Worldwide organized cigarette smuggling : an empirical analysis

This article estimates the economic size and the impact on government revenues of cigarette smuggling worldwide and formulates economic policies that can be used to effectively address the problem. First, information from various sources are combined and a global map of smuggling routes for cigarettes is described. By examining the international cigarette trade records, the hub/transit countries in six regions of the world are identified. Second, a variable that measures smuggling incentives for cigarettes is defined and computed for 110 countries. Third, a static global demand model for cigarettes (that includes the smuggling incentives variable) is specified and robustly estimated. Using the estimation results, global price and income elasticities of cigarette demand are obtained as -0.41 and 0.37, respectively. It is estimated that in 1999, 3.4% of global cigarette consumption was smuggled and 7.4% of tax revenue was lost to smuggling. Fourth, the best policy options are identified to achieve the objectives of both public health agencies (less consumption, less smuggling) and governments (less smuggling, more revenue). A tax-induced increase in real retail cigarette prices and an improvement in anti-smuggling law enforcement (as proxied by the corruption indicator) are found to significantly increase government revenues while decreasing global consumption and smuggling. Furthermore, when the tax increase is not accompanied by an improvement in law enforcement, then global smuggling of cigarettes would increase, but governments would still enjoy increased tax revenues.