Assessing the causal impact of tobacco expenditure on households’ spending patterns Grieve Chelwa Emerging Research Programme C A P E T O W N 22 – 26 June 2015

Tobacco and household spending patterns 22–26 June 2015 Presentation Outline Introduction & motivation Brief review of literature Conceptual framework Empirical strategy Data Results Summary & conclusion

Tobacco and household spending patterns 22–26 June 2015 Introduction & motivation 5 million people die p/a directly (WHO, 2010) & 600,000 passively (Oberg et al., 2010) Additional cost of tobacco which until recently received little attention – Tobacco consumption might displace other goods & services – Likely to be more severe among income- constrained households

Tobacco and household spending patterns 22–26 June 2015 Introduction & motivation Zambia Tobacco increasingly becoming important in households’ budgets – Yet households have not become substantially well-off Important to find out which goods & services tobacco displaces, if at all any

Tobacco and household spending patterns 22–26 June 2015 Contribution Use expenditure data from SSA to do this work – Only other study I am aware of is Koch and Tshiswaka-Kashalala (2008) Use the standard instrumental variable from the literature, adult-sex ratio, but relax the strict exogeneity assumption using Nevo and Rosen (2012)

Tobacco and household spending patterns 22–26 June 2015 Preview of findings Even after relaxing the strict exogeneity assumption, confirm many of the findings in the literature – Tobacco expenditure crowds out food, schooling, clothing, water, transportation & equipment maintenance But unlike previous studies, I do not find instances of crowding in of alcohol – More likely to be a correlation than a causal relationship

Tobacco and household spending patterns 22–26 June 2015 Literature review Tobacco costs conceptualized in two ways – Costs on the macroeconomy via death, increased health care expenditure & lost productivity (Chaloupka & Warner; Kang et al, 2003; Max et al, 2004; Liu et al, 2006) – Displacement costs (crowding out)

Tobacco and household spending patterns 22–26 June 2015 Literature review 1 st round of studies – Simple comparison of expenditure profiles Efroymson et al. (2001) Second round – Control for observable confounders Busch et al. (2004); Wang et al (2006)

Tobacco and household spending patterns 22–26 June 2015 Literature review 3 rd round – Control for observable and unobservable confounders using the method of instrumental variables John (2008); Koch and Tshiswaka-Kashalala (2008); Pu et al (2008) Block & Webb (2009) My approach aligned with 3 rd round, except I use the standard instrumental variable with less stringent assumptions

Tobacco and household spending patterns 22–26 June 2015 Conceptual framework Following John (2008), assume each household maximizes a single utility fn s.t. budget constraint Problem results in Marshallian demands functions Suppose that a hhold first spends on tobacco and then allocates expenditure to other goods:

Tobacco and household spending patterns 22–26 June 2015 Empirical strategy

Tobacco and household spending patterns 22–26 June 2015 Instrumental variables: A digression Validity requirement Exclusion restriction

Tobacco and household spending patterns 22–26 June 2015 Data Use 2006 round of the Living Conditions Monitoring Survey (LCMS) About 18,000 Households Nationally representative

Tobacco and household spending patterns 22–26 June 2015 Results: Mean shares

Tobacco and household spending patterns 22–26 June 2015 Results: OLS

Tobacco and household spending patterns 22–26 June 2015 Results: 3SLS

Tobacco and household spending patterns 22–26 June 2015 Relaxing the exclusion restriction Concede that But assume: These assumptions much less stringent that standard IV assumptions

Tobacco and household spending patterns 22–26 June 2015 Relaxing the exclusion restriction

Tobacco and household spending patterns 22–26 June 2015 Relaxing the exclusion restriction

Tobacco and household spending patterns 22–26 June 2015 Summary & conclusions Establish a pattern of crowding out related to socioeconomic status – Food for poor and rural – Health for rich – Schooling for rich and poor – Clothing for urban, rural and poor – Water for urban and rich – Electricity for urban – Alternative energy for poor – Transportation for urban and rich

Tobacco and household spending patterns 22–26 June 2015 Summary & conclusions Unable to find evidence of crowding in of alcohol – More likely a correlation than causal relationship Overall: A broader accounting of tobacco’s costs in Zambia should include: – Under nutrition – Under investment in education, among others