Economic Policy Review ISSN 1313 - 0544

The paradox with the policies about tobacco and cigarettes

Author: Zornitza Manolova / 11.12.2008
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This week there was dispute which affected a lot of producers of tobacco from various countries, including Bulgaria. On one hand, the European Parliament insists on extending the period for assistance to the tobacco producers until 2013. On the other, the Commissioner on agriculture Mariann Fischer Boel stated that the assistance must stop during 2010. The result was the grumbling of the tobacco producers, which even stated protests.

IME for quite a while has been commenting the details about the assistance and subsidies for the tobacco producers and cigarette manufacturers, as well as the harmfulness from these. Without any doubt we had proved the consequences from the strong protectionism, which leads to ineffectiveness and lack of competitiveness of the production.

What is happening at present is one of the many requests for government support and a privileged position, which is opposed by all logical arguments.

In the first place we could raise the question about the meaning of these three years. Let us assume that assistance would be provided until 2013. What is going to happen after that when the tobacco producers would be in the same situation? It would be naïve to believe that during those years the producers would develop and would not need support, quite the opposite - the assistance and the direct subsidies reduce the stimuli for development and the producers could afford a non optimal production and low quality product, since the state declares that it would pay if nobody else wants to buy it.   Naturally this is done with the money of the taxpayers. We have to understand that the state does not have money - it simply takes from these who generate income and gives it to someone else. During the "socialist" regime the principal "we take from one to give to someone else" could and had a place, but in the market economy, which is developing - no.

Second, the policy of protectionism is binding even more people who could not handle the competition on the market by producing the same production. The tobacco producers claim that they could not continue to operate without the help from the government. It means that in this way they could move to another sector where they could handle it. The state, however, apparently does not agree and continue to press them in the sector with low added value. The explanation here is that the production of tobacco and cigarettes is a "strategic sector" and the production is exported. The truth is that actually the export of this production is insignificant (compared to the production exports from other sectors) and probably would never become a leading component which has extreme importance to our economy.

Finally comes the moment of the paradox in the policies of the state to encourage production of tobacco and cigarettes and the policies to limit cigarette smoking. On one hand the state makes the production cheaper (by covering some of the costs), while from another - makes the consumption of cigarettes more expensive (by increasing the excise tax and respectively the price). In this situation its role looks senseless. Simply stated, if the tobacco producers do not receive financial assistance, the price of raw tobacco would increase and as a result the prices of cigarettes would rise. Thus the price for cigarettes for the consumers would rise naturally. 

The conclusion from all that is, that at present the taxpayers fist pay to help the production of tobacco (mainly unnecessary for the market) and than - artificially high prices for cigarettes, with the intend to limit the smokers, according to the country's policy. We should not forget the salaries of the employees in the administration, which undertake to handle the absurdities during the entire cycle.