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Economics HL Extended Essay                                                 Rut Setio NastitiSouth East Asia Tobacco Contr...
To what extent has the Indonesian Government’s Policy on Tobacco Consumption Affected the Demand for Cigarettes; a case st...
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To what extent has the Indonesian Government’s Policy on Tobacco Consumption Affected the Demand for Cigarettes; a case study from Jakarta?

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This extended essay suggests what policies or implementations should be amended by the Indonesian government; including the adoption of the Framework Convention on Tobacco Control to reduce the consumption of cigarettes in Indonesia.
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Transcript of "To what extent has the Indonesian Government’s Policy on Tobacco Consumption Affected the Demand for Cigarettes; a case study from Jakarta?"

  1. 1. Economics HL Extended Essay Rut Setio Nastiti Abstract Indonesia is famous worldwide for its kretek cigarettes which are produced all over thecountry and sold abroad whilst dominating the tobacco market in Indonesia. Since 1970, thecigarettes industry has brought significant income to the country and provides jobs for almosttwo million people. Until now, cigarettes companies in Indonesia keep on expanding theirproduction. On the contrary, world citizens acknowledge that tobacco causes many healthconsequences that might lead to death and illness. The thesis of this investigation that led to thewriting of this economic essay is trying to answer “To what extent has the IndonesianGovernment’s Policy on Tobacco Consumption Affected the Demand for Cigarettes; a casestudy from Jakarta?” This research was done by survey, interview, and books study. The research mainlyfocused on; how the Indonesian Government has used indirect taxation, sale restrictions,smoking restrictions, advertising/marketing restrictions and anti-smoking campaign to reducethe consumption of tobacco. Consideration was given to the contribution of the cigarettesindustry to the Indonesian economy. Some regulations and laws have been imposed to prevent the consumption ofcigarettes, such as: indirect taxation, sale and smoking restrictions, advertising/marketingrestrictions and anti smoking campaign including lobby from religious leader; however thoseactions have been largely ineffectual, due to the heavy reliance of the economy on the excisetax revenue, employment in the industry and the powerful tobacco companies. In the end, this extended essay suggests what policies or implementations should beamended by the government; including the adoption of the Framework Convention on TobaccoControl to reduce the consumption of cigarettes in Indonesia Word count: 265 1
  2. 2. Economics HL Extended Essay Rut Setio Nastiti Acknowledgement It is a pleasure to thank those who made this Extended Essay Possible. I humbly thankGod, Jesus Christ for the strength He has given me throughout my life. I am heartily thankful tomy supervisor, Malcolm Price, whose guidance from the initial to the final level enabled me todevelop an understanding of the thesis. I am delighted to have Annemarie Oomes as myEconomics teacher, who has fulfilled me with the knowledge that is relevant to my ExtendedEssay. Beside, I would like to thank Yayasan Lembaga Konsumen Indonesia (YLKI) who hadhelped me doing book and article study for my Extended Essay. Finally, my deepest gratitude goes to my family, for their unflagging love and supportthroughout everything in my life; this Extended Essay is simply impossible without them. 2
  3. 3. Economics HL Extended Essay Rut Setio Nastiti Table of ContentsAbstract ................................................................................................................................... 1Acknowledgement ................................................................................................................... 2Table of Content ....................................................................................................................... 31. Introduction ........................................................................................................................... 42. 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 Campaign3. How successful is the Government’s Policy? .................................................................. 18 3.1 Data on Consumption 3.2 Evidence from Seller 3.3 Evidence from Consumer4. 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 Leaders5. 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 3
  4. 4. Economics HL Extended Essay Rut Setio NastitiI. Introduction Smoking has become one of the world’s major health concerns. Countries all over theworld 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 causingillness for the smokers, but also the people who are second hand smokers; worse the nicotine1in cigarettes is causing addictiveness. Governments all over the world have imposed economic and social policies todiscourage the consumption of tobacco, which industry is one of the most profitable industries2.World Health Organization seriously deals with this problem by making a FrameworkConvention on Tobacco Control (FCTC)3,. It provides a sound framework to reach reductions ontobacco use. Its essential principle is participation of civil society to achieve the policy objectiveswithin the Convention. The FCTC acknowledges that “there is a fundamental and irreconcilableconflict between the tobacco industry’s interests and public health policy interest.”4 It is alsorecognized that civil society can play an important role in raising awareness about tobaccoindustry – its goals, its size and operation, its strategies to promote its product and to thwart theadoption and implementation of strong policies by gaining influence and credibility with policymakers and the public at large.51 Is a stimulant drug but paradoxically effect of both stimulation and relaxation may be felt. The addictive effect ofnicotine is linked to its capacity to trigger the release of dopamine – a chemical in the brain that is associated withfeelings of pleasure. (www.ash.org.uk)2 Tobacco Industry Profile – Indonesia, p. 43 Its aim is to “protect present and future generations from the devastating health, social, environmental andeconomic 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;20035 Tobacco Industry Profile-Indonesia, p.5 4
  5. 5. Economics HL Extended Essay Rut Setio Nastiti According to the issues in the previous paragraphs, Indonesia the country where I comefrom remains as one of the highest consumers of tobacco products that have not yet ratified theFramework Convention on Tobacco Control (FCTC). This Extended Essay is going toinvestigate the Research Question “To what extent has the Indonesian Government’s Policyon tobacco consumption affected the demand for cigarettes; a case study fromJakarta?”. Jakarta is the capital city of Indonesia. Taking Jakarta as the study case would makethe 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%) usekreteks6, which are traditional cigarettes made from tobacco, clove, and flavouring “sauces” andare either hand-rolled or machine-rolled into conventional cigarettes form. Kreteks containtobacco and therefore, all of the same deadly health harms caused by conventional whitecigarettes 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, thegovernment has tried to impose some policies; at the level of national and regional, that wereaimed to reduce the consumption of cigarette. Cigarettes are considered as demerit good, agood which the government acknowledges is bad for the people who consume them and for the6 Brinson B.A. A Good Match, Tobacco Reporter. p.17 Tobacco Industry Profile - Indonesia. pg.2. 5
  6. 6. Economics HL Extended Essay Rut Setio Nastitisociety8, this also links to externality. An externality arises when a person engages in an activitythat influences the well-being of a bystander and yet neither pays nor receives anycompensation for that effect9. For smoking there is a negative externality on consumption, whichimpact 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 freedomof consumer which states that consumers themselves make the best decision about how theyspend their money. The argument is based on two assumptions10. Firstly, the consumers arefully informed of the costs and benefits from the decision they are making. Secondly, anindividual has to bear all the risks of their consumption, which means she/he realize that otherpeople aren’t going to take the burden of their individualist action. Table 1. Taken from Mankiw p. 2088 Blink, Dorton, Economics, IB Course Companion p. 1989 Mankiw, N Gregory. Principles of Economics: p.20610 Barber, Sarah. Adioetome SM et al . Ekonomi Tembakau di Indonesia, p. 16 6
  7. 7. 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 welfareloss which is a state of health, prosperity and or happiness that the society lost. These are allconsidered as societal externalities. The societal externality includes the cost of treating illpeople with smoking related illnesses, the cost of their early death and the cost of their absencefrom work. Market always tries to reach its optimum position of Qm meets Pm, or the position ofwhen private cost (supply) is equal with private benefits (demand), the situation whereeverybody’s pleasure is maximized. But since the existences of smoke bothers the secondhand smokers and add cost to social health care, it is clearly seen that the private benefit or theactive smoker’s pleasure is bigger than the social benefit. Also the fact that the socially optimalquantity or Qo (social benefit) is less than the equilibrium quantity Qm, shows that the societydoesn’t benefit from the cigarettes consumption, therefore the Indonesian government has tointernalize11 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). 7
  8. 8. Economics HL Extended Essay Rut Setio Nastiti 2.2 How do they discourage consumption? The World Health Organisation announced that Indonesia place the 3rd largestpopulation for smokers which is 146,860,000 people12. Since smoking in Indonesia has been achronic problem blended with a smoking culture, the government of Indonesia has imposedsome 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 onconsumption13. 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 theconsumption of specific goods. In Indonesia, excise tax from cigarettes and tobacco are one ofthe 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% ofurban 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 andProposal Reform, pg 3.14 th Until 28 June 2010, the realisation of the excise revenue at the first semester reached 9, 2 trillion rupiahs, and90% comes from cigarettes and tobacco (http://bataviase.co.id/node/133809/). 8
  9. 9. 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 ofcigarettes inrupiahs 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) 9
  10. 10. 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 + TaxPrice ofcigarettes Sin 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 10
  11. 11. Economics HL Extended Essay Rut Setio Nastitilikely to happen for the producer is losing their revenue. In 2014, the government of Jakartawill be imposing an additional 10% tax from cigarettes excise; therefore the price of cigaretteswill be more expensive whilst the government will be able to control the occurrence of cigarettesin the society and getting more revenue, which is about Rp8.6 trillion21. Increasing the price oftobacco 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 theselling of the cigarettes to minors exist22. However, in 2003, the Government of Indonesiawithdrew a national law PP 38/2000 that regulate the content of tar respectively to a maximumof 20 mg and nicotine to a maximum of 5 mg per stick considering it would be difficult for smallcompany to comply23. With reference to Table 2, currently each stick has about 40-60mg of tarand 1.67-2.50mg nicotine which is above the WHO standard.21 “Pajak Rokok Efektif 2014”, www.jakarta.go.id July 31 200922 Achadi A, Soerojo W, Barber S. The relevance and prospects of advancing tobacco control in Indonesia. HealthPolicy 2005; 72: 333–49.23 Pefindo. Cigarettes Industry. p.5 11
  12. 12. 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 GubernurDKI/Pergub DKI (Governor Regulation) No. 75/2005 about No Smoking Area (KDM). Surveydone by DKI Jakarta Environmental Body (BPLHD) in 15 hospitals in Jakarta, 73% iscategorised as good and 27% is fairly good on applying the law24. Schools are supposed to besmoke-free areas, but informants from the writer’s survey often see their male teachers smokingin 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 aboutsmoking. Health education research. 22(6): 794-804. 12
  13. 13. 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 ispriced Rp. 980 which is usually sold Rp.1000,-. In this case seller will get more profit and theconsumer can take up smoking easily. 2.5 Smoking Restrictions As stated, some rules have been applied by the government to lessen the consumptionof cigarettes by not allowing smoking in some places; however the statistic shows the number ofsmokers continued to increase27. The latest smoking restriction was re-enacted on July 2006, the policy was adapted fromthe Perda DKI Jakarta No.2/2005 and Pergub DKI Jakarta No. 75/2005 about KDM bothregulation was manifested from Peraturan Pemerintah (Government Regulation) No. No10/2003 about Cigarettes for Health Security – which was mandated to all the administrativeregion 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 smokingrestricted area. The violation would be criminally punished with maximum fine Rp, 50.000.000 or6 months imprisoned” 29. Lately, the Governor of Jakarta, Fauzi Bowo, imposed a newregulation Pergub DKI No.88/2010 revising the previous one, which aimed to be stronger than26 A small shop that sells light foods, candies, cigarettes and basic daily need27 Until 2009, there is 146.860.000 smokers in Indonesia from 243.200.000 people in the country (WHO) andaddition 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 13
  14. 14. Economics HL Extended Essay Rut Setio Nastitias 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 theirfamilies who stay in the same house access to free healthcare for low-income families arguingthat they shared the responsibility of maintaining a healthy environment31. Fauzi Bowo theGovernor said the city would not support heavy smokers who wasted their potential, andendangered their families for the habit because these people enjoyed free health care while stillsmoking. But, the government has not yet set the criteria to differentiate between a smoker andex-smoker. 2.6 Advertising/Marketing Restrictions "Indonesia is a big concern, a big epidemic, a big population, and very little control," saidDr. Prabhat Jha, a tobacco control expert at the University of Toronto. "They have a chaotictaxation and regulatory structure. They have made the mistake of letting the Marlboro Man intothe country32”. Since the implement of the law of advertising and marketing restriction is so weak, theconsumers are easily attracted to consume cigarettes. One of the methods that commonly useby the tobacco company cigarettes in Indonesia and also another countries, to advertise theirproduct is subliminal advertising. This method done by introducing each individual into a specificcigarette 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 impressions30 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, 201032 Indonesia Smoking Debate Ensnares Kelly Clarkson, www.cbsnews.com April 21, 201033 Interview with Dra. Wahyu Indiastuti, M,Psi from Universitas Indonesia 14
  15. 15. Economics HL Extended Essay Rut Setio Nastitithat make people feel proud and stylish to smoke, and no regulations regulate where the displayof cigarettes are not allowed to be shown therefore cigarettes advertisements in Jakarta iseverywhere 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 thesame time giving income to media. In Table 4 shows that cigarette s contributed an impact of7% 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 15
  16. 16. Economics HL Extended Essay Rut Setio Nastiti Table 5 shows that 92,4% teenagers in Jakarta have seen cigarettes advertisement atbillboards, 88,7% in the newspapers and 93,9% at sport and music events, which is ranked atnumber one compare to other 8 countries on surveys. In the television, smoking advertisementis only allowed from 9.30pm to 5.00am every day. However, the survey done by KPA (NationalCommittee of Children Protection) published that the incessantness of smoking advertisementin 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 pastdecades, act of smoking among men is so ingrained in the Indonesian culture that many of thetobacco 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 thatincluded musicians from the USA) was sponsored by Dji Sam Soe, Alicia Keys Concert on July2008 was sponsored by A Mild, The Cranberries and Shaggy on May 2009 supported by34 Aturan Tembakau Lindungi Anak. KOMPAS 13 Maret 2010.35 GYTS Paper Indonesia 2002, p. 136 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. TobaccoControl. 2009;18: 98-10738 Litbang DKI, Larangan Menyeluruh terhadap Iklan, Promosi dan Pemberian Sponsor, p. 119 16
  17. 17. Economics HL Extended Essay Rut Setio NastitiBentoel39. Usually free samples of cigarettes are given away by the sponsors, as it was in MuseConcerts, 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 groupof 16-19 reached 14,53%41. 2. 7 Anti Smoking Campaign Smoke-Free Jakarta has been campaigned by the Government of Jakarta and TheIndonesian Consumer or YLKI (a non-governmental organisation that strives for consumer’sright and protection) by frequently raising awareness and sticking posters on how bad is theeffect of smoking to smokers and society, The targets were public transportation drivers andcitizen 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 busstations in 5 administrative region of Jakarta42. The samples were 600 buses and there areabout 50% passengers who were present in each bus. Until June 14-30 Juni 2010, the numberof smokers still remains high in 47%, that number significantly decreases from 89% last year onOctober 200943, however it shows the campaign of No Smoking. On the 9th October 2008, YLKI accused the President of Republic Indonesia SusiloBambang Yudhoyono to the Jakarta District Court of Appeal, since the President and hiscabinet were apparently not protecting their citizens by being permissive on tobacco selling andnot ratifying the FCTC. It stated in the document that everyday there are 1,172 people in39 Tobacco Industry Profile – Indonesia. Pg 8.40 South East Asia Tobacco Control Alliance, Indonesia Report Card: Status of Tobacco Use and Its Control, p. 641 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
  18. 18. Economics HL Extended Essay Rut Setio NastitiIndonesia die because of the illness that related to cigarettes44. Last year April 2nd, two hundredheadmasters of high schools in Jakarta declared they will to build No Smoking Area in theirschools. In Jakarta, there are number of NGO that attempt to raise awareness on the effect thatcause by smoking such as Indonesian Cancer Organisation (YKI), Tobacco-Free Woman(WBT), Tobacco-Free Society (MBT), and Smoking Prevention Organisation (L3M). Their actsare usually oration, morning walk and distributing posters or stickers about the danger ofsmoking. However, in the Anti Tobacco Day on 2009 and this year, many of Jakarta’snewspaper 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 thatdata on consumption45 of cigarettes is highly variable, despite the research done by NGOs,individuals, newspapers and government bodies. Generally the data is published periodically infive to ten years. But to validate the old data, a combination of the latest data updated byanother NGO has to be taken into consideration. In Indonesia, the demand for tobacco products is inelastic, i.e. the percentage decreasein 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 inconsumption since the price elasticity is -0, 29 up to -0, 6746,44 YLKI. Dokumen Litigasi Menggugat Presiden Republik Indonesia, p. 245 The number of cigarettes sold annually in a country is considered as its total cigarette consumption (often inmillion 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 thetotal population of those who are 15 years old and older. In some countries, where cigarette smuggling is asignificant problem, consumption estimated by this method is less reliable. (World Bank on Tobacco)46 Ekonomi Tembakau. Pg. 22 18
  19. 19. 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 itincreased from 1995 by 139,4% in 2004. Table7 19
  20. 20. 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. InTable 8, Jakarta has the third highest smoking prevalence in Indonesia with 58, 3% after NorthSumatera and Riau. The issue on smoking consumption in Indonesia has touched not only menbut woman, teenagers and kids. In 2004, the research by GYTS found out that 34.2% ofstudents had smoked cigarettes (Boys = 53.9 %, Girls = 11.6 %), 20.6% currently use anytobacco product (Boys = 32.1%, Girls = 7.4%), 98% of never smokers are likely to initiatesmoking next year47.47 GYTS Indonesia 2006. 20
  21. 21. 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 hassurprised the world. A two years old boy, Ardi Rizal smokes about 40 sticks of cigarettes a daysince his father let him smoke since he was 18 months. Reported from Metro Newspaper UK ,26th May, 2010, Hes totally addicted. If he doesnt get cigarettes, he gets angry and screamsand batters his head against the wall. He tells me he feels dizzy and sick, said Diana (26) hermother, who has been trying to get him to quit but with little success. Lately, Ardi has beentreated by a special therapist in Jakarta. 21
  22. 22. 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 anincrease. The highest growth and production was in 2004 with 1214% and in 2008, 230 billionsticks produced in 2008. The statistic shows that last year 2009 there were 245 billion sticks ofcigarettes produced with 5% were exported therefore 232 million were consumed by thepublic48. 3.3 Evidence from consumer Based on the survey done by the writer, it was shown that from to 120 students age from17-19 answered 70,6 % spend up to Rp.10.000 ($1) on buying cigarettes and 23,5% spendabout 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 22
  23. 23. Economics HL Extended Essay Rut Setio Nastitistated they are already addicted with smoking49. Another data showed 70% percent of smokersare those whose income is less than minimum wages less than Rp. 675.000; which breaks theassumption those who smoke are people with high income. In Table 6, the survey done bySusenas during the period 2003-2005 shows that the consumption of poor household waspositioned 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 in49 Survey conducted in July 201050 Koran Indonesia, Sesaat Pikirkan Kebijakan Tembakau, Tulus Abdi.51 Pefindo, Indonesian Cigarettes, p. 2 23
  24. 24. 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 governments 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. 6155 Studies had shown no country has ever suffered reduction in government tax revenue by increasing cigarettestaxes. The increase will reduce consumption, but by a smaller proportion relative to the price increase. (WorldBank 1999, Curbing the Epidemic, Ch.4: Measure to reduce demand) 24
  25. 25. 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 perceivedas “golden leaf” which was believed to improve the welfare of the tobacco farmers. These twoassumptions were one of the backgrounds why the government did not ratify the FCTC, anegative impact on the tobacco employee56. In 2007, the number of farmer became 582,192and from that number, 2:3 farmers want to change their job57. The reason is farming tobacconeeds an intense maintenance and really depending on the weather. Contrary to the popularperception, tobacco is not the major employer in Indonesia at a national level. But ranks 48 of66 sectors in contributing total employment58.56 Warta Konsumen YLKI, “Menelisik Kesejahteraan Petani Tembakau”, XXXVI/2010.p.657 Braber, Sarah, Sri Moertiningsih Aditomo, and friends. Aspek Ekonomi Tembakau di Indonesia, p.2658 Ibid, p. 3 25
  26. 26. Economics HL Extended Essay Rut Setio Nastiti Table 9Sources: 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 since1970. In 1970 it absorbed about 38% of total national industrial whereas the proportion declinedto 5.6% in 200059 with regard to Table 9 with 245,626 workers. Until 2010, there are more than201 companies of cigarettes that employed over 1,2 million workers or 1% from the number ofnational workers or 1,6% from all workers in agriculture in Indonesia60. Those workers paid witha low wage about Rp. 662.000 in the manufacture sectors and Rp. 81.000 for those who workon agriculture61. Recently, the involvement of child labor in tobacco production becomes a usualthing since it is not just helping the parents but also getting paid.59 Ministry of Health Republic Indonesia. The Tobacco Source Book, p . 7860 Warta Konsumen YLKI, Loc,Cit, p. 761 Ibid 26
  27. 27. 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 Kretek62 A corporate action in which a company buys most, if not all, of the target companys ownership stakes in orderto assume control of the target firm. Acquisitions are often made as part of a companys growth strategy wherebyit is more beneficial to take over an existing firms operations and niche compared to expanding on its own.Acquisitions are often paid in cash, the acquiring companys 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.htm64 Indonesia Tobacco Profile, p. 1565 Jambi Ekspres, “Pro Kontra Rokok dalam Perspektif Politik dan Kesehatan”, 09 April 2010 27
  28. 28. Economics HL Extended Essay Rut Setio Nastiti 4.4 Consumer Demand Demand is largely potential supported large population size. After suffering from aslight contraction in 2006 due to high inflation, lower purchasing power66 after two times fuelprice adjustment in 2005 and 10% banderol tax increase in April 2006, the cigarettes productionthen increased by 5,4% y-y to 237,6 billion stick in 2007 shows the production were followed bythe demand in consumption67. As stated before, even there was a high inflation and fuel priceadjustment; the cigarettes companies were still capable to expand their products whilst pushesthe 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 is10% 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 priceof cigarettes becomes really expansive68.66 Capability of one’s buying goods or services in an economic cylce67 Pefindo, Indonesian Cigerattes, p.168 Survey done by writer conducted in July 2010 28
  29. 29. 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 ademocratic republic but religion plays an important role to influence the society. MUI(Indonesian Council Ulama), the country’s highest Islamic authority, declared a fatwa69 thatsaying smoking is haram70 last January 26, 2009 in Padang, West Sumatra. And the secondMuslim organisation, Muhammadiyah recently declared a fatwa on March 8, 2010, beforehandin 2005 smoking was considered mubah, it is doable but better on not doing it. The mainreason is clear because smoking is not good and dangerous for health; they even compared itwith suicide. The decision that was made by the two organizations was supported by study bythe WHO in 2008 found that more than 20 percent of all deaths here, or about 400,000Indonesians a year, were the result of tobacco-related illnesses71, whilst Nahdlatul Ulama anIndonesian 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 tobaccoindustry, which directly employs 1,2 million workers, as well as 920,000 tobacco and clovefarmers (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 recognizedreligious authority in Islam. But since there is no hierarchical priesthood or anything of the sort in Islam, a fatwa isnot 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/36377672 Ibid 29
  30. 30. Economics HL Extended Essay Rut Setio Nastiti5. Conclusion 5.1. To what extent has Government’s Policy changed consumption? At national level, the policy is reluctant to be changed since cigarettes productionrigorously allied with the economic aspect on the country: it provides about 1.2 million peoplewith job and gives substantial revenue from the excise tax since the major tobacco companiesare big and have powerful yet influential owners. The Indonesian Government may say that theyare doing something about the level of tobacco consumption, but the evidence shows that theyare not really serious in their efforts. Therefore the Government’s Policy has not tangiblychanged the consumption. 5.2. Should policy or implementation be amended? Even though the government widely implemented some policies in order to reduce theconsumption of cigarettes, they do not seriously reduce the production of cigarettes and theelements that impulse the production of cigarettes. Statistics show an upsurge in cigarettesproduction, 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 studiedshould effectively diminish the number of smokers, since it will keep giving the governmentincome while decrease the consumption of cigarettes. At the same time the Government musthave a backup plan if there is a unemployment among the tobacco workers. There must be alaw controlling; the minimum age to purchase cigarettes and where it is allowed to be sold, there 30
  31. 31. Economics HL Extended Essay Rut Setio Nastitishould be a strict regulation on composition of substances in each sticks, a restriction onadvertisement and or cigarettes sponsorship at particular events that involve youth and or massmedia that is widely seen by prospective new targets. The law that regulate smoking places isgood and potentially reduce the consumption of cigarettes per area, however the fine which isup to Rp50 million, seems unrealistic and impractical, since the income of smokers vary. Thedistribution of revenue from the allocation of excise tax has to be directly place to all sector ofcountry 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 thefuture generation. Campaign by NGOs and civil society to raise awareness is highly supportedand encouraged, with regard to the impact of the campaign done by YLKI from October 2009 toJune 2010. Changing the government stand on ratifying the FCTC will be evidence that showthe government is keen to deal with smoking problems in the country by implementing strongpolicies. Word Count: 3,998 31
  32. 32. Economics HL Extended Essay Rut Setio Nastiti BIBLIOGRAPHYBooksBlink, Jocelyn, and Ian Dorton. Economics: Course Companion. Oxford: Oxford UP, 2007.Print.Mankiw, N. Gregory. Principles of Economics. Fort Worth, Tex. ; London: Harcourt BraceCollege, 2001. Print.Sloman, John, and Mark Sutcliffe. Economics. Harlow: Financial Times/Prentice Hall, 2000.Print.JournalsAchadi A, Soerojo W, Barber S. The Relevance and Prospects of Advancing Tobacco Control inIndonesia. Health Policy; 2005Barber S., Adioetome SM., Ahsan A., Setyonaluri D,. Tobacco Economics in Indonesia. Paris:International Union Against Tubercolosis and Lung Disease; 2008.Barber S., Adioetome SM., Ahsan A., Setyonaluri D,. Ekonomi Tembakau di Indonesia. Depok:Lembaga Demografi Universitas Indonesia Fakultas Ekonomi; 2008.Barber S., Adioetome SM., Ahsan A., Setyonaluri D,. Aspek Ekonomi Tembakau di IndonesiaDepok: Lembaga Demografi Universitas Indonesia Fakultas Ekonomi; 2008.Brinson B,. A Good Match. Tobacco Reporter 2008 November.Global Youth Tobacco Survey. Indonesia. World Health Organization; 2006.Global Youth Tobacco Survey. Regional Tobacco Surveillance System: Indonesia. World HealthOrganization; 2002.Ministry of Health Republic Indonesia. Larangan Menyeluruh terhadap Iklan, Promosi danPemberian Sponsor. Jakarta: Litbang DKI; March 2004.Ministry of Health Republic Indonesia. The Tobacco Source Book Data to support a NationalTobacco Control Strategy English Translation. Jakarta: Bakti Husada; March 2004.Nawi Ng., L. Weinhall, A., Ohman.. ‘If I don’t smoke, I am not real man’ – Indonesian teenageboys’ views about smoking. Health education research; 2007Nichter M, Padmawati S, Danardono M. Reading Culture for Tobacco advertisement inIndonesia. 2009.PEFINDO Credit Rating Indonesia. Cigarettes Industry Jakarta: October 2004. 32
  33. 33. Economics HL Extended Essay Rut Setio NastitiSouth East Asia Tobacco Control Alliance. Indonesia Report Card: Status of Tobacco Use andIts Control. Bangkok: South East Asia Tobacco Control Alliance; 10 November 2007.Sumarno, Simon Bambang. Struktur, Kinerja, dan Kluster Industri Rokok Kretek: Indonesia1996-1999. Jogjakarta; Universitas Gajah Mada; 2002.Sunley, M Emil. Taxtation of Cigerattes in the Bloomberg Initiative Countries: Overview ofPolicies Issues and Proposal Reform. Tobacco Free Union Organisation; December 2009.World Bank. Curbing the Epidemic : Governments and the Economics of Tobacco Control.Washington DC: The World Bank; 1999.Yayasan Lembaga Konsumen Indonesia. Dokumen Litigasi Mengugat Presiden Indonesia.Jakarta: Tim Litigasi YLKI; February 2009.Websiteswww.antara.newswww.ash.org. ukhttp://bataviase.co.id/www.berita8.comwww.cbsnews.comwww.investopedia.comwww.jakarta.go.idwww.jambiekspres.comhttp://jurnalskripsi.com/http://koleksirokok.blogspot.com/www.kompas.comwww.mediaindonesia.comwww.thejakartaglobe.comwww.vivanews.comwww.ylki.or.idCover Picture:Job Palar’s and Flickr.com 33

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