Affordability of Cigarettes in Southeastern European Countries [Working Paper Series]

Background

The World Health Organization (WHO) and the World Bank advocate for periodic reevaluation of tobacco tax levels taking into account both price and income elasticity of demand for tobacco products. Excise increases should exceed or at least keep pace with real income growth (GDP per capita used as a proxy), ensuring that tobacco products are becoming less affordable over time. In the Southeastern European (SEE) region, there is no regional analysis of the affordability trends including estimation of the impact that affordability has on consumption of cigarettes.

Methodology

We employed two approaches to analyze affordability trends in ten SEE countries over the period 2009–2019 (Model 1) and 2008-2018 (Model 2). First, to analyze affordability trends in the observed period, we used two affordability measures: the tobacco affordability index (TAI), calculated using data on gross domestic product (GDP) growth and overall/tobacco consumer price indices, and the relative income price (RIP) measure retrieved from the Global Health Observatory (GHO) database of the WHO. Using the two affordability measures as explanatory variables, we specified two econometric models assessing the impact of affordability on consumption of cigarettes.

Results

The affordability of cigarettes in the selected SEE countries decreased on average but showed different patterns over the observed period. The decrease in affordability using the RIP approach ranges from around 247 percent in Montenegro to 15 percent in Bulgaria. Both applied models confirm affordability as the main determinant of tobacco consumption. Model 1 shows that a decrease in affordability (measured by TAI) by one percentage point results in a 1.2 percentage point decrease in the annual consumption. In Model 2 we estimated affordability elasticity (-1.1), showing that a decrease of affordability by 1 percent results in a decrease of consumption by 1.1 percent.

Conclusions

During 2008-2018, the decrease in affordability of cigarettes was a crucial determinant in reducing consumption of cigarettes in the SEE region. However, affordability is still not considered when designing national tobacco taxation policies. For example, in the period of economic growth (2017–2018) affordability in most of the observed countries increased slightly. Therefore, policy makers should be aware of the risk that future increases in cigarette prices could lag behind real income growth, making tax policy less effective at reducing consumption.

A Policy Brief based on the report can be found here.