Policy Analysis, The Policy Analysis Matrix and Determining System Profitability's

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Policy Analysis, The Policy Analysis Matrix and
Determining System Profitability's
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Role of Policy Analysis

• Clarify to policymakers intended and unintended
  consequences of specific policy actions
• Provide a means of simulating outcomes of
  alternative polices and assessing the relative
  desirability of the outcomes
• Assists in the decision making process

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Public Policy Objectives Often Being Promoted

• Neo-classical objective of economic efficiency
• Optimal allocation of scarce resources
• Minimize transaction costs
• Correction of market failures
• Non-efficiency objectives
• Food security
• Income distribution
• Producer and/or consumer protection
• Increase government revenues

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Common Policy Choices

• Pricing policies affecting inputs and outputs
• Subsidies
• Taxes
• Exchange rate
• Floor and ceiling price policies
• Trade policies
• Import tariffs
• Export quota
• Notion of Policy Hierarchy
• Selecting policies that most closely lead to
  meeting objectives

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PAMs as a Tool for Policy Analysis

• Single-market analysis tool
• Considers individual markets in isolation
• Considered static
• A tool to examine effects of pricing and trade
  policies in addition to market failures on farmer
  profits
• compares private versus social prices of inputs
  and output of a particular production system.
• Allows for the determination of how economically
  efficient resources are being allocated.

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Utility of PAMs

• Quantifies impact of current policy setting on
  existing and potential technological
  introductions
• Conducive to easy sensitivity analysis of policy
  scenarios
• Allows for easy determination of protection
  coefficients
• Straightforward in calculation and presentation
• Contributes to adoptability analysis
• Provides building blocks for more dynamic
  analysis i.e. general equilibrium analysis

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Means to Measure Extent of Economic Efficiency

• Common Coefficients of Protection
• Nominal Protection Coefficient
• Is a ratio that contrasts private and social
  output prices
• Effective Protection Coefficient
• Is the ratio of value added measured at private
  vs. social prices
• Domestic Resource Cost Coefficient
• Is the ratio of domestic factor prices to value
  added at social prices

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Baseline PAM
Where A is the gross value of outputs at
realized prices and E is the gross value at
social prices, or those in the absence of policy
or market failure. Private profits D
(A-B-C) Social profits H (E-F-G) Output
transfers I (A-E) Tradable input
transfers J (B-F) Factor transfers K (
C-G) Net transfers L (I-J-K) or (D-H)
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Steps to Develop Each PAM

• Data collection
• Establish input-output tables
• Establish private and social prices tables
• Establish private and social budgets
• Derive PAMS from budget tables
• If desired, determine protection coefficient
  ratios
• Conduct analysis

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Data Needs for PAMs

• Input-Output coefficients for production
  system(s) in question
• Tradables
• Non-tradables or domestic resources
• Private prices for inputs, outputs and market
  linkages
• Social prices for inputs, outputs and market
  linkages
• Policy data i.e., subsidy/tax rates etc.

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Input-Output Tables
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Calculating Private and Social Prices

• Private prices
• Actual prices realized by farmer, processor,
  marketer, exporter/importer etc.
• Social prices
• Those prices that would exist in the absence of
  any policy distortion, market failure, or next
  best use.

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Example of Calculating Import Parity Prices
(Private and Social)
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Private and Social Price Tables
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Private and Social Budgets
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Baseline PAM
Where A is the gross value of outputs at
realized prices and E is the gross value at
social prices, or those in the absence of policy
or market failure. Private profits D
(A-B-C) Social profits H (E-F-G) Output
transfers I (A-E) Tradable input
transfers J (B-F) Factor transfers K (
C-G) Net transfers L (I-J-K) or (D-H)
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Calculating Protection Coefficients
NPC A/E A NPCgt1 is indicative of private
prices of output being greater than social prices
reflecting that producers are positively
protected. EPC (A-B)/(E-F) it is the ratio of
value added measured at private vs. social
prices. A EPC gt 1 is that there is an overall
incentive to produce a commodity. DRC G/(E-F)
it is the ratio of domestic factor prices to
value added at social prices. If DRC gt 1 the
commodity system is not desirable from an
economic efficiency standpoint, i.e., country X
does not have a comparative advantage.
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Expanding Traditional PAMs

• Incorporation of multiple crops
• Incorporation of non-market values
• Incorporation of perennial crops-multi-year
  analysis

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Incorporation of multiple crops
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Incorporating Ecological Values
In the case of carbon sequestration, A E now
would include additional values assuming a
functioning carbon market.
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Multi-Year Analysis
Where ? reflects the discounted values over the
period of analysis.