Is cigarette smoking in poorer nations highly sensitive to price?: Evidence from Russia and China

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Abstract

We examine cigarette demand in China and Russia using longitudinal micro-level household and community surveys. Previous developing-country price elasticity estimates of around −0.75 have been larger than United States estimates of about −0.4, but the former have relied primarily on aggregate data. In contrast, our micro-level price elasticity estimates in China and Russia range from 0 to −0.15. Thus, raising prices in poorer countries may not reduce smoking to the degree previously suggested.

Introduction

Traditionally, cigarette smoking has been more pervasive in wealthier societies. However, in the 1970s per-capita consumption began to rise dramatically in poorer nations, while on balance it fell in richer ones. The anticipated future health burdens from smoking have accordingly shifted as well. In Western nations, cigarette taxes have often been an important instrument for discouraging smoking. It is unclear whether they will prove effective in developing nations, but it would seem that there is a fairly widely held belief that they should. In this paper, we estimate the sensitivity of consumers in Russia and China to cigarette prices and therefore provide some insight into the likely implications of Western-style cigarette excise taxes in these nations.

Cigarette smoking behavior in lower-income countries has received little attention from economists. It is apparently generally accepted that the elasticity of demand for cigarettes in developing nations is higher than the average of −0.4 recovered with samples from wealthy, industrialized societies (Warner, 1990 and others). Several factors appear to drive this belief. Warner (1990) emphasizes low initial smoking and income levels in poorer societies. It has also been argued (see Chaloupka et al. (2000) and others) within the framework of addiction models that lower educational levels should heighten price sensitivity.

The sparse demand analysis using samples from lower-income societies generally sustains these expectations. Nearly all studies conducted in developing countries rely on aggregate data (e.g. Chapman and Richardson, 1990). In general, they report elasticity estimates significantly larger than those recovered by studies using samples from wealthier countries. However, the range of estimates is really quite wide. Further, they are subject to all of the limitations and empirical concerns normally associated with aggregate data. Explanatory variables are often highly collinear and there can be (possibly substantial) simultaneity. Additionally, many studies utilize somewhat questionable data and extremely short time series (studies with 10–15 observations are not unusual). Finally, many use official cigarette sales as the dependent variable, in which case unobserved smuggling could lead to overly large elasticity estimates.

Aggregate studies generally do not provide elasticity estimates for demographic subgroups within developing nations. This could be important, since modest overall smoking rates in poorer societies often mask high incidence for certain subgroups (such as men in Indonesia, Russia, China, etc.) among whom consumption is highly concentrated. Another drawback to aggregate data is their failure to incorporate price variation below the national level, which can be considerable in developing nations (due, for instance, to more limited infrastructure, information, and, in some instances, market contestability).

This paper examines the demand for cigarettes in Russia and China with longitudinal micro-level surveys of individuals and their communities. Micro-level analysis has the advantage that many problems associated with aggregate data, such as simultaneity and multicollinearity, are less serious (Chaloupka and Warner, 2000). It permits more extensive examination of variation in price sensitivity across demographic subgroups and allows for inter-community variation. Perhaps most importantly, the longitudinal nature of our data allows us to correct for the presence of community-level unobservables which might otherwise contaminate estimates of the role of cigarette prices in the conditional distribution of demand.

China and Russia are ideal subjects for cigarette demand analysis. Both are large and diverse nations which exhibit nearly all of the economic circumstances present in the contemporary developing world. China is the largest market by volume for cigarettes. The Chinese market has for decades been nearly totally dominated by the state-owned China National Tobacco Corporation (CNTC), which sells over a thousand brands. Per capita cigarette consumption rose dramatically from the early 1970s to the early 1990s. Female smoking rates are negligible compared with those of men.

Chinese policy-makers have not implemented consistent or comprehensive tobacco-control policies. Local governments have made sporadic efforts to discourage smoking, but there has been no coordinated effort to raise consciousness or directly discourage it. Cigarette production taxes provide substantial revenue, but are not intended to discourage smoking. Taxes (at the manufacturer or wholesale level) comprise 35% of the price of cigarettes. This is relatively low compared to the rest of the world. (Hu and Mao, 2000).

In the Russian Federation cigarette smoking is concentrated among men (though female smoking rates are by most reports higher than those in China). Foreign firms now control 70% of the Russian market. Following the collapse of Communism, their cigarettes and advertising quickly became ubiquitous and they invested heavily in local production facilities. The government has not pursued comprehensive tobacco control measures and Russia has one of the lowest cigarette tax rates in the world.

While we are unaware of any demand analysis in Russia, several papers examine the demand for cigarettes in China. Mao et al. (1997) use annual time series data for Sichuan province from 1981 to 1993. Mao and Xiang (1997), the only demand study from a developing country (of which we are aware) using micro-level data, employs a cross-sectional sample of 2431 adults from the same province. Finally, Xu et al. (1998) estimate demand with annual national data from 1978 till 1992. Aggregate data studies generally produce overall elasticity estimates centered on −0.75. Mao and Xiang (1997) report participation and conditional consumption elasticities of −0.89 and −0.18, respectively.

In this paper we report elasticity estimates for China and Russia that are far more modest than those found in earlier papers. Indeed, in many cases we find a price elasticity that is virtually zero, with a range of 0 to −0.15.

Section snippets

Econometric Model

We employ the two-part model, which separates demand into two parts: the decision to smoke (participation) and the number of cigarettes smoked conditional upon smoking (intensity). Then, demand Y isE(Y)=Pr(Y>0)×E(Y|Y>0)The elasticity of unconditional demand ηE(Y) is thusηE(Y)Pr(Y>0)E(Y|Y>0)Using logit for participation and linear regression for intensity, we estimate a specification in which demand is a function of the price of cigarettes, wealth, age, education, household size, a community

China

For our Chinese analysis, we employ the China Health and Nutrition Survey (CHNS). It is a longitudinal household survey conducted in nine Chinese provinces: Guangxi, Guizhou, Heilongjiang (1997 wave), Henan, Hubei, Hunan, Jiangsu, Liaoning (1989–1993 waves), and Shandong. The survey contains two basic modules. The household module includes an extensive set of health-related instruments that ask about health status and health-related behaviors such as smoking. It is also a rich source of

Results

Table 2 presents point estimates and overall elasticities separately for participation and intensity. In the Chinese participation models, the price terms are collectively significant in all three specifications. Their collective significance grows with the introduction of tighter controls for community level unobservables. However, the overall participation elasticities are uniformly small, under −0.05. Interestingly, there is little statistical evidence of wealth effects.

For the Chinese

Discussion

Drawing from Russian and Chinese samples, we report price-elasticity estimates in the 0 to −0.15 range, which is small in comparison with those derived from most of the earlier work and far smaller than many might have anticipated. Perhaps this should be less surprising than it might first seem to be. First, the exceptionally high smoking intensity in both the samples may suggest a strong addiction to cigarettes by consumers. China and Russia generally both lack the defined regulation on tar

Acknowledgements

We are grateful for partial financial support from the National Institute of Child Health and Human Development (Grant #R01 HD38063).

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