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IMF's Asian Bailout Could Open Markets for the Tobacco Giants

By Suein L. Hwang and Michael M. Phillips, Wall Street Journal
Wednesday 16 December 1998

A fight is breaking out over the Asian economic bailout effort because it is having a controversial side effect: helping open markets in South Korea and Thailand to global tobacco giants.

The International Monetary Fund swept in last year to bail out the struggling economies of those countries. As a condition of its emergency assistance, the IMF is seeking the privatization of state-owned companies in various industries, including tobacco. That stands to open the lucrative South Korean and Thai cigarette markets to Philip Morris Cos. and other rivals.

Now the IMF's policy is drawing fire from Congress. Last week, 17 legislators penned a strongly worded protest to the IMF Managing Director Michel Camdessus.

"Whatever the merits of privatization of other sectors of the economy, tobacco represents a grave public health menace that must be treated differently," said their Dec. 8 letter. Signatories included Sen. Richard J. Durbin (D., Ill.), Sen. Frank R. Lautenberg (D., N.J.) and Rep. James V. Hansen (R., Utah).

No Specific Policy

IMF officials say they have no specific policy on tobacco, adding that the moves are simply part of its larger effort to encourage economic reform. "Privatization of state industries is wholly consistent with IMF efforts to promote sound fiscal management," says spokesman William Murray. "If that means privatizing tobacco companies, or any other industry that is likely to be more effectively operated in private hands, I don't see why the IMF would object."

In its agreement with the IMF, South Korea promised to privatize its South Korea Tobacco Ginseng Corp. and five other government-owned companies by 2002. And in an Aug. 25 letter to Mr. Camdessus, Thai authorities committed to complete a study "outlining strategic options for Tobacco Monopoly" by the first quarter of 1999. They also agreed to sell stakes in Esso Thailand PLC, Thai Airways and many other companies.

Amid economic turmoil, selling even a partial stake in a tobacco monopoly is an easy way for a cash-strapped government to quickly generate needed funds. In anticipation, the world's largest cigarette makers are jockeying to position themselves for a possible deal.

In the past few months, British American Tobacco PLC and RJR Nabisco Holdings Corp.'s Reynolds unit say, they have made overtures to South Korean officials. Philip Morris declined to comment about its activities in South Korea. But, this past summer, Philip Morris Chief Executive Geoffrey Bible attended a posh ceremony at New York's Waldorf Astoria hotel honoring South Korean President Kim Dae Jung. Then in October, Mr. Bible flew to South Korea and expressed interest in a strategic partnership with the country's tobacco monopoly.

South Korea is a plum market. It is a nation of heavy smokers who light up more than 100 billion cigarettes a year, making it one of the 10 largest tobacco markets in the world. In Thailand, people smoke roughly 50 billion cigarettes annually. (The number is nearly 500 billion in the U.S.)

Important Markets

International markets are becoming more important to cigarette makers as long-term prospects in the U.S. grow increasingly dim. Although U.S. and other multinational tobacco companies have sold cigarettes in South Korea and Thailand for several years, they have been no match for state-owned operations that control distribution around the country.

Philip Morris, British American and Reynolds collectively share barely 8% of the cigarette market in South Korea and less than half that percentage in Thailand, says Salomon Smith Barney analyst Martin Feldman. South Korea's tobacco and ginseng enterprise, which employs roughly 6,000 people, controls almost 90% of its market.

Some public-health officials say the IMF's failure to exclude tobacco companies from broad privatization plans could result in increased cigarette sales. That is because state-owned tobacco companies, sluggish and unchallenged, do little to promote market growth. Like other state-run monopolies around the world, cigarette companies in South Korea and Thailand churn out poorly made cigarettes that bear little resemblance to the carefully engineered, smooth-tasting foreign brands like Marlboro or Camel.

"If you change from a nonconfrontational, inefficient government monopoly to a transnational company, it invariably leads to an increase in tobacco consumption," says Judith Mackay, an antitobacco activist based in Hong Kong. Turkey, for example, has become one of the fastest-growing cigarette markets in the world since its government abolished price controls that had propped up the former state-run tobacco monopoly.

The IMF and the cigarette companies strongly deny that the privatization of state-owned tobacco enterprises leads to increases in cigarette consumption. Peter S. Heller, deputy director of the IMF's fiscal affairs department, suggests that removing foreign governments from the tobacco business might actually increase their willingness to regulate tobacco use, advertising and promotion.

"Privatization might free the government to be much more aggressive" in regulating tobacco, he says. Mr. Heller also notes that the IMF often urges governments to raise tobacco excise taxes to boost government revenues, a step that may also help reduce smoking levels. Korea's IMF-approved government budget, for example, includes a new 10% value-added tax on tobacco.

Although South Korea is the larger market, health activists are particularly worried about privatization in Thailand, which has some of the strictest antismoking laws in the world. Thai public health groups successfully lobbied for a complete tobacco advertising ban. And last month, Thailand made headlines when it required all cigarette packs to include a warning that smoking can cause impotence.

'Buy Influence'

Public health officials in Thailand say privatization of the tobacco monopoly will inevitably erode their efforts. "When the transnationals set up their base, they can bring in a lot of money to buy influence, buy politicians, buy social leaders in every level of society," says Hatai Chitanondh, who is president of the Thailand Health Promotion Institute.

"Our entrance in a foreign market, whether by exports or direct investment, does nothing to inhibit a government's ability to legislate over any aspect of our business," Philip Morris says in a statement. "In fact, by permitting international competition and eliminating state-controlled tobacco monopolies, the previous conflict of interest between the sale and regulation of cigarettes by a state enterprise is eliminated." The company also says that overall cigarette consumption dropped in the Czech Republic after Philip Morris acquired the state-owned monopoly there.

The IMF itself has operated in Asia for decades, but its lending ballooned there after the financial crisis erupted in Thailand last year. In August 1997, the IMF approved a $4 billion contribution to Thailand's $17 billion international rescue package. Then last December, as the crisis spread, the IMF agreed to lend about $20 billion to South Korea. In return for its loans, the IMF generally requires recipients to comply with a number of agreed-to economic reforms.