The Economics of Tobacco and Tobacco Control

Monograph 21: The Economics of Tobacco and Tobacco Control
The market for raw tobacco in Europe was previously regulated under a Common Market Organisation
created in 1992. 40 This system provided payments to farmers (a premium) per kilogram of tobacco,
depending on the tobacco variety and other conditions, and established production limits through
country-specific thresholds and production quotas. The regulation also established a Community
Tobacco Fund which supported research and provided assistance related to crop substitution and
alternative livelihoods. 32
Over the years, concerns were raised about the EU system of support for tobacco growing, and the need
for reform was increasingly recognized. A 1997 EU report acknowledged the apparent contradiction
between EU policies to reduce tobacco consumption while at the same time supporting raw tobacco
production. This report cautioned that abolishing support altogether would impact the livelihoods of an
estimated 200,000 workers and threaten tobacco growers who depended on production premiums for
most (over 80%) of their income. 41 It was also argued that the premium system failed to provide
incentives for improving the quality of the tobacco grown, resulting in a surplus of poor quality tobacco,
which was in turn exported at low prices to Eastern Europe and Africa. 42
Starting in 2004, as part of broader reforms of the EU Common Agricultural Policy (CAP), the premium
system was phased out over several years. Production quotas were abolished and financial aid was
“decoupled” from production, which meant that aid was no longer tied to the amount of tobacco
produced. Thus, farmers were freed to grow other crops in place of tobacco. The CAP also had the effect
of removing from the market lower quality tobacco varieties which may have been grown primarily to
benefit from the earlier production-based subsidy. 43 Since 2010, the EU has not granted any specific
subsidies for raw tobacco production, but it continues to provide general agricultural aid through direct
payments and rural development programs. 39 As a result, raw tobacco production has declined. 44
Low- and Middle-Income Countries
Many LMICs continue to apply price support systems for tobacco growing. For example, starting in
1940, the Turkish government set a minimum purchase price for each grade of tobacco leaf purchased
by Tekel, the government’s tobacco-producing monopoly. Farmers were free to sell their tobacco leaf on
the open market, but most contracted with Tekel to sell at the established price. In 2000, the government
replaced its price support program with “direct income support” for farmers, providing a subsidy based
on the size of the farm. 45
In many LMICs, however, governments are less focused on guaranteeing minimum prices to tobacco
farmers and more concerned with providing and improving infrastructure facilities that expand tobaccofarming
activities (e.g., roads and irrigation, loans, and tax incentives). For example, in the Philippines,
15% of tobacco tax revenues for specific types of tobacco are returned to tobacco-growing provinces
and are used to support a variety of activities, including efforts to improve tobacco farming and
infrastructure development. 46 As another example, Argentina has provided subsidies and technical
assistance to tobacco growers since 1972 through the “Fondo Especial del Tabaco” (FET, or Special
Tobacco Fund), which is financed through a 7% tax on the sale of cigarette packs. 47–49 In addition, for
several decades the World Bank provided loans to tobacco farmers as part of its economic development
efforts in LMICs; in 1991, the World Bank changed its policy and no longer supports tobacco projects or
provides aid for tobacco production. 50
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