Loretta Napoleoni: The Globalization of Tobacco

A BUZZFLASH GUEST CONTRIBUTION
by Loretta Napoleoni

Last week, the bear hurricane hit the stock market. In the space of 24 hours, world stock exchanges fell one after the other, like dominoes, and a large slice of global profits went up in smoke. The sole exception: the tobacco industry. "Ever since 1973, financial crises don't touch it" reads a weekly bulletin from J.P. Morgan, the American investment bank. Are cigars and cigarettes investment safe-havens whenever the market seas get choppy? It certainly appears that way!

'The magic of smoke' is how finance defines the 'remarkable' performance of tobacco shares, amongst which those are giants such as Phillip Morris and British American tobacco. The explanation is easy to grasp: smoking is an addiction and it is irreplaceable! "People like to smoke and there is no substitute for tobacco," explains David Algerman, analyst at American investment bank Morgan Stanley. As if this was not enough, demand is also inelastic, it is indifferent to prices. "Smokers are willing to pay any amount for that pleasure," Alderman observes, and this is true across all social classes. Considered a unique product, the consumption of tobacco is therefore international, multi-class and rising worldwide. The idea that people smoke less today than they did 20 years ago is a mere illusion. Ever since the beginning of the 1990s, Western tobacco companies have become wealthier than oil companies because while energy consumption is functional, smoking is a need that satisfies a desire and thanks to globalization, it has become a universal addiction.

Paradoxically, the anti-smoking campaigns of the '90s pushed tobacco multinationals to look beyond Western markets; they encouraged them to ride the globalization tiger. 'At the end of the 1980's in the United States, anti-cancer organizations and other pressure groups initiated a succession of legal actions which threatened the survival of the tobacco industry" explains Dr. James J. Kenney, director of nutritional research and instructor at the Pritikin Longevity & Spa in Florida. However, the publicity surrounding the dangers of smoking has had little consequences. "Although one in every two long term smokers is destined to die of lung cancer, heart failure or some other disease tied to tobacco," admits Kenney, "no serious move to ban tobacco, as has happened with other addictive products, had taken place. The percentage of drug addicts who die of overdoses is much lower, yet tobacco is legal and drugs are not." A London based PR for the tobacco industry who, for obvious reasons, wishes to remain anonymous, unveils the reasons.

"No one wants to outlaw smoking because nobody wants to ban one of - if not THE - most profitable industry in the world. Think only of the taxes imposed on tobacco products, they generate a considerable fiscal income for the state. In Australia, where the tax man pockets 70% of the retail price of cigarettes, smoking generates approximately $6 billion in taxes every year. But tobacco kills, this is a fact, and in order to avoid admitting it governments reverted to clever strategies. In the USA, for example, tobacco is not regulated by the Food and Drug Administration (FDA), the organization which supervises all food and pharmaceutical products, amongst which nicotine, which is an addictive drug, should technically fall."

"If the FDA were involved, it would have to ban tobacco just as it has done with other toxic substances, from marijuana to cocaine!" reveals Kenney.

It was at the end of the 1990s that Western tobacco multinationals suffered their first big blow: Motley & Rice, a law firm in Charleston, South Carolina, successfully represented a long-term smoker suffering from lung cancer. The jury awarded damages for over $3 billion and forced the tobacco industry to admit that smoking creates a dependency and kills. Soon after the U.S. government and the tobacco's giants entered secret negotiations which ended with a compromise. "Washington imposed harsh conditions but the tobacco's multinationals accepted them all. They agreed to pay over $350 billion over 25 years to the single states, part of the moneys funded anti-smoking campaigns," revealed our anonymous source. "The industry agreed to publicize the dangers caused by smoking on cigarette packets and to end advertising. Why did they accept such treatment? Because these conditions did not affect their most important markets: Eastern Europe and Asia."

The fall of the Berlin Wall had, in fact, opened new horizons for tobacco's multinationals -- during the Soviet regime, Eastern markets were off limits to them. In the space of a few short years, Winston became the most widely sold cigarette brand in Russia. In Eastern Europe and in developing countries, Western marketing restrictions, if they exist at all, are few and far between. While 89% of industrialized countries insist on printing warnings on cigarette packets, only 25% of developing countries require it. Governments of developing nations also welcome the fiscal revenues generated by the increase in tobacco consumption among their citizens. And the numbers are dizzying: in Senegal, annual per capita consumption of cigarettes went from 430 in 1970 to 1,500 in the mid-'90s. Naturally, the giant Western multinationals of tobacco are well disposed to share profits with these governments. Joint ventures have also blossomed with the local tobacco's industry, for example between Phillip Morris and RJ Reynolds (producers of Camel) and the Senegalese Manufacture du Tabac de l'Ouest Africain (MTOA), which controls 93% of the Senegalese market, or between the Indian Tobacco Company and British American Tobacco to exploit the phenomenal market of bidi (hand rolled cigarettes), which at the end of the '90s in India reached a yearly consumption of 1,220 bidi per capita.

On paper, tobacco consumption helps the balance of payments of developing countries even if, in the long run, it kills their citizens. But shockingly even this tragic event can be seen as an asset! In 1998, the Czech subsidiary of Phillip Morris produced a report where it proved that smoking was an important source of revenue for the state. The sale of cigarettes generated 150 million dollars for the Treasury, net of the medical costs for patients with terminal cancer, the loss of income tax from those who died from smoking and the days off work resulting from tobacco-provoked illnesses. Milos Zeman, the then Czech Prime Minister, even cracked a morbid joke about the fiscal advantages of smoking: "given that long term smokers tend to die younger, the state doesn't have to pay their pension."

Tobacco consumption took a major leap after 2000 when Chinese youth discovered Western cigarettes. From 2003 to 2005, total sales of Philip Morris, the undisputed king tobacco, rose from 400 billion to over 700 billion cigarettes. Yet in the West, consumption fell dramatically to the extent that anti-smoking lobby shouted victory. In Italy, during the same period, cigarettes consumption decreased from 102,000 tons to 98,000 tons. In the USA, the number of smokers fell to 22% of the adult population, the same level of 1951. In Australia, demand is so weak that the national health institute foresees its 'extinction' by 2030. These are, however, but a few of the economic mirages created by the globalization of smoking. The Asian population is so vastly greater than the Western population that a decrease of 30% in the consumption of cigarettes in these areas can be offset by a mere 2% increase in the Asian market. "Those who have understood this principle have made millions. For example, Japanese Tobacco International, who holds the rights to sell various Western brands outside the West, is one of the fastest-growing companies in the world," revealed our London source.

The turnover of the global smoking industry is enormous. In Indonesia, the fifth largest consumption market in the world, tobacco employs 7 million people with a turnover of over 8 billion dollars per year. The profits are staggering. In 2005, Philip Morris, whose best-selling brand is Marlboro, pocketed $4.6 billion in the U.S. and $7.8 billion in the rest of the world, more than the GDP of Jordan.

New smokers, and they are millions, don't live in the West, they reside in the East. Over the last 10 years, tobacco consumption in Indonesia rose from one-fourth to one-third of the population, equivalent to 230 million people. But in China, we find the most serious smokers to the point that one out of every three cigarettes consumed in the world is smoked by a Chinese person. Projections in the near future show smoking will claim its victims in East Asia: while in the 1990s smoking killed 4 million people per year, by 2030, deaths will have increased to over 10 million per year and 70% of them will be from developing countries.

The enrichment of the tobacco industry at the expense of East Asian smokers is skillfully hidden because tobacco multinationals are masters of the market matrix, the maze of smoke and mirrors that traps Western consumers. They hide behind 'screen' companies that invest profits in other industries, especially the food industry. In the mid-90s, Altria, the New York-based holding company that controls Philip Morris, acquired Kraft Foods and, in 2005, became the 10th largest American company by profits. The following year, turnover exceeded $100 billion. Without knowing it, Western consumers shopping in supermarkets enrich the tobacco's industry.

The globalization of smoking, however, and not the food industry, represents the real profit engine for tobacco's multinationals. At the end of January, the announcement that Altria was selling Kraft to return being a tobacco multinational made its share price jump by 10%. Wall Street prefers tobacco to food and last week, amid the crash, those who hold tobacco shares in their portfolio were smoking cigars to celebrate their latest fat profits.

Tobacco by the Numbers

1. Worldwide more than 15 billion cigarettes are smoked every day.

2. At the beginning of the 20th century, 50 billion cigarettes were consumed per year worldwide. At the end of last year, that figure was 6 trillion, a 120-fold increase.

3. In Italy, more than 93,000 tons of cigarettes are consumed each year.

4. Between 1990 and 1997, the consumption of cigarettes increased by 24.3% in the Middle East, 8.6% in Pacific Asia, and by 3.6% in Africa, while during the same period it decreased by 10.9% in Europe, 7.6% in North America, and 16.5% in Latin America.

5. China produces 3.5 million tons of tobacco per year, one-third of world production.

6. There are over 500 million smokers in China, over twice the total population of the United States.

7. The China National Tobacco Corporation is the world's largest tobacco producer.

8. In 2003, British American Tobacco, under heavy pressure from the British government, became the last multinational to abandon Myanmar but it remains the largest foreign investor in Uzbekistan.

9. At the end of the '90s, around 90 million contraband cigarettes were smoked each day.

10. In 2000, the consumption of cigarettes declined by 10% in developed countries while increasing 64% in developing countries.

A BUZZFLASH GUEST CONTRIBUTION

Loretta Napoleoni is the author of the just published Rogue Economics: Capitalism's New Reality with Seven Stories Press. Visit her at www.lorettanapoleoni.org.

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