Smoking is already acknowledged to stand behind many serious diseases and health conditions, and consequently, there has been a growing awareness among policymakers to tackle smoking, especially in more developed countries. Efficient policies, aiming at reducing tobacco consumption, should be based on evidence. The determinants of consumer demand are extensively investigated on the empirical ground, the investigation of tobacco products has been only recently investigated on developed countries and at a lesser extent on developing or transition countries.
One of the most widely used policies is increased taxation, which is expected to result in higher prices and lower consumption. The existing evidence from countries at all economic stages suggest that price increase on tobacco are effective in reducing smoking (Eozenou and Fishburn, 2007). Tobacco taxation generates a social positive outcome in terms of health and quality of living. In terms of reducing tobacco consumption, economic theory and studies suggest that especially young people and people with low incomes particularly from low socioeconomic status are likely to be more responsive to tax and price increases, because the greater the share of an individual’s disposable income spent on a good, the more the individual will respond to price changes (Chaloupka and Grossman, 1996; Farrelly et al., 2001). The positive impact of taxes on reducing tobacco consumption has been confirmed in several empirical studies from developed and developing countries (see Bader et al. 2011; Chaloupka et al., 2010; Currie et al., 2012; Ross et al., 2007; Ross et al. 2003). However, developing and transition countries have not been following at the same pace, anti-tobacco policies, like the developed counterparts. This is also the case of Albania, which is a transition country, one of the poorest countries in Europe but also one of the countries with highest smoking prevalence in the region (WHO, 2016). Despite the seriousness of the smoking phenomena, there has been limited research on smoking behavior including also determinant factors, which is surprising given the high smoking prevalence in Albania. Both theoretical and empirical research has devoted substantial attention to the price elasticity of tobacco, both for economic purposes and health externalities caused by smoking. Despite the prevalence of smoking in Albania and the existence of some studies investigating the impact of tobacco control policy on the Albanian market (Levy et al., 2008, Ross et al., 2008, Zaloshnja, 2010), there is a lack of empirical research on the price elasticity of tobacco.
Accordingly, motivated by the need to investigate the demand of tobacco in Albania, from which policies can be better tailored, and the scarcity of empirical studies, this paper is based on extensive research including econometrical analysis of both aggregate macro data and household level data.
The empirical analysis conducted on annually aggregate data suggests that prices significantly affect tobacco consumption. More precisely, the estimated results suggested that tobacco demand is price inelastic, with demand being relatively more elastic in the long-run than in the short run. Namely, the price elasticities of tobacco range from -0.27 to -0.77 in long-run and -0.007 to -0.107. With regard to the income elasticity, the estimated results suggested that income is not an important factor influencing cigarette consumption. Also, in terms of other control variables, this paper suggests that all the other factors expect enrolment in tertiary education is insignificant factors.
To further strengthen the research findings, this paper reflects also the findings of the research on the tobacco price elasticity from a microeconomic perspective. To empirically estimate the elasticity of cigarettes demand in Albania, this paper uses the Living Standard Measurement Survey (LSMS) as cross-section data for the year 2012. Whilst the majority of studies conducted in this field use Household Budget Survey, we are substantially determined by the data availability of our main variable of interests (quantity of cigarettes and expenditures of cigarettes) to use alternative surveys, which as abovementioned is the LSMS.
Following the Deaton’s (1988) demand model and employing cross-sectional household survey data, this paper estimated the price elasticity for cigarette demand, which to the best of our knowledge this is the first empirical research conducted in Albania. More precisely, this research estimates an Almost Ideal Demand System (AIDS), which allows disentangling quality choice from exogenous price variations through the use of unit values from cigarette consumption. Following a three-stage procedure, the estimated results suggest that the price elasticity is around -0.57. The price elasticity appears to be within the range of estimated elasticities in developing countries and in line with the estimates elasticities from the model using aggregate. In terms of the control variables, it seems that the total expenditure, household size, male to female ratio and adult ratio are important determinants of tobacco demand in Albania. Thus, since increase prices, which have been mainly driven by the increases of taxes, have demonstrated to have had a significant impact on tobacco consumption, the government should further engage in a gradual increase of taxation. Revising the existing tax policy in the context of a more dynamic increase in excises would lead to an increase in tax revenues of the state and significant savings in the health system. The results of the research show that by increasing the excise tax so that the minimum level of excise tax of 90 Euros per 1000 cigarettes, as required by EU, is achieved, the budget revenues would increase by 36 million Euros or 28%, as compared to the budget revenues generated in 2017, excluding the additional budget revenues generated from VAT taxes. The figures on overall cigarettes tax burden as well as the budgetary trends provide optimal conditions for strengthening fiscal control instruments on tobacco in Albania. Furthermore, the tax burden on cigarettes and tobacco products is the lowest in the region. Therefore, any immediate measure for pursuing sustained incremental increases in tobacco excises is feasible and is in line with the revenue-raising objectives of the governments. An awareness campaign has to be organized in order to inform policymakers on the importance of applying excise increase for the tobacco control in Albania.