In What Measure Is Public Finance Sustainability Threatened by Illicit Tobacco Trade: The Case of Western Balkan Countries

Abstract

The aim of this paper is to gain new knowledge about illicit tobacco trade in Western Balkan countries and its effects on public finance sustainability. It includes an estimation of the volume of illicit tobacco trade, identifying and quantifying the key factors that cause illegal tobacco trade, the effects of illegal tobacco trade on public finance sustainability, and the effects on the intensity of total tobacco trade. An empirical analysis was conducted using the data collected by field research on consumer preferences in tobacco products in Western Balkan countries (Bosnia and Herzegovina, Croatia, Kosovo, Macedonia, Montenegro, Serbia, and Slovenia). The reference research period is the year 2018. The results obtained show a high variability of volume of illicit tobacco trade in Western Balkan countries. While more than 20% of tobacco products in Montenegro and Bosnia and Herzegovina are bought on the gray market, a share of illicit tobacco trade lower than 5% is found in Slovenia and Macedonia. Underdeveloped institutional framework fighting against illicit trade and weak rule of law, coupled with the heavy taxation of tobacco products, are the key factors behind a higher intensity of illicit trade in comparison to more developed European Union (EU) economies. Illicit tobacco trade negatively affects the stability of public finance of Western Balkan economies and reduces the level of public service. It is especially important for the health system combating the negative consequences of smoking. Regular and illicit tobacco trade amongst Western Balkan countries is found to flow in opposite directions.