Impact of the Free Trade Zone on Cigarette Consumption: An Examination of Indonesian Households

Abstract

Objective - The purpose of this research is to evaluate the impact of the Free Trade Zone ('FTZ') in the Riau Islands Province (Batam, Bintan and Karimun) on specific products, i.e. cigarettes. Methodology/Technique - To investigate the demand for cigarettes in the FTZ area, this study examines data on cigarette consumption in Batam and surrounding areas before and after the implementation of the FTZ. The data is collected from SUSENAS surveys conducted in 2003, 2005, 2008, 2011 and 2014. To examine the net impact of the FTZ, this study also uses an experimental approach; the implementation of the FTZ can be viewed as a natural influence on a decrease in prices of specific products. The subject group includes households in the Riau Islands Province. Households in the surrounding provinces are therefore used a control groups. Several indicators were used to identify and establish the control groups, including: cigarette consumption, population, sex ratio, life expectancy and education level. Following this criteria, Bengkulu Province was selected as the ideal group of control candidates. Findings - The results show that there has been a significant increase in cigarette consumption in the Riau Islands Province following the implementation of the FTZ. Novelty - The introduction of the FTZ means that trade commodities, including cigarettes, are no longer subject to excise duty. As a result, the selling price of tobacco products has become very cheap. Type of Paper: Empirical. Keywords: Cigarette Tax; Free Trade Zone; Indonesian Households; Natural Experiment. JEL Classification: F10, F13, F19.