Class 3 - Policy Analysis Matrix (2).pptx

Class 3 - Policy Analysis Matrix (2).pptx

1. Policy Analysis Matrix Class 4 August 10, 2024 10/8/2024 1

2. Law of one price The law of one price (LOOP) is an economic theory that states that the price of identical commodities should be equal across countries. It is based on many assumptions like the absence of trade frictions, and presence of free competition, flexible pricing, and perfect commodity arbitrage. It is commonly applied to the commodities traded in the financial markets. However, it is also the basis for many economic theories. The violation of LOOP occurs due to transport costs, trade restrictions, and the limits placed on the level of rational arbitrageurs’ intervention. 10/8/2024 2

3. Aim of this lesson To introduce the Policy Analysis Matrix To help students to understand the difference between market prices and opportunity costs To comprehend data required to perform an analysis using PAM To provide hands-on experience on analysis using PAM 10/8/2024 3

4. ILOs Perform an analysis using a PAM for a selected agricultural industry and describe the degree of protection provided and comparative advantage of the industry. Degree of protection – the extent to which domestic prices deviate from world market prices Comparative advantage – the opportunity cost of production in the home country versus ROW 10/8/2024 4

5. Policy Analysis Matrix (PAM) This lesson is based on Monke and Pearson (1989) The PAM approach was first developed in 1981 by researchers at the University of Arizona and Stanford University to study changes in agricultural policies in Portugal. The seminal book applying this analytical approach is Scott R. Pearson et al., Portuguese Agriculture in Transition, 1987. An empirical application of this framework to rice in Indonesia is found in Scott Pearson et al., Rice Policy in Indonesia, 1991, Chapter 7, pp. 114-120, 131-137. 10/8/2024 5

6. What is PAM Matrix: A matrix is an array of numbers (or symbols) that follows two rules of accounting – one defining relationships across the columns of the matrix and the other defining relationships down the rows of the matrix. The profitability identity in PAM is the accounting relationship across the columns of the matrix. The divergences identity in PAM is the relationship down the rows of the matrix. 10/8/2024 6

7. The Policy Analysis Matrix (PAM) is a central tool for regional agricultural policy analysis. It provides information to help policy makers address three central issues of agricultural policy analysis. Competitiveness, Efficiency, and Extent of policy transfers. 10/8/2024 7

8. Framework of PAM: Value of production of …… (sector) per ……(ha) in …..…….(season) Items Revenue Costs Profit …….., ….., …… (Tradable Inputs) ….., ……, ….. (Non- Tradable Inputs) Private Price A B C D Private profit (D) = A-(B+C ). Use cost of cultivation reports 10/8/2024 8

9. Framework of PAM: Value of production of …… (sector) per ……(kg or ha) in …..…….(year/season) Items Revenue Costs Profit Tradable Inputs Non- Tradable Inputs) Private Price A B1 B2 B3 B4 C1 C2 C3 D Social Price E F1 F2 F3 F4 G1 G2 G3 H Divergence I J1 J2 J3 J4 K1 K2 K3 L 10/8/2024 9

10. Usefulness Whether agricultural systems are competitive: A comparison of private profitability before and after the policy change measures the impact of the policy change on competitiveness. Impact of new public investment in infrastructure/research on the efficiency of agricultural systems: A comparison of social profits before and after the new public investment measures the increase in social profits. 10/8/2024 10

11. Measures of profitability and transfers Private profits: D = A - B - C. Social profits: H = E – F - G. Output transfers: I = A - E. Input transfers: J = B - F. Factor transfers: K = C - G. Net transfers: L = D – H = I - J - K. 10/8/2024 11 Revenue Cost Profit Tradable Domestic Private prices A B C D Social prices E F G H Divergences I J K L

12. Ratio Indicators Private cost ratio (PCR): C/(A - B). Domestic resource cost ratio (DRC): G/(E - F) Nominal protection coefficient (NPC) on tradable outputs (NPCO): A/E on tradable inputs (NPCI): B/F Effective protection coefficient (EPC): (A - B)/(E - F) Profitability coefficient (PC): (A - B - C)/(E - F - G) or D/H Subsidy ratio to producers (SRP): L/E or (D - H)/E 10/8/2024 12 Revenue Cost Profit Tradable Domestic Private prices A B C D Social prices E F G H Divergences I J K L

13. Policy Transfers in PAM PAM compares returns, costs, and profits of agricultural systems in private (actual market) prices and in social (efficiency) prices. This enables the PAM to provide measures of the extent of policy transfers and of market failures. The results show how policies individually and collectively affect private profitability. 10/8/2024 13

14. Product market transfers in PAM To analyze how policies affect tradable outputs and inputs, one must thoroughly understand the process of price determination and the gains from international trade.  Inefficient policies change prices, interfere with the gains from trade, and create efficiency losses.  10/8/2024 14

15. Governments use subsidies or international trade restrictions (tariffs or quotas) to raise product prices.  Good policy analysts measure the impacts of price policy on quantities produced, consumed, and traded, on the welfare of producers, consumers and the treasury, and on efficiency. Governments use subsidies on imports of food or on all food consumption to lower the domestic price of food. Policy analysts investigate the effects of policy on quantities consumed, produced, and imported, on transfers among consumers, producers, and the treasury, and on efficiency. 10/8/2024 15

16. Input markets in PAM Understanding factor markets, those for labor, capital, and land, is critical in analyzing agriculture. The key is to discover whether policy distortions or market imperfections cause observed factor prices to diverge from efficient ones. 10/8/2024 16

17. Exchange Rate Policy in PAM Exchange rate policy determines whether the prices of tradables (those linked to foreign markets) keep up with the prices of nontradables .  It thus has a central influence on the competitiveness of agricultural commodities in world markets. 10/8/2024 17

18. Benefit Cost Analysis in PAM The basic PAM calculations focus on the divergences between private and social prices that signal the impact of government policy Distorting policies or market failures cause divergences between private and social prices. 10/8/2024 18

19. PAM indices Nominal Protection Coefficient Output   Effective Protection Coefficient   Domestic Resource Cost Ratio   NPCO>1, System Is Protected By Policies EPC>1, Government policies protect producers DRC < 1 Country has comparative advantage Tax Payer Cost   Positive value shows taxpayers are transferring the amount equivalent to TPC 10/8/2024 19

20. Policy Support for Paddy and Other Food Crops in Sri Lanka: How Large are the Transfers to Farm Producers? Sara Sahibzada and Jeevika Weerahewa 22/1/2021 Post Graduated Institute of Agriculture, University of Peradeniya 10/8/2024 20

21. Introduction- COVID 19 and Sri Lanka NFP COVID-19 is a pressing global concern Economic repercussions began impacting Sri Lanka at all levels in March 2020 The most impacts : labor-intensive food crops Fruits, vegetables, dairy, products, and meat processing Production and distribution of agri -food needed to be supported Support package during COVID-19 in Sri Lanka: Speed up the implementation of its National Food Production (NFP) program 10/8/2024 21

22. Introduction- Protection and Comparative advantage Food production is distorted in Sri Lanka through a myriad of input and output taxes and subsidies Decisions to expand food crop cultivation could have some significant implications on the taxpayers The magnitude of such effects is dependent on the degree of protection given to each sector Therefore, needed to evaluate the degree of protection and comparative advantage of food crops before expand the cultivation 10/8/2024 22

23. Objective To analyze and compare the social returns of paddy and six other food crops in Sri Lanka using a Policy Analysis Matrix (PAM) framework 10/8/2024 23

24. Profitability of Paddy and OFCs production (SLKR ) 10/8/2024 24

25. Protection Coefficients and Comparative Advantage PAM Indicators Paddy Maize Potato B onion B gourd Cabbage Pole bean NPC 0.68 1.02 1.64 1.25 0.61 0.51 0.86 EPC 0.86 1.09 6.05 1.35 0.59 0.44 0.92 DRC 0.62 1.10 4.88 1.00 0.31 0.28 0.59 10/8/2024 25

26. Taxpayer costs in production of paddy and OFCs (SLKR ) 10/8/2024 26

27. Conclusions The taxpayer will have to bear costs largely if cultivation of maize, potato, and big onion expanded. cultivation of cabbage, bitter gourd, and pole bean, which currently are not included in the NFP program, provide some benefits to the society when the cultivation of the same is expanded. The study recommends a revisiting of the types of crops chosen for NFP to minimize the burden on the taxpayers. The inclusion of the later in the NFP program and providing market intelligence to reach export markets are recommended. 10/8/2024 27

28. In class exercise: Prepare a PAM for a product of your choice 10/8/2024 28

29. Data requirement Private costs: activity budgets (farming, marketing, and processing) for each agricultural system. Social costs: come partly from the system budgets and partly from government documents or industry sources. Information on input-output relationships (quantities of inputs needed per hectare or per ton of output) typically are assumed to be the same in both private and social analysis and thus are obtained from the system budgets (and then from the first row of PAM). 10/8/2024 29

30. The entries for social valuation of domestic factor costs (G) cannot be observed directly in the field or taken from government or industry documents (because comparable world prices do not exist for factors). Instead, field researchers study rural factor markets to search for the presence or absence of divergences in each factor market – effective distorting policies or significant market failures. 10/8/2024 30

31. Exercise – Compare profitability and protection coefficients of Central Java and East Java (from a websource ) 10/8/2024 31

32. Using the PAM given, answer the following questions What is the degree of protection provided by the government on the output produced by this industry? What is the degree of protection provided by the government on the tradable inputs used by this industry? What is the overall protection provided to the industry when protection provided to outputs and inputs are considered? 10/8/2024 32

33. How big are the transfers from the government to the industry? Does this industry posses a comparative advantage? How distorted are the factor markets? 10/8/2024 33

34. Assignment Select an agriculture sub-sector; year; season Identify tradable inputs and domestic factors of production Peruse activity budgets and obtain the first row of PAM Find out government interventions on outputs, tradable inputs and factors of production Do some approximations and obtain the second row of PAM Compute the third row of PAM Compute NPC, EPC and DRC 10/8/2024 34

35. Selected data sources Cost of cultivation of agricultural crops https://www.doa.gov.lk/SEPC/images/PDF/CostofCulti_08_26.pdf https://www.doa.gov.lk/ICC/images/publication/Books/Fruit_B/CropEnterpriseBudjet_Book.pdf http://www.statistics.gov.lk/agriculture/data/TeaCoconutRubberTotal.htm World market prices of agricultural items https://www.doa.gov.lk/SEPC/images/PDF/AgStat.pdf Policy levels http://www.customs.gov.lk/classification/tarrif 10/8/2024 35

36. Thank you! 10/8/2024 36