Exploring the impact of foreign direct investment on tobacco consumption in the former
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《烟草控制杂志》
ABSTRACT
Background: Tobacco is the single largest cause of morbidity and mortality in the
developed world; in the former socialist bloc tobacco kills twice as many men as in the
west. Although evidence shows that liberalisation of the cigarette trade through the
elimination of import barriers leads to significant increases in consumption, far less is
known about the impact of foreign direct investment on cigarette consumption. This paper
seeks to explore the impact that the substantial transnational tobacco company investments
have had on patterns of tobacco trade and consumption in the former Soviet Union.
Design: Routine data were used to explore trends in cigarette trade and consumption in
the 15 countries of the former Soviet Union from the 1960s to the present day. Comparisons
were made between trends in countries that have received substantial investment from the
tobacco transnationals and countries that have not.
Results: Between 1991 and 2000 cigarette production increased by 96% in countries
receiving industry investment and by 11% in countries that did not. Over the same period
cigarette consumption increased by 40%; the increase was concentrated in countries
receiving investments. Despite these investments, cigarette imports still outweigh exports
and no trade surplus has yet to result.
Conclusions: The findings suggest that liberalisation of inward investment has a
significant and positive impact on cigarette consumption and that without appropriate
safeguards, market liberalisation may have long term negative impacts on health. Specific
trade rules are needed to govern trade and investment in this uniquely harmful product.
Implementation of effective tobacco control policies should precede tobacco industry
privatisation. International financial organisations pressing for privatisation should
ensure this occurs.
Abbreviations: FAO, United Nations Food and Agriculture Organization; FDI, foreign
direct investment; FSU, former Soviet Union; GATT, General Agreement on Tariffs and Trade;
IMF, International Monetary Fund; TTCs, transnational tobacco companies; USDA FAS, US
Department of Agriculture, Foreign Agricultural Service
Keywords: former Soviet Union; tobacco consumption; trade liberalisation
The unprecedented political, economic, and social changes that followed the collapse of
the former Soviet Union (FSU) in 1991 and the creation of 15 independent states have had a
huge short term impact on health.1 The immediate decline in life expectancy has been
largely attributed to the rapid increase in cardiovascular deaths and injuries
predominantly affecting young and middle aged men.2–4 There has, however, been much less
attention paid to the longer term impact of these changes.
Market reforms, in particular the rapid and large scale privatisation recommended by
the global financial institutions, have had mixed but, to date, largely negative
consequences in the FSU.5,6 Market liberalisation has improved access to a variety of
products. Some—for example fruit, vegetables, and vegetable oils—should improve health,7
but others, including fast food and tobacco, will be detrimental. The transnational tobacco
companies (TTCs) entry to and substantial investments8 in a region with already high rates
of tobacco related disease, and male tobacco related mortality rate twice that seen in the
west,9 is therefore of particular concern.
Previous studies show that the TTCs forced entry to the Asian markets in Taiwan, Korea,
Thailand, and Japan under the threat of US trade sanctions10 led to an increase in per
capita consumption of about 10%.11 Other econometric studies show that greater trade
openness (measured using total trade as a share of gross domestic product and import
penetration) has a significant and positive impact on tobacco consumption that is greatest
in low income countries.12,13 Such findings are consistent with economic theory which
suggests that reducing trade barriers increases tobacco consumption through an increase in
both supply and demand, the latter driven by and through competition, which reduces prices
and increases advertising expenditure.13 The TTCs entry to new markets and the surge in
global trade of tobacco products since the 1980s has been enabled by trade liberalisation,
driven by bilateral, regional, and multilateral agreements that have reduced both tariff
and non-tariff barriers.12 Pursuant to the 1994 General Agreement on Tariffs and Trade
(GATT), for example, a 42% rise in global cigarette exports was seen between 1993 and
1996.12
However, in addition to exporting to a foreign market, companies can access new markets
by establishing or acquiring the facilities to produce in-country and sell directly to the
domestic market. Over the last decade such foreign direct investment (FDI) has grown
considerably faster than trade, leading some to argue that "globalisation of production"
now outweighs "globalisation through trade" in economic importance.14 It offers TTCs the
advantage of accessing cheaper labour, avoiding developed world regulations on disposal of
cigarette production waste,15 and lower transport costs. Yet to our knowledge only one
attempt has been made to explore the impact of FDI on tobacco consumption.13 It suggested
that an increase in exchange rate distortions (used to indicate a disincentive to
investment) led to a decline in cigarette consumption, leading to the tentative conclusion
that FDI should lead to higher levels of cigarette consumption. Certainly the theoretical
impact of FDI, in terms of its consequences for supply and demand, is likely to be similar
to that of trade liberalisation. In addition FDI gives the transnationals additional
economic and political leverage within the country concerned.16
Between 1992 and 2000 the TTCs invested over $2.7 billion in the tobacco industries of
10 of the 15 FSU states, accounting for between 1% and over 31% of the total FDI in these
countries.8 This led to major changes including the introduction of branding and
advertising which were previously unknown.8,17 Unlike the industry’s entry to Asia, there
was little opposition to the TTC’s entry. The newly created countries were in the process
of developing their own constitutions with new legislative and taxation systems, so none
had in place, nor was able to rapidly enact, tobacco control laws. Nor did they have
established tobacco control or civil society groups to oppose industry pressure.8,17 As
elsewhere, the TTCs used smuggling as a major market entry technique17 and in countries
where they have not yet invested, smuggling rates remain high.8,18
Despite the scale of these changes, little is known about their impacts. This paper
therefore seeks to explore the impact that foreign direct investment has had on patterns of
cigarette trade and, in turn, on cigarette consumption in the FSU. In so doing it aims to
add to the growing body of evidence on the impact that trade liberalisation and transition
from a socialist to a market economy has on health. Given evidence that the International
Monetary Fund (IMF) is pressuring countries to privatise their tobacco industries and
making privatisation a prerequisite for loans,19,20 it is becoming increasingly important
to understand what impact privatisation might have. The economic turmoil accompanying
transition, periods of rapid inflation, and the introduction of new currencies and
redenomination of old ones, makes interpretation of financial data, including cigarette
prices, across these 15 countries extremely difficult, so this paper takes a descriptive
rather than an econometric approach.
METHODS
Three main data sources were used, the United Nations Food and Agriculture Organization
(FAO) database which provides data from 1961 onwards,21 the United Nations Commodity
Statistics Yearbooks which provide cigarette production data from 1963, and the US
Department of Agriculture, Foreign Agricultural Service (USDA FAS) data which are available
from 1960.22 The accuracy and completeness of the data were compared with each other and
with other sources in order to identify the most appropriate source for each measure of
interest (table 1).
All data are presented for the region as a whole, the USSR until transition, and the
FSU as a whole post-transition. The demise of the FSU does not present problems when
examining production or consumption data over time, with data simply aggregated where
necessary. It does, however, lead to potential difficulty when comparing import and export
data as products traded between different parts of the USSR did not, until the collapse of
the USSR, contribute to international trade figures. The FAO database allows for this
transfer by providing trade figures for the old boundaries (that is, for the USSR) up until
1995 and for the new boundaries from 1992 to 1999, giving a four year period of overlap. By
contrast USDA simply provides data for the old boundaries up to 1991 and for the new
boundaries from 1992 (Arnella Trent, USDA, personal communication). For trade figures we
therefore present both sets of data up to 1995 to examine the impact that these
configuration changes had.
Where not already provided, cigarette consumption was calculated from USDA data using
the formula: production + imports – exports. Consumption per capita was calculated for the
population as a whole using mid year population estimates from the United Nations
Demographic Yearbooks for the years to 199023–25 and the World Health Organization Health
for All database (which uses data from the United Nations Population Division) for the
years 1990 onwards.26 Whole population data were used rather than the population aged 15
and over as accurate data on the latter were not available across the whole time period.
For the period 1991 onwards we examined consumption per capita using the population aged 15
years plus.
The newly independent states can be split into two groups, those without direct
industry investments (Belarus, Georgia, Moldova, Tajikistan, and Turkmenistan) and those
with substantial investment from the tobacco transnationals in the early to mid 1990s
(Latvia, Lithuania, Estonia, Russia, Ukraine, Kazakhstan, and Uzbekistan).8 Trends in
tobacco leaf imports, and cigarette production and consumption, were compared in these two
groups of countries. Kyrgyzstan, Armenia, and Azerbaijan were excluded from these analyses
because although they have now received investments from the tobacco industry this only
occurred after 1997, considerably later than the other countries, and it was felt that
insufficient time had elapsed for these investments to have had an observable impact.
RESULTS
Tobacco leaf production
Agricultural production of tobacco has varied greatly over time, with a drop in the late
1970s and early 1980s, a peak in the mid 1980s, followed by a notable decline until the mid
1990s (fig 1). This recent decline is consistent with reported shortfalls in tobacco during
this period. It appears to reflect a number of factors27 including policies to discourage
production as part of Gorbachev’s health campaign in the 1980s, droughts and wars, and the
demise of Soviet subsidies for agricultural production.28 Gorbachev’s health campaign
focused largely (and effectively) on reducing alcohol consumption,29 but some believe it
also aimed to reduce cigarette consumption through reducing supply of leaf and manufactured
cigarettes. Others, however, have suggested that the campaign really only served to hide
the underlying economic difficulties that were driving down production.
In the mid 1990s production stabilised and now appears to be increasing. The
traditional tobacco producing areas of Moldova, Azerbaijan, and Kyrgyzstan30 are all
recovering from slumps in production post-transition, although little increase in
production has yet been seen in Azerbaijan.31 Interestingly, production has also increased
in countries that have not traditionally been major tobacco producers, notably Uzbekistan
and Kazakhstan, reflecting foreign investment by British American Tobacco (BAT) and Philip
Morris respectively in their leaf growing industries32–34 (fig 2).
Cigarette production
Cigarette production fluctuated from 1960 with a slow, overall upward trend that peaked
in 1986 (fig 3). The rapid decline then seen has been attributed variously to obsolete
manufacturing equipment, shortages of raw materials (tobacco leaf, paper, and filters) and,
once again, Gorbachev’s health campaign. Since the mid 1990s cigarette production has
increased almost exponentially and has now reached higher levels than ever previously seen,
with a 76% increase between 1991 and 2000. Production in countries receiving foreign
investment increased by 96% during this period, compared with only 11% in countries not
receiving investment (fig 3).
Imports and exports
Imports of cigarettes fluctuated, albeit with an overall upward trend between 1960 and
1984 (fig 4). A rapid decline then occurred through the rest of the 1980s. In 1990 and 1991
imports suddenly rose due to the airlift into the USSR of a reported 34 billion
manufactured cigarettes by Philip Morris and RJ Reynolds.35 USDA data suggest that imports
then increased steadily between 1993 and 1995, declining rapidly thereafter. Importantly,
this temporary increase was seen only in those countries where the transnationals had
invested. These patterns are consistent with the production data described above,
suggesting that imports increased until local production picked up from 1995 onwards.
Before transition tobacco leaf imports fluctuated over time (fig 5). It appears that
shortfalls in local leaf production (fig 1) were covered by increasing imports. Since 1990,
leaf imports have increased steadily, with the increase seen almost exclusively in
countries with transnational tobacco investments.
Tobacco leaf and cigarette exports from the USSR varied between 1961 and 1990 with no
clear trend but were always small, at under 5000 metric tonnes and 5 billion units (one
unit = 1 cigarette), respectively. A sudden increase in cigarette exports occurred in the
mid 1990s (fig 6), a trend that appears to have continued. In contrast leaf exports have
not increased overall since transition (data not shown).
Cigarette consumption
Per capita cigarette consumption increased between 1960 and the mid 1970s but then
stabilised for a decade until the shortfalls in production and imports led to a rapid
decline until the mid-1990s (fig 7). Since then consumption has increased almost
exponentially and now totals almost 575 billion cigarettes per year, considerably higher
than the previous peak. Over the period 1991 to 2000 per capita consumption among those
aged 15+ increased by 40% in all countries combined, 51% in countries that had received
tobacco industry investments compared with a 3% fall in countries that had not, with
similar figures seen for the period 1991 to 2001 (table 2).
These data suggest that the transition to a market economy with its accompanying
liberalisation of trade and investment, which permitted entry of the tobacco
transnationals, has had a major impact on tobacco trade and consumption in the FSU.
Cigarette consumption has increased almost exponentially in line with the rapid increase in
cigarette production. Moreover, these large increases in consumption have been concentrated
in countries receiving tobacco industry investment. Tobacco leaf production declined,
largely due to the disruption of transition, but has now started to increase, not only in
traditional producing areas but also in Uzbekistan and Kazakhstan, following British
American Tobacco and Philip Morris investments. Cigarette imports increased only
temporarily and in countries receiving industry investments, seemingly until output from
the updated local production facilities had reached a sufficient level, while exports have
seen a continued but smaller rise insufficient to result in a trade surplus.
Before considering the results in any detail, it is necessary to consider data
accuracy. There are three main concerns in this area: data collection systems, smuggling,
and illegal production. With independence, each country had to establish new data
collection systems and this caused difficulties, particularly in the early 1990s. Thus,
while the Statistical Committee of the Commonwealth of Independent States publish trade
statistics, they do not cover all years or all countries, and the definitions of tobacco
related categories are inconsistent.36 Similarly, the United Nations Statistical Division
Comtrade database37 does not contain data for some countries in the region such as
Uzbekistan.
Problems with data appear to have mainly affected the smaller central Asian states
which contribute less to the regional total. In addition, the gaps are predominantly in
export data for the early 1990s which, given the small scale of exports relative to
production or imports, will have relatively little impact on final consumption figures.
However, in some other countries, at particular times, there are some contradictions
between data sources that cannot be reconciled. The USDA has attempted to overcome these
problems by using a variety of sources to generate best estimates in the absence of
credible data and, while it cannot be considered perfect, we believe it is the most
comprehensive and consistent source of data available at present.
Import and export data include only officially traded cigarettes and are therefore
problematic given that smuggling was and is a major issue in the region.17,18 As much of
the smuggling, particularly in more recent years, is likely to occur between countries
within the region, this problem is overcome to some extent by considering the FSU as a
whole. Based on the fact that cigarette exports far outweigh imports, it is estimated that
approximately one third of global cigarette exports are smuggled.38 Our data show the
opposite occurring in this region. Nevertheless, the most likely impact of smuggling on the
data presented in this paper is to underestimate imports to and hence consumption in
countries without substantial TTC investments, while also perhaps underestimating exports
from countries that have received investments. This will exaggerate the different scale of
increases in consumption between countries with and without tobacco industry investments
and may account for part of these differences. Overall, the three issues are likely to
underestimate consumption in the immediate post-transition period when data problems,
illegal production, and smuggling (used as an industry market entry strategy) were
greatest.39
While not wishing to overlook these serious concerns, the data presented here are the
most comprehensive available and, despite their weaknesses, allow a preliminary assessment
of an important issue. Although data sources often overlap, wherever possible, data from at
least two sources were obtained and compared. FAO data were used for tobacco leaf
production as they were more consistent with industry data on production levels in the
post-transition period,28,40 and because the trade data have the advantage of being
presented in metric tons across the whole time period. UN and USDA data on imports,
exports, and production differed somewhat more in the post-transition period, particularly
in the early 1990s, although overall trends were similar. USDA data were more complete and
believed to be more accurate for consumption (and for the underlying import, export, and
production data). They were, for example, more consistent with the publication World
Tobacco Trends41 and with ERC data42 and had the additional advantage of being more up to
date. Other sources, including the World Tobacco File,43 did not have data for all
countries in the region and could not therefore be used.
Attempts to validate our findings also suggest they are reasonably robust. For most
countries, our estimates of cigarette consumption per capita were very similar to those
provided by ERC which also found that between 1990 and 2000 consumption increased by 57.3%
in Russia.42 In addition, survey data suggests that smoking prevalence has been rising
particularly among young women.44–46 Production figures were consistent with our previous
assessment of production capacity.8 We estimated that in 10 countries receiving investments
before 2001, production capacity in factories with transnational investments totalled 416
billion cigarettes. Such factories are thought to account for between 80–90% of
production39,47 consistent with the data presented here that in 2000, production in these
countries totalled 459 billion, the extra 43 billion presumably accounted for by factories
without TTC investments.
This current level of consumption (2529 cigarettes per capita in 2001) is high by
international standards although similar to levels seen in much of central and eastern
Europe.26 The increase in consumption has been far greater in countries that have received
major tobacco industry investments (56%) than in countries that have not (–1%). While some
of the overall increase is caused by the artificially low consumption levels seen around
independence, and some of the differential increase in countries receiving investments is
due to undocumented smuggling from these countries in the latter half of the decade (or
smuggling to these countries in the first half), it is clear that consumption has now
increased well above its previous peak in the mid 1980s. The increase in consumption is
particularly notable for two reasons. Firstly, the tobacco epidemic in the FSU, at least
among men, has been established for some time. Although historical data on smoking habits
are scarce, contemporary studies asking about ever smoking, combined with data on lung
cancer mortality,9,48 suggest that male smoking must have become widespread during the
first half of the 20th century, probably contemporaneously with the establishment of the
habit in the USA or UK. In addition, the region’s first cigarette factories and brands
were established in the 1850s and 1860s.34,49 Although Soviet women did not smoke in large
numbers until recently, the classic description of the progress of the tobacco epidemic
would suggest that consumption should now be steady or declining as appeared to be the case
in the 1970s to 1980s, not increasing to the extent indicated here. Second, after
independence, most countries experienced sustained economic recessions, with pronounced
increases in poverty, which would be expected to reduce rather than increase consumption.
As noted earlier, trade liberalisation can work in several ways to increase
consumption. Although elucidating the precise mechanisms in this instance is impossible
because of the absence of detailed data on, for example, price, compounded by the extreme
financial volatility during this period, it appears that many factors seen elsewhere were
also in operation here, albeit with some minor differences. An increased supply of
cigarettes was seen but occurred through increased production rather than imports. Even
where companies planned to or successfully established monopolies8,50 and then exerted
pressure on governments to close the market to outside competition through both tariff and
non-tariff barriers,51,52 competition was more intense than in the Soviet era. Moreover,
industry documents suggest that, in terms of marketing, such markets would be treated as
though they were competitive.50 Thus advertising increased virtually everywhere, even where
the TTCs had manufacturing monopolies. The TTCs were soon identified as the largest
advertisers on Russian television and radio and in at least four of the former Soviet
states the tobacco transnationals ranked among the top three advertisers.53,54 With the
advent of television advertising bans (in Russia, for example) industry spend shifted to
other media—tobacco is now the product most heavily advertised outdoors with three major
transnationals ranked as first, second, and third heaviest advertisers.55 An almost
identical pattern is seen in Ukraine and Belarus.55 Tobacco industry documents indicate
that young people, women, opinion leaders, and urban residents were specifically targeted
and the allure of western products was used to attract smokers.17,50,56–58 This targeted
advertising combined with the increased production of filter brands, and the introduction
of milder brands and brands targeted specifically to women to a market previously dominated
by coarse filterless or papirossy cigarettes, must have encouraged new smokers
(particularly women) to take up the habit as the TTCs predicted.50 Indeed our studies in
several countries have found smoking among women to be far higher in cities, where
advertising has been concentrated.45,59,60
But why then was the increase in consumption in the FSU (approximately 40%) so much
greater than in Asia (10–20%)? One factor is data artefact, in particular the artificially
low consumption level at the end of the 1980s. Another is the absence of effective tobacco
control policies, or even organised tobacco control groups that might have counterbalanced
industry pressure. However, it is argued here that a major factor was the enormous economic
and political leverage of the tobacco industry on account of their major contribution to
FDI in the recipient countries.8 It is also likely that efforts to stimulate demand
succeeded because of the vulnerability of the population in a time of rapid transition and
great uncertainty. Our research on factors influencing smoking behaviour in Ukraine
highlighted the role of deterioration in social position (a proxy for of the stress of
changes associated with transition), as well as unemployment and poverty as important
determinants of current smoking.45
Over the period 1991 to 2000, annual cigarette production increased by over 200
billion, a 76% increase. Yet, despite the increase in production, exports have only
increased by a fraction of this amount to a total of just over 20 billion for the region.
Meanwhile, imports, which rose initially, have declined to approximately 50–60 billion.
Overall, therefore, despite significant investment in the region’s tobacco industry, the
overall trade balance in cigarettes remains negative. Moreover the rapid increase in
tobacco leaf imports by countries receiving tobacco industry investment may further
increase their trade deficit. The shift in consumer preferences towards new blended
cigarette varieties, coupled with the increase in consumption, has led to a decline in the
proportion of tobacco imported from former Soviet republics in favour of imports from, for
example, India, Greece, Turkey, Italy, Spain, Zimbabwe, and Brazil.61,62
Ideally, further work would be useful to verify these findings on a country by country
basis using more detailed econometric analysis to control for changes in incomes, price,
and advertising over this period. Researchers studying other parts of the world have
examined this issue by undertaking such analyses and we considered doing so here, but it
rapidly became clear that many factors (not only affecting data on tobacco) that arose as
countries struggled to establish data systems, tackle the informal economy, introduce new
currencies, deal with hyperinflation, build state structures and, in some cases, define
national frontiers following the outbreak of hostilities, made it impossible to obtain
sufficient valid and meaningful data in which one could be confident. Nevertheless, we
conclude tentatively that similar to trade liberalisation, liberalisation of inward
investment leads to an increase in cigarette consumption. Although liberalisation has led
to the investment of much needed capital, no other benefits have accrued from tobacco
industry investments. Trade deficits initially increased and, although now stabilised, have
yet to decline and leaf deficits are likely to increase. Profits from tobacco sales will
accrue to investors outside the region, while the considerable costs of long term health
consequences will be borne by host countries with already high premature mortality rates.
What this paper adds
This paper shows that liberalisation of inward investment has had a significant and
positive impact on cigarette consumption in the countries of the former Soviet Union. It
highlights the need for appropriate safeguards to govern trade and investment in this
uniquely harmful product.
The World Bank plays a major role in global tobacco control and since 1991 has not
loaned for or invested in the tobacco industry.63 Despite the growing body of evidence on
the impact of trade liberalisation on tobacco consumption, the World Bank suggests trade
restrictions would be potentially counterproductive, and recommends restricting supply side
measures to the control of smuggling.63 Others, however, argue that international treaties
that have liberalised trade should develop specific rules to govern tobacco as they have
done other uniquely harmful products such as weapons and hazardous waste—products that
kill far fewer people.9,64 In the meanwhile, a basic first step would be to protect markets
before their opening through ensuring the presence of comprehensive tobacco control
programmes with comprehensive advertising bans and effective taxation policies as absolute
prerequisites (although the Thai experience suggests that this may be insufficient). The
IMF which may exert pressure for industry privatisation (as it did, for example, in
Moldova19,20) and the World Bank have a particular responsibility in this regard. Unlike
the World Bank, which recognises the economic consequences of tobacco use and poor health,
this may require a major volte-face by the IMF. In addition, the case can be made for
requiring health impact assessments of the short and long term health and economic impacts
of tobacco industry privatisation where further privatisations are recommended.
FOOTNOTES
Funding: This work was supported in part by the National Cancer Institute, US National
Institutes of Health, grant number 1 R01 CA91021-01.
Conflict of interest: AG is board member of ASH-UK (unpaid)
The opinions are those of the authors alone.
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CropsLivestockProducts&Domain=Trade&servlet=1&language=EN&hostname=apps.fao.org&version=def
ault (Accessed 16 September 2002).(A B Gilmore and M McKee)
Background: Tobacco is the single largest cause of morbidity and mortality in the
developed world; in the former socialist bloc tobacco kills twice as many men as in the
west. Although evidence shows that liberalisation of the cigarette trade through the
elimination of import barriers leads to significant increases in consumption, far less is
known about the impact of foreign direct investment on cigarette consumption. This paper
seeks to explore the impact that the substantial transnational tobacco company investments
have had on patterns of tobacco trade and consumption in the former Soviet Union.
Design: Routine data were used to explore trends in cigarette trade and consumption in
the 15 countries of the former Soviet Union from the 1960s to the present day. Comparisons
were made between trends in countries that have received substantial investment from the
tobacco transnationals and countries that have not.
Results: Between 1991 and 2000 cigarette production increased by 96% in countries
receiving industry investment and by 11% in countries that did not. Over the same period
cigarette consumption increased by 40%; the increase was concentrated in countries
receiving investments. Despite these investments, cigarette imports still outweigh exports
and no trade surplus has yet to result.
Conclusions: The findings suggest that liberalisation of inward investment has a
significant and positive impact on cigarette consumption and that without appropriate
safeguards, market liberalisation may have long term negative impacts on health. Specific
trade rules are needed to govern trade and investment in this uniquely harmful product.
Implementation of effective tobacco control policies should precede tobacco industry
privatisation. International financial organisations pressing for privatisation should
ensure this occurs.
Abbreviations: FAO, United Nations Food and Agriculture Organization; FDI, foreign
direct investment; FSU, former Soviet Union; GATT, General Agreement on Tariffs and Trade;
IMF, International Monetary Fund; TTCs, transnational tobacco companies; USDA FAS, US
Department of Agriculture, Foreign Agricultural Service
Keywords: former Soviet Union; tobacco consumption; trade liberalisation
The unprecedented political, economic, and social changes that followed the collapse of
the former Soviet Union (FSU) in 1991 and the creation of 15 independent states have had a
huge short term impact on health.1 The immediate decline in life expectancy has been
largely attributed to the rapid increase in cardiovascular deaths and injuries
predominantly affecting young and middle aged men.2–4 There has, however, been much less
attention paid to the longer term impact of these changes.
Market reforms, in particular the rapid and large scale privatisation recommended by
the global financial institutions, have had mixed but, to date, largely negative
consequences in the FSU.5,6 Market liberalisation has improved access to a variety of
products. Some—for example fruit, vegetables, and vegetable oils—should improve health,7
but others, including fast food and tobacco, will be detrimental. The transnational tobacco
companies (TTCs) entry to and substantial investments8 in a region with already high rates
of tobacco related disease, and male tobacco related mortality rate twice that seen in the
west,9 is therefore of particular concern.
Previous studies show that the TTCs forced entry to the Asian markets in Taiwan, Korea,
Thailand, and Japan under the threat of US trade sanctions10 led to an increase in per
capita consumption of about 10%.11 Other econometric studies show that greater trade
openness (measured using total trade as a share of gross domestic product and import
penetration) has a significant and positive impact on tobacco consumption that is greatest
in low income countries.12,13 Such findings are consistent with economic theory which
suggests that reducing trade barriers increases tobacco consumption through an increase in
both supply and demand, the latter driven by and through competition, which reduces prices
and increases advertising expenditure.13 The TTCs entry to new markets and the surge in
global trade of tobacco products since the 1980s has been enabled by trade liberalisation,
driven by bilateral, regional, and multilateral agreements that have reduced both tariff
and non-tariff barriers.12 Pursuant to the 1994 General Agreement on Tariffs and Trade
(GATT), for example, a 42% rise in global cigarette exports was seen between 1993 and
1996.12
However, in addition to exporting to a foreign market, companies can access new markets
by establishing or acquiring the facilities to produce in-country and sell directly to the
domestic market. Over the last decade such foreign direct investment (FDI) has grown
considerably faster than trade, leading some to argue that "globalisation of production"
now outweighs "globalisation through trade" in economic importance.14 It offers TTCs the
advantage of accessing cheaper labour, avoiding developed world regulations on disposal of
cigarette production waste,15 and lower transport costs. Yet to our knowledge only one
attempt has been made to explore the impact of FDI on tobacco consumption.13 It suggested
that an increase in exchange rate distortions (used to indicate a disincentive to
investment) led to a decline in cigarette consumption, leading to the tentative conclusion
that FDI should lead to higher levels of cigarette consumption. Certainly the theoretical
impact of FDI, in terms of its consequences for supply and demand, is likely to be similar
to that of trade liberalisation. In addition FDI gives the transnationals additional
economic and political leverage within the country concerned.16
Between 1992 and 2000 the TTCs invested over $2.7 billion in the tobacco industries of
10 of the 15 FSU states, accounting for between 1% and over 31% of the total FDI in these
countries.8 This led to major changes including the introduction of branding and
advertising which were previously unknown.8,17 Unlike the industry’s entry to Asia, there
was little opposition to the TTC’s entry. The newly created countries were in the process
of developing their own constitutions with new legislative and taxation systems, so none
had in place, nor was able to rapidly enact, tobacco control laws. Nor did they have
established tobacco control or civil society groups to oppose industry pressure.8,17 As
elsewhere, the TTCs used smuggling as a major market entry technique17 and in countries
where they have not yet invested, smuggling rates remain high.8,18
Despite the scale of these changes, little is known about their impacts. This paper
therefore seeks to explore the impact that foreign direct investment has had on patterns of
cigarette trade and, in turn, on cigarette consumption in the FSU. In so doing it aims to
add to the growing body of evidence on the impact that trade liberalisation and transition
from a socialist to a market economy has on health. Given evidence that the International
Monetary Fund (IMF) is pressuring countries to privatise their tobacco industries and
making privatisation a prerequisite for loans,19,20 it is becoming increasingly important
to understand what impact privatisation might have. The economic turmoil accompanying
transition, periods of rapid inflation, and the introduction of new currencies and
redenomination of old ones, makes interpretation of financial data, including cigarette
prices, across these 15 countries extremely difficult, so this paper takes a descriptive
rather than an econometric approach.
METHODS
Three main data sources were used, the United Nations Food and Agriculture Organization
(FAO) database which provides data from 1961 onwards,21 the United Nations Commodity
Statistics Yearbooks which provide cigarette production data from 1963, and the US
Department of Agriculture, Foreign Agricultural Service (USDA FAS) data which are available
from 1960.22 The accuracy and completeness of the data were compared with each other and
with other sources in order to identify the most appropriate source for each measure of
interest (table 1).
All data are presented for the region as a whole, the USSR until transition, and the
FSU as a whole post-transition. The demise of the FSU does not present problems when
examining production or consumption data over time, with data simply aggregated where
necessary. It does, however, lead to potential difficulty when comparing import and export
data as products traded between different parts of the USSR did not, until the collapse of
the USSR, contribute to international trade figures. The FAO database allows for this
transfer by providing trade figures for the old boundaries (that is, for the USSR) up until
1995 and for the new boundaries from 1992 to 1999, giving a four year period of overlap. By
contrast USDA simply provides data for the old boundaries up to 1991 and for the new
boundaries from 1992 (Arnella Trent, USDA, personal communication). For trade figures we
therefore present both sets of data up to 1995 to examine the impact that these
configuration changes had.
Where not already provided, cigarette consumption was calculated from USDA data using
the formula: production + imports – exports. Consumption per capita was calculated for the
population as a whole using mid year population estimates from the United Nations
Demographic Yearbooks for the years to 199023–25 and the World Health Organization Health
for All database (which uses data from the United Nations Population Division) for the
years 1990 onwards.26 Whole population data were used rather than the population aged 15
and over as accurate data on the latter were not available across the whole time period.
For the period 1991 onwards we examined consumption per capita using the population aged 15
years plus.
The newly independent states can be split into two groups, those without direct
industry investments (Belarus, Georgia, Moldova, Tajikistan, and Turkmenistan) and those
with substantial investment from the tobacco transnationals in the early to mid 1990s
(Latvia, Lithuania, Estonia, Russia, Ukraine, Kazakhstan, and Uzbekistan).8 Trends in
tobacco leaf imports, and cigarette production and consumption, were compared in these two
groups of countries. Kyrgyzstan, Armenia, and Azerbaijan were excluded from these analyses
because although they have now received investments from the tobacco industry this only
occurred after 1997, considerably later than the other countries, and it was felt that
insufficient time had elapsed for these investments to have had an observable impact.
RESULTS
Tobacco leaf production
Agricultural production of tobacco has varied greatly over time, with a drop in the late
1970s and early 1980s, a peak in the mid 1980s, followed by a notable decline until the mid
1990s (fig 1). This recent decline is consistent with reported shortfalls in tobacco during
this period. It appears to reflect a number of factors27 including policies to discourage
production as part of Gorbachev’s health campaign in the 1980s, droughts and wars, and the
demise of Soviet subsidies for agricultural production.28 Gorbachev’s health campaign
focused largely (and effectively) on reducing alcohol consumption,29 but some believe it
also aimed to reduce cigarette consumption through reducing supply of leaf and manufactured
cigarettes. Others, however, have suggested that the campaign really only served to hide
the underlying economic difficulties that were driving down production.
In the mid 1990s production stabilised and now appears to be increasing. The
traditional tobacco producing areas of Moldova, Azerbaijan, and Kyrgyzstan30 are all
recovering from slumps in production post-transition, although little increase in
production has yet been seen in Azerbaijan.31 Interestingly, production has also increased
in countries that have not traditionally been major tobacco producers, notably Uzbekistan
and Kazakhstan, reflecting foreign investment by British American Tobacco (BAT) and Philip
Morris respectively in their leaf growing industries32–34 (fig 2).
Cigarette production
Cigarette production fluctuated from 1960 with a slow, overall upward trend that peaked
in 1986 (fig 3). The rapid decline then seen has been attributed variously to obsolete
manufacturing equipment, shortages of raw materials (tobacco leaf, paper, and filters) and,
once again, Gorbachev’s health campaign. Since the mid 1990s cigarette production has
increased almost exponentially and has now reached higher levels than ever previously seen,
with a 76% increase between 1991 and 2000. Production in countries receiving foreign
investment increased by 96% during this period, compared with only 11% in countries not
receiving investment (fig 3).
Imports and exports
Imports of cigarettes fluctuated, albeit with an overall upward trend between 1960 and
1984 (fig 4). A rapid decline then occurred through the rest of the 1980s. In 1990 and 1991
imports suddenly rose due to the airlift into the USSR of a reported 34 billion
manufactured cigarettes by Philip Morris and RJ Reynolds.35 USDA data suggest that imports
then increased steadily between 1993 and 1995, declining rapidly thereafter. Importantly,
this temporary increase was seen only in those countries where the transnationals had
invested. These patterns are consistent with the production data described above,
suggesting that imports increased until local production picked up from 1995 onwards.
Before transition tobacco leaf imports fluctuated over time (fig 5). It appears that
shortfalls in local leaf production (fig 1) were covered by increasing imports. Since 1990,
leaf imports have increased steadily, with the increase seen almost exclusively in
countries with transnational tobacco investments.
Tobacco leaf and cigarette exports from the USSR varied between 1961 and 1990 with no
clear trend but were always small, at under 5000 metric tonnes and 5 billion units (one
unit = 1 cigarette), respectively. A sudden increase in cigarette exports occurred in the
mid 1990s (fig 6), a trend that appears to have continued. In contrast leaf exports have
not increased overall since transition (data not shown).
Cigarette consumption
Per capita cigarette consumption increased between 1960 and the mid 1970s but then
stabilised for a decade until the shortfalls in production and imports led to a rapid
decline until the mid-1990s (fig 7). Since then consumption has increased almost
exponentially and now totals almost 575 billion cigarettes per year, considerably higher
than the previous peak. Over the period 1991 to 2000 per capita consumption among those
aged 15+ increased by 40% in all countries combined, 51% in countries that had received
tobacco industry investments compared with a 3% fall in countries that had not, with
similar figures seen for the period 1991 to 2001 (table 2).
These data suggest that the transition to a market economy with its accompanying
liberalisation of trade and investment, which permitted entry of the tobacco
transnationals, has had a major impact on tobacco trade and consumption in the FSU.
Cigarette consumption has increased almost exponentially in line with the rapid increase in
cigarette production. Moreover, these large increases in consumption have been concentrated
in countries receiving tobacco industry investment. Tobacco leaf production declined,
largely due to the disruption of transition, but has now started to increase, not only in
traditional producing areas but also in Uzbekistan and Kazakhstan, following British
American Tobacco and Philip Morris investments. Cigarette imports increased only
temporarily and in countries receiving industry investments, seemingly until output from
the updated local production facilities had reached a sufficient level, while exports have
seen a continued but smaller rise insufficient to result in a trade surplus.
Before considering the results in any detail, it is necessary to consider data
accuracy. There are three main concerns in this area: data collection systems, smuggling,
and illegal production. With independence, each country had to establish new data
collection systems and this caused difficulties, particularly in the early 1990s. Thus,
while the Statistical Committee of the Commonwealth of Independent States publish trade
statistics, they do not cover all years or all countries, and the definitions of tobacco
related categories are inconsistent.36 Similarly, the United Nations Statistical Division
Comtrade database37 does not contain data for some countries in the region such as
Uzbekistan.
Problems with data appear to have mainly affected the smaller central Asian states
which contribute less to the regional total. In addition, the gaps are predominantly in
export data for the early 1990s which, given the small scale of exports relative to
production or imports, will have relatively little impact on final consumption figures.
However, in some other countries, at particular times, there are some contradictions
between data sources that cannot be reconciled. The USDA has attempted to overcome these
problems by using a variety of sources to generate best estimates in the absence of
credible data and, while it cannot be considered perfect, we believe it is the most
comprehensive and consistent source of data available at present.
Import and export data include only officially traded cigarettes and are therefore
problematic given that smuggling was and is a major issue in the region.17,18 As much of
the smuggling, particularly in more recent years, is likely to occur between countries
within the region, this problem is overcome to some extent by considering the FSU as a
whole. Based on the fact that cigarette exports far outweigh imports, it is estimated that
approximately one third of global cigarette exports are smuggled.38 Our data show the
opposite occurring in this region. Nevertheless, the most likely impact of smuggling on the
data presented in this paper is to underestimate imports to and hence consumption in
countries without substantial TTC investments, while also perhaps underestimating exports
from countries that have received investments. This will exaggerate the different scale of
increases in consumption between countries with and without tobacco industry investments
and may account for part of these differences. Overall, the three issues are likely to
underestimate consumption in the immediate post-transition period when data problems,
illegal production, and smuggling (used as an industry market entry strategy) were
greatest.39
While not wishing to overlook these serious concerns, the data presented here are the
most comprehensive available and, despite their weaknesses, allow a preliminary assessment
of an important issue. Although data sources often overlap, wherever possible, data from at
least two sources were obtained and compared. FAO data were used for tobacco leaf
production as they were more consistent with industry data on production levels in the
post-transition period,28,40 and because the trade data have the advantage of being
presented in metric tons across the whole time period. UN and USDA data on imports,
exports, and production differed somewhat more in the post-transition period, particularly
in the early 1990s, although overall trends were similar. USDA data were more complete and
believed to be more accurate for consumption (and for the underlying import, export, and
production data). They were, for example, more consistent with the publication World
Tobacco Trends41 and with ERC data42 and had the additional advantage of being more up to
date. Other sources, including the World Tobacco File,43 did not have data for all
countries in the region and could not therefore be used.
Attempts to validate our findings also suggest they are reasonably robust. For most
countries, our estimates of cigarette consumption per capita were very similar to those
provided by ERC which also found that between 1990 and 2000 consumption increased by 57.3%
in Russia.42 In addition, survey data suggests that smoking prevalence has been rising
particularly among young women.44–46 Production figures were consistent with our previous
assessment of production capacity.8 We estimated that in 10 countries receiving investments
before 2001, production capacity in factories with transnational investments totalled 416
billion cigarettes. Such factories are thought to account for between 80–90% of
production39,47 consistent with the data presented here that in 2000, production in these
countries totalled 459 billion, the extra 43 billion presumably accounted for by factories
without TTC investments.
This current level of consumption (2529 cigarettes per capita in 2001) is high by
international standards although similar to levels seen in much of central and eastern
Europe.26 The increase in consumption has been far greater in countries that have received
major tobacco industry investments (56%) than in countries that have not (–1%). While some
of the overall increase is caused by the artificially low consumption levels seen around
independence, and some of the differential increase in countries receiving investments is
due to undocumented smuggling from these countries in the latter half of the decade (or
smuggling to these countries in the first half), it is clear that consumption has now
increased well above its previous peak in the mid 1980s. The increase in consumption is
particularly notable for two reasons. Firstly, the tobacco epidemic in the FSU, at least
among men, has been established for some time. Although historical data on smoking habits
are scarce, contemporary studies asking about ever smoking, combined with data on lung
cancer mortality,9,48 suggest that male smoking must have become widespread during the
first half of the 20th century, probably contemporaneously with the establishment of the
habit in the USA or UK. In addition, the region’s first cigarette factories and brands
were established in the 1850s and 1860s.34,49 Although Soviet women did not smoke in large
numbers until recently, the classic description of the progress of the tobacco epidemic
would suggest that consumption should now be steady or declining as appeared to be the case
in the 1970s to 1980s, not increasing to the extent indicated here. Second, after
independence, most countries experienced sustained economic recessions, with pronounced
increases in poverty, which would be expected to reduce rather than increase consumption.
As noted earlier, trade liberalisation can work in several ways to increase
consumption. Although elucidating the precise mechanisms in this instance is impossible
because of the absence of detailed data on, for example, price, compounded by the extreme
financial volatility during this period, it appears that many factors seen elsewhere were
also in operation here, albeit with some minor differences. An increased supply of
cigarettes was seen but occurred through increased production rather than imports. Even
where companies planned to or successfully established monopolies8,50 and then exerted
pressure on governments to close the market to outside competition through both tariff and
non-tariff barriers,51,52 competition was more intense than in the Soviet era. Moreover,
industry documents suggest that, in terms of marketing, such markets would be treated as
though they were competitive.50 Thus advertising increased virtually everywhere, even where
the TTCs had manufacturing monopolies. The TTCs were soon identified as the largest
advertisers on Russian television and radio and in at least four of the former Soviet
states the tobacco transnationals ranked among the top three advertisers.53,54 With the
advent of television advertising bans (in Russia, for example) industry spend shifted to
other media—tobacco is now the product most heavily advertised outdoors with three major
transnationals ranked as first, second, and third heaviest advertisers.55 An almost
identical pattern is seen in Ukraine and Belarus.55 Tobacco industry documents indicate
that young people, women, opinion leaders, and urban residents were specifically targeted
and the allure of western products was used to attract smokers.17,50,56–58 This targeted
advertising combined with the increased production of filter brands, and the introduction
of milder brands and brands targeted specifically to women to a market previously dominated
by coarse filterless or papirossy cigarettes, must have encouraged new smokers
(particularly women) to take up the habit as the TTCs predicted.50 Indeed our studies in
several countries have found smoking among women to be far higher in cities, where
advertising has been concentrated.45,59,60
But why then was the increase in consumption in the FSU (approximately 40%) so much
greater than in Asia (10–20%)? One factor is data artefact, in particular the artificially
low consumption level at the end of the 1980s. Another is the absence of effective tobacco
control policies, or even organised tobacco control groups that might have counterbalanced
industry pressure. However, it is argued here that a major factor was the enormous economic
and political leverage of the tobacco industry on account of their major contribution to
FDI in the recipient countries.8 It is also likely that efforts to stimulate demand
succeeded because of the vulnerability of the population in a time of rapid transition and
great uncertainty. Our research on factors influencing smoking behaviour in Ukraine
highlighted the role of deterioration in social position (a proxy for of the stress of
changes associated with transition), as well as unemployment and poverty as important
determinants of current smoking.45
Over the period 1991 to 2000, annual cigarette production increased by over 200
billion, a 76% increase. Yet, despite the increase in production, exports have only
increased by a fraction of this amount to a total of just over 20 billion for the region.
Meanwhile, imports, which rose initially, have declined to approximately 50–60 billion.
Overall, therefore, despite significant investment in the region’s tobacco industry, the
overall trade balance in cigarettes remains negative. Moreover the rapid increase in
tobacco leaf imports by countries receiving tobacco industry investment may further
increase their trade deficit. The shift in consumer preferences towards new blended
cigarette varieties, coupled with the increase in consumption, has led to a decline in the
proportion of tobacco imported from former Soviet republics in favour of imports from, for
example, India, Greece, Turkey, Italy, Spain, Zimbabwe, and Brazil.61,62
Ideally, further work would be useful to verify these findings on a country by country
basis using more detailed econometric analysis to control for changes in incomes, price,
and advertising over this period. Researchers studying other parts of the world have
examined this issue by undertaking such analyses and we considered doing so here, but it
rapidly became clear that many factors (not only affecting data on tobacco) that arose as
countries struggled to establish data systems, tackle the informal economy, introduce new
currencies, deal with hyperinflation, build state structures and, in some cases, define
national frontiers following the outbreak of hostilities, made it impossible to obtain
sufficient valid and meaningful data in which one could be confident. Nevertheless, we
conclude tentatively that similar to trade liberalisation, liberalisation of inward
investment leads to an increase in cigarette consumption. Although liberalisation has led
to the investment of much needed capital, no other benefits have accrued from tobacco
industry investments. Trade deficits initially increased and, although now stabilised, have
yet to decline and leaf deficits are likely to increase. Profits from tobacco sales will
accrue to investors outside the region, while the considerable costs of long term health
consequences will be borne by host countries with already high premature mortality rates.
What this paper adds
This paper shows that liberalisation of inward investment has had a significant and
positive impact on cigarette consumption in the countries of the former Soviet Union. It
highlights the need for appropriate safeguards to govern trade and investment in this
uniquely harmful product.
The World Bank plays a major role in global tobacco control and since 1991 has not
loaned for or invested in the tobacco industry.63 Despite the growing body of evidence on
the impact of trade liberalisation on tobacco consumption, the World Bank suggests trade
restrictions would be potentially counterproductive, and recommends restricting supply side
measures to the control of smuggling.63 Others, however, argue that international treaties
that have liberalised trade should develop specific rules to govern tobacco as they have
done other uniquely harmful products such as weapons and hazardous waste—products that
kill far fewer people.9,64 In the meanwhile, a basic first step would be to protect markets
before their opening through ensuring the presence of comprehensive tobacco control
programmes with comprehensive advertising bans and effective taxation policies as absolute
prerequisites (although the Thai experience suggests that this may be insufficient). The
IMF which may exert pressure for industry privatisation (as it did, for example, in
Moldova19,20) and the World Bank have a particular responsibility in this regard. Unlike
the World Bank, which recognises the economic consequences of tobacco use and poor health,
this may require a major volte-face by the IMF. In addition, the case can be made for
requiring health impact assessments of the short and long term health and economic impacts
of tobacco industry privatisation where further privatisations are recommended.
FOOTNOTES
Funding: This work was supported in part by the National Cancer Institute, US National
Institutes of Health, grant number 1 R01 CA91021-01.
Conflict of interest: AG is board member of ASH-UK (unpaid)
The opinions are those of the authors alone.
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