Recently, parliament has been debating the opening of a new 75.4 million Dinar (200 Million USD) tobacco plant in Bahrain, where the factory's approval has been subjected to many delays. Plans for the tobacco plant can be traced back to September 2019, where some MP members have urged such a plant's approval. Currently, Bahrain prohibits the manufacturing of tobacco products since the introduction of tobacco legislation in 2009. MPs have argued that the tobacco plant will generate jobs and growth towards the economy by opening the economy towards another industry and thus support the effort of diversification (although such goods have large externality costs towards society).
This article will look at if it makes sense from an Economic appraisal point of view for the government and parliament to open a tobacco plant, thus changing the 2009 tobacco legislation and opening up the tobacco industry in Bahrain. The article will touch on the following matters: first, basic theoretical background on Economic appraisal, Current background of smoking in the GCC, an overview of what are the potential benefits and costs of opening a new tobacco manufacturing plant, and from the evidence above, what should be the likely actions that the Bahraini government should take.
Basic Overview of Economic Appraisal
An economic appraisal is viewed as what is the most optimal intervention that a government or government body should take for an economy. We want to know the economic net benefits of intervening in the economy, such as building a new bridge, introducing a tax, or changing a regulatory policy. Thus as Economists and policymakers, we are interested in, with current resources, what is the most efficient allocation of resources?
In Economic Appraisal, Economists generally look at the benefits and costs associated with a new project, changes in regulation, or taxation policy changes. This will then be compared to other projects, regulatory proposals, and tax policies to see the benefits to cost ratio compared to the alternatives. Benefits are generally changes in Economic output, government revenues, or can be something such as time-saved during commuting to work for the general population. Costs usually are the amount of labor and capital needed (this is described further below) and other costs such as Environmental costs or healthcare costs towards the economy.
Therefore, we should look at the benefits and costs of allowing the proposed tobacco plant's opening, summarized in this simple chart below.
Prevalence of Tobacco use statistics in the GCC
Let's look at the prevalence of tobacco outlook in the GCC. First, what is the prevalence of tobacco use in the GCC? And what is it like compared to other areas?
Source: World Bank
Here we see that, in general, the overall prevalence of tobacco use is lower than in high-income countries. However, over-time, we see that between 2007 and 2018, the GCC has only seen a 0.80% decrease in prevalence rate compared to high-income nations with a 5.12% decrease and that Bahrain has seen the largest decline of 4.40% between the selected period. Next, let's see how does the prevalence rate for the men in the GCC.
We see that men in the GCC have similar prevalence rates to high-income nations, with Bahrain and Kuwait having significantly higher prevalence rates. Between 2007 and 2018, we see that there has only been a 0.32% decrease in the prevalence rate across the GCC, while High-Income nations have seen a 6.36% decrease, indicating that males in the GCC have not changed their overall tobacco use behavior. Next, how does the data look like for women?
With women in the GCC, we see that in general, the prevalence rate is by far lower than high-income nations, where Bahrain and Kuwait have the highest tobacco use in the GCC (at 8.60% and 3.40% prevalence rate as of 2018 data). We also see that overall, the prevalence rate for women has decreased by 1.12%, far more than men, which has seen a 0.32% decrease in the prevalence rate. However, we still see that the decline in the prevalence rate still lags behind high-income nations.
Overall, we see that adults in the GCC have a lower prevalence rate than high-income nations. However, the data indicates that this is predominately due to differences in behavior by gender. Men generally have similar prevalence rates compared to high-income nations, while women in the GCC have significantly lower prevalence rates. One piece of data missing is that it would be good to see a breakdown of the prevalence rate by age and gender across time, as this may give us more valuable insights into how trends have changed across different age groups.
Potential Benefits and Costs, theoretical benefits and evidence
Now that we understand what economic appraisal should look at and the prevalence outlook, we should see the potential benefits and costs of the proposed tobacco plant's opening and the historical outcome of such proposed benefits. We mainly look at (Gilmore et al. 2012) as this paper is the most detailed paper looking at the Economic impacts of the tobacco industry away from healthcare costs.
The first benefit is that opening the new tobacco plant can generate tax revenue for the Bahraini government. Currently, tobacco products are taxed under the sin-tax, which levies a 100% tax on tobacco products. Historically, evidence suggests that as firms that have entered nations that have deregulated or privatized the tobacco industry, lobbying efforts for highly favorable tax treatments usually follow. Additionally, newly entered firms may also conduct illegal operations such as smuggling to avoid import taxes and excise duties. The evidence above has been seen in Ukraine, Uzbekistan, Hungary, and Kyrgyzstan. For example, the earliest tax records of Ukraine show that Excise tax as a percentage of the estimated tobacco industry size has not been stable and had decreased across time, only to increase towards 2006/2007 when Ukraine had begun implementing tobacco regulatory reforms. It is important to note that these are estimates of the legal market and do not include the illegal market, which was rampant at the time. As a result, policymakers should be careful to ensure that such lobbying efforts do not lead to similar results. The introduction of tobacco manufacturing in Bahrain may lead to similar outcomes.
The second theoretical benefit that can be argued is that deregulating the tobacco industry may increase exports and reduce imports, thus reducing reliance on imported tobacco products. Historically, Former Soviet Union nations that had received private investments have seen large growths in cigarette production compared to those that did not. Furthermore, this was marked by an increase in tobacco-related imports, which had outweighed exports by around 2.5 to 1 across those regions. In the Ukraine case, we see that the balance of trade-specific to Tobacco products had increased between 1996 to 2007. As a result, the reality is that additional production capacity from private investments is likely to end up towards domestic consumption, which increases various costs (described below) towards society given the large social costs associated with increased tobacco consumption.
Overall, we see that the theoretical benefits associated with deregulating the Tobacco industry are limited, and in the case of an export-import substitution play, are the opposite where such benefits may be costs towards society. If parliament is to go ahead with opening a Tobacco plant, an independent regulatory board would be required to limit potential tobacco lobbying efforts to sway parliament. Additionally, a production quota may also be needed to prevent an increase in the total supply of tobacco products in Bahrain. Such a plant won't have the ability to expand production, as seen from historical evidence continuously.
Potential Benefits and Costs, theoretical costs and evidence
What are the costs associated with opening the tobacco plant? The first cost is that of direct labor and capital costs needed for such a plant. In general, when a policy is considered, alternative policies should be considered to see what net benefits from alternative policies. Potentially, deregulating another sector may derive more benefits that have similar labor and capital costs as opening the tobacco plant.
The second cost is that opening the tobacco plant may lead to higher production efficiency and may reduce real prices of tobacco prices. A reduction in real prices would increase demand (to various degrees depending on age primarily), increasing direct costs towards the economy, being direct costs such as healthcare costs, and indirect costs, such as economy-wide loss of productivity. Smoking and Secondhand smoking exposure costs in the GCC and high-income nations represent 1.25% and 2.20% of total GDP. This represents approximately 15.57 Billion Dinars PPP (41.3 Billion USD PPP) of 2016 GCC GDP. Below is a graph that shows the costs as a percentage of GDP around the world.
From the evidence of FSU nations, the world bank's estimates have found that real prices of cigarettes in the early 2000s in Ukraine and Russia have stayed relatively stable, while general prices have increased significantly. Using Data from Russia, we can see that real cigarette prices have only begun to rise once intervention was introduced in 2009, which saw the increase of excise tax on cigarettes by at least 30% per year. With this, Russia saw a 6% decrease in tobacco prevalence rates, with male prevalence rates decreasing by 11% from 2009 to 2017. The evidence above suggests that privatized state-owned firms in FSU nations had managed to achieve higher economy of scales. In turn, this had likely allowed for a reduction in real prices for cigarettes, especially when compared to general price levels.
Regarding Bahrain, it would only make sense for investors to open a tobacco plant where the plant can compete cost-wise with foreign competition and achieve at least normal profits. This means that the likely scenario is that the tobacco plant's opening will achieve Economies of scale relative to imported products, and therefore have the ability to reduce offered prices. In turn, we may see an increase in demand for tobacco products by the general consumers and potentially increase tobacco prevalence rates, thus further increasing the direct healthcare costs and indirect productivity costs towards society.
The third potential cost is that of environmental damages associated with the tobacco industry and tobacco consumption. We will not include the environmental damages associated with tobacco cultivation as plans for cultivation were scrapped from the initial proposal. However, the manufacturing and distribution of tobacco products produce a considerable amount of waste, which is non-recyclable. Those wastes include solid waste, nicotine waste, and chemical waste, which are considered toxic to both health and the environment. Additionally, cigarette butts are the most commonly discarded piece of waste globally and are the most frequent litter item seen at water edges and beaches. With hazardous substances found in such substances (such as arsenic and lead), these substances may have the ability to leak into aquatic environments and soil. These substances may also end-up towards food consumed through bio-accumulation in the food-chain (thus further increasing healthcare costs). Last, tobacco smoking also leads directly to emissions, and indirectly via deforestation for cultivating tobacco. As a result, the tobacco plant's proposal must consider these environmental costs, in addition to potential increases in prevalence rates for tobacco use, which will have further environmental impacts domestically and abroad.
Overall, we see that the likely costs are to be large and significant towards the economy. We see that smoking and secondhand smoking exposure has a significant cost to the economy. The proposed tobacco plant will likely achieve higher economies of scale. Additional production capacity is likely to be used for domestic consumption (as described in the perceived second benefits) as prices are reduced, thus increasing demand. In turn, it is likely to increase the tobacco prevalence rate and increase direct and indirect costs towards the economy. We also see that the proposed plant's opening may also aid environmental damages via direct manufacturing and potential increased consumption by the general public.
Overall likely outcomes of opening the new tobacco plant
Overall, we see that opening the new tobacco plant is likely to lead towards higher costs than benefits towards the economy. Perceived Economic benefits are likely to be limited. In the case of our second benefit of a potential "import-export" play, the historical evidence shows no evidence of such benefits happening, and are likely to increase domestic consumption, thereby becoming more of a cost than a benefit. Economic costs associated with the proposed plant are likely to lead to reductions in real prices for tobacco products, and thus, an increase in demand. In turn, this is likely to increase healthcare costs and productivity losses in the economy. Last, we also see that the new proposed plant may also increase environmental damage from direct manufacturing and increased tobacco usage. The likely outcome of the proposed tobacco plant is that it will likely lead towards negative net benefits (i.e., costs will outweigh benefits). If parliament and the government were to go forward with the proposed plant, heavy monitoring, and taxation is proposed to curb the negative externalities which may arise.
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