Reform Of PRC's Tobacco Monopoly System: Cost And Benefit Analysis

The tobacco monopoly system is an important system in administration of tobacco industry of China. Since the establishment of China's tobacco monopoly system in 1983, tobacco industry, an industry chain including the three major industry categories, agriculture, industry, and commerce, has made crucial contribution for national economic development. As a leading planter, producer and consumer of tobacco, China accounts for nearly one third of the world's tobacco production, cigarette production and consumption. For the past decades tobacco monopoly has been offering huge tax and profit contributions for treasury revenue, ranking top of all industries, but the system is facing the domestic appeal for reforming as well as Global trend of "De-monopoly".In the key period of reforming and development, study on the reform of tobacco monopoly system is not only to raise suggestion for the reform and development of tobacco industry, but also offer a case for institutional transition theory, so it is significant both theoretically and practically.This dissertation carries cost-income analysis based on institutional transition theory, deems China's tobacco monopoly system should undergo gradual, and proposes relevant countermeasure and suggestions. The body of the dissertation is divided into 4 parts, institution history and characteristics, theoretical analysis, empirical analysis and countermeasures & suggestions.First, this dissertation explained evolution, history and characteristics of China's tobacco monopoly system. Change of production-supply-sale relationship, in tobacco industry, institutional characteristics and interest allocation in different periods is analyzed in details. As per the viewpoint of this dissertation, the history of China's tobacco monopoly system can be divided into three periods, trial (1949-1982), establishment (1983-1999), and reforming (since 2000), each presents different characteristics. In the trial period, the characteristics include regional sale monopoly, centralized purchase and contracted sale with participation of comprehensive agencies. In this period, the administration of tobacco industry was in the charge of a plurality of agencies. The supply and sale cooperative system was responsible for the appropriation of tobacco leaf, light industry administration took charge of cigarette production, and commercial administration was responsible for the sale& allocation of cigarette. The system caused poor efficiency of tobacco industry, so in 1963, China's government attempted to build a tobacco trust in order to improve profitability of the tobacco industry, in which the supply of tobacco leaf and cigarette production were integrated, however, the rights of allocating and were still held by local agencies. This mode took some advantages of centralized management, but an integrated system of production-supply-marketing was not yet set up. In the period of establishment, the system was characterized by legal sale monopoly, planned management and high centralization of state power. Since the establishment of tobacco monopoly system, production, allocation, delivery and sale of cigarettes have been strict planned and monopolized. Because of close relation between tobacco tax system and planning system, the tobacco tax revenue is closely related to local government's interests, the national tobacco monopoly system is dissimilated as the local tobacco monopoly system in practice. This seriously hinders to the development of tobacco industry. The reforming period is featured by market-orientation, disintegration of production and sale, supply to order. Reform in this period is market-oriented, under which cigarette factories were restructured as provincial tobacco industry company. Supply procedure is optimized to accord with market demand instead of planning. But the reforms failed to shake the base of the tobacco monopoly system, i.e. mixture of planning system and tax system. So regional protectionism wasn't broken. After explaining the production-supply-marketing relation of three periods of China's tobacco monopoly system, the dissertation analyzes the game & competition of interests in different periods, and proves that the multiple game exists under the tobacco monopoly system, a large number of transaction costs were resulted, which aggravated the cost burden of the system. The basic drawbacks of China's tobacco monopoly system include government administrative management, planned management and tax system.Part 2 carries theoretical analysis on cost and benefit of China's tobacco monopoly system. Based on explanation of concepts of cost and benefit of the system, monopoly system, tobacco monopoly system respectively, the dissertation proposes the changes of the system, monopoly system, tobacco monopoly system stem from the changes of their cost and benefit relation. The costs of system include cost of inherent system, external system cost and system evolution cost. The system income can be achieved through coordination and trust, property rights protection, conflict avoidance, and right balance. The law of declining system efficiency leads to the imbalance between actual supply and demand for the system, so all interest subjects are willing to promote system evolution in order to obtain the potential income under the new system. Success of system evolution depends on the marginal income and the transitional costs. The costs of the monopoly system include internal cost (operating cost) and external cost. The former mainly comprises of operating cost of an organization, which can also be called agent cost. The latter includes transaction cost between the superior and the subordinate within the organization, monopolizer and controlling government agencies, monopolizer and the.society. The benefits of monopoly include monopoly profits, avoided tax losses and externalities of public goods supply. The transition of monopoly system originates from the difference between cost-benefit relation.Part 3 carries empirical analysis of costs and benefits of China's tobacco monopoly system. Based on estimation of total cost and total benefit of monopoly system respectively, this dissertation concludes China's tobacco monopoly system should be reformed because the total cost exceeds the total benefit. Cost of China's tobacco monopoly system is the sum of rent-seeking cost, meaningless losses, X-inefficiency, and monopoly administration cost. Rent-seeking cost is the surplus of ratio between administrative expenses and core business cost against other free competitive industries (food manufacture), multiplying the administrative expenses. Meaningless losses (DWL) are estimated with Hamper formula, DWL=1/2r2εPmQm, in which r means profit rate,εstands for the demand price elasticity of cigarette, PmQm is the revenue of tobacco industry. X inefficient is estimated under framework of "comprehensive technological efficiency" and analyzed with DEA program. Administrative cost is estimated as 35%of management expenses. The total benefit of monopoly system is the sum of monopoly profits, avoided tax,cigarette control benefit and protection of tobacco planters'interests. Estimated total benefits of China's tobacco monopoly system in 1998,2004,2005,2006,2007 and 2008 are RMB43,976,510,000,94,898,360,000,113,508,760,000, 139,264,280,000,141,514,130,000 and 183,576,040,000 yuan respectively, the relevant costs are RMB61,144,130,000,121,467,330,000,148,018,260,000, 155,125,840,000,195,204,250,000 and 227,197,950,000 yuan, net benefit are RMB-17,167,620,000,-26,568,970,000,-34,509,500,000,-15,861,560,000,-53,690,120,000 and-43,621,910,000 yuan, so further reforming is necessary.After theoretical and empirical analysis on cost and benefit of China's tobacco monopoly system, this dissertation compares cost and benefit of radical and evolutionary reform, and suggests reform on China's tobacco monopoly system should undergo a progressive evolution. Based on separation of government and enterprises, and tobacco taxation system, the tobacco industry must form a tobacco trust, to enhance the performance of tobacco monopoly system. The monopoly should be cancelled after the tobacco trust runs well. After the cancellation of tobacco monopoly, the government should maintain appropriate regulation on tobacco industry, to restrain the profit margin of tobacco trust, and set up auction center and third party tobacco leaf rating organization, to protect the interests of tobacco planters. Theoretically, the net income of the new system must exceed that of the old system.