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An empirical analysis of cigarette demand in Argentina
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1. Eugenio Martinez1,
2. Raul Mejia2,
3. Eliseo J Pérez-Stable3
1. 1Instituto de Estudios Laborales y del Desarrollo Económico (IELDE) and Consejo de Investigaciones de la Universidad Nacional de Salta (CIUNSa), Facultad de Ciencias Económicas, Universidad Nacional de Salta, Salta, Argentina
2. 2Centro de Estudios de Estado y Sociedad and Programa de Medicina Interna General, Universidad de Buenos Aires, Buenos Aires, Argentina
3. 3Division of General Internal Medicine, Department of Medicine, Medical Effectiveness Research Center for Diverse Populations, Helen Diller Family Comprehensive Cancer Center, University of California, San Francisco, California, USA
1. Correspondence to Professor Eliseo J Pérez-Stable, 1545 Divisadero Street, Box 0320 San Francisco, CA 94143-0320, USA; eliseops{at}medicine.ucsf.edu

## Abstract

Objective To estimate the long-term and short-term effects on cigarette demand in Argentina based on changes in cigarette price and income per person >14 years old.

Method Public data from the Ministry of Economics and Production were analysed based on monthly time series data between 1994 and 2010. The econometric analysis used cigarette consumption per person >14 years of age as the dependent variable and the real income per person >14 years old and the real average price of cigarettes as independent variables. Empirical analyses were done to verify the order of integration of the variables, to test for cointegration to capture the long-term effects and to capture the short-term dynamics of the variables.

Results The demand for cigarettes in Argentina was affected by changes in real income and the real average price of cigarettes. The long-term income elasticity was equal to 0.43, while the own-price elasticity was equal to −0.31, indicating a 10% increase in the growth of real income led to an increase in cigarette consumption of 4.3% and a 10% increase in the price produced a fall of 3.1% in cigarette consumption. The vector error correction model estimated that the short-term income elasticity was 0.25 and the short-term own-price elasticity of cigarette demand was −0.15. A simulation exercise showed that increasing the price of cigarettes by 110% would maximise revenues and result in a potentially large decrease in total cigarette consumption.

Conclusion Econometric analyses of cigarette consumption and their relationship with cigarette price and income can provide valuable information for developing cigarette price policy.

• Economics
• Tobacco industry
• Price

## Discussion and policy implications

This paper examined cigarette demand in Argentina employing monthly data over the period 1994–2010. Cointegration techniques were applied to estimate both long-term and short-term income and own-price elasticity of demand for cigarettes. Finally, the importance of short-term deviations was presented using VECM estimation. The empirical results suggest that in the long-term period (3 months) the demand for cigarettes was affected by changes in real income and real price. The value of income elasticity was equal to 0.43, while the value of price elasticity was equal to −0.31. The results of VECM estimation show that the income elasticity in the short term (1 month) in Argentina is equal to 0.25 and the short-term (1 month) price elasticity of the demand for cigarettes is −0.15.

These income and price elasticity results for Argentina fall in between the elasticity estimates made for the other South American countries. Studies of elasticity estimates for cigarette demand in Bolivia for the period 1988–2002 found an income elasticity of 0.71and an own-price elasticity of demand of −0.85.13 Data obtained from Brazil estimated that the price elasticity of cigarette demand for long term and short term were −0.42 and −0.25, respectively, from 1991 to 2003.14 An innovative approach estimated income and own-price elasticity of cigarette demand in Chile comparing conventional models with the myopic addiction model. Using the conventional models of long-term demand elasticity, this was equal to 0.23 for income elasticity and −0.21 for own-price elasticity.15 When the authors applied the myopic addiction model, results for the long-term and short-term own-price elasticity were −0.45 and −0.22, respectively, and results for the income elasticity were 0.22 and 0.11, respectively.15 Analyses of the demand for legal cigarettes in Uruguay using quarterly time series for the period 1991–2003 showed a price elasticity of −0.55 for the long term and −0.49 for the short term; income elasticity values were 0.73 and 0.65 for the long term and short term, respectively.16

Argentina has undergone steady economic expansion with annual growth rates as high as 9% since 2003. Despite this expected expansion of purchasing power, the price of cigarettes has remained stagnant and thus these economic policies may be counterproductive to tobacco control. Although smoking prevalence has decreased somewhat, the potential for greater impact by raising cigarette prices to keep up with per capita income has not been realised. Our estimates of elasticity provide valuable information for policy makers on the possible impact of an increase in final retail price of cigarettes (through a tax) on the amount smoked either by encouraging cessation, delaying initiation or decreasing the amount each smoker smokes (intensity). Raising the price of cigarettes simply to keep up with the expanded economic capacity of the population is recommended as a minimum measure based on these data. However, our results show there is a wide margin to increase the cigarette price without revenues from cigarette tax decreasing.

It is important that public health policy makers make their decisions using information from empirical studies based on their own country's data. Therefore, this paper makes a contribution in two ways by providing the estimation of income and price elasticity for Argentina and by addressing the gap caused by the lack of empirical information on cigarette demand in Argentina.

This policy of increasing cigarette prices through taxation is part of Article 6 of the Framework Convention from WHO that was signed but not ratified by Argentina. The results of the simulation exercise suggest that an increase in cigarette prices would permit the government to increase its revenues from taxes imposed on cigarettes to 38%, while at the same time expecting a decrease in consumption. This would be achieved by raising the price by 110% or slightly more than twice the current price in Argentina.

The results of our analysis and the simulation model suggest that increases in cigarette prices by higher tax in Argentina can be an effective instrument for reducing tobacco consumption. Furthermore, the income elasticity estimates in the long term imply that a substantially higher cigarette consumption pattern would be expected as the real income of Argentineans converges with the income of the households from high-income countries. Finally, Argentina is currently working on different antismoking programmes and policies and trying to implement the Framework Convention from WHO even without formal legislative ratification. Policy makers and tobacco control advocates could benefit from the findings of this study that provides useful information on the characteristics of the cigarette market in Argentina and supports proposals to increase taxes.

• Using available public data from the Ministry of Economics and Production of Argentina between 1994 and 2010, this econometric analysis showed that the demand for cigarettes was affected by changes in real income and the real average price of cigarettes.

• Using these values in a simulation exercise showed that increasing the price of cigarettes by 110% through additional taxes would both maximise government revenues and result in a potentially large decrease in total cigarette consumption. This would potentially lead to thousands of saved lives in future.

## Acknowledgments

We would like to thank Teh-wei Hu, PhD, and John Tauras, PhD, for providing excellent comments and suggestions on earlier versions of this paper and Cecilia Populus-Eudave for research administrative support. The views expressed in this paper are solely those of the authors and do not necessarily reflect the views of the institutions.

• ## Supplementary Data

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## Footnotes

• Contributors The authors EM, RM and EJP-S meet the authorship conditions described below. Authorship credit should be based on (1) substantial contributions to conception and design, acquisition of data or analysis and interpretation of data; (2) drafting the article or revising it critically for important intellectual content; and (3) final approval of the version to be published.

• Funding This work was supported by the Tobacco Research Network Programme, Fogarty International Center, National Institute on Drug Abuse and National Institutes of Health, USA. Grant number: TW05935.

• Competing interests None.

• Provenance and peer review Not commissioned; internally peer reviewed.

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