cigarette price is not significantly associated with legal domestic sale of cigarette. Higher household income and more active outdoor advertising have positive and significant impact on cigarette sales. There is also a positive relationship between the affordability for cigarette and legal domestic cigarette sales. Increasing the cigarette excise tax by 10% would increase the price of cigarettes by 3%. This shows that cigarette tax policy can be used to regulate cigarette price in Ukraine. The people are found to be relatively insensitive to cigarette prices and cigarette taxes, even t hough of low magnitude, but the effect of cigarettes affordability is significant statistically. Similarly, Lee et al. (2005) concludes that price elasticity of cigarettes is approximated to be less than one, which implies that the tax will have some result in reducing cigarette consumption, although it will also generate further tax revenues. Moreover, Hidayat and Thabrany (2010) study the demand for cigarettes in Indonesia using a myopic addiction model and uses it to analyse the price elasticity of cigarette demand. They use an aggregated panel data structured from three waves of the Indonesian Family Life Survey over the period of 1993 to 2000. They claim that the short run and long run price elasticity of cigarette demand are estimated to be at -0.28 and -0.73 correspondingly. Price increases have a significantly negative impact on cigarette consumption. Increasing cigarette prices via excise taxes can control tobacco use and thus raise government revenue. They then conclude that excise taxes are more likely an efficient tobacco control rather than a key source of government revenue in the long run. Besides that, Lee (2008) conduct a study which analyses the readiness of current smokers to stop the smoking habit or reduce the consumption of cigarettes when experiencing an increase in tax of NT $22 per pack, which is a consequent rise of 44%. Lee uses cross-sectional study on 483 valid questionnaires conducted during a telephone survey from April to July 2004, targeting current smokers aging 15 years and above, around the 23 major cities in Taiwan. The methods that he uses to measure the elasticity in cigarette demand are the Tobit regression model and also the maximum likelihood method, and estimation results shows a price elasticity of -0.29 following the 44% increase in the cigarette price. Interestingly, the most significant response to the increase in price was found among women, smokers with low salary, smokers who are only moderately addicted, and smokers who purchase low priced cigarettes. Lee concludes that the smokers are relatively insensitive to a hike in cigarette pr icing, since the prices of cigarettes are low in Taiwan. Thus, a marginal increase in cigarette tax would consequently reduce cigarette consumption and thus also increase the cigarette tax revenue of the government and the income of cigarette merchants effectively. This result is consistent with the findings of previous studies by Townsend (1996) and Sissoko (2002) which reflects that the price has a major effect on cigarette consumption and consequently diseases caused by smoking, especially in low income groups. Progressive rise in cigarette tax rates offer a powerful contribution to policy for reducing cigarette consumption and generating extra government revenue. Consequently, when Ross and Al-Sadat (2007) evaluate income elasticity and the price on cigarette demand and also the effect of cigarette taxes towards cigarette demand and cigarette tax revenue within Malaysia, they find that income is positively connected to cigarette consumption. A 1% rise in real income boosts cigarette consumption by 1.46%. They use time series regression analysis for 1990 to 2004 applying the error-correction model. The per-capita consumption of domestic and imported cigarettes is calculated using the excise tax and import duties collected by the Malaysian government and the size of the adult population which are aged above 15 years old. The model estimates that a rise in cigarette excise tax from RM 1.60 to RM 2 per pack will effectively reduce cigarette consumption in Malaysia by 3.37%. They conclude that taxation is an effectual means for reducing cigarette consumption and deaths linked to tobacco while bringing up the revenue for the Malaysian government. According to Huang, Yang, and Hwang (2004), future cigarette consumptions will depend entirely on tax share, price and income elasticity of remaining heavy smoker. They use a panel unit root test to calculate the demand for cigarettes over the period of 1961 to 2002 for 42 states including Washington D.C. The cigarette data in this study is obtained from The Tax Burden on Tobacco published by the Tobacco Institute. They find that price and income elasticity are approximately -0.41 and 0.06. Other than that, a decrease in tax elasticity leads to decreasing price elasticity, and smaller tax shares seems to be interconnected to declining tax elasticity. This study shows an interesting implication, whereby cigarette consumption is a normal good to transfer payment recipients and wage earners, which however is an inferior good to the elderly population and stocks owners. In 2002, Hu and Mao examine a policy dilemma in China on public health against the tobacco economy through added cigarette tax. In order to analyse the impact of tobacco consumption and production towards government revenue and also to the entire economy, they use published data from 1980 to 1997. Imposition of cigarette tax increase will have a significant impact in generating extra central government revenue and reducing cigarette consumption. Therefore, increasing additional tax on cigarettes will be beneficial to the Chinese government from both the financial and public health perspective. Levy, Cummings, and Hyland (2000) use a simulation model to evaluate the effects of taxes on the smoking rate and smoking induced deaths. The method they use in their study projects the number of smokers and smoking attributable deaths from a baseline year of 1993. They find that increase in taxes is to reduce the percentage of the total population that smokes. Youth groups experiences greater effects. The effects of a tax hike tends to increase over time as younger individuals who are more responsive to price increase grows older, but federal and state taxes on cigarettes are currently set at a fixed amount per unit. Moreover, the price of cigarettes falls comparative to the purchasing power of the population as wages increase. These effects grow over time and lead to a substantial savings in lives and health care cost. Lanoie and Leclair (1998) investigate the relative ability of two anti-smoking policies which are taxes and regulations, in inducing a decline in cigarette consumption and in providing incentives to quit smoking. Based on a Canadian data over the period of 1980 to 1995, the results show that cigarette demand react to taxes with the elasticity of -0.28, not regulation. This result implies that the policies are both acting in a corresponding fashion to influence the incidence of smoking. In addition to that, Galbraith and Kaiserman (1997) analyses Canadian cigarette taxation and consumption within the period of 1980 and 1994. During that period, there is a large price rise and decline, and a dramatic increase in the consumption of the contraband tobacco products. In their study, they examine the elasticity of legal cigarette sales and total sales which include contraband with respect to the price of legal cigarettes and various other factors. They conclude that price elasticity regarding demand towards cigarettes tends to increase in absolute value over time, making taxation an increasing strong instrument with which to influence smoking behavior. In considering untaxed sales as well, it becomes clear that the sensitivity of total cigarette sales to the taxation instrument is much lower than would otherwise appear, and has fallen obviously. According to Meier and Licari (1997), a rise in federal tax is more successful than increases in state taxes in reducing tobacco use. Cigarette consumption drops when labels with health warnings were added. They use a pooled time-series analysis from the period of 1955 to 1994 with 50 states as units of the study. The effect of excise taxes on cigarette consumption for numerous different models and econometric techniques is asset to analyse the usefulness of state and federal taxes in bringing down the consumption of cigarettes and estimate the effect of government health warnings. Their study also shows how warnings and taxes interact. Tobacco control programs also has some impact towards the consumption of cigarettes as stated by Farrelly, Pechacek and Chaloupka (2003) that increase in tobacco control program expenditures reduce cigarette sales. Additionally, in reviewing the evidence on the effectiveness of comprehensive tobacco control programs, the recent Surgeon Generals Report on Reducing Tobacco Use concludes that comprehensive tobacco control programs work. Although these studies consistently suggest that state tobacco control programs decrease tobacco use, these studies can easily be confounded by changes in excise taxes, cross-border sales, and other factors. Nevertheless, Leu (1984) reveals that anti smoking advertisements in Switzerlands mass media has a significant permanent effect on cigarette consumption. It is a powerful instrument to reduce cigarette consumption. He claims that extended publicity, following the 1964 US Surgeon Generals Report, accompanying various tax increases which preceded by a public vote on an advertising ban for tobacco products, helps reduce consumption permanently by a total of 11%. It is also supported by Keeler et al (1993) who examine the impact of income, taxes, prices, and anti smoking policy on the consumption of cigarettes in California. They use a monthly time-series data throughout 1980 to 1990. He also declares that the effect of the increase in tax in the long run will be to decrease cigarette consumption. Anti-smoking regulations decreases cigarette consumption, and thus, it shows that consumers behave consistently with the model of rational addiction. CHAPTER 3 METHODOLOGY This chapter is to describe on the methods used in this study and the collection of data. It also explains the procedures used in collecting the data and the measurement of the variables. Thus, it provides a summary of expected result of the study. 3.1 Data types A time series data is used for the empirical analysis in this study. The data is collected annually over the period of 1998 to 2008. The types of data obtained are real price of cigarette, real income per capita, cigarette consumption, and also the aging population. 3.2 Data Source The secondary data is collected from the previous studies by other researchers. Mainly, the sources of data are from Departme