To what extent has the Indonesian Government’s Policy on Tobacco Consumption Affected the Demand for Cigarettes; a case study from Jakarta?

Economics HL Extended Essay Rut Setio Nastiti

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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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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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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


4.2 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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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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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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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.

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

Table 1. Taken from Mankiw p. 208


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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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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

Until 28th

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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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.

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)

S + tax

S

Private Benefit

Social Benefit

PO

PM

PT

QO QT QM

Price of

cigarettes in

rupiahs

Quantity of

cigarettes in

billion


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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.

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

Qe Q1

S + Tax

S

Diagram 3: Distribution of Tax

Pe

P1

P2

Producer revenue before tax is imposed

Producer revenue after tax is imposed

Tax revenue for government

Tax burden for consumer

Tax burden for producers

Price of

cigarettes

in rupiahs

Quantity of cigarettes in billion

http://koleksirokok.blogspot.com/


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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

http://www.jakarta.go.id/


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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.


13

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

http://www.ylki.or.id/wartas/view/05xxxv2009

http://www.ylki.com/


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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

http://www.mediaindonesia.com/

http://www.cbsnews.com/


15

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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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

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

Picture 2


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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

Gurih Pahitnya Rokok, VIVANews, March 19th

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

http://www.kompas.com/


18

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?


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


19

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


20

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.


21

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.

Picture 3


22

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


23

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


24

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)

http://www.fiskal.depkeu.go.id/


25

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


26

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


27

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


28

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


29

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


30

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


31

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


32

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33

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Cover Picture:

Job Palar’s and Flickr.com

To what extent has the Indonesian Government’s Policy on Tobacco Consumption Affected the Demand for Cigarettes; a case study from Jakarta?

Education

kawasan dilarang

sri moertiningsih

including

warta konsumen

bloomberg

advancing

perda dki

health republic