Moving from aggregate to individual level affordability of tobacco products: New research from Bangladesh

Increases in taxes, which increase the price of tobacco products, are considered to be the most effective tobacco control policy measure. However, as the burden of smoking has shifted from high-income to low- and middle-income countries, evaluating the trends in prices as a nominal anchor for tax policy has become less important since so many low- and middle-income countries are experiencing fairly rapid economic growth. While in many high-income countries economic growth rates of 3% or less have become the norm, many low- and middle-income countries are experiencing annual economic growth rates of 6% per year or more. For a country with annual economic growth of 6%, even tax increases which result in price increases may not ensure that tobacco use declines. This has led to a significant change in the policy framework as much of the attention has shifted to ensuring that tax increases ensure that tobacco products become less affordable over time. This is reflected in the recommendations for the Guidelines for Implementation of Article 6 of the WHO Framework Convention on Tobacco Control , which states:

“When establishing or increasing their national levels of taxation Parties should take into account – among other things – both price elasticity and income elasticity of demand, as well as inflation and changes in household income, to make tobacco products less affordable over time in order to reduce consumption and prevalence. Therefore, Parties should consider having regular adjustment processes or procedures for periodic revaluation of tobacco tax levels.”

This shift was driven by a now well-developed literature that advanced and tracked aggregate measures of affordability across the country, and over time (see for example here, here and here). This literature has since found that while cigarettes are more affordable in high-income than in low- and middle-income countries, they have become less affordable over time in high-income countries, but more affordable in low- and middle-income countries over time. The change over time was driven by price increases outpacing income increases in almost all high-income countries. However, in low- and middle-income countries, even countries that were experiencing increases in real prices, income growth was exceeding these price increases. Furthermore, as time has gone on, the literature has also found the number of low- and middle-income countries where cigarettes are becoming less affordable over time to be growing, showing greater momentum in tobacco tax policy implementation.

The aggregate affordability literature was particularly useful for shedding light on the issue in addition to tracking and evaluating global progress on tobacco tax policy. Although, it has always been subject to a number of criticisms, particularly the fact that it pays no attention to within country variations, and inequalities in tobacco use and even incomes. In countries with significant variation of prices, particularly those countries with ad valorem tax structures or structures with tiers, assessing trends in country affordability has important policy relevance. Furthermore, there may be additional interest in country differences in affordability where significant product variation might exist (e.g. countries with high prevalence of bidis or chewing tobacco in addition to cigarettes).

A new paper published in Tobacco Control, led by Dr. Nigar Nargis of the American Cancer Society in collaboration with Tobacconomics researchers, the International Tobacco Control Policy Evaluation Project (ITC) and the University of Dhaka, does just this using several waves of data from the Bangladesh ITC survey between 2009 and 2015. Bangladesh has a tiered ad valorem tax system, which leads to large price variation. For example, the average price per pack of premium brand cigarettes in 2014-15 was more than 6 times higher than low prices brands. Furthermore, bidis and chewing tobacco are also prevalent, and significantly cheaper than cigarettes.

The innovation in the paper was that by using panel data, not only was it able to match prices and incomes of individuals, it was also able to track changes in prices faced by consumers over time and mobility in household income. Even though cigarettes prices increased in real terms in all categories between 2009 and 2014-15, cigarettes became more affordable in all categories due to income growth as well as availability of cheaper options in choosing brands. Bidi prices decreased increasing the affordability of bidi, and the affordability of smokeless tobacco remained unchanged.

The policy implications of this research are important. Specifically, it shows that tax structures are important, specifically that the tiered tax structures undermine the effectiveness of tobacco tax increases by allowing consumers, particularly poorer consumers, the opportunities to avoid tax/price increases by trading down to cheaper brands.

This blog is based on a policy brief that was recently published by Tobacconomics, “Tobacco Products Are Becoming Increasingly Affordable in Bangladesh with Rise in Incomes”.