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Nicotine & Tobacco Research Volume 9, Number 11 (November 2007) 1163–1169




Demand analysis of tobacco consumption in
Malaysia

Hana Ross, Nabilla A. M. Al-Sadat

Received 18 May 2006; accepted 12 February 2007




                                                                                                                                   Downloaded from http://ntr.oxfordjournals.org/ at Perpustakaan Universiti Sains Malaysia on October 24, 2011
We estimated the price and income elasticity of cigarette demand and the impact of cigarette taxes on cigarette
demand and cigarette tax revenue in Malaysia. The data on cigarette consumption, cigarette prices, and public
policies between 1990 and 2004 were subjected to a time-series regression analysis applying the error-correction
model. The preferred cigarette demand model specification resulted in long-run and short-run price elasticities
estimates of 20.57 and 20.08, respectively. Income was positively related to cigarette consumption: A 1% increase
in real income increased cigarette consumption by 1.46%. The model predicted that an increase in cigarette excise
tax from Malaysian ringgit (RM) 1.60 to RM2.00 per pack would reduce cigarette consumption in Malaysia by
3.37%, or by 806,468,873 cigarettes. This reduction would translate to almost 165 fewer tobacco-related lung
cancer deaths per year and a 20.8% increase in the government excise tax revenue. We conclude that taxation is an
effective method of reducing cigarette consumption and tobacco-related deaths while increasing revenue for the
government of Malaysia.




Introduction                                                                 Tobacco use is currently one of the leading causes
                                                                          of death in Malaysia, accounting for 19% and 11.5%
Tobacco use has reached epidemic proportions
                                                                          of deaths among men and women, respectively
worldwide (Jha, 1999). Although the prevalence of
                                                                          (World Health Organization, 2003). The economic
smoking has decreased in countries with higher per-
                                                                          costs of tobacco use are equally high and consist
capita income over the past two decades, cigarette
                                                                          primarily of the healthcare costs of treating tobacco-
use has increased in countries with low- and mid-
                                                                          related diseases (often covered by public funds) and
level per-capita income (Gajalakshmi, Jha, Ranson,
                                                                          lower labor productivity.
& Nguyen, 2000). Malaysia is no exception to this
                                                                             Some government interventions have been shown
trend. Smoking prevalence there has increased from
                                                                          to reduce tobacco use (Ranson, Jha, Chaloupka, &
21.5% in 1986 to 24.8% in 1996 (Institute of Public
                                                                          Nguyen, 2000), and the Malaysian government has
Health, 1987, 1997). Smoking is much more pre-
                                                                          taken steps to leverage that fact. In 2004, the
valent among males than females (49.2% vs. 3.5%;
                                                                          government introduced a total ban on all forms of
Institute of Public Health, 1997). Youth smoking is a
                                                                          tobacco advertising and launched a 5-year multi-
particularly acute problem in Malaysia, where as
                                                                          million-dollar smoking prevention media campaign.
many as 60% of young males from lower socio-
                                                                          Malaysia also bans smoking in many public areas.
economic backgrounds smoke (Ahmad, Jaafar, &
                                                                          However, Malaysia does not yet have a clear tobacco
Musa, 1997).
                                                                          tax policy, which is one of the most effective methods
                                                                          to combat smoking behavior (Chaloupka, Hu,
                                                                          Warner, Jacobs, & Yurekli, 2000). The motivation
Hana Ross, Ph.D., International Tobacco Surveillance, American            for several cigarette tax increases in the past decade
Cancer Society, Atlanta, GA; Nabilla A. M. Al-Sadat, M.P.H.,
Department of Social and Preventive Medicine, Faculty of Medicine,
                                                                          was primarily to raise government revenue (Table 1).
University of Malaya, Malaysia.                                           The 2005 excise tax on locally produced cigarettes,
  Correspondence: Hana Ross, Ph.D., Epidemiology and Surveillance         which constitute over 95% of the market, represents
Research, National Home Office, American Cancer Society, 250
Williams St. NW, Atlanta, GA 30303-1002, USA. Tel: +1 (404) 329-
                                                                          only about 25% of the retail price. This rate is far
7990; Fax: +1 (404) 327-6450; E-mail: hana.ross@cancer.org                below the tax level in some of Malaysia’s neighboring

ISSN 1462-2203 print/ISSN 1469-994X online # 2007 Society for Research on Nicotine and Tobacco
DOI: 10.1080/14622200701648433
1164     DEMAND ANALYSIS OF TOBACCO CONSUMPTION IN MALAYSIA


Table 1. Import, excise, and sales taxes, 1990–2005.

                        Import tax (non-ASEAN          Import tax (ASEAN countries) Excise tax (local cigarettes)
Year                 countries) RM/KG or RM/stick           RM/kg or RM/stick           RM/kg or RM/stick             Sales tax (%)

1990                              85                                85                            13                       15
1991                             135                               135                            14                       15
1992–1997                        162                               162                            29                       15
1998–2000                        180                               180                            40                       15
2001–2002                        216                               216                            48                       25
2003                             259                               108                            58                       25
2004                             200                               100                            58                       25
2005                               0.20                              0.10                          0.08                    25

Note. ASEAN, Association of Southeast Asian Nations; kg, kilogram; RM, Malaysian Ringgit. Tax in 2005 is in RM/stick; tax for all other
yeas is in RM/kg.


countries. In Thailand, for example, the cigarette                    smoking prevalence and smoking intensity while




                                                                                                                                          Downloaded from http://ntr.oxfordjournals.org/ at Perpustakaan Universiti Sains Malaysia on October 24, 2011
excise tax represents 78% of the retail price.                        controlling for the population growth, served as the
   International research has shown that a 10%                        dependent variable in our demand model. The real
increase in cigarette prices can reduce cigarette                     tobacco consumer price index (CPI), which represents
consumption by 4%–8% (Jha, 1999). Most countries                      the cost of all tobacco products in Malaysia adjusted
fall into this range, but some countries or regions                   for inflation, was provided by the Department of
may exhibit different price sensitivity because of                    Statistics. It is based on the price of one of the most
cultural or social factors. Nevertheless, only a few                  popular cigarette brands in Malaysia, Benson &
low- and middle-income countries have calculated                      Hedges (ACNielsen, 2002), which was collected
their country-specific estimates of the price respon-                 monthly by the Department of Statistics in randomly
siveness of the cigarette market. Lack of data or                     selected shops across the country. We adjusted the
research capacity is often the reason why this                        tobacco CPI for inflation using the general CPI. Our
information is not available. Having a country-                       model of cigarette demand controlled for the impact
specific estimate of responsiveness to cigarette tax                  of income and tobacco control policies on cigarette
changes is useful for planning purposes because the                   consumption. We measured income by real gross
impact of a tax increase on tax collection can be                     domestic product (GDP) per capita.
predicted with a higher degree of precision.                             Tobacco control policies other than cigarette taxes
   This study is the first to estimate the responsive-                can be important determinants of cigarette consump-
ness of Malaysians to a change in cigarette prices. It                tion. We created a set of policy or event variables
demonstrates how cigarette excise tax policy can be                   that capture the tobacco control environment in
used to curb the tobacco epidemic in Malaysia,                        Malaysia between 1990 and 2004. Variable ‘‘tlaw1’’
predicts the impact of higher cigarette taxes on future               takes the value of 1 for 1994–1996 and the value of 2
tobacco-related mortality, and estimates the impact                   for 1997–2004 to reflect the adoption of the Control
of cigarette tax policy on budget revenue.                            of Tobacco Products Regulation law and its amend-
                                                                      ment in 1997 that expanded smoke-free areas and
                                                                      banned minors’ smoking. Variable ‘‘relig’’ is assigned
Method                                                                the value of 1 for 1995–2002 to mark the National
The secondary aggregate time-series data for 1990 to                  Fatwa Council announcement that ‘‘Smoking Is
2004 used in this study are summarized in Table 2.                    Haram (Forbidden),’’ and the value of 2 for 2003–
The per-capita consumption of domestic and                            2004 to capture the additional impact of the New
imported cigarettes was calculated using the excise                   Breath Beginning Ramadan Campaign calling for
tax and import duties collected by the Malaysian                      smoking cessation during Ramadan. Variable ‘‘ban-
government and the size of the adult population                       derol’’ takes the value of 1 for 2003, when the
(aged 15 years or older). Since the excise tax and                    government introduced special stickers to curb illegal
import duties were levied per kilogram until 2004, we                 tobacco products, and the value of 2 for 2004, when
determined the consumption of both domestic and                       security marks were placed on cigarette packs to
imported cigarettes in kg per year. To convert the                    improve the control of cigarette smuggling. Variable
weight amount to the number of cigarettes, we                         ‘‘taknak’’ assumes the value of 1 for 2004, when the
assumed, as did the Malaysian Department of                           national media anti-tobacco campaign Tak Nak was
Customs, that each kilogram of cigarettes is equal                    launched. Variable ‘‘tcmeas’’ is a dichotomous
to 1,100 sticks. Per-capita consumption is obtained                   indicator for every year in which a new tobacco
by dividing the total consumption (in sticks) by the                  control policy was adopted or a new tobacco control
size of the adult population (defined as population                   event occurred. The rationale for this variable is that
aged 15 years or older). This variable, which reflects                the impact of a new policy or event lasts only one
NICOTINE & TOBACCO RESEARCH        1165

Table 2. Cigarette consumption, cigarette prices, and real income in Malaysia, 1990–2004.

                Consumption (cigarettes/
Year                  person)               Real tobacco CPI       Real GDP per capita (RM)      Tobacco policy index

1990                     1,476                  77.6                         8,292                   0
1991                     1,679                  78.3                         8,504                   0
1992                     1,034                  81.2                         8,610                   0
1993                     1,554                  91.8                         8,887                   0
1994                     1,456                  94.0                         9,110                   1
1995                     1,549                  93.1                         9,398                   2
1996                     1,579                  92.5                         9,762                   2
1997                     1,607                  92.0                         9,977                   3
1998                     1,179                  91.6                         8,576                   3
1999                     1,393                  98.8                         8,642                   3
2000                     1,360                 100.0                         9,000                   3
2001                     1,175                 105.6                         9,027                   3
2002                     1,278                 111.1                         9,397                   3




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2003                     1,335                 112.7                         9,895                   5
2004                     1,402                 124.6                        10,588                   7
Mean (SD)                1,404 (181.6)          96.3 (13.1)                  9,178 (651.0)           2.13 (1.60)

Note. CPI, consumer price index; RM, Malaysian Ringgit; GDP, gross domestic product.


period because of its weak enforcement, and that the             selecting the two model versions can be found in
impact is related mostly to publicity and public                 the Results section.
health advocates’ lobbying efforts surrounding pol-                 We began by evaluating stationarity of our time-
icy enactment or a tobacco control event. All events             series data. A nonstationary time series can lead to
and policies are summarized by a tobacco policy                  spurious regression, which confuses long-term rela-
index (variable ‘‘tcindex’’) defined as the sum of               tionships, such as correlation over time, with causal
dichotomous indicators ‘‘tlaw1,’’ ‘‘relig,’’ ‘‘ban-              relationships. We applied the Dickey–Fuller test for
derol,’’ and ‘‘taknak.’’                                         unit root and found that our measure of consump-
   To estimate the demand for cigarettes, we used the            tion was integrated at zero order I (0), that is, it was
following conventional model in linear functional                stationary since the 10% critical value for the
form:                                                            reported Z(t) test statistic was 22.630. The price
                                                                 and income variables were integrated at first order I
            Yst ~azb0 Xpt zb1 Xgt zb2 Xtct zeð1Þ                 (1); they were stationary in their first differences.
                                                                 Since the variables were not integrated at the same
   WhereYst5aggregate consumption of cigarettes                  order, we proceeded with the Engle–Granger test for
per capita; Xpt5real tobacco CPI; Xgt5real GDP                   cointegration. This test is based on the stationarity of
per capita; Xtct5tobacco control policy/event.                   the model’s residuals and detects a possibility of
   We estimated several versions of this model in a              spurious regression. We found that the model’s
search for our preferred specification. We were                  residuals were stationary and that cointegration
limited by the degrees of freedom and thus could                 existed, given that the 10% critical value for the
not estimate a model controlling for all individual              reported Z(t) test statistics was 21.60. This allowed
policies and events. Therefore, we adopted three                 us to proceed with the ordinary least squares (OLS)
different strategies: First, we estimated a model that           model.
included only price and income variables to assess                  Given that our OLS model describes tobacco use
the impact of price on cigarette consumption without             in the entire country (macro level), the market
a possible distortion related to the high degree of              clearance price could be determined by the interac-
correlation between price and other tobacco control              tion of both demand and supply sides of the market.
policies or events. Second, we augmented the model               In that case, price would be determined endogen-
by controlling for one policy or event variable at a             ously and OLS estimates would be biased. We tested
time. Third, we estimated the model with the tobacco             this possibility using Hausman’s test. The m test
policy index representing the summary measure for                statistic for Model II was 23.447, which is below the
all tobacco control policies and events.                         critical value of 6.63. Therefore, we could not reject
   We subjected our key variables and two selected               the null hypothesis of exogenous price. This result is
model versions to a battery of tests to verify the               consistent with the theory of open economy and
accuracy of our specifications (Table 3 and Table 4).            perfect competition, whereby cigarette price is
Model I included only price and income variables.                determined exogenously by costs of production at
Model II was similar to Model I but controlled for               the world market and by cigarette taxes. Hausman’s
the impact of tobacco control policies or events by              test could not be performed on Model I because
the tobacco policy index. The justification for                  of the small number of independent variables.
1166     DEMAND ANALYSIS OF TOBACCO CONSUMPTION IN MALAYSIA


Table 3. Test for nonstationarity.                                        Engle–Granger method. ECM is based on the notion
                                                                          that deviations from long-run equilibrium tend to
                    Consumption
                        Yst             Price Xpt       Income Xgt        partially revert to the equilibrium position in the
                                                                          following period. ECM uses stationary data (in this
Autocorrelation          No               Test               No           case, first differences of price and income measures)
                                      inconclusive
Dickey–Fuller          23.939            0.753            20.918          and includes the lagged residuals (of the long-run
test: Z(t)                                                                relationship) as an explanatory variable. Coefficients
Dickey–Fuller                            22.717           22.836          from ECM represent the relationship in the short
test first
difference: Z(t)                                                          run, and the coefficient on the lagged residual
Results                Variable          Variable         Variable        measures the speed of convergence to the long-run
                    integrated at     integrated at integrated at         equilibrium (as a percentage).
                   zero order I (0) first order I (1) first order I (1)
                                                                             Long-run price elasticity is derived by multiplying
                                                                          the relevant price coefficient estimated in the first
However, the exogeneity of price has been confirmed                       step of the Engle–Granger method by the fitted




                                                                                                                                                Downloaded from http://ntr.oxfordjournals.org/ at Perpustakaan Universiti Sains Malaysia on October 24, 2011
in Model II and its variations with different policy                      values of price, and then dividing this expression by
                                                                          the fitted values for quantity. The use of fitted values
variables.
                                                                          instead of actual average values is required to obtain
   Further, we applied the Ramsey regression speci-
                                                                          results based on the long-run equilibrium. Income
fication error test and the omitted variable test. The
                                                                          elasticity is calculated similarly but using the income
omitted variable test is conducted by regressing
                                                                          coefficient and the income fitted values instead.
trend-stationary variables on time and using (sta-
                                                                          Short-run elasticities are calculated using coefficients
tionary) residuals from this regression in the model
                                                                          from the short-run ECM equation and the means of
with a time trend. Both tests indicated that we did
                                                                          variables representing consumption, price, and
not exclude any important variables from our model.
                                                                          income.
Such exclusion would result in biased estimates.
   The Durbin–Watson test assessed the autocorrela-
tion of OLS model residuals. If residuals are
                                                                          Results
correlated, OLS estimates are unbiased and consis-
tent, but they are inefficient. We found the value of                     Results for different versions of our model are
the reported d -statistic to be closer to the value 2 (no                 summarized in Table 5. Each model includes price,
serial correlation) than to the value 0 (positive serial                  income and one of the policy or event variables,
correlation) or 4 (negative serial correlation).                          except for Model I. The results in Table 5 show that
   The Breusch–Pagan/Cook–Weisberg test deter-                            price has a negative and statistically significant
mined that residuals of the OLS model have constant                       impact on cigarette use in four out of seven model
variance. Therefore, no heteroscedasticity exists that                    specifications. The impact of income is quite
would reduce the reliability of our hypothesis testing                    consistent across different model specifications. Its
and cause OLS estimators to be inefficient.                               coefficient is statistically significant in six out of
   Because our model passed the specification tests,                      seven model specifications. The lack of the signifi-
we proceeded with estimating both long-run and                            cance of the price variable can be explained by the
short-run relationships in the tobacco market using                       high degree of correlation between the measure of
the Engle–Granger two-step method (Engle &                                price and policies or events, given that in most cases
Granger, 1987). The first step estimates a long-run                       the adoption of a new policy also has been
equation without time trend. Given that a cointe-                         accompanied by a price increase. For example, the
grating relationship exists, we proceeded with an                         correlation coefficient between price and the tobacco
error-correction model (ECM), the second step of the
                                                                          Table 5. Linear demand model: Impact of tobacco control
                                                                          policies and events.
Table 4. Test results.
                                                                                                                                  Policy/
                                     Model I            Model II          Model:                           Price      Income       event
                                                                          Yst5a+b0Xpt+b1Xgt+b3Xtct+e     coefficient coefficient coefficient
Engle–Granger test for       26.248         25.965
cointegration: Z(t)                                                       Xtct not included (Model I)    211.05**      0.21**       —
Hausman test: m                 —           23.447                        Xtct5tlaw1                      29.18        0.21**      233.64
Ramsey specification error    0.05           0.23                         Xtct5relig                      29.18        0.23**      258.33
test: F                                                                   Xtct5banderol                  210.80*       0.22**      213.29
Omitted variable test: time 213.85 (21.45) 240.36 (21.05 )                Xtct5taknak                    211.15**      0.21**       14.91
coefficient (t value)                                                     Xtct5tcmeas                    210.75**      0.19         32.86
Durbin–Watson test: d         2.98           1.85                         Xtct5tcindex (Model II)         28.31        0.22**      228.96
Breusch–Pagan/Cook–           0.21           0.01
                  2                                                       Note. *Statistically significant at 10% level; **statistically sig-
Weisberg test: x
                                                                          nificant at 5% level.
NICOTINE & TOBACCO RESEARCH         1167

policy index is 0.87. Both price and income are                    impact of price was statistically significant at a 5%
statistically significant in the model that does not               level in all models except for the long-term relation-
include a tobacco control policy. None of the policy               ship based on Model II (because of the high degree of
variables were statistically significant. This finding             correlation, as explained earlier). The impact of
can be explained by the lack of enforcement of the                 income was statistically significant at a 5% level in all
policies and the short-lived impact of health promo-               models. As expected, the long-run elasticities were
tion campaigns.                                                    greater than the short-run elasticities, which is typical
   We selected two model specifications to calculate               for an addictive product such as cigarettes. Price
our price and income elasticity estimates. Model I                 elasticity was larger in Model I because this
included only price and income variables, thus                     specification does not control for the impact of
avoiding the problem of the high degree of correlation             policies or events, and we considered this value to be
between price and a policy or event. Both price and                the upper bound of our price elasticity estimate.
income coefficients were significant in Model I. The               Model II price elasticity was considered the lower
results based on Model I can be considered an upper                bound of our estimate because of the high level of




                                                                                                                               Downloaded from http://ntr.oxfordjournals.org/ at Perpustakaan Universiti Sains Malaysia on October 24, 2011
bound of our price elasticity estimate since the impact            correlation between price and the tobacco policy
of a tobacco control policy or event was not taken into            index.
account. Model II was similar to Model I, but it                      The coefficients on the lagged residual of the short-
controlled for the impact of tobacco control policies              run equations were 20.89 and 20.86 for Model I and
or events by including the tobacco policy index, the               Model II, respectively. This indicates that, on
most comprehensive measure of these policies and                   average, about 86% to 89% of the deviation from
events. Model II may underestimate the impact of                   long-run equilibrium will be corrected in the follow-
price because of the high degree of correlation                    ing year. This is a large speed of adjustment,
between the index and the price variable. Therefore,               reflecting the addictive nature of tobacco use.
the results based on Model II are considered the lower                We used our price elasticity estimate to calculate
bound of our price elasticity estimate. This lower                 the impact of a 25% cigarette tax increase (raising the
bound is used for predicting the impact of a tax                   tax to RM0.1 per stick from its current level of
increase on budget revenue and on reduced mortality.               RM0.08) on cigarette consumption, revenue from
The impact of income on the demand for tobacco                     tobacco taxes, and long-term health outcomes. First,
seemed to be quite stable across models. To be                     we estimated the impact of this tax increase on the
consistent, we also used the income elasticity based               average cigarette price using the 2005 tax incidence,
on Model II in our simulation of future growth in                  average cigarette price of Benson & Hedges brand
tobacco consumption because of GDP growth.                         (the base for our tobacco CPI), and market share of
   Table 6 summarizes results of the long-run and                  domestic and imported cigarettes. If the tobacco
short-run elasticities based on Model I and Model II.              industry passes all of the tax increase on to
The results for long-run elasticities also have been               consumers, cigarette prices can be expected to
bootstrapped to calculate the confidence interval for              increase by about 5.9%. We applied the lower bound
the estimates. The bootstrap method failed in                      of our price elasticity estimate, 20.57, to predict the
calculating the results for short-run price elasticities           impact of a tax increase to compensate for a possible
because of an insufficient number of observations                  upward bias in our estimates. This bias could have
(one data point is lost in the short-run equation since            occurred because we were unable to control for
first differences of income and price are used). The               cigarette smuggling in the model. We predict that the
                                                                   proposed tax increase will result in a 3.37% reduction
                                                                   in cigarette consumption in the long run. This change
Table 6. Price elasticity estimates.                               translates to a reduction of about 47 cigarettes per
                                  Model I          Model II        person per year, or 806,468,873 fewer cigarettes
                                                                   consumed in Malaysia per year.
Price elasticity
  Long-run                       20.758*          20.571
                                                                      The reduced consumption of cigarettes would have
  Long-run bootstrapped          20.745           20.537           many health benefits for the Malaysian population.
                               (¡ 0.059)*        (¡0.079)          Research shows that for every cigarette per person
  Short-run                      20.083*          20.077*
Income elasticity
                                                                   not smoked, lung cancer mortality decreases by
  Long-run                        1.403*           1.464*          0.0248 per 100,000 adults aged 35–69 years within 20
  Long-run bootstrapped           1.413            1.495           years (Gajalakshmi et al., 2000). This estimate is
                               (¡ 0.089)*        (¡0.124)*
  Short-run                       0.028*           0.025*          based on regressing 1990 tobacco-attributable lung
  Coefficient on lagged          20.891           20.862           cancer mortality per 100,000 adults aged 35–69 years
    residual                    (¡0.772)*        (¡0.809) *        on 1970 cigarette consumption in industrialized
Note. *Two-tailed test used to determine 5% level of statistical   countries with a history of prolonged smoking.
significance.                                                      Assuming that the current population growth of
1168   DEMAND ANALYSIS OF TOBACCO CONSUMPTION IN MALAYSIA


2.8% continues for the next 20 years, there will be       lower bound of our elasticity estimate for predicting
14.17 million people in Malaysia in the 35–69 age         the impact of a tax increase on cigarette consumption
category by 2026. Therefore, a 25% cigarette tax          and government revenue.
increase in 2006 would prevent about 165 premature           Simulation of the impact of a 25% cigarette excise
lung cancer deaths per year among that age group by       tax increase predicted a 5.9% increase in the average
2026. Additional premature deaths would be pre-           price of cigarettes and a 3.37% reduction in cigarette
vented thanks to reduced mortality from other             consumption. This reduced cigarette consumption
tobacco-related diseases.                                 could prevent about 165 premature tobacco-related
   In addition to reducing the number of premature        deaths related to lung cancer per year by 2026 and
deaths, the cigarette tax increase would raise            increase government tax revenue by RM434 million,
government revenue. With the current cigarette tax        or 20.8%.
level, population, and income growth, Malaysia can           The estimate of the tax revenue increase is close to
expect to collect about RM2,088 million in cigarette      the World Bank’s prediction of 17.5% (Jha, 1999),
excise tax in 2006. A 25% tax increase would generate     based on its global experience, and in accordance




                                                                                                                                    Downloaded from http://ntr.oxfordjournals.org/ at Perpustakaan Universiti Sains Malaysia on October 24, 2011
RM2,522 million in cigarette tax revenue in 2006, an      with a mathematical model of tax revenue and price
increase of Malaysian ringgit (RM)434 million             elasticity (Merriman, 2002) predicting a 20.5%
(US$115 million using the exchange rate                   increase in tax revenue. We conclude that a cigarette
US$15RM3.77), or 20.8%.                                   tax increase in Malaysia will result in improved
                                                          public health and increased tax revenue. Ideally these
                                                          newly obtained resources would be used to help
Discussion                                                smokers quit, strengthen the enforcement of the
                                                          current tobacco control laws, and to public health in
Our preferred lower bound estimate of price elasticity
                                                          general. They also could be used to support tobacco
of 20.57 based on macro-level data is comparable
                                                          farmers in switching to alternative crops.
with results from neighboring countries based on
micro-level data, such as Thailand (price elasti-
city520.39; Sarntisart, 2003) or Vietnam (price
                                                          Acknowledgments
elasticity520.53; Eozenou, 2001). According to our
results, a 1% increase in income in Malaysia will lead    The authors gratefully acknowledge funding support from the
                                                          Rockefeller Foundation and from the ThaiHealth Foundation.
to a 1.46% increase in cigarette demand. Again, this
estimate is comparable with those from other middle-
income countries (Sarntisart, 2003; Van Walbeek,
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income elasticities of cigarette demand changed over      Gajalakshmi, C., Jha, P., Ranson, K., & Nguyen, S. (2000). Global
time, as suggested by previous research (Van                 patterns of smoking and smoking attributable mortality. In: P. Jha,
Walbeek, 2000). Our time-series data cover only a            & F. Chaloupka (Eds.), Tobacco control in developing countries.
                                                             Oxford: Oxford University Press.
short time period, which is not suitable for that type    Institute of Public Health. (1987). National Health and Morbidity
of analysis. In addition, our model estimated the            Survey 1986. Kuala Lumpur: Author, Ministry of Health Malaysia.
impact of price on taxable cigarette sales and thus did   Institute of Public Health. (1997). National Health and Morbidity
                                                             Survey 1996. Kuala Lumpur: Author, Ministry of Health Malaysia.
not control for illegal cigarette sales. Therefore, we
                                                          Jha, P. (1999). Curbing the epidemic: Governments and the economics of
may have overestimated the impact of price on                tobacco control. Washington, DC: World Bank.
cigarette demand because some of the measured             Merriman, D. (2002). Methods for studying tobacco smuggling with
reduction in consumption may be attributed to                applications to Southeast Asia. Presented at the Southeast Asia
                                                             Tobacco Control Workshop, Kanchanaburi, Thailand.
substitution with smuggled cigarettes. This possible      Ranson, K., Jha, P., Chaloupka, F., & Nguyen, S. (2000). The
upward bias in our estimates led us to apply the             effectiveness and cost-effectiveness of price increases and other
NICOTINE & TOBACCO RESEARCH              1169

  tobacco control policies. In: P. Jha, & F. Chaloupka (Eds.), Tobacco   Van Walbeek, C. (2000). The economics of tobacco control in South
  control in developing countries. Oxford: Oxford University Press.        Africa. (Research Release No.1). Cape Town, South Africa:
Sarntisart, I. (2003). An economic analysis of tobacco control in          Economics of Tobacco Control Project, University of Cape
  Thailand. (Economics of Tobacco Control Paper No.15; Health,             Town.
  Nutrition and Population Discussion Paper). Washington, DC:            World Health Organization. (2003). WHO mortality database. In,
  World Bank Human Development Network.                                    Tobacco control country profiles. (2nd ed.). Geneva: Author.




                                                                                                                                             Downloaded from http://ntr.oxfordjournals.org/ at Perpustakaan Universiti Sains Malaysia on October 24, 2011

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1163 demand analysis on tobacco consumption.full

  • 1. Nicotine & Tobacco Research Volume 9, Number 11 (November 2007) 1163–1169 Demand analysis of tobacco consumption in Malaysia Hana Ross, Nabilla A. M. Al-Sadat Received 18 May 2006; accepted 12 February 2007 Downloaded from http://ntr.oxfordjournals.org/ at Perpustakaan Universiti Sains Malaysia on October 24, 2011 We estimated the price and income elasticity of cigarette demand and the impact of cigarette taxes on cigarette demand and cigarette tax revenue in Malaysia. The data on cigarette consumption, cigarette prices, and public policies between 1990 and 2004 were subjected to a time-series regression analysis applying the error-correction model. The preferred cigarette demand model specification resulted in long-run and short-run price elasticities estimates of 20.57 and 20.08, respectively. Income was positively related to cigarette consumption: A 1% increase in real income increased cigarette consumption by 1.46%. The model predicted that an increase in cigarette excise tax from Malaysian ringgit (RM) 1.60 to RM2.00 per pack would reduce cigarette consumption in Malaysia by 3.37%, or by 806,468,873 cigarettes. This reduction would translate to almost 165 fewer tobacco-related lung cancer deaths per year and a 20.8% increase in the government excise tax revenue. We conclude that taxation is an effective method of reducing cigarette consumption and tobacco-related deaths while increasing revenue for the government of Malaysia. Introduction Tobacco use is currently one of the leading causes of death in Malaysia, accounting for 19% and 11.5% Tobacco use has reached epidemic proportions of deaths among men and women, respectively worldwide (Jha, 1999). Although the prevalence of (World Health Organization, 2003). The economic smoking has decreased in countries with higher per- costs of tobacco use are equally high and consist capita income over the past two decades, cigarette primarily of the healthcare costs of treating tobacco- use has increased in countries with low- and mid- related diseases (often covered by public funds) and level per-capita income (Gajalakshmi, Jha, Ranson, lower labor productivity. & Nguyen, 2000). Malaysia is no exception to this Some government interventions have been shown trend. Smoking prevalence there has increased from to reduce tobacco use (Ranson, Jha, Chaloupka, & 21.5% in 1986 to 24.8% in 1996 (Institute of Public Nguyen, 2000), and the Malaysian government has Health, 1987, 1997). Smoking is much more pre- taken steps to leverage that fact. In 2004, the valent among males than females (49.2% vs. 3.5%; government introduced a total ban on all forms of Institute of Public Health, 1997). Youth smoking is a tobacco advertising and launched a 5-year multi- particularly acute problem in Malaysia, where as million-dollar smoking prevention media campaign. many as 60% of young males from lower socio- Malaysia also bans smoking in many public areas. economic backgrounds smoke (Ahmad, Jaafar, & However, Malaysia does not yet have a clear tobacco Musa, 1997). tax policy, which is one of the most effective methods to combat smoking behavior (Chaloupka, Hu, Warner, Jacobs, & Yurekli, 2000). The motivation Hana Ross, Ph.D., International Tobacco Surveillance, American for several cigarette tax increases in the past decade Cancer Society, Atlanta, GA; Nabilla A. M. Al-Sadat, M.P.H., Department of Social and Preventive Medicine, Faculty of Medicine, was primarily to raise government revenue (Table 1). University of Malaya, Malaysia. The 2005 excise tax on locally produced cigarettes, Correspondence: Hana Ross, Ph.D., Epidemiology and Surveillance which constitute over 95% of the market, represents Research, National Home Office, American Cancer Society, 250 Williams St. NW, Atlanta, GA 30303-1002, USA. Tel: +1 (404) 329- only about 25% of the retail price. This rate is far 7990; Fax: +1 (404) 327-6450; E-mail: hana.ross@cancer.org below the tax level in some of Malaysia’s neighboring ISSN 1462-2203 print/ISSN 1469-994X online # 2007 Society for Research on Nicotine and Tobacco DOI: 10.1080/14622200701648433
  • 2. 1164 DEMAND ANALYSIS OF TOBACCO CONSUMPTION IN MALAYSIA Table 1. Import, excise, and sales taxes, 1990–2005. Import tax (non-ASEAN Import tax (ASEAN countries) Excise tax (local cigarettes) Year countries) RM/KG or RM/stick RM/kg or RM/stick RM/kg or RM/stick Sales tax (%) 1990 85 85 13 15 1991 135 135 14 15 1992–1997 162 162 29 15 1998–2000 180 180 40 15 2001–2002 216 216 48 25 2003 259 108 58 25 2004 200 100 58 25 2005 0.20 0.10 0.08 25 Note. ASEAN, Association of Southeast Asian Nations; kg, kilogram; RM, Malaysian Ringgit. Tax in 2005 is in RM/stick; tax for all other yeas is in RM/kg. countries. In Thailand, for example, the cigarette smoking prevalence and smoking intensity while Downloaded from http://ntr.oxfordjournals.org/ at Perpustakaan Universiti Sains Malaysia on October 24, 2011 excise tax represents 78% of the retail price. controlling for the population growth, served as the International research has shown that a 10% dependent variable in our demand model. The real increase in cigarette prices can reduce cigarette tobacco consumer price index (CPI), which represents consumption by 4%–8% (Jha, 1999). Most countries the cost of all tobacco products in Malaysia adjusted fall into this range, but some countries or regions for inflation, was provided by the Department of may exhibit different price sensitivity because of Statistics. It is based on the price of one of the most cultural or social factors. Nevertheless, only a few popular cigarette brands in Malaysia, Benson & low- and middle-income countries have calculated Hedges (ACNielsen, 2002), which was collected their country-specific estimates of the price respon- monthly by the Department of Statistics in randomly siveness of the cigarette market. Lack of data or selected shops across the country. We adjusted the research capacity is often the reason why this tobacco CPI for inflation using the general CPI. Our information is not available. Having a country- model of cigarette demand controlled for the impact specific estimate of responsiveness to cigarette tax of income and tobacco control policies on cigarette changes is useful for planning purposes because the consumption. We measured income by real gross impact of a tax increase on tax collection can be domestic product (GDP) per capita. predicted with a higher degree of precision. Tobacco control policies other than cigarette taxes This study is the first to estimate the responsive- can be important determinants of cigarette consump- ness of Malaysians to a change in cigarette prices. It tion. We created a set of policy or event variables demonstrates how cigarette excise tax policy can be that capture the tobacco control environment in used to curb the tobacco epidemic in Malaysia, Malaysia between 1990 and 2004. Variable ‘‘tlaw1’’ predicts the impact of higher cigarette taxes on future takes the value of 1 for 1994–1996 and the value of 2 tobacco-related mortality, and estimates the impact for 1997–2004 to reflect the adoption of the Control of cigarette tax policy on budget revenue. of Tobacco Products Regulation law and its amend- ment in 1997 that expanded smoke-free areas and banned minors’ smoking. Variable ‘‘relig’’ is assigned Method the value of 1 for 1995–2002 to mark the National The secondary aggregate time-series data for 1990 to Fatwa Council announcement that ‘‘Smoking Is 2004 used in this study are summarized in Table 2. Haram (Forbidden),’’ and the value of 2 for 2003– The per-capita consumption of domestic and 2004 to capture the additional impact of the New imported cigarettes was calculated using the excise Breath Beginning Ramadan Campaign calling for tax and import duties collected by the Malaysian smoking cessation during Ramadan. Variable ‘‘ban- government and the size of the adult population derol’’ takes the value of 1 for 2003, when the (aged 15 years or older). Since the excise tax and government introduced special stickers to curb illegal import duties were levied per kilogram until 2004, we tobacco products, and the value of 2 for 2004, when determined the consumption of both domestic and security marks were placed on cigarette packs to imported cigarettes in kg per year. To convert the improve the control of cigarette smuggling. Variable weight amount to the number of cigarettes, we ‘‘taknak’’ assumes the value of 1 for 2004, when the assumed, as did the Malaysian Department of national media anti-tobacco campaign Tak Nak was Customs, that each kilogram of cigarettes is equal launched. Variable ‘‘tcmeas’’ is a dichotomous to 1,100 sticks. Per-capita consumption is obtained indicator for every year in which a new tobacco by dividing the total consumption (in sticks) by the control policy was adopted or a new tobacco control size of the adult population (defined as population event occurred. The rationale for this variable is that aged 15 years or older). This variable, which reflects the impact of a new policy or event lasts only one
  • 3. NICOTINE & TOBACCO RESEARCH 1165 Table 2. Cigarette consumption, cigarette prices, and real income in Malaysia, 1990–2004. Consumption (cigarettes/ Year person) Real tobacco CPI Real GDP per capita (RM) Tobacco policy index 1990 1,476 77.6 8,292 0 1991 1,679 78.3 8,504 0 1992 1,034 81.2 8,610 0 1993 1,554 91.8 8,887 0 1994 1,456 94.0 9,110 1 1995 1,549 93.1 9,398 2 1996 1,579 92.5 9,762 2 1997 1,607 92.0 9,977 3 1998 1,179 91.6 8,576 3 1999 1,393 98.8 8,642 3 2000 1,360 100.0 9,000 3 2001 1,175 105.6 9,027 3 2002 1,278 111.1 9,397 3 Downloaded from http://ntr.oxfordjournals.org/ at Perpustakaan Universiti Sains Malaysia on October 24, 2011 2003 1,335 112.7 9,895 5 2004 1,402 124.6 10,588 7 Mean (SD) 1,404 (181.6) 96.3 (13.1) 9,178 (651.0) 2.13 (1.60) Note. CPI, consumer price index; RM, Malaysian Ringgit; GDP, gross domestic product. period because of its weak enforcement, and that the selecting the two model versions can be found in impact is related mostly to publicity and public the Results section. health advocates’ lobbying efforts surrounding pol- We began by evaluating stationarity of our time- icy enactment or a tobacco control event. All events series data. A nonstationary time series can lead to and policies are summarized by a tobacco policy spurious regression, which confuses long-term rela- index (variable ‘‘tcindex’’) defined as the sum of tionships, such as correlation over time, with causal dichotomous indicators ‘‘tlaw1,’’ ‘‘relig,’’ ‘‘ban- relationships. We applied the Dickey–Fuller test for derol,’’ and ‘‘taknak.’’ unit root and found that our measure of consump- To estimate the demand for cigarettes, we used the tion was integrated at zero order I (0), that is, it was following conventional model in linear functional stationary since the 10% critical value for the form: reported Z(t) test statistic was 22.630. The price and income variables were integrated at first order I Yst ~azb0 Xpt zb1 Xgt zb2 Xtct zeð1Þ (1); they were stationary in their first differences. Since the variables were not integrated at the same WhereYst5aggregate consumption of cigarettes order, we proceeded with the Engle–Granger test for per capita; Xpt5real tobacco CPI; Xgt5real GDP cointegration. This test is based on the stationarity of per capita; Xtct5tobacco control policy/event. the model’s residuals and detects a possibility of We estimated several versions of this model in a spurious regression. We found that the model’s search for our preferred specification. We were residuals were stationary and that cointegration limited by the degrees of freedom and thus could existed, given that the 10% critical value for the not estimate a model controlling for all individual reported Z(t) test statistics was 21.60. This allowed policies and events. Therefore, we adopted three us to proceed with the ordinary least squares (OLS) different strategies: First, we estimated a model that model. included only price and income variables to assess Given that our OLS model describes tobacco use the impact of price on cigarette consumption without in the entire country (macro level), the market a possible distortion related to the high degree of clearance price could be determined by the interac- correlation between price and other tobacco control tion of both demand and supply sides of the market. policies or events. Second, we augmented the model In that case, price would be determined endogen- by controlling for one policy or event variable at a ously and OLS estimates would be biased. We tested time. Third, we estimated the model with the tobacco this possibility using Hausman’s test. The m test policy index representing the summary measure for statistic for Model II was 23.447, which is below the all tobacco control policies and events. critical value of 6.63. Therefore, we could not reject We subjected our key variables and two selected the null hypothesis of exogenous price. This result is model versions to a battery of tests to verify the consistent with the theory of open economy and accuracy of our specifications (Table 3 and Table 4). perfect competition, whereby cigarette price is Model I included only price and income variables. determined exogenously by costs of production at Model II was similar to Model I but controlled for the world market and by cigarette taxes. Hausman’s the impact of tobacco control policies or events by test could not be performed on Model I because the tobacco policy index. The justification for of the small number of independent variables.
  • 4. 1166 DEMAND ANALYSIS OF TOBACCO CONSUMPTION IN MALAYSIA Table 3. Test for nonstationarity. Engle–Granger method. ECM is based on the notion that deviations from long-run equilibrium tend to Consumption Yst Price Xpt Income Xgt partially revert to the equilibrium position in the following period. ECM uses stationary data (in this Autocorrelation No Test No case, first differences of price and income measures) inconclusive Dickey–Fuller 23.939 0.753 20.918 and includes the lagged residuals (of the long-run test: Z(t) relationship) as an explanatory variable. Coefficients Dickey–Fuller 22.717 22.836 from ECM represent the relationship in the short test first difference: Z(t) run, and the coefficient on the lagged residual Results Variable Variable Variable measures the speed of convergence to the long-run integrated at integrated at integrated at equilibrium (as a percentage). zero order I (0) first order I (1) first order I (1) Long-run price elasticity is derived by multiplying the relevant price coefficient estimated in the first However, the exogeneity of price has been confirmed step of the Engle–Granger method by the fitted Downloaded from http://ntr.oxfordjournals.org/ at Perpustakaan Universiti Sains Malaysia on October 24, 2011 in Model II and its variations with different policy values of price, and then dividing this expression by the fitted values for quantity. The use of fitted values variables. instead of actual average values is required to obtain Further, we applied the Ramsey regression speci- results based on the long-run equilibrium. Income fication error test and the omitted variable test. The elasticity is calculated similarly but using the income omitted variable test is conducted by regressing coefficient and the income fitted values instead. trend-stationary variables on time and using (sta- Short-run elasticities are calculated using coefficients tionary) residuals from this regression in the model from the short-run ECM equation and the means of with a time trend. Both tests indicated that we did variables representing consumption, price, and not exclude any important variables from our model. income. Such exclusion would result in biased estimates. The Durbin–Watson test assessed the autocorrela- tion of OLS model residuals. If residuals are Results correlated, OLS estimates are unbiased and consis- tent, but they are inefficient. We found the value of Results for different versions of our model are the reported d -statistic to be closer to the value 2 (no summarized in Table 5. Each model includes price, serial correlation) than to the value 0 (positive serial income and one of the policy or event variables, correlation) or 4 (negative serial correlation). except for Model I. The results in Table 5 show that The Breusch–Pagan/Cook–Weisberg test deter- price has a negative and statistically significant mined that residuals of the OLS model have constant impact on cigarette use in four out of seven model variance. Therefore, no heteroscedasticity exists that specifications. The impact of income is quite would reduce the reliability of our hypothesis testing consistent across different model specifications. Its and cause OLS estimators to be inefficient. coefficient is statistically significant in six out of Because our model passed the specification tests, seven model specifications. The lack of the signifi- we proceeded with estimating both long-run and cance of the price variable can be explained by the short-run relationships in the tobacco market using high degree of correlation between the measure of the Engle–Granger two-step method (Engle & price and policies or events, given that in most cases Granger, 1987). The first step estimates a long-run the adoption of a new policy also has been equation without time trend. Given that a cointe- accompanied by a price increase. For example, the grating relationship exists, we proceeded with an correlation coefficient between price and the tobacco error-correction model (ECM), the second step of the Table 5. Linear demand model: Impact of tobacco control policies and events. Table 4. Test results. Policy/ Model I Model II Model: Price Income event Yst5a+b0Xpt+b1Xgt+b3Xtct+e coefficient coefficient coefficient Engle–Granger test for 26.248 25.965 cointegration: Z(t) Xtct not included (Model I) 211.05** 0.21** — Hausman test: m — 23.447 Xtct5tlaw1 29.18 0.21** 233.64 Ramsey specification error 0.05 0.23 Xtct5relig 29.18 0.23** 258.33 test: F Xtct5banderol 210.80* 0.22** 213.29 Omitted variable test: time 213.85 (21.45) 240.36 (21.05 ) Xtct5taknak 211.15** 0.21** 14.91 coefficient (t value) Xtct5tcmeas 210.75** 0.19 32.86 Durbin–Watson test: d 2.98 1.85 Xtct5tcindex (Model II) 28.31 0.22** 228.96 Breusch–Pagan/Cook– 0.21 0.01 2 Note. *Statistically significant at 10% level; **statistically sig- Weisberg test: x nificant at 5% level.
  • 5. NICOTINE & TOBACCO RESEARCH 1167 policy index is 0.87. Both price and income are impact of price was statistically significant at a 5% statistically significant in the model that does not level in all models except for the long-term relation- include a tobacco control policy. None of the policy ship based on Model II (because of the high degree of variables were statistically significant. This finding correlation, as explained earlier). The impact of can be explained by the lack of enforcement of the income was statistically significant at a 5% level in all policies and the short-lived impact of health promo- models. As expected, the long-run elasticities were tion campaigns. greater than the short-run elasticities, which is typical We selected two model specifications to calculate for an addictive product such as cigarettes. Price our price and income elasticity estimates. Model I elasticity was larger in Model I because this included only price and income variables, thus specification does not control for the impact of avoiding the problem of the high degree of correlation policies or events, and we considered this value to be between price and a policy or event. Both price and the upper bound of our price elasticity estimate. income coefficients were significant in Model I. The Model II price elasticity was considered the lower results based on Model I can be considered an upper bound of our estimate because of the high level of Downloaded from http://ntr.oxfordjournals.org/ at Perpustakaan Universiti Sains Malaysia on October 24, 2011 bound of our price elasticity estimate since the impact correlation between price and the tobacco policy of a tobacco control policy or event was not taken into index. account. Model II was similar to Model I, but it The coefficients on the lagged residual of the short- controlled for the impact of tobacco control policies run equations were 20.89 and 20.86 for Model I and or events by including the tobacco policy index, the Model II, respectively. This indicates that, on most comprehensive measure of these policies and average, about 86% to 89% of the deviation from events. Model II may underestimate the impact of long-run equilibrium will be corrected in the follow- price because of the high degree of correlation ing year. This is a large speed of adjustment, between the index and the price variable. Therefore, reflecting the addictive nature of tobacco use. the results based on Model II are considered the lower We used our price elasticity estimate to calculate bound of our price elasticity estimate. This lower the impact of a 25% cigarette tax increase (raising the bound is used for predicting the impact of a tax tax to RM0.1 per stick from its current level of increase on budget revenue and on reduced mortality. RM0.08) on cigarette consumption, revenue from The impact of income on the demand for tobacco tobacco taxes, and long-term health outcomes. First, seemed to be quite stable across models. To be we estimated the impact of this tax increase on the consistent, we also used the income elasticity based average cigarette price using the 2005 tax incidence, on Model II in our simulation of future growth in average cigarette price of Benson & Hedges brand tobacco consumption because of GDP growth. (the base for our tobacco CPI), and market share of Table 6 summarizes results of the long-run and domestic and imported cigarettes. If the tobacco short-run elasticities based on Model I and Model II. industry passes all of the tax increase on to The results for long-run elasticities also have been consumers, cigarette prices can be expected to bootstrapped to calculate the confidence interval for increase by about 5.9%. We applied the lower bound the estimates. The bootstrap method failed in of our price elasticity estimate, 20.57, to predict the calculating the results for short-run price elasticities impact of a tax increase to compensate for a possible because of an insufficient number of observations upward bias in our estimates. This bias could have (one data point is lost in the short-run equation since occurred because we were unable to control for first differences of income and price are used). The cigarette smuggling in the model. We predict that the proposed tax increase will result in a 3.37% reduction in cigarette consumption in the long run. This change Table 6. Price elasticity estimates. translates to a reduction of about 47 cigarettes per Model I Model II person per year, or 806,468,873 fewer cigarettes consumed in Malaysia per year. Price elasticity Long-run 20.758* 20.571 The reduced consumption of cigarettes would have Long-run bootstrapped 20.745 20.537 many health benefits for the Malaysian population. (¡ 0.059)* (¡0.079) Research shows that for every cigarette per person Short-run 20.083* 20.077* Income elasticity not smoked, lung cancer mortality decreases by Long-run 1.403* 1.464* 0.0248 per 100,000 adults aged 35–69 years within 20 Long-run bootstrapped 1.413 1.495 years (Gajalakshmi et al., 2000). This estimate is (¡ 0.089)* (¡0.124)* Short-run 0.028* 0.025* based on regressing 1990 tobacco-attributable lung Coefficient on lagged 20.891 20.862 cancer mortality per 100,000 adults aged 35–69 years residual (¡0.772)* (¡0.809) * on 1970 cigarette consumption in industrialized Note. *Two-tailed test used to determine 5% level of statistical countries with a history of prolonged smoking. significance. Assuming that the current population growth of
  • 6. 1168 DEMAND ANALYSIS OF TOBACCO CONSUMPTION IN MALAYSIA 2.8% continues for the next 20 years, there will be lower bound of our elasticity estimate for predicting 14.17 million people in Malaysia in the 35–69 age the impact of a tax increase on cigarette consumption category by 2026. Therefore, a 25% cigarette tax and government revenue. increase in 2006 would prevent about 165 premature Simulation of the impact of a 25% cigarette excise lung cancer deaths per year among that age group by tax increase predicted a 5.9% increase in the average 2026. Additional premature deaths would be pre- price of cigarettes and a 3.37% reduction in cigarette vented thanks to reduced mortality from other consumption. This reduced cigarette consumption tobacco-related diseases. could prevent about 165 premature tobacco-related In addition to reducing the number of premature deaths related to lung cancer per year by 2026 and deaths, the cigarette tax increase would raise increase government tax revenue by RM434 million, government revenue. With the current cigarette tax or 20.8%. level, population, and income growth, Malaysia can The estimate of the tax revenue increase is close to expect to collect about RM2,088 million in cigarette the World Bank’s prediction of 17.5% (Jha, 1999), excise tax in 2006. A 25% tax increase would generate based on its global experience, and in accordance Downloaded from http://ntr.oxfordjournals.org/ at Perpustakaan Universiti Sains Malaysia on October 24, 2011 RM2,522 million in cigarette tax revenue in 2006, an with a mathematical model of tax revenue and price increase of Malaysian ringgit (RM)434 million elasticity (Merriman, 2002) predicting a 20.5% (US$115 million using the exchange rate increase in tax revenue. We conclude that a cigarette US$15RM3.77), or 20.8%. tax increase in Malaysia will result in improved public health and increased tax revenue. Ideally these newly obtained resources would be used to help Discussion smokers quit, strengthen the enforcement of the current tobacco control laws, and to public health in Our preferred lower bound estimate of price elasticity general. They also could be used to support tobacco of 20.57 based on macro-level data is comparable farmers in switching to alternative crops. with results from neighboring countries based on micro-level data, such as Thailand (price elasti- city520.39; Sarntisart, 2003) or Vietnam (price Acknowledgments elasticity520.53; Eozenou, 2001). According to our results, a 1% increase in income in Malaysia will lead The authors gratefully acknowledge funding support from the Rockefeller Foundation and from the ThaiHealth Foundation. to a 1.46% increase in cigarette demand. Again, this estimate is comparable with those from other middle- income countries (Sarntisart, 2003; Van Walbeek, References 2000). It suggests that the income effect in Malaysia is quite strong. Given the real GDP and population ACNielsen. (2002). 2001 Market research. The Star, 7–19. Ahmad, Z., Jaafar, R., & Musa, R. (1997, December 6–7). Cigarette growth rates of 5.3% and 1.78%, respectively smoking among Malaysian youth: Problems and prospects. Paper (Central Intelligence Agency, 2006), per-capita cigar- presented at the Proceedings of the Malaysian Society of Health 21st ette consumption will increase by 5.12% every year. Scientific Symposium, Kuala Lumpur. Central Intelligence Agency. (2006). The world factbook, Malaysia. This increase will translate to both higher smoking Retrieved September 21, 2006, from www.cia.gov/cia/publications/ prevalence and higher smoking intensity. The overall factbook/geos/my.html#Econ consumption of cigarettes in Malaysia will increase Chaloupka, F. J., Hu, T., Warner, K. E., Jacobs, R., & Yurekli, A. (2000). The taxation of tobacco products. In: P. Jha, & F. J. by 7.0% per year. This is good news for the tobacco Chaloupka (Eds.), Tobacco control in developing countries. Oxford: industry but not for public health. There is a danger Oxford University Press. that the tobacco epidemic will spread quite rapidly if Engle, R. F., & Granger, C. W. J. (1987). Co-integration and error correction representation. Econometrica, 55, 251–276. no tobacco control measures are taken. Eozenou, P. (2001). Price elasticity estimations for cigarette demand The present study has some limitations. For in Vietnam. Retrieved from http://pathcanada.org/vietnam/tobacco/ example, we could not test whether the price and research/docs/PriceElasticityEstimatesForCigaretteDemandInVietnam- EN.pdf income elasticities of cigarette demand changed over Gajalakshmi, C., Jha, P., Ranson, K., & Nguyen, S. (2000). Global time, as suggested by previous research (Van patterns of smoking and smoking attributable mortality. In: P. Jha, Walbeek, 2000). Our time-series data cover only a & F. Chaloupka (Eds.), Tobacco control in developing countries. Oxford: Oxford University Press. short time period, which is not suitable for that type Institute of Public Health. (1987). National Health and Morbidity of analysis. In addition, our model estimated the Survey 1986. Kuala Lumpur: Author, Ministry of Health Malaysia. impact of price on taxable cigarette sales and thus did Institute of Public Health. (1997). National Health and Morbidity Survey 1996. Kuala Lumpur: Author, Ministry of Health Malaysia. not control for illegal cigarette sales. Therefore, we Jha, P. (1999). Curbing the epidemic: Governments and the economics of may have overestimated the impact of price on tobacco control. Washington, DC: World Bank. cigarette demand because some of the measured Merriman, D. (2002). Methods for studying tobacco smuggling with reduction in consumption may be attributed to applications to Southeast Asia. Presented at the Southeast Asia Tobacco Control Workshop, Kanchanaburi, Thailand. substitution with smuggled cigarettes. This possible Ranson, K., Jha, P., Chaloupka, F., & Nguyen, S. (2000). The upward bias in our estimates led us to apply the effectiveness and cost-effectiveness of price increases and other
  • 7. NICOTINE & TOBACCO RESEARCH 1169 tobacco control policies. In: P. Jha, & F. Chaloupka (Eds.), Tobacco Van Walbeek, C. (2000). The economics of tobacco control in South control in developing countries. Oxford: Oxford University Press. Africa. (Research Release No.1). Cape Town, South Africa: Sarntisart, I. (2003). An economic analysis of tobacco control in Economics of Tobacco Control Project, University of Cape Thailand. (Economics of Tobacco Control Paper No.15; Health, Town. Nutrition and Population Discussion Paper). Washington, DC: World Health Organization. (2003). WHO mortality database. In, World Bank Human Development Network. Tobacco control country profiles. (2nd ed.). Geneva: Author. Downloaded from http://ntr.oxfordjournals.org/ at Perpustakaan Universiti Sains Malaysia on October 24, 2011