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2.4.1 Introduction

Government attempts to reduce production of tobacco or to divert agriculture away from tobacco production have failed, although no systematic attempt has been made to study and propose alternative crops. No viable income generating alternative is available. Without appropriate research, not much can be done to help policy formulation.

Government has concentrated on anti-smoking campaigns. The cigarette industry adopted countermeasures designed to neutralize any campaign that might damage its image before Congress and public opinion. Any attempt made by the Executive to pass legislation imposing any restriction on production, marketing or consumption of cigarette has been emasculated in the House and Senate.

The tobacco industry stresses its importance to local communities and states, emphasizing contributions to social benefits improving the quality of life in the communities where they operate. Companies have often resorted to community work as a strategy to strengthen ties with political power, particularly local government and constituencies. Company employees - through a series of campaigns - have developed ties between the company and other local organizations, institutions and the community at large.

Some companies are contributing to natural resource management and the environment. There are programmes for environmental education, noise reduction, treatment of liquid effluents and control of air emissions. One company has a project for recycling plastics, to be re-utilized in the manufacture of other products. In Santa Cruz, Rio Grande do Sul, acetate, cellulose and filters are re-used in producing bedclothes and jackets.

The tobacco companies want to have their name associated with (i) cultural activities, such as art seminars, student artistic activities and events with prestigious artists; (ii) health initiatives such as work in partnership with the prestigious Zerbini Foundation in an AIDS prevention programme; (iii) social action and solidarity “capable of changing people’s lives”; and (iv) education to eradicate illiteracy, associated with the project “Solidarity for Literacy”, a programme developed by the prestigious Solidarity Community Council, whose aim is to improve literacy in the most disadvantaged regions of the country.

2.4.2 Impact of government policies on production

In terms of employment, tobacco farming is mainly a family enterprise. This type of crop fits perfectly into the model of family farming that the federal government has sponsored, especially through the National Programme of Family Agriculture (Pronaf). Under Pronaf, tobacco growers are eligible for production and investment credit with subsidized interest rates.

No information is available with regard to the participation of tobacco farmers in Pronaf. It would be difficult to exclude growers from this programme, without a political cost, since this group meets the eligibility criteria. If productive alternative crops were available, perhaps this programme could be used.

Tobacco is excluded from government support policies for the production sector. In both the minimum price and the marketing loan (non-recourse loans) programmes, tobacco is ineligible. However, the tobacco industry provides farms with de facto price insurance through the system of guaranteed purchase at a pre-established price. This sort of arrangement creates strong ties between producers and industry, although, in a good harvest year, it can be hard agreeing a price.

2.4.3 Impact of government policies on marketing

Government attempts to restrict cigarette smuggling

The Government has directed efforts towards reducing the smuggling of cigarettes into Brazil. The Federal Revenue Department has increased seizures of smuggled and counterfeited products, especially those coming in from Paraguay and Uruguay. There are indications, however, that despite intensified efforts to control the flow of contraband, it may be more than estimated and even growing. Domestic cigarette markets were flooded with “pirate” brands and poor copies of existing regular brands. According to market specialists, the volume of cigarettes originating elsewhere (contraband) approached 30 percent of the total.

According to Abifumo, the illegal market continues to be a serious threat to the industry’s survival (particularly for small- and medium-sized industrial units). Within illegal cigarette marketing, more than 80 percent is contraband, of which more than 25 percent are counterfeit products, and around 19 percent is tax-evading local production. Abifumo says that it is hard to measure the illegal market and therefore to determine total cigarette consumption in Brazil.

Public-private partnership in quality control

In January 1998, Associated Press reported that growers in Rio Grande do Sul were producing ¡-1 type tobacco, which is characterized by double the normal amount of nicotine (the average level being 6.2 percent) compared with regular tobacco. This report caused considerable concern among those linked to the tobacco industry and among consumers and importers.

In response, the Ministry of Agriculture implemented a programme to certify alkaloid levels in Brazilian tobacco, due to the possible damage that the report could have to the industry. All Virginia tobacco processed by companies in Rio Grande do Sul now undergoes rigorous checks for nicotine levels. The programme is a partnership of seven companies linked to Abifumo and the University of Santa Cruz (UNISC) and ensures official product certification for the international market.

UNISC provides laboratory analyses of the average levels of alkaloids (nicotine and secondary alkaloids) in Virginia tobacco leaves, based on samples collected along the buying lines of tobacco companies. Subsequently, the results obtained by the authorized laboratory (UNISC Analysis Centre) are compared with results from the companies’ laboratories. Each company receives a certificate with its average and Sindifumo gets one with the general average. The scheme is now being extended to Santa Catarina and Paraná, thus covering all the south.

2.4.4 Impact of government policies on consumption

Empirical studies on economics of cigarette consumption are scarce in Brazil, but two (Costa e Silva et al., 2000; Carvalho and Lobão, 1999) can be used to assess the impact of government policies (through taxation, for example) on prices and consumption of cigarettes. Costa e Silva draws heavily on the data analysis of the earlier paper and discusses the results and their implications for policy-making.

Costa e Silva et al strongly favour increasing prices as a means to restrict consumption. This study published by INCA and influenced government decisions to raise cigarette prices to restrict tobacco use.

Costa e Silva et al. (2000) estimated price and income elasticities for market demand, with models of cigarette consumers, the results of which are summarized in Table 2.8.

The first - Model 1 - was based on the assumption that smokers were willing to keep in their bodies a “stock of tobacco”, which is a proportion of the “desired consumption” of cigarette (Chaloupka, 1991). The model was based on the assumption that smoking, being a harmful activity, is the result of an evaluation of costs (dependence, damage to the person's own health and that of other people) and benefits (the pleasure of smoking).

The second - Model 2 - was proposed by Becker and Murphy (1988), with two versions. One hypothesized rational demand in the case of smokers with fixed preferences, while the other hypothesized a myopic or narrow-view demand on the part of adolescents and people with low levels of formal education and income. In the myopic hypothesis, a consumer is defined as someone with very little information about the long-term effects of smoking. They are, in other words, assumed to be people with naïve behaviour or with little schooling, such as the socio-economically disadvantaged. According to the literature, this group of myopic consumers should be the target of policies aimed at restricting tobacco consumption.

Table 2.8: Econometric models of cigarette price elasticity


Model 1
(Chaloupka, 1991)

Model 2
(Becker and Murphy, 1988)


Narrow or myopic


short term




long term





short term




long term




Source: Costa e Silva et al., 2000, based on Chaloupka, 1991, and Becker and Murphy, 1988.

The results of the analysis based on the myopic hypothesis indicated that cigarette consumption in Brazil underwent a structural change in price elasticity during the 3rd quarter of 1990, when consumption clearly shifted to a lower level compared with the historical trend of consumption. This structural change was probably related to occupational health regulations introduced in 1990, requiring strict control on smoking in work places. After that change, price elasticity of demand for both the short and long terms increased, mainly in the myopic consumer group, where it almost doubled. These changes are illustrated in Table 2.9.

Table 2.9: Changes in price elasticity as a result of public policy changes in 1990.

Rational model

Narrow model

Before 3rd quarter

short term



long term



After 3rd quarter

short term



long term



Source: Costa e Silva et al., 2000.

A simulation of the impact of public policy changes aimed at reducing cigarette consumption suggested a price elasticity of demand of -0.15 in the short term, and -0.5 in the long term (as in Table 2.9). An increase of 15 percent in cigarette prices would lead to a reduction in consumption of 2.25 percent in the short term and 7.5 percent in the long term.

These results imply that changes in public policies on tobacco control can influence the price elasticities of demand of both rational and myopic consumers. Empirical evidence indicates that consumption is reduced in the face of improved information about possible health damage.

Consumer response to changes in prices and income had elasticities similar to comparable studies elsewhere, which showed that price increases may reduce cigarette consumption, while increased consumer income expands consumption.

There was little sensitivity to price variation in the short term. With an average price increase of 10 percent, a pack-a-day smoker would reduce cigarette consumption by between 4 and 7 packs a year.

In the long-term, the same 10 percent increase would reduce consumption by 344 cigarettes per year. Myopic consumers (youth and the less educated) would be more sensitive to price changes in the short-term than were the rational group.

Increasing taxes on cigarettes to 90 percent of average retail prices would in the short term increase tax revenues by 12-15.5 percent, while reducing consumption by 1.5-3 percent, and in the long term increase tax revenue by 3-9 percent and reduce consumption by 6-12 percent.

There are several policy implications:

Carvalho and Lobão (1999) discussed the efficiency of various policies. Taxes are already high (74 percent of cigarette retail price) and so increasing taxes may not be viable. However, despite high taxes, Brazilian cigarette prices are among the lowest in the world, indicating that there is still some room for increase, but increasing the price of cigarettes might encourage smuggling and thereby reduce tax revenue. Taxes always impose a greater burden on those with less capacity to evade.

The available statistics suggest that social norms influencing tobacco use are probably responsible for changes observed in structural demand for cigarettes. Hence the fall in consumption a few months after the introduction of warning labels on cigarette packets in 1995. Social norms also make the consumer more sensitive to price variation, increasing the price elasticity of demand (with a lower impact among rational consumers and a greater impact among myopic consumers.

The Carvalho and Lobão (1999) study, based on work in the 1990s, had three main conclusions. First, any attempt to reduce the consumption of cigarettes through increased taxes is probably an inefficient policy, as raising taxes may have little impact on consumption because of the stimulus to illegal trade. Cigarette taxes are already high and probably have reached their limit, as tax evasion is already very high.

Second, higher taxes on cigarettes might have negative distributive effects, as the income effect of higher taxes would hurt the individuals (families) in the lower income brackets, since they spend a proportionally larger share of income on cigarettes, than do those in higher income brackets. This might cause "down trading" - a price increase due to higher taxes might not induce less consumption but rather transfer consumption to cigarettes of poorer quality. This policy could therefore be counterproductive.

Third, there are indications that health warning policies are more effective than increasing prices through taxation.

Brazil also restricts cigarette sales, imposes age limits for purchasing cigarettes, limits sales to specific places and requires special licences to sell cigarettes, prohibits sale in public places and limits the distribution of free testing samples. These policies were subject to much debate, and there is no research that examines the effectiveness of such measures.

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