EXECUTIVE SUMMARY
“Smoking is considered one of the leading causes of preventable deaths globally. In Bahrain, smoking prevalence has increased in the last few years which is concerning for policymakers since smoking tobacco, especially cigarettes, has been highly correlated with many illnesses, including lung cancer.
This article aims to demonstrate the extent to which an excise tax can have on demand reduction.”
Introduction
Smoking is considered one of the leading causes of preventable deaths globally. In Bahrain, smoking prevalence has increased in the last few years which is concerning for policymakers since smoking tobacco, especially cigarettes, has been highly correlated with many illnesses, including lung cancer. In addition, Ross and Chaloupka (2003) associate smoking with market failures, in which they state that there are large health care expenses involved as a result of participating, which reduces public funds and inflates insurance premiums. They go further to state that the inherent negative externalities and the presence of imperfect information among the participants justify government intervention for tobacco products.
There is a general agreement by policymakers around the world that by controlling prices, they can regulate smoking participation. In theory, this is correct, given that tobacco products abide by the laws of demand and price rises are inevitably followed by demand decreases. In practice, however, research conducted in the United States shows that tobacco products are highly unresponsive to price changes. The explanation behind the lack of response has been subject to much debate amongst economists and psychologists. Chaloupka and Warner (2000) (p. 14-17) summarise the theories of different rational behaviour models to understand the thought process of an addicted individual. The main contrasting elements of these theories are the lengths in which a smoker is short-sighted (myopic) or far-sighted in their decision to participate in the tobacco market.
The WHO Framework Convention on Tobacco Control (FCTC), which Bahrain has ratified in 2007 [1], states that demand reduction policies through taxation is required as one of the obligations towards controlling the consumption of tobacco [2]. As of the 30th of December 2017, Bahrain did see the implementation of an excise tax on most tobacco products, which raised their prices by 100%. The objective of the excise tax was to ensure that consumption of tobacco would fall and that the revenues generated from it would be used to alleviate the financial burden of healthcare costs. Many countries around the world, and indeed all countries which have agreed to the FCTC, do have some form of excise tax in place to achieve demand reduction and revenue generation.
This article aims to demonstrate the extent to which an excise tax can have on demand reduction. We will first briefly discuss the research done on Bahrain and the region in regards to smoking to establish the need for policymakers to intervene. We will then discuss various research papers conducted in the United States that managed to gauge the predictability of quitting tobacco through price increases, separated by age groups. Finally, a discussion of the facts established will be presented at the end of the article which will offer recommendations for policymakers.
LOCAL RESEARCH ON SMOKING
Smoking Prevalence in Bahrain
The following information was compiled on individuals who identified themselves as current users of any tobacco product in Bahrain, separated by male and female prevalence. Cross-sectional survey results for adult prevalence are summarized below:
For youth smoking prevalence in Bahrain, the following cross-sectional study was done by the Global Youth Tobacco Survey (GYTS) for 2002 and 2015 [6] on whether the respondent was a current user of tobacco:
It is a cause for concern that there are rising trends for adult smoking, especially since anti-smoking measures have been put in place since ratifying the FCTC in 2007. Also, there is limited data on youth smoking in Bahrain, so there is a 13-year information gap on trends. Thus, we cannot determine whether there has been substantial improvements in this age group.
Lung Cancer and Smoking
80% of the lung cancer deaths are caused by tobacco smoking [7.] Al-Hamdan et al. (2009) conducted a study on all GCC countries regarding cancer incidence and smoking prevalence. In his research, he found that lung cancer incidence between 1998-2001 for males was the highest form of cancer in Bahrain, Qatar, and the United Arab Emirates, and the second most common in Kuwait. He also found that smoking prevalence in 1996 was highest in the order of Kuwait, Bahrain, Qatar and the United Arab Emirates. Also, the Gulf Centre for Cancer Control and Prevention stated that between 1998 to 2007, Lung Cancer was the most common form of cancer in Bahrain for men [8].
Barriers to Quit and Smoking Cessation Clinics
Al-Hashel et al. (2012) conducted a survey in malls around Bahrain where respondents who identified themselves as smokers were asked what the main reason was that prevented them to quit smoking. The answers were documented in the figure below:
Craving for a cigarette and the enjoyment of smoking account for 57% of the responses, while the other reasons were related to financial or actual physical barriers. If we consider this survey as a representative sample of the population, then this suggests the primary barrier for Bahrainis to quit smoking is psychological [9]. The most interesting result found by the study was that the majority of the respondents have never heard of the Smoking Cessation Clinics in Bahrain.
A first-ever local survey was conducted recently to study the effectiveness of Smoking Cessation Clinics. Hamadeh et al. (2017) studied two Quit Tobacco Clinics (QTC) in Bahrain and found that during the study period (which spanned for four months and ten days), 56.5% of respondents had stopped smoking. Ultimately 37.6% of respondents have stopped smoking all forms of tobacco for longer than six months. Respondents also listed that the reasons for preventing them from quitting smoking were personal problems (34.2%), habit (27%) and enjoyment (11.7%). This further reinforces the argument that psychological barriers are the main reasons that prevent individuals from smoking cessation.
[3] https://www.moh.gov.bh/Content/Files/Publications/X_2812013135226.pdf
[4] https://rho.emro.who.int/rhodata/node.main.Tobacco15?lang=en
[5] https://rho.emro.who.int/rhodata/node.main.Tobacco15?lang=en
[6] https://www.cdc.gov/tobacco/global/gtss/gtssdata/index.html
[7] https://www.cancer.org/cancer/cancer-causes/tobacco-and-cancer/health-risks-of-smoking-tobacco.html
[8] https://www.moh.gov.bh/Content/Files/Publications/GCC%20Cancer%20Incidence%202011.pdf (Page 118)
[9] A principle foundation of economics explains the distinction between a need and a want. We need food, water, and shelter, but we do not need cigarettes. However, smokers have developed an addiction to nicotine, which is a condition that causes physical distress. Despite this, the reason why the word ‘psychological’ was used is that: 1) The human body does not require nicotine to live (it is not an economic need). 2) The majority of withdrawal symptomsassociated with smoking can be managed with psychological therapy.
THE ECONOMICS OF TOBACCO
Cigarettes are classified as normal goods which means that they abide by the standard laws of demand, where price increases are met with demand decreases and vice versa. However, studies show that they exhibit a property of inelasticity.
A normal good is said to be inelastic when a percentage price increase is met with a smaller percentage decrease in demand, which means that consumers consider cigarettes an essential part of their lives and are unwilling to change their consumption behaviour drastically. Possible reasons as to why it is inelastic can be made with regards to market power and consumer addiction which makes it hard to substitute away from cigarettes.
To offer a quick recap of the mathematics behind demand elasticity;
In the next section, it will be revealed that many researchers agree that tobacco elasticity is under -1. The closer the number is to 0, the less responsive people will be to changes in price. For example, with an elasticity value of -0.5, a 1% increase in price will only have a -0.5% decrease in quantity demanded.
PREVIOUS RESEARCH ON SMOKING PARTICIPATION
There has been a variety of research done regarding the level of elasticity that cigarettes have in the face of price increases. Demand for tobacco is represented by smoking participation, which is defined as the probability of the respondent to continue smoking in the future using slightly different forms of Binary Choice Models.
Adult Smoking Participation
Callison and Kaestner (2012) offer a summary of the studies that have been done in the past in regards to adult smoking participation:
Although each of these papers employs different models at different time periods, it is enough to prove the point that the elasticity gravitates towards a negligible amount. Averaging the numbers above, the probability of an American adult to quit smoking is 0.075 per every 1% increase in price. This suggests that the demand for tobacco is very inelastic.
Youth Smoking Participation
On the other hand, there is an overwhelming consensus among researchers that price rises are met with a much stronger response from younger people [10]. A summary of the studies done on smoking participation for youth are shown below:
Averaging the numbers above, the probability of an American youth to quit smoking is 0.633 for every 1% increase in price. This suggests that the demand for tobacco to youth is far less inelastic, and thus, more responsive to change than adults.
To illustrate the results, let us assume that the federal government imposes an excise tax of 100% on all tobacco products sold by retailers in the United States. Using the average results found above and all other things being equal, the results will show that adults will have an 8.5% probability to quit smoking. In contrast, the youth will have a staggering 63% probability of quitting. These amounts are not absolute facts (see footnote for further discussion) [11], but offer guidance to legislators on the scale of impact the excise tax has on the population.
[10] Some studies reject these results, such as Wasserman et al. (1991) and Callison and Kaestner (2012) whom both have found no association of price rises and youth smoking participation. Analysing both these papers, it is possible to state that they contain irregularities. Notably, the former paper suffers from multicollinearity and has a small sample size, as pointed out by Grossman (1991). The latter paper considers young people to encompass the ages 18 to 34, which create downward bias since it includes people over the age of 24, who cease to be considered youth and thus could severely impact the standard errors.
[11] It is improper to average statistical results over many research methods, especially since methodologies, surveys and sample sizes may differ. The problem was that when stating the ‘consensus’ amount, researchers do not separate the effects between adults and youths, which meant that personal research had to be done. Nonetheless, what was found is a study conducted by Gallet and List (2003), using 17 price elasticity estimates found that the median value was -0.32 for adults. Ross and Chaloupka (2003) state that youth participation consensus ranged between -0.9 to -1.5, but do not provide any basis for the claim.
REVIEW AND DISCUSSION
Using the findings of multiple research papers, this article has established some important facts that have implications for health and economic policymakers.
• Adult smoking prevalence is on the rise in Bahrain
• Lung cancer is one of the most common forms of cancers in Bahrain
• The main barriers that prevent Bahrainis from quitting are psychological
• Smoking Cessation Clinics are an effective therapy to quit smoking for Bahrainis
• Price increases have an almost negligible effect on adult smoking participation
• Price increases have a powerful response towards youth smoking participation
The increasing prevalence of smoking in Bahrain must be tackled on two fronts; to prevent new entrants from participating, and to get current participants to quit. Price is a reliable incentive to control consumer behaviour; however, the extent of its effect is variable.
In dealing with potential and new smokers
It is possible to hypothesise that price is a useful measure to deter potential smokers from participating, as well as to stop new smokers from future participation. It is not unreasonable to reach this conclusion, given the fact that this paper has already determined that addiction is a significant factor that prevents smokers from quitting. In an addict's mind, the craving for a cigarette is given more weight than the costs incurred from increased prices, so he will ‘rationally’ continue to smoke. This is not the case for non-smokers, and not entirely true for new smokers, who have not yet been addicted and therefore could clearly weigh the financial costs incurred from participating.
There is a problem in this hypothesis mainly in which it assumes that price is the only factor that a person has in his mind when deciding to smoke. For example, a high-income individual will not weigh the (short-term) financial costs of smoking as much as that of a low-income individual. However, the underlying notion of understanding is that, although the price is not the ultimate factor, it is most certainly a significant factor for certain groups of people. There are only two types of individuals who are non-smokers; those who have already decided not to smoke and those who have yet to understand what smoking can do for them. It is the latter group which should concern policymakers since they are usually inexperienced, short-sighted children who are unable to make a decision that has extreme long-term health repercussions rationally. As this paper's research has already shown, the youth are far more responsive to changes in price than any other group, and this is irrespective of any socio-economic divisions, including income group. This is because policymakers must assume that most children are financially dependent on their parents’ income and that as long as parents are held accountable for their children’s health (either for moral reasons or through the state's coercive power), then income group is not an extraordinary consideration [12].
In dealing with addicted smokers
The addicted population of smokers must be managed differently, since the majority of these individuals are adults who, unlike children, are usually financially independent and hence, have a less reactive response to changes in price. In this article, it was stated that the primary barriers that prevented adult smokers from quitting were psychological. Although the very act of ‘craving' tobacco is a biological condition that is formed from excessive smoking, it still, in fact, provokes a psychological response, mainly where a person is highly incentivised to continue smoking to pacify the craving sensation. This article has already discovered that price is not an adequate measure to make smokers quit, which is why policymakers must try to solve the behavioural aspects instead.
The one alternative solution found by this paper is the success of Smoking Cessation Clinics in Bahrain. These clinics offer medicinal therapy and counselling that seem to have a substantial effect on an individual’s smoking behaviour. The overall results and methodologies differ, with studies ranging between 25%-35% according to Ezat et al. (2008) [13]. In Bahrain, the only research done on smoking cessation clinics by Hamadeh et al. (2017) puts the quit rate (during the study period of four months) at 56.5%. Therefore to combat the smoking prevalence in Bahrain, health policymakers must consider ways of promoting these clinics through media campaigns given the fact that many Bahrainis are unaware of its existence according to Al-Hashel et al. (2012). Advertising these clinics alongside health hazard labels that are pasted on cigarette packs can be the most efficient way of reaching out to smokers. It is also important to note that behavioural problems are more efficiently solved through encouragement; therefore policymakers must consider ways to incentivise collaborative efforts from different groups, such as family members, work supervisors and physicians, to give support to smokers to take part in these clinic programs. Indeed, Hamadeh et al. (2017) found that only 7.3% of respondents were told about the clinics from physicians, which is disappointing considering that they account for 33% of the respondent's supporters to quit. Work supervisors also have an incentive to discourage smoking since several studies are linking it towards lower labour productivity [14].
Further considerations
Ultimately, what is established is that the excise tax is not a powerful incentive to deter addicted individuals from smoking, but they do yield more effective responses from the youth. The main shortcomings of both these results are the fact that they are based on studies conducted in the United States rather than Bahrain. There is currently no published research done on smoking participation and its association to price through discrete choice models in Bahrain, which means that it is not possible to gauge the elasticity of demand. The only other way of measuring elasticity would be to use the private data of retailers and measure the pre and post effects of the excise tax on sales. However, this method will not provide the socio-economic breakdown of consumers, which is arguably necessary for the pursuit of halting smoking prevalence.
As stated, the results of the American studies are not meant to be taken as definitive facts, but instead, as a guideline for what smoking behaviour looks like. Economic and health policymakers would benefit by encouraging local research in applying discrete choice models to measure demand, for not only cigarettes but also other harmful products and services with inelastic properties.
Despite having a negligible effect on adult smoking participation, this article is in the belief that excise taxes are still beneficial to public health. It must be understood that smokers create an externality to themselves and others around them. The excise tax passes some of the costs created unto smokers so as to alleviate the financial burden that the government spends to treat it. Also, the excise tax will have a very responsive effect on the youth, which will go a long way in reducing smoking prevalence in the future.
[12] The technical fault of this conclusion is the rigidity of the assumption that parents are successfully looking out for the best interest of their children. In reality, parents may not always be successful or worse; they might believe they are successful when they are not. This is why smoking cessation and prevention can only be managed through combinative efforts of society from parents to teachers to the government, and it is policymakers who must act as the guiding hand to incentivise this collaboration.
[13] Their study was found to be as low 17.3% quit rate. Despite this, they did find an impressive result regarding the predictability of quitting. Using a logistic model, a person is more likely to quit the older he is (with a coefficient value of 1.901). They did not go into detail into why this is the case, but it may suggest that since older people may be beginning to experience the inverse health effects of smoking, then they are more motivated to quit. Therefore, health considerations are a factor in an individual's decision to smoke. However, they only begin to react when the negative effects are more tangible, which is a strong case for the myopic behaviour model.
[14] See Baker et al. (2016), Bunn et al. (2006) and Halpern et al. (2001)
CONCLUSION
The purpose of this article was to show to what lengths an excise tax can have on reducing smoking behaviour in Bahrain. The most important result this article found was that the adult population does not react efficiently to price increases in cigarettes, and since adult smokers represent the majority of consumers of cigarettes then it is possible to assume that the social costs of smoking will remain unsolved. Therefore, smoking prevalence will continue to rise, lung cancer incidences will continue to rise, and ultimately, more money will need to be spent on healthcare. A more cost-effective approach would be to tackle the behavioural problems related to quitting tobacco by advertising programs and support groups (such as the Smoking Cessation Clinics). An efficient method of raising awareness would be to advertise these clinics alongside the health hazard labels in cigarettes packs.
However, this does not mean that there is no benefit to the excise tax. An equally important result found in this article is how responsive the youth are towards prices of cigarettes. With this, it is possible to state that a price increase will have a substantial effect on youth smoking participation, which could act as a preventive measure to youth smoking in the future, and ultimately decrease total smoking prevalence. Furthermore, there is an inherent justice in an excise tax. It essentially asks the consumers of harmful goods to contribute towards the healthcare expenses that they bring to society, which would include the illnesses brought to themselves as well as to non-smokers.
ABOUT THE AUTHOR
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Khaled Bastaki is a graduate from the University of Warwick in a Masters of Science in Economics at the University of Warwick. His main interests relate to economic policy, law and politics. His current research relates to dynamic modelling of the economy and applied microeconometrics.
To contact Khaled Bastaki, please use the following medias:
Email: k.bastaki@bahrainresearchgroup.com