The document summarizes an economics extended essay on the Indonesian government's policy on tobacco consumption and its impact on cigarette demand. Some key points:
1) Indonesia has high rates of smoking and kretek cigarettes dominate the market. The government aims to reduce consumption due to health risks.
2) Policies used include indirect taxes, sale restrictions, smoking bans, advertising limits, and anti-smoking campaigns. However, these have had limited effectiveness due to economic reliance on the tobacco industry.
3) The essay examines the impact of these policies on cigarette demand in Jakarta and considers other factors like employment, industry lobbying, and consumer demand. It aims to evaluate policy effectiveness and recommend amendments.
Health, Well-being and Social Inclusion: Therapeutic Horticulture in the UKangeliaGeo
Similar to To what extent has the Indonesian Government’s Policy on Tobacco Consumption Affected the Demand for Cigarettes; a case study from Jakarta? (15)
To what extent has the Indonesian Government’s Policy on Tobacco Consumption Affected the Demand for Cigarettes; a case study from Jakarta?
1.
2. Economics HL Extended Essay Rut Setio Nastiti
Abstract
Indonesia is famous worldwide for its kretek cigarettes which are produced all over the
country and sold abroad whilst dominating the tobacco market in Indonesia. Since 1970, the
cigarettes industry has brought significant income to the country and provides jobs for almost
two million people. Until now, cigarettes companies in Indonesia keep on expanding their
production. On the contrary, world citizens acknowledge that tobacco causes many health
consequences that might lead to death and illness. The thesis of this investigation that led to the
writing of this economic essay is trying to answer “To what extent has the Indonesian
Government’s Policy on Tobacco Consumption Affected the Demand for Cigarettes; a case
study from Jakarta?”
This research was done by survey, interview, and books study. The research mainly
focused on; how the Indonesian Government has used indirect taxation, sale restrictions,
smoking restrictions, advertising/marketing restrictions and anti-smoking campaign to reduce
the consumption of tobacco. Consideration was given to the contribution of the cigarettes
industry to the Indonesian economy.
Some regulations and laws have been imposed to prevent the consumption of
cigarettes, such as: indirect taxation, sale and smoking restrictions, advertising/marketing
restrictions and anti smoking campaign including lobby from religious leader; however those
actions have been largely ineffectual, due to the heavy reliance of the economy on the excise
tax revenue, employment in the industry and the powerful tobacco companies.
In the end, this extended essay suggests what policies or implementations should be
amended by the government; including the adoption of the Framework Convention on Tobacco
Control to reduce the consumption of cigarettes in Indonesia
Word count: 265
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3. Economics HL Extended Essay Rut Setio Nastiti
Acknowledgement
It is a pleasure to thank those who made this Extended Essay Possible. I humbly thank
God, Jesus Christ for the strength He has given me throughout my life. I am heartily thankful to
my supervisor, Malcolm Price, whose guidance from the initial to the final level enabled me to
develop an understanding of the thesis. I am delighted to have Annemarie Oomes as my
Economics teacher, who has fulfilled me with the knowledge that is relevant to my Extended
Essay.
Beside, I would like to thank Yayasan Lembaga Konsumen Indonesia (YLKI) who had
helped me doing book and article study for my Extended Essay.
Finally, my deepest gratitude goes to my family, for their unflagging love and support
throughout everything in my life; this Extended Essay is simply impossible without them.
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4. Economics HL Extended Essay Rut Setio Nastiti
Table of Contents
Abstract ................................................................................................................................... 1
Acknowledgement ................................................................................................................... 2
Table of Content ....................................................................................................................... 3
1. Introduction ........................................................................................................................... 4
2. What is the Indonesian Government’s Policy ..................................................................... 5
2.1 If it is to discourage consumption, why?
2.2 How do they discourage consumption?
2.3 Indirect Taxation
2.4 Sale Restriction
2.5 Smoking Restriction
2.6 Advertising/Marketing Restriction
2.7 Anti Smoking Campaign
3. How successful is the Government’s Policy? .................................................................. 18
3.1 Data on Consumption
3.2 Evidence from Seller
3.3 Evidence from Consumer
4. What other Factors need to be taken into consideration? ............................................... 23
4.1 Data on Consumption
4.2 Tobacco Industry Employment
4.3 Tobacco Industry Owners
4.4 Consumer Demand
4.5 Lobbyist, including Religious Leaders
5. Conclusion .......................................................................................................................... 30
5.1 To what extent has Government’s Policy changed consumption?
5.2 Should policy or implementation be amended?
5.3 What are recommended changes?
Bibliography ............................................................................................................................ 32
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5. Economics HL Extended Essay Rut Setio Nastiti
I. Introduction
Smoking has become one of the world’s major health concerns. Countries all over the
world try to minimize the consumption of tobacco and cigarettes to protect their citizens.
Tobacco and cigarettes are highly related to smoking. Those two things are not only causing
illness for the smokers, but also the people who are second hand smokers; worse the nicotine1
in cigarettes is causing addictiveness.
Governments all over the world have imposed economic and social policies to
discourage the consumption of tobacco, which industry is one of the most profitable industries2.
World Health Organization seriously deals with this problem by making a Framework
Convention on Tobacco Control (FCTC)3,. It provides a sound framework to reach reductions on
tobacco use. Its essential principle is participation of civil society to achieve the policy objectives
within the Convention. The FCTC acknowledges that “there is a fundamental and irreconcilable
conflict between the tobacco industry’s interests and public health policy interest.”4 It is also
recognized that civil society can play an important role in raising awareness about tobacco
industry – its goals, its size and operation, its strategies to promote its product and to thwart the
adoption and implementation of strong policies by gaining influence and credibility with policy
makers and the public at large.5
1
Is a stimulant drug but paradoxically effect of both stimulation and relaxation may be felt. The addictive effect of
nicotine is linked to its capacity to trigger the release of dopamine – a chemical in the brain that is associated with
feelings of pleasure. (www.ash.org.uk)
2
Tobacco Industry Profile – Indonesia, p. 4
3
Its aim is to “protect present and future generations from the devastating health, social, environmental and
economic consequences of tobacco consumption and exposure to tobacco smoke.”(Tobacco Industry Profile)
4
World Health Organization (WHO) WHO Framework Convention on Tobacco Control: Article 5.3. Geneva: WHO;
2003
5
Tobacco Industry Profile-Indonesia, p.5
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6. Economics HL Extended Essay Rut Setio Nastiti
According to the issues in the previous paragraphs, Indonesia the country where I come
from remains as one of the highest consumers of tobacco products that have not yet ratified the
Framework Convention on Tobacco Control (FCTC). This Extended Essay is going to
investigate the Research Question “To what extent has the Indonesian Government’s Policy
on tobacco consumption affected the demand for cigarettes; a case study from
Jakarta?”. Jakarta is the capital city of Indonesia. Taking Jakarta as the study case would make
the integration of the data reachable since lots of surveys have been conducted with Jakartans,
who widely consume cigarettes.
2. What is the Indonesian Government’s Policy?
2.1 If it is to discourage consumption, why?
“Indonesia has a unique market because the majority of smokers in Indonesia (92%) use
kreteks6, which are traditional cigarettes made from tobacco, clove, and flavouring “sauces” and
are either hand-rolled or machine-rolled into conventional cigarettes form. Kreteks contain
tobacco and therefore, all of the same deadly health harms caused by conventional white
cigarettes apply to kreteks7 ”. It is called kretek because when it is burned it produces sound
“tek, tek, tek”.
Due to the perils above about the composition of the cigarettes in Indonesia, the
government has tried to impose some policies; at the level of national and regional, that were
aimed to reduce the consumption of cigarette. Cigarettes are considered as demerit good, a
good which the government acknowledges is bad for the people who consume them and for the
6
Brinson B.A. A Good Match, Tobacco Reporter. p.1
7
Tobacco Industry Profile - Indonesia. pg.2.
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7. Economics HL Extended Essay Rut Setio Nastiti
society8, this also links to externality. An externality arises when a person engages in an activity
that influences the well-being of a bystander and yet neither pays nor receives any
compensation for that effect9. For smoking there is a negative externality on consumption, which
impact on the bystander is adverse and which adds to the cost of health care in Indonesia.
Therefore the government tries to lessen the consumption to make the externality disappear.
The consumption of cigarettes breaks the assumptions behind the principle of freedom
of consumer which states that consumers themselves make the best decision about how they
spend their money. The argument is based on two assumptions10. Firstly, the consumers are
fully informed of the costs and benefits from the decision they are making. Secondly, an
individual has to bear all the risks of their consumption, which means she/he realize that other
people aren’t going to take the burden of their individualist action.
Table 1. Taken from Mankiw p. 208
8
Blink, Dorton, Economics, IB Course Companion p. 198
9
Mankiw, N Gregory. Principles of Economics: p.206
10
Barber, Sarah. Adioetome SM et al . Ekonomi Tembakau di Indonesia, p. 16
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8. Economics HL Extended Essay Rut Setio Nastiti
Diagram 1: Negative Exterenality on Consumption. Adapted from Mankiw
The diagram above will explain how the market of cigarettes in Indonesia causes welfare
loss which is a state of health, prosperity and or happiness that the society lost. These are all
considered as societal externalities. The societal externality includes the cost of treating ill
people with smoking related illnesses, the cost of their early death and the cost of their absence
from work.
Market always tries to reach its optimum position of Qm meets Pm, or the position of
when private cost (supply) is equal with private benefits (demand), the situation where
everybody’s pleasure is maximized. But since the existences of smoke bothers the second
hand smokers and add cost to social health care, it is clearly seen that the private benefit or the
active smoker’s pleasure is bigger than the social benefit. Also the fact that the socially optimal
quantity or Qo (social benefit) is less than the equilibrium quantity Qm, shows that the society
doesn’t benefit from the cigarettes consumption, therefore the Indonesian government has to
internalize11 the externality that is caused from smoking by applying some public policies.
11
Altering incentives, so people take account of the external effect of their actions (Mankiw, p. 209).
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9. Economics HL Extended Essay Rut Setio Nastiti
2.2 How do they discourage consumption?
The World Health Organisation announced that Indonesia place the 3rd largest
population for smokers which is 146,860,000 people12. Since smoking in Indonesia has been a
chronic problem blended with a smoking culture, the government of Indonesia has imposed
some practical policies to prevent the consumption of such as; indirect taxation, sale restriction,
smoking restriction, advertising/marketing restrictions and anti smoking campaigns.
2.3 Indirect Taxation
There are three major indirect taxes which are excise, import duties and a general tax on
consumption13. Excise tax is an indirect tax which is added on specific goods like gasoline,
cigarettes and alcoholic beverages, which is also aimed to raise revenue and reduce the
consumption of specific goods. In Indonesia, excise tax from cigarettes and tobacco are one of
the biggest government revenue14.
Source: KOMPAS.com
Picture 1:
Excise Revenue on cigarettes in trillion
Revenue from tobacco excise
in trillion ( 1$= 9,000 Rupiah)
12
In Indonesia, smokers usually start at the young age. The Indonesian health department estimates that 22.9% of
urban 10-years-olds and 24,8% of rural 10-year-olds smoke(GYTS Paper 2002).
13
Sunley, M Emil. Taxtation of Cigerattes in the Bloomberg Initiative Countries: Overview of Policies Issues and
Proposal Reform, pg 3.
14 th
Until 28 June 2010, the realisation of the excise revenue at the first semester reached 9, 2 trillion rupiahs, and
90% comes from cigarettes and tobacco (http://bataviase.co.id/node/133809/).
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10. Economics HL Extended Essay Rut Setio Nastiti
The purpose of excise is to discourage the demand of a good15. Specific excise which
imposes the same amount of excise every box of cigarette will be more effective to press the
consumption of cigarettes than ad valorem.
Price of
cigarettes in
rupiahs
S + tax
PT S
PM
PO
Private Benefit
Social Benefit
QO QT QM
Quantity of
cigarettes in
billion
Diagram 2: Specific Indirect Taxation
According to the diagram, optimum quantity is QO, but when a tax is imposed the
quantity is reduced from QM to QT at the private benefit point, since they are getting less
quantity of cigarette, that point is better than the point of QM, since it is closer to the optimum
quantity. The amount of the tax that is collected by the government is the vertical distance
between the S and S+Tax curves times the quantity QT.
The research also found that installment of the same level of international standard
about 70% from the selling price with specific excise will be more effective than ad valorem tax16
and bring a significant impact for public health. As the matter of fact, in Indonesia, the average
15
Improvement of excise is aiming to discourage consumption has to be higher than the level of inflation and
significantly enough to balance the improvement in income (Ekonomi Tembakau di Indonesia, pg ix)
16
A percentage of the price or valued added at each stage of production (Sloman, pg 83)
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11. Economics HL Extended Essay Rut Setio Nastiti
of cigarettes excise is only 37%17, whereas the amount that is allowed by the Indonesian law is
57%18. This percentage can prevent 1,7 up to 4 million deaths that cause by cigarettes between
smokers which is equal with Rp. 29.1 up to Rp. 59, 3 trillion that can be allocated to
government’s revenue19.
S + Tax
Price of
cigarettes S
in rupiahs P2
Producer revenue before tax is imposed
P1
Pe Producer revenue after tax is imposed
Tax revenue for government
Tax burden for consumer
Tax burden for producers
Quantity of cigarettes in billion
Q1 Qe
Diagram 3: Distribution of Tax
Sources: Blink, Dorton, Economics IB Diploma Book.
Before the specific tax is imposed, the equilibrium meets at the point Qe,Pe, when it is
imposed, the producer tends to allocate all the taxes to the consumer on the point Qe,P2, since
there is an excess supply20. However, as how the market works and consumer and producer
always find a way to make demand and supply meet, there will be a new equilibrium meets at
the point of P1, Q1 - when the quantity supply and demand at a certain price are balanced. The
diagram above clearly explains that specific excise will raise the price tothe consumer from Pe
to P1 and it reduces the quantity that the consumer willing and able to pay. The impact that is
17
Compared to India (72%), Thailand (63%) and Japan (61%). (http://koleksirokok.blogspot.com/2010/01/fakta-
mengejutkan-tentang-rokok.html)
18
Braber, Sarah, Sri Moertiningsih Aditomo, and friends. Aspek Ekonomi Tembakau di Indonesia, p.i
19
Ibid, p. ii
20
The quantity that is supplied is more than what is necessary
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12. Economics HL Extended Essay Rut Setio Nastiti
likely to happen for the producer is losing their revenue. In 2014, the government of Jakarta
will be imposing an additional 10% tax from cigarettes excise; therefore the price of cigarettes
will be more expensive whilst the government will be able to control the occurrence of cigarettes
in the society and getting more revenue, which is about Rp8.6 trillion21. Increasing the price of
tobacco products limits the affordability, especially among those groups most sensitive to price.
2.4 Sale Restriction
Example of sales restrictions is hard to find in Indonesia, and no laws prohibiting the
selling of the cigarettes to minors exist22. However, in 2003, the Government of Indonesia
withdrew a national law PP 38/2000 that regulate the content of tar respectively to a maximum
of 20 mg and nicotine to a maximum of 5 mg per stick considering it would be difficult for small
company to comply23. With reference to Table 2, currently each stick has about 40-60mg of tar
and 1.67-2.50mg nicotine which is above the WHO standard.
21
“Pajak Rokok Efektif 2014”, www.jakarta.go.id July 31 2009
22
Achadi A, Soerojo W, Barber S. The relevance and prospects of advancing tobacco control in Indonesia. Health
Policy 2005; 72: 333–49.
23
Pefindo. Cigarettes Industry. p.5
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13. Economics HL Extended Essay Rut Setio Nastiti
Source: Ministry of Health Republic Indonesia. The Tobacco Source Book Data to support a National Tobacco Control Strategy
Table 2
As the study case showed in Jakarta, cigarettes aren’t sold inside schools and hospitals
– since both are smoking free areas, it is under a law imposed by the government of Jakarta,
Peraturan Daerah DKI/Perda DKI (Local Regulation) No.2/2005 and Peraturan Gubernur
DKI/Pergub DKI (Governor Regulation) No. 75/2005 about No Smoking Area (KDM). Survey
done by DKI Jakarta Environmental Body (BPLHD) in 15 hospitals in Jakarta, 73% is
categorised as good and 27% is fairly good on applying the law24. Schools are supposed to be
smoke-free areas, but informants from the writer’s survey often see their male teachers smoking
in their offices, in the schoolyard and in classes25.
24
2010 Gedung Pelanggar Perda Rokok di DKI Akan di Umumkan Secara Terbuka. (www.berita8.com)
25
N.Ngi, L. Weinhall, A. Ohman. 2007. ‘If I don’t smoke, I am not real man’ – Indonesian teenage boys’ views about
smoking. Health education research. 22(6): 794-804.
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14. Economics HL Extended Essay Rut Setio Nastiti
In Jakarta, buying cigarettes per stick can be found in a warung or kelontong26 shop.
The seller usually sets the price by dividing the price of a packet by the number of sticks in it.
For example, Sampoerna Mild Menthol 16 costs Rp. 9.800 divided by 10 therefore each stick is
priced Rp. 980 which is usually sold Rp.1000,-. In this case seller will get more profit and the
consumer can take up smoking easily.
2.5 Smoking Restrictions
As stated, some rules have been applied by the government to lessen the consumption
of cigarettes by not allowing smoking in some places; however the statistic shows the number of
smokers continued to increase27.
The latest smoking restriction was re-enacted on July 2006, the policy was adapted from
the Perda DKI Jakarta No.2/2005 and Pergub DKI Jakarta No. 75/2005 about KDM both
regulation was manifested from Peraturan Pemerintah (Government Regulation) No. No
10/2003 about Cigarettes for Health Security – which was mandated to all the administrative
region to issue exclusive regulation about tobacco cigarettes28. The Perda DKI Jakarta says
“Public places, health facility, offices, and such places which specifically used as study facility,
central activity for children, religious places, and public transportation are declared as smoking
restricted area. The violation would be criminally punished with maximum fine Rp, 50.000.000 or
6 months imprisoned” 29. Lately, the Governor of Jakarta, Fauzi Bowo, imposed a new
regulation Pergub DKI No.88/2010 revising the previous one, which aimed to be stronger than
26
A small shop that sells light foods, candies, cigarettes and basic daily need
27
Until 2009, there is 146.860.000 smokers in Indonesia from 243.200.000 people in the country (WHO) and
addition the number of female smoker with 5,06% increase (ANTARANews).
28
Runtuhnya KDM di Kantor Pemerintah. YLKI News. Edisi 05/XXXV/2009 (www.ylki.com)
29
www.jakarta.go.id
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15. Economics HL Extended Essay Rut Setio Nastiti
as Perda DKI as it will be more specific to maintain Smoke-Restricted Areas in order to create
“Smoke-Free Jakarta”30.
In February 2010, the city administration said it planned to deny smokers and their
families who stay in the same house access to free healthcare for low-income families arguing
that they shared the responsibility of maintaining a healthy environment31. Fauzi Bowo the
Governor said the city would not support heavy smokers who wasted their potential, and
endangered their families for the habit because these people enjoyed free health care while still
smoking. But, the government has not yet set the criteria to differentiate between a smoker and
ex-smoker.
2.6 Advertising/Marketing Restrictions
"Indonesia is a big concern, a big epidemic, a big population, and very little control," said
Dr. Prabhat Jha, a tobacco control expert at the University of Toronto. "They have a chaotic
taxation and regulatory structure. They have made the mistake of letting the Marlboro Man into
the country32”.
Since the implement of the law of advertising and marketing restriction is so weak, the
consumers are easily attracted to consume cigarettes. One of the methods that commonly use
by the tobacco company cigarettes in Indonesia and also another countries, to advertise their
product is subliminal advertising. This method done by introducing each individual into a specific
cigarette brand whereas they don’t consciously realize that they are actually being introduced,
explained psychology Wahyu Indiastuti33. Cigarettes advertisement has two competing purpose;
providing health warning or promoting tobacco product. On the displays they make impressions
30
Kawasan Dilarang Merokok:Masih Tinggi, Angka Merokok di Angkutan. KOMPAS. 21 Juli 2010
(www.kompas.com)
31
Pemprov DKI Cabut Kartu Gakin Perokok, www.mediaindonesia.com February 9, 2010
32
Indonesia Smoking Debate Ensnares Kelly Clarkson, www.cbsnews.com April 21, 2010
33
Interview with Dra. Wahyu Indiastuti, M,Psi from Universitas Indonesia
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16. Economics HL Extended Essay Rut Setio Nastiti
that make people feel proud and stylish to smoke, and no regulations regulate where the display
of cigarettes are not allowed to be shown therefore cigarettes advertisements in Jakarta is
everywhere on the streets. They try to influence people’s mind by saying “It is ok to smoke”.
Cigarettes advertisements in Indonesia is proved effective to influence new smokers and at the
same time giving income to media. In Table 4 shows that cigarette s contributed an impact of
7% TV advertisement revenue in 2002.
Sources: Ministry of Health Republic Indonesia. The Tobacco Source Book, March 2004
Table 4
Table 5
Source: GYTS Survey Paper 2000
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17. Economics HL Extended Essay Rut Setio Nastiti
Table 5 shows that 92,4% teenagers in Jakarta have seen cigarettes advertisement at
billboards, 88,7% in the newspapers and 93,9% at sport and music events, which is ranked at
number one compare to other 8 countries on surveys. In the television, smoking advertisement
is only allowed from 9.30pm to 5.00am every day. However, the survey done by KPA (National
Committee of Children Protection) published that the incessantness of smoking advertisement
in all communication media was acknowledged to encourage teenager to start smoking34.
Nowadays, there is an age shift of young smokers which is 5-9 years old, increases four times35.
In the survey done by the writer of 100 participants’ age 15-1936, who lives in Jakarta, 86%
correspondents choose “Cigarettes advertisements are inspiring and noble”. For the past
decades, act of smoking among men is so ingrained in the Indonesian culture that many of the
tobacco products on the market target men specifically using images of nationalism, adventure
and masculinity37.
In 2002, YLKI, L3M and three others NGOs
accused two cigarettes companies ( Djarum and
Sampoerna), national televisions station (RCTI and
Picture 2 SCTV) and two others printed media because they
violated the cigarettes advertisement regulation38. In
Jakarta, there were a lot of concerts supported by
cigarettes companies. For example The Java Jazz Music
Festival on March 2009 (an international festival that
included musicians from the USA) was sponsored by Dji Sam Soe, Alicia Keys Concert on July
2008 was sponsored by A Mild, The Cranberries and Shaggy on May 2009 supported by
34
Aturan Tembakau Lindungi Anak. KOMPAS 13 Maret 2010.
35
GYTS Paper Indonesia 2002, p. 1
36
Survey conducted by writer in July 2010 among 150 students at the writer’s previous schools in Jakarta.
37
Nichter M, Padmawati S, Danardono M. Reading Culture for Tobacco advertisement in Indonesia. Tobacco
Control. 2009;18: 98-107
38
Litbang DKI, Larangan Menyeluruh terhadap Iklan, Promosi dan Pemberian Sponsor, p. 119
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18. Economics HL Extended Essay Rut Setio Nastiti
Bentoel39. Usually free samples of cigarettes are given away by the sponsors, as it was in Muse
Concerts, January 200940. Survey done by Coalition for Healthy Indonesia found out 10,2%
from woman age 13-15 years old confessed of being offered free cigarettes, whereas the group
of 16-19 reached 14,53%41.
2. 7 Anti Smoking Campaign
Smoke-Free Jakarta has been campaigned by the Government of Jakarta and The
Indonesian Consumer or YLKI (a non-governmental organisation that strives for consumer’s
right and protection) by frequently raising awareness and sticking posters on how bad is the
effect of smoking to smokers and society, The targets were public transportation drivers and
citizen that use public transport the most. As the follow up, YLKI released the survey on how
“No Smoking Area” policy has been implemented in Jakarta, the survey was held at 14 bus
stations in 5 administrative region of Jakarta42. The samples were 600 buses and there are
about 50% passengers who were present in each bus. Until June 14-30 Juni 2010, the number
of smokers still remains high in 47%, that number significantly decreases from 89% last year on
October 200943, however it shows the campaign of No Smoking.
On the 9th October 2008, YLKI accused the President of Republic Indonesia Susilo
Bambang Yudhoyono to the Jakarta District Court of Appeal, since the President and his
cabinet were apparently not protecting their citizens by being permissive on tobacco selling and
not ratifying the FCTC. It stated in the document that everyday there are 1,172 people in
39
Tobacco Industry Profile – Indonesia. Pg 8.
40
South East Asia Tobacco Control Alliance, Indonesia Report Card: Status of Tobacco Use and Its Control, p. 6
41 th
Gurih Pahitnya Rokok, VIVANews, March 19 2010.
42
The reason why they chose public transportation stations because many drivers and passengers smoke daily.
43
Kawasan Dilarang Merokok:Masih Tinggi, Angka Merokok di Angkutan. www.kompas.com July 21, 2010
17
19. Economics HL Extended Essay Rut Setio Nastiti
Indonesia die because of the illness that related to cigarettes44. Last year April 2nd, two hundred
headmasters of high schools in Jakarta declared they will to build No Smoking Area in their
schools. In Jakarta, there are number of NGO that attempt to raise awareness on the effect that
cause by smoking such as Indonesian Cancer Organisation (YKI), Tobacco-Free Woman
(WBT), Tobacco-Free Society (MBT), and Smoking Prevention Organisation (L3M). Their acts
are usually oration, morning walk and distributing posters or stickers about the danger of
smoking. However, in the Anti Tobacco Day on 2009 and this year, many of Jakarta’s
newspaper caught many people still smoking.
3. How successful is the government’s policy?
3.1 Data on Consumption
One of the difficulties that were found while doing this extended essay is the fact that
data on consumption45 of cigarettes is highly variable, despite the research done by NGOs,
individuals, newspapers and government bodies. Generally the data is published periodically in
five to ten years. But to validate the old data, a combination of the latest data updated by
another NGO has to be taken into consideration.
In Indonesia, the demand for tobacco products is inelastic, i.e. the percentage decrease
in demand is smaller than the percentage of the increased-price. It was studied that each 10%
of increases of the price of cigarettes leads to between 2,9% and 6,7% decrease in
consumption since the price elasticity is -0, 29 up to -0, 6746,
44
YLKI. Dokumen Litigasi Menggugat Presiden Republik Indonesia, p. 2
45
The number of cigarettes sold annually in a country is considered as its total cigarette consumption (often in
million sticks), often estimated as: Total Cigarette Consumption = Cigarette Production + Cigarette Imports -
Cigarette Exports. ‘Per adult’ cigarette consumption is calculated by dividing total cigarette consumption by the
total population of those who are 15 years old and older. In some countries, where cigarette smuggling is a
significant problem, consumption estimated by this method is less reliable. (World Bank on Tobacco)
46
Ekonomi Tembakau. Pg. 22
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20. Economics HL Extended Essay Rut Setio Nastiti
Table 6
Source: Litbang, Minister of Health Republic Indonesia
Table 6 shows that the cigarettes has now consumed by people of age 15 and it
increased from 1995 by 139,4% in 2004.
Table7
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21. Economics HL Extended Essay Rut Setio Nastiti
Table 8 Smoking Prevelence by province and gender age above 15
Sources for tables 7 & 8: GYTS, Indonesian Tobacco Final Report 2002
In Table 7, Jakarta remains in the 4th place with 10 years old kids who ever smoked. In
Table 8, Jakarta has the third highest smoking prevalence in Indonesia with 58, 3% after North
Sumatera and Riau. The issue on smoking consumption in Indonesia has touched not only men
but woman, teenagers and kids. In 2004, the research by GYTS found out that 34.2% of
students had smoked cigarettes (Boys = 53.9 %, Girls = 11.6 %), 20.6% currently use any
tobacco product (Boys = 32.1%, Girls = 7.4%), 98% of never smokers are likely to initiate
smoking next year47.
47
GYTS Indonesia 2006.
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22. Economics HL Extended Essay Rut Setio Nastiti
Picture 3
Picture 3
This fact is likely to be according to a news coming from Sumatera, Indonesia, which has
surprised the world. A two years old boy, Ardi Rizal smokes about 40 sticks of cigarettes a day
since his father let him smoke since he was 18 months. Reported from Metro Newspaper UK ,
26th May, 2010, 'He's totally addicted. If he doesn't get cigarettes, he gets angry and screams
and batters his head against the wall. He tells me he feels dizzy and sick,' said Diana (26) her
mother, who has been trying to get him to quit but with little success. Lately, Ardi has been
treated by a special therapist in Jakarta.
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23. Economics HL Extended Essay Rut Setio Nastiti
3.2 Evidence from sellers
Sources: Litbang, Departemen Kesehatan Republik Indonesia
Table 5: Cigarettes Industry Growth, the production of cigarettes sticks
According to Table 5 since 2003, the growth of cigarettes has always shows an
increase. The highest growth and production was in 2004 with 1214% and in 2008, 230 billion
sticks produced in 2008. The statistic shows that last year 2009 there were 245 billion sticks of
cigarettes produced with 5% were exported therefore 232 million were consumed by the
public48.
3.3 Evidence from consumer
Based on the survey done by the writer, it was shown that from to 120 students age from
17-19 answered 70,6 % spend up to Rp.10.000 ($1) on buying cigarettes and 23,5% spend
about Rp.10.000 – Rp. 30.000 ($3), because the price is affordable enough (60,3%) and 27,4%
48
http://sorot.vivanews.com/news/read/137736-gurih_pahitnya_rokok
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24. Economics HL Extended Essay Rut Setio Nastiti
stated they are already addicted with smoking49. Another data showed 70% percent of smokers
are those whose income is less than minimum wages less than Rp. 675.000; which breaks the
assumption those who smoke are people with high income. In Table 6, the survey done by
Susenas during the period 2003-2005 shows that the consumption of poor household was
positioned in the second place (12,43%) after the main daily needs for example rice (19,30%)50.
Table 6 : Total Monthly Expenditure on Tobacco, Food, Health and Education for Houshold with Smokers
Source: Braber, Sarah, Sri Moertiningsih Aditomo, and friends. Aspek Ekonomi Tembakau di Indonesia.
4. What other Factors need to be taken into consideration?
4.1 Government Revenue
A report says cigarettes industry provides a significant revenue contribution for the
country, almost 90% yearly total excise tax revenue come from the cigarettes industry51. But
this is contrasted by a study done by BPS (Indonesian Statistic Body) and LDUI in 2007,
published that the average contribution is only Rp. 26 trillion or 1.4% from the total revenue in
49
Survey conducted in July 2010
50
Koran Indonesia, Sesaat Pikirkan Kebijakan Tembakau, Tulus Abdi.
51
Pefindo, Indonesian Cigarettes, p. 2
23
25. Economics HL Extended Essay Rut Setio Nastiti
2003, compared to the sector of construction with Rp 111,94 trillion (5,4%)52. Since April, the
government has planned to lift its 2010 revenue target from cigarette excise to Rp. 58.3 trillion,
7% up from last year, to offset lower production53,
Table 7
Ministry of Finance. Data 1990-2000. www.fiskal.depkeu.go.id
“The increase in cigarette excise is in line with the government's aim of controlling
cigarette output for health reasons. The measures include limiting production to a maximum of
260 billion sticks by 2015 which was 245 billion sticks in 2009,” said Bachtiar, Excise Director
at the Finance Ministry. Increasing the price by increase in tax of tobacco product has both
health and social benefits, whilst increasing government revenue54. The World Bank estimates
that tax increases that raise the price of cigarettes by 10% worldwide would increase
government revenue by about 7% on average55.
52
http://koranindonesia.com/2008/05/30/sesat-pikir-kenijakan-tembakan/
53
Pemerintah Akan Naikkan Cukai Rokok, Antara 9 April 2010.
54
Ministry of Health, Tobacco Source Book p. 61
55
Studies had shown no country has ever suffered reduction in government tax revenue by increasing cigarettes
taxes. The increase will reduce consumption, but by a smaller proportion relative to the price increase. (World
Bank 1999, Curbing the Epidemic, Ch.4: Measure to reduce demand)
24
26. Economics HL Extended Essay Rut Setio Nastiti
4.2 Tobacco Industry Employment
Table 8
Source: Directorate General of Farming 2001. Indonesian Farming Statistic 1999-2001
For the past decades a perception saying tobacco is a precious plant for the farmers,
since they are given high price by the cigarettes producers. The tobacco leaves also perceived
as “golden leaf” which was believed to improve the welfare of the tobacco farmers. These two
assumptions were one of the backgrounds why the government did not ratify the FCTC, a
negative impact on the tobacco employee56. In 2007, the number of farmer became 582,192
and from that number, 2:3 farmers want to change their job57. The reason is farming tobacco
needs an intense maintenance and really depending on the weather. Contrary to the popular
perception, tobacco is not the major employer in Indonesia at a national level. But ranks 48 of
66 sectors in contributing total employment58.
56
Warta Konsumen YLKI, “Menelisik Kesejahteraan Petani Tembakau”, XXXVI/2010.p.6
57
Braber, Sarah, Sri Moertiningsih Aditomo, and friends. Aspek Ekonomi Tembakau di Indonesia, p.26
58
Ibid, p. 3
25
27. Economics HL Extended Essay Rut Setio Nastiti
Table 9
Sources: Central Bureau of Statistics 1987-2002. Strategic of Large and Medium Industry 1985-2000
The role of processing industry in providing employment has significantly declined since
1970. In 1970 it absorbed about 38% of total national industrial whereas the proportion declined
to 5.6% in 200059 with regard to Table 9 with 245,626 workers. Until 2010, there are more than
201 companies of cigarettes that employed over 1,2 million workers or 1% from the number of
national workers or 1,6% from all workers in agriculture in Indonesia60. Those workers paid with
a low wage about Rp. 662.000 in the manufacture sectors and Rp. 81.000 for those who work
on agriculture61. Recently, the involvement of child labor in tobacco production becomes a usual
thing since it is not just helping the parents but also getting paid.
59
Ministry of Health Republic Indonesia. The Tobacco Source Book, p . 78
60
Warta Konsumen YLKI, Loc,Cit, p. 7
61
Ibid
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28. Economics HL Extended Essay Rut Setio Nastiti
4.3 Tobacco Industry Owners
The tobacco production in Indonesia is mastered by three biggest companies there are
HM Sampoerna, Gudang Garam and Djarum. Take into account Sampoerna, in March 2005,
Philip Morris acquired62 40% of its share which is about Rp.47 trillion63. During last year,
Sampoerna has shown an outstanding performance with a 30,60% increase in net income
which is equal with Rp. 5,08 trillion. Compare to Gudang Garam, the net income was Rp. 3,455
trillion, which is 83,77% increase from 2008. Budi Hartono, the owner of Sampoerna rated as
the 10th richest man in South East Asia64. A report done by an organization that publishes the
wealth of businessman announced at least three richest people in Indonesia are tobacco’s
company owner65.
Table 10: Top Ten Indonesia Big Companies
Sumarno, Simon. Struktur, Kinerja, dan Kluster Industri Rokok Kretek
62
A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order
to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy whereby
it is more beneficial to take over an existing firm's operations and niche compared to expanding on its own.
Acquisitions are often paid in cash, the acquiring company's stock or a combination of both (investopedia.com)
63
http://jurnalskripsi.com/deskripsi-motif-keuangan-akuisisi-pt-hm-sampoerna-tbk-oleh-pt-philip-morris-
indonesia-studi-pada-pt-hanjaya-mandala-sampoerna-tbkperiode-2000-2005-pdf.htm
64
Indonesia Tobacco Profile, p. 15
65
Jambi Ekspres, “Pro Kontra Rokok dalam Perspektif Politik dan Kesehatan”, 09 April 2010
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29. Economics HL Extended Essay Rut Setio Nastiti
4.4 Consumer Demand
Demand is largely potential supported large population size. After suffering from a
slight contraction in 2006 due to high inflation, lower purchasing power66 after two times fuel
price adjustment in 2005 and 10% banderol tax increase in April 2006, the cigarettes production
then increased by 5,4% y-y to 237,6 billion stick in 2007 shows the production were followed by
the demand in consumption67. As stated before, even there was a high inflation and fuel price
adjustment; the cigarettes companies were still capable to expand their products whilst pushes
the consumption from 0,9% up to 3%.
Table 11
Source: Braber, Sarah, Sri Moertiningsih Aditomo, and friends. Aspek Ekonomi Tembakau di Indonesia
Shows in the above four studies, the demand in consumption will always fall if there is
10% increase in cigarettes excise whilst increase in the government revenue will be from 6.7%
up to 9.0%. Survey done by writer, shows that 61% would stop demanding cigarettes if the price
of cigarettes becomes really expansive68.
66
Capability of one’s buying goods or services in an economic cylce
67
Pefindo, Indonesian Cigerattes, p.1
68
Survey done by writer conducted in July 2010
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30. Economics HL Extended Essay Rut Setio Nastiti
4.5 Lobbyist, including Religious Leaders
Indonesia is the country with the most population on Muslims in the world. Even it is a
democratic republic but religion plays an important role to influence the society. MUI
(Indonesian Council Ulama), the country’s highest Islamic authority, declared a fatwa69 that
saying smoking is haram70 last January 26, 2009 in Padang, West Sumatra. And the second
Muslim organisation, Muhammadiyah recently declared a fatwa on March 8, 2010, beforehand
in 2005 smoking was considered mubah, it is doable but better on not doing it. The main
reason is clear because smoking is not good and dangerous for health; they even compared it
with suicide. The decision that was made by the two organizations was supported by study by
the WHO in 2008 found that more than 20 percent of all deaths here, or about 400,000
Indonesians a year, were the result of tobacco-related illnesses71, whilst Nahdlatul Ulama an
Indonesian traditional Sunni Muslim Group still considers smoking as makruh or undesirable,
and has no plan to change it so far. Nahdatul Ulama concerns more about the future of tobacco
industry, which directly employs 1,2 million workers, as well as 920,000 tobacco and clove
farmers (estimation with their families’ members)72.
69
A fatwa is an Islamic religious ruling, a scholarly opinion on a matter of Islamic law issued by a recognized
religious authority in Islam. But since there is no hierarchical priesthood or anything of the sort in Islam, a fatwa is
not necessarily "binding" on the faithful (islam,about.com/od/law/g/fatwa.htm)
70
Unlawful, and should be avoided by all Muslims.
71
http://www.thejakartaglobe.com/home/indonesian-clerics-join-smoking-fatwa-row/363776
72
Ibid
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31. Economics HL Extended Essay Rut Setio Nastiti
5. Conclusion
5.1. To what extent has Government’s Policy changed consumption?
At national level, the policy is reluctant to be changed since cigarettes production
rigorously allied with the economic aspect on the country: it provides about 1.2 million people
with job and gives substantial revenue from the excise tax since the major tobacco companies
are big and have powerful yet influential owners. The Indonesian Government may say that they
are doing something about the level of tobacco consumption, but the evidence shows that they
are not really serious in their efforts. Therefore the Government’s Policy has not tangibly
changed the consumption.
5.2. Should policy or implementation be amended?
Even though the government widely implemented some policies in order to reduce the
consumption of cigarettes, they do not seriously reduce the production of cigarettes and the
elements that impulse the production of cigarettes. Statistics show an upsurge in cigarettes
production, therefore policy should be amended.
5.3. What are recommended changes?
The policy of increasing cigarettes excise tax up to 57% to 70% which has been studied
should effectively diminish the number of smokers, since it will keep giving the government
income while decrease the consumption of cigarettes. At the same time the Government must
have a backup plan if there is a unemployment among the tobacco workers. There must be a
law controlling; the minimum age to purchase cigarettes and where it is allowed to be sold, there
30
32. Economics HL Extended Essay Rut Setio Nastiti
should be a strict regulation on composition of substances in each sticks, a restriction on
advertisement and or cigarettes sponsorship at particular events that involve youth and or mass
media that is widely seen by prospective new targets. The law that regulate smoking places is
good and potentially reduce the consumption of cigarettes per area, however the fine which is
up to Rp50 million, seems unrealistic and impractical, since the income of smokers vary. The
distribution of revenue from the allocation of excise tax has to be directly place to all sector of
country that is impacted by the societal externalities of cigarettes such as prevention for second-
hand smokers, environmental pollution, and any efforts that tend to protect the society and the
future generation. Campaign by NGOs and civil society to raise awareness is highly supported
and encouraged, with regard to the impact of the campaign done by YLKI from October 2009 to
June 2010. Changing the government stand on ratifying the FCTC will be evidence that show
the government is keen to deal with smoking problems in the country by implementing strong
policies.
Word Count: 3,998
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33. Economics HL Extended Essay Rut Setio Nastiti
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Cover Picture:
Job Palar’s and Flickr.com
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