Tobacco Economics in Croatia

In this paper we examine tobacco economics in Croatia. The research covers multiple issues of tobacco economics: health risks, tobacco control and regulation compliance, cigarette production, imports and exports, taxation and its fiscal effects as well as retail price structure. Our main research issue however is taxation and price elasticity of cigarette demand. We have tested the hypothesis that price elasticity of cigarette demand in Croatia is low. We have compared Croatia's tobacco consumption related health risks to other countries in transition. As a response to an increased smoking-related health risks, anti-smoking regulations have been recently introduced in Croatia, and more strict legislation is coming in force to comply with EU tobacco control regulatory framework. However, tobacco law enforcement is still an outstanding issue in Croatia. The tobacco industry is a significant part of the Croatian economy, yet characterized by almost monopolistic domestic cigarette industry. The annual production (15.6 billion of cigarettes in 2003) is increasing, as well as exports. Croatia is a regional net cigarette exporter with the almost exclusive exports to Bosnia and Herzegovina (57%) and Serbia and Montenegro (35%). Cigarette imports in Croatia account for less than 0.5% percent of total cigarette demand. Taxation of tobacco products is considered important source of government budget revenues. The revenues from excise taxes on tobacco products represent about 3% of total budget revenues in Croatia. However, the share of taxes in retail price of cigarettes is about 75%, what is in line with the share of taxes in EU countries. It leads us to conclude that there is not much room left to increase the excise taxes in the future. Beside various research surveys on smoking prevalence (Croatia is at par with the prevalence for all countries in 2000 i.e. about 30% of adult population are smokers), officially reliable data on cigarette consumption are still lacking. Therefore it is difficult to evaluate tobacco control policies, especially the economic effects. In this paper we have used Household Budget Survey data in order to estimate the cigarette price elasticity. Cigarette consumption in Croatia is price inelastic. Price elasticity is -0.36. Despite that 10% of increase in price will result in 3.6% decrease in quantity of cigarettes consumed, it is hard to argue for further tax rise. Given high price differential with neighboring countries, it would increase smuggling and distort further tobacco taxation effects. When considering the health issues, inelastic demand points towards the fact the tax increase on cigarettes alone is not the single, most optimal tobacco control tool. In terms of recommendations for further research, the suggestion is to explore the differences in the price sensitivity of demand among different socio-economic groups. More in depth qualitative evaluations of anti-smoking policies would be possible if detailed surveys on cigarette consumption would be regularly available for Croatia.