The effects of tobacco policies in the Dominican Republic

Abstract

A tobacco supply function for the Dominican Republic was estimated and the resulting coefficients used to measure the effects of government policies on tobacco production. Nominal (Direct and Total) protection rates (NRP) and effective rates of protection (ERP) were estimated for tobacco, corn, and fertilizer. The results indicated that tobacco was taxed at an annual average rate of 9 percent while corn was subsidized during most years of the study. Direct and total price interventions for both crops and for fertilizer had the effect of decreasing tobacco production in 17 out of 21 years. A major source of taxation on tobacco production is the government policy of overvaluing the Dominican currency. In order to ameliorate the negative effects of the exchange rate policy, the Dominican government provides an explicit subsidy to tobacco production through the Tobacco Institute. Nonetheless, the results show that government revenues from tobacco product sales more than offset government expenditures on tobacco production.