The Hand-Off to Big Tobacco: IMF Support for Privatization of State-Owned Tobacco Enterprises

By Anna White and Robert Weissman

An estimated 4 million people will die worldwide from tobacco-related disease this year, according to the World Health Organization (WHO). By 2030, WHO projects 10 million will die from tobacco-related causes, with 70 percent of those deaths occurring in developing countries.

Because of the costs of treating the disease associated with smoking, it is generally the case that tobacco-related policies which prioritize public health will also be economically sound decisions.

The World Bank has been an international leader in recognizing that tobacco use is an impediment to development. The health costs of tobacco are severe, and lost work time due to illness and death saps societies of labor power.

The Bank's econometric reviews have reiterated that excise taxes work to reduce smoking rates and advance public health.

The Bank has also published important information on tobacco trade liberalization, finding that reduced tobacco tariffs and freer trade in tobacco products has dire consequences, raising smoking rates and increasing preventable death and disease.

Despite the Bank's embrace of a pro-public health position on tobacco, the Bank's sister institution, the International Monetary Fund (IMF), has in many cases supported privatization of state-run tobacco companies, and has even supported reduction of tobacco excise taxes and tariffs - policies universally agreed among public health advocates to undermine public health goals.

A Multinational Monitor investigation has found that the IMF supported excise tax or tariff reductions in:

• Djibouti
• The Gambia
• Macedonia
• Peru
• Uganda

Multinational Monitor found that the IMF has pushed for privatization in:

• Bulgaria
• Korea
• Mali
• Moldova
• Thailand
• Turkey

The IMF does not consistently endorse excise tax or tariff reductions; the Monitor found the institution has also supported tobacco tax increases in several instances.

What does seem clear is that, as with tobacco privatization, in the tobacco tax arena, the IMF fails to give due consideration to the health impacts of the policies that it supports.

The IMF push for tobacco privatization is unswerving, and appears to be part of its ideological commitment to privatization. In several cases, the IMF has pushed for privatization despite intense local opposition.

Tobacco control advocates have strongly criticized the IMF's tobacco privatization drive, saying the Fund's ideological agenda is damaging public health. Countries have strongly resisted the IMF's tobacco privatization demands, with ministers fired and laws vetoed in major policy controversies. But the broad resistance notwithstanding, the Fund continues to push ahead.

The Price of Privatization

Although the tobacco industry has been firmly in private hands throughout U.S. history, in many countries, including in the developing world as well as in Eastern Europe and the former Soviet Union, state-owned enterprises have had responsibility for tobacco product manufacturing and distribution. This has reflected a desire for the state to capture the immense profits associated with tobacco, as well as national economic arrangements where the state has had a much larger role in the economy than it traditionally has had in the United States.

The last 15 to 20 years has witnessed a trend of the privatization of state-owned enterprises around the world. Tobacco operations have been part of this IMF/World Bank-facilitated trend, but not completely engulfed by it. Especially because there are apparent fiscal benefits in governments maintaining tobacco enterprises in the public sector - but for other reasons also, including in some cases opposition from health activists to tobacco privatization - many countries continue to maintain state-owned tobacco enterprises.

The clear trend in the tobacco industry, however, is toward privatization - and the IMF is aggressively pushing it along. Public health advocates say privatization will repeat and reinforce the public health damage already known to be caused by trade liberalization.

In the 1980s, the United States applied trade pressure on Asian countries, successfully forcing open markets in Japan, Taiwan, South Korea and, to a lesser extent, Thailand. The result: smoking rates jumped. Not only did tariff reduction allow U.S. and other foreign company products to gain a greater market share - a logical outgrowth of lowering the prices of these products as against domestic cigarettes - overall cigarette consumption increased. Tobacco liberalization led to aggregate increases in smoking rates of 10 percent, according to World Bank analyses.

The result was not just an expansion of foreign brand market share, but an overall increase in consumption. "Reductions in the barriers to tobacco-related trade will likely lead to greater competition in the markets for tobacco and tobacco products [and] reductions in the prices for tobacco products," according to a World Bank report. "Given the inverse relationship between price and consumption Ö cigarette smoking and other tobacco use will likely increase under this scenario as tobacco markets become more open. As a result, the death and disease from tobacco use will also increase."

The effects are particularly serious among teens and women, who have lower smoking rates in many developing countries, and who the multinationals have expertise in inducing to smoke. In South Korea, according to the U.S. General Accounting Office, the smoking rate among teenage girls quintupled in a single year following the opening of the market to the multinational tobacco companies.

The harmful public health impacts of trade liberalization are due to two overarching factors: price impact, and market and political manipulation. For both factors, say critics, privatization is as severe, or worse.

With trade liberalization, reduced tariff rates enable foreign brands to sell cigarettes at a considerably lower price. In the case of privatization, given a sell-off to a foreign brand, the effect is to enter into a zero-tariff regime for the acquiring company, and the price impact is at its most extreme.

In terms of market and political manipulation, selling off state-owned tobacco enterprises generally has the effect of transferring control of cigarette markets from state companies to the handful of tobacco multinationals (BAT, Japan Tobacco, Philip Morris and a couple more minor players) which are the almost certain acquirers. Rather than starting with a small market share as would be the case with trade liberalization in a national monopoly-dominated market, the multinational gains a dominant market share. This positions the multinational to manipulate the market in a far more comprehensive way than would be possible in a competitive environment in which it was a small player.

These manipulation mechanisms involve an array of conscious efforts by multinationals to advertise, market, package, brand and promote their product using aggressive and innovative means; to adjust the product taste and composition for broad and diverse appeal; and to influence, skirt, undermine or block domestic tobacco control regulations.

Trouble in Turkey

Public health advocates have been joined by workers and farmers in opposing tobacco privatization. Tobacco workers have objected to the layoffs that typically follow privatization. Tobacco farmers fear that privatized companies will buy tobacco from foreign rather than domestic sources. As a loose coalition, these forces have been able to mobilize strong opposition to IMF mandates - but they have run up against an international financial institution willing to flex all of its muscles in service of the privatization cause.

Turkey has been among the tobacco privatization hotspots. The country had already been involved in several years of loan negotiations with the IMF, when its worst economic crisis in years hit at the end of 2000. In a June 22, 2000 Letter of Intent to the IMF, Turkey pledged that "three new laws necessary to phase out the support price mechanism for tobacco and for reforming TEKEL [the state monopoly agency] will be enacted in 2000," including one that would "enable the privatization of TEKEL's production facilities for spirit, salt and tobacco products." The economic crisis added greater urgency to the implementation of the IMF's conditions.

In a December 18, 2000 Letter of Intent to the IMF, Turkey promised that the country would adopt "by end-January 2001 a decree restructuring TEKEL and issuing a high privatization commission decision which would allow the transfer of all of TEKEL's tobacco-processing units to the PA [Privatization Agency]" and enact by the same date, "a tobacco law which would set in place an auction mechanism for tobacco purchases, henceforth, phasing out the support purchase policy for tobacco." A January 30, 2001 Letter of Intent further clarified the December letter, pledging to enact a law by end-February 2001 that would transfer the entire state monopoly agency to the Privatization Agency, reform the tobacco sector, and phase out support purchases of tobacco.

But public discontent and controversy over the economic crisis and the IMF's strict economic reforms grew, and the end of February came and went without Turkey fulfilling its promise to pass the tobacco sector law. The IMF refused to release assistance to Turkey, despite appeals from Turkish Prime Minister Bulent Ecevit.

The tobacco sector reform legislation, key to obtaining a joint IMF-World Bank $15.7 billion loan, faced multiple obstacles. In addition to ending state subsidies for farmers and enabling the privatization of TEKEL, it established a seven-person regulatory board to oversee tobacco and alcohol production, and gave special rights to companies producing more than 2 billion cigarettes annually in Turkey to import, price and sell tobacco products. TEKEL employees and tobacco growers protested the law. But when the Privatization Minister Yuksel Yalova suggested that there might be delays in passing the law, he was forced to resign.

Health groups were particularly opposed to the powerful tobacco regulatory board, which would be controlled by people without any background in public health. Only one of the seven members would be a public health official, yet the board would have the power to affect laws with potentially adverse consequences for public health.

"We, as health advocates, resisted," says Elif Dagli, a pediatrician and leading Turkish tobacco control advocate, "We went to the press. We went to the parliament. We spoke with the new minister of privatization. We fought very hard."

Dagli communicated with World Bank officials in Washington and Turkey, who repeatedly told her that they were "not forcing the law" and were "extremely concerned about health issues." Turkish officials had a different story. The IMF and World Bank would only release loans to Turkey if the tobacco sector law - which gave more freedom to tobacco multinationals, while destroying the local tobacco industry - was passed.

The Turkish parliament finally passed the law in late June 2001, but Turkish President Ahmet Necdet Sezer vetoed it because the law failed to provide support for thousands of small tobacco farmers, likely to be most acutely hurt by the liberalization of the tobacco sector.

In September, TEKEL announced that it would close 24 tobacco processing plants. The announcement led to boycotts and factory sit-ins by TEKEL workers, but the agency proceeded in laying off temporary staff. The new Minister of Privatization Yilmaz Karakoyunlu pledged to break up TEKEL and sell it off by 2002. Both Philip Morris and British American Tobacco would be well-positioned buyers, having strategically signed partnerships - in 1990 and 2001, respectively - with the two largest private sector conglomerates in the country.

On January 3, 2002, the Turkish Parliament ratified the tobacco law to deregulate the tobacco industry. Although the law was unchanged from the original law that the President had vetoed, this time the President was forced to approve it. The law has since been sent to a constitutional court, which will rule on its compatibility with the Turkish constitution.

With a new Turkish plant that has the capacity to manufacture more than 2 billion cigarettes annually, BAT is now legally allowed to import tobacco from abroad. The company is not likely to purchase tobacco from local farmers, who do not grow the type of tobacco used in the blends preferred by the tobacco multinationals.

Resistance in Moldova

Moldova, a small country wedged between Romania and the Ukraine, declared independence from the USSR in 1991. Home to the some of the most fertile soil in the world, Moldova is a primarily agricultural state. Wine and tobacco are the two most prized industries in the country.

In the years following independence, the country experienced increasing economic woes. The economy shrank dramatically, salaries plunged while unemployment rose, the government built up months in wage arrears, and the foreign debt grew steadily.

In 1999, the IMF promised a $35 million loan to Moldova, on the condition that the country privatize its wine and tobacco sectors. In a Letter of Intent to the IMF on July 29, 1999, Moldova noted that is was "working with investment advisers to develop a privatization strategy for the plants in the tobacco sector, and expect to announce a tender for these units by September 30, 1999."

While the country had launched a mass privatization effort in the early 1990s, selling off various state enterprises and transferring land to local farmers, there was strong public and political sentiment against privatizing the wine and tobacco industry. In November 1999, the Moldovan parliament rejected a law that would privatize the country's wine and tobacco industries, and the IMF suspended plans to provide Moldova with a $35 million Expanded Fund Facility.

The international lending institution stood firm: the privatization of tobacco was a non-negotiable term of any future loans. Additional financial pressure was exerted on Moldova when a $30 million World Bank loan and a $15 billion European Union loan, both of which had been contingent upon the IMF loan going through, were put on hold.

By March 2000, the IMF threatened to sever its ties to Moldova if the country did not promptly sell off its wine and tobacco industries.

When the Moldovan parliament voted overwhelmingly against the privatization of these industries (85 to 16), the IMF suspended its lending to the country.

With the economic situation turning worse and without any viable alternatives for securing international loans, the country was left with little choice but to accept the IMF conditions.

In October 2000, the parliament gave in to IMF pressure, passing a law to privatize the wine and tobacco monopolies by a vote of 55 to 36.

In a November 30, 2000 Letter of Intent to the IMF, Moldova noted the approval of the privatization bill by parliament and stated that "according to a strategy to be agreed to with the World Bank, we will prepare the privatization of these wineries and tobacco companies."

Despite this pledge, however, it remains unclear whether Moldova will proceed with privatization.

Thailand: Privatization Reversed

Thailand is world-renowned for its strong tobacco control policies and for standing up to the U.S. Trade Representative and transnational tobacco corporations that aggressively sought to open up the Thai tobacco market to foreign brands in the late 1980s. With Thailand refusing to capitulate to its demands, the United States sued the Southeast Asian nation at the GATT (General Agreement on Tariffs and Trade, the predecessor to the World Trade Organization (WTO)). A 1990 GATT tribunal in part ruled in favor of the United States, mandating that Thailand abolish its import ban, but it also ruled that Thailand could implement a comprehensive advertising ban, require ingredient disclosures and raise excise taxes.

Although the foreign share of the Thai tobacco market increased steadily following the ruling, it remains a small portion of the overall market, which is dominated by the Thai Tobacco Monopoly (TTM).

In the late 1990s, Thailand was the first country to be hit by the Asian economic crisis. In response to a currency devaluation in July 1997 and the steady outflow of money from the country, Thailand sought the aid of the IMF. The IMF offered a $17.2 billion loan to Thailand, with the condition that the country privatize state-owned enterprises, including TTM. The government was reluctant to sell TTM, a profitable monopoly, but agreed, in an August 25, 1998 Letter of Intent to IMF Managing Director Michael Camdessus, to conduct a study "outlining strategic options for Tobacco Monopoly" by early 1999.

The IMF's pressuring of the Thai government to privatize TTM drew heavy protests from within the country and around the world. TTM employees opposed the privatization because the TTM State Enterprise Employees' Association estimated that it would lead to a 50 percent reduction in staff.

Thai health groups argued that the privatization of TTM would allow predatory multinational tobacco corporations to strengthen their foothold in the country, exert greater political influence and increase smoking rates, particularly among women and children.

Furthermore, health groups opposed the IMF's basic premise that increasing the efficiency of TTM was a worthwhile goal, arguing that improved TTM efficiency would ultimately lead to higher rates of tobacco-related death and disease.

Anticipating heightened competition by 2003 as the Asian Free Trade Agreement came into force, TTM was receptive to the calls for privatization. The monopoly would have to produce and distribute its products more efficiently in order to compete successfully against imported brands. Philip Morris, R.J.Reynolds, Japan Tobacco and British American Tobacco all held discussions with TTM to discuss possible joint ventures.

In June 1999, Thailand announced plans to sell part of TTM's retail and printing units. In March 2000, the plans to privatize TTM were still on hold and it remained one of the country's most profitable state enterprises. Meanwhile, popular anti-IMF sentiment led to the defeat of Prime Minister Chuan Leekpai, who had sought to implement the strict economic policies that the IMF had set as conditions for loans. In January 2001, Thailand's prime minister-elect Thaksin Shinawatra pledged to soften the rules being imposed by the IMF.

In mid-2001, however, Thailand chose TTM and eight other state enterprises to come under a national holding company, in anticipation of privatization in 2002. In March 2002, the government announced intentions to privatize part of TTM by the end of the year.

But popular resistance mounted. In July 2002, in the face of strident opposition from health advocates, the government announced it was indefinitely suspending its tobacco privatization plans.

Privatization or Public Health?

While individual countries continue to struggle against IMF mandates for tobacco privatization, some public health advocates are looking to change IMF policy to end the institution's drive to privatize.

In December 1998, public health concerns led 17 Members of the U.S. Congress to write to the then-managing director of the IMF, Michel Camdessus, about tobacco privatization.

The Members' letter stated, "We believe privatization would have serious public health consequences. We urge an immediate change in IMF policy on this matter."

Echoing the demands of public health campaigners, they urged a shift in IMF policy, so that the institution would cease to support tobacco privatization, urging the IMF "to adopt a formal policy of prioritizing public health over other considerations in tobacco-related matters."

The IMF responded by arguing that there was no reason to believe that privatization would impact public health.

"Our reading of the recent research on the economics of tobacco control does not support the contention that privatization of state-owned tobacco companies, per se, is a major cause of increased tobacco consumption," the letter stated. If tobacco trade liberalization and privatization do increase consumption, the letter stated, the problem is best dealt with, not by stopping these policies, but implementing other tobacco control policies. Finally, it said the IMF defers to the World Bank and World Health Organization on such matters.

Nowhere does the IMF letter indicate any serious consideration of the effects of tobacco privatization on consumption, or a commitment to prioritization of public health concerns regarding tobacco-related matters.

Anna White is coordinator of Essential Action’s Global Partnerships for Tobacco Control. For a list of citations to the IMF documents indicating the Fund’s support for tobacco privatization and tax and tariff reductions, as well as more detailed analysis of the harms of tobacco privatization, see www.essentialaction.org/needlessharm.