Tradable-Input Transfers

The tradable-input transfers, J, are defined as the difference between the total costs of the tradable inputs valued in private prices, B, and the total costs of the same inputs measured in social prices, F. A private output price above its social price means that policy is providing a positive transfer, causing the production system to realize higher private profits or cover greater private costs than it could without the aid of the policy. This positive transfer has a positive sign in the third row of the PAM. Correspondingly, subsidies on tradable inputs cause production to have greater private profitability. The PAM allows aggregation of all of the effects of divergences, combining those influencing outputs, tradable inputs, and factors.

The principles underlying the interpretation of tradable-input transfers are equivalent to those just set out for output transfers. World prices serve as social valuations of all tradable inputs. Nontradable inputs are decomposed into their component tradable-input and

Box 12.1 Output Transfers in a Portuguese Wheat System
	Revenues (escudos per kilo)
	Wheat Grain	Wheat Straw	Total
Private prices	23.00	4.42	27.42
Social prices	18.37	4.42	22.79
Effects of divergences	4.63	0	4.63
In this example, the effects of divergences are entirely the result of distorting policy, not of market failures. The actual policy was a quantitative restriction against imports of wheat, which had an effect equivalent to that of an import tariff of 25 percent: (23.00 / 18.37 -1.00) x 100 percent. No policies affected the price of wheat straw, a nontradable by-product of wheat grain used for animal feed. If the government had chosen to permit an unrestricted supply of wheat imports, the private (actual market) price would have fallen to the social (cif import) price. At that lower price, the country would have imported more wheat, produced less domestically, and consumed more is the outcome would have been more efficient than the actual one, because too many domestic resources were used to produce a product that could have been imported more cheaply and because local processors (and ultimately consumers) were forced to pay too much for wheat. In effect, the protectionist policy caused the country to give up some of the potential gains from international trade. To evaluate the effectiveness of this policy, one needs to compare the efficiency losses from producing, consuming, and trading inefficiently with whatever gains might have arisen for the government in pursuing nonefficiency objectives, such as income redistribution (favoring wheat farmers over wheat product consumers) and food security (which would be enhanced if domestic variability in wheat quantities and prices were less than variability on thenternational market for wheat). The NPCO permits comparison of systems producing unlike outputs. The NPCO on wheat grain only is given by the ratio of the private price of wheat to the social price of wheat, or 23.00 / 18.37 = 1.25. This result shows that the country's trade-restrictive policy has permitted the private price to be 25 percent higher than without the policy. The private price could be compared with other single-commodity NPCOs. The NPCO for the entire wheat system is found by formation of a ratio of total revenues in private and social prices. This result, 27.42 / 22.79 = 1.20, indicates somewhat lesser protection for the total output of the system than for the main product, wheat grain, because the secondary product, wheat straw, is totally unprotected (and thus has an NPCO of 4.42 / 4.42 = 1.00).

primary factor costs to permit social valuation. All intermediate input costs are thus divided into tradable-input or factor cost categories.

An analyst searching for the sources of divergences in tradable-input markets finds that departures from world prices nearly always are caused by distorting policies rather than market failures. This situation is identical to that of divergences affecting outputs. Although one should always look carefully for the existence of market failures, in most empirical analyses product market failures (for both outputs and tradable inputs) are assumed to be nonexistent or unimportant. This assumption is made in the study summarized in

.Interpretation of the transfer effects of tradable-input price policies follows closely that of output price policies. If a government desires to raise domestic prices, it can restrict imports (if the product is imported), subsidize exports (if the country is a net exporter of the item), or tax all domestic consumption of the good. To reduce input costs, a government can subsidize importables, restrict exportables by imposing export taxes or quotas, or subsidize all domestic consumption of the input item.

Often governments decide to subsidize specific agricultural inputs, such as improved seeds or chemical fertilizers, in order to encourage greater use of these inputs and adoption of new technologies. In this respect, tradable-input price policy may have different goals and results from output price policy. Whereas output policy raises or lowers profits per ton for all systems, tradable-input policy can be designed to favor systems whose technologies use the subsidized inputs intensively.

Nominal protection coefficients on tradable inputs (NPCIs) can be calculated to permit comparisons among agricultural systems that produce dissimilar outputs. Calculations of NPCIs for single inputs and for the total of tradable inputs are contained in Box 12.2. These results are the opposite from those for the NPCOs, because both higher private prices of output and lower private costs of tradable inputs lead to greater private profits. Hence, the larger the NPCOs and the smaller the NPCIs, the greater the policy transfers to agricultural systems.

These separate influences of commodity price policies can be combined in an indicator called the effective protection coefficient (EPC), which is defined as (A - B) / (E - F). This measure uses the same information as the NPCO (A and E) and the NPCI (B and F). It is a useful way to indicate the extent of incentives or disincentives that systems receive from product policies. The EPC concept is illustrated in Box 12.3. Its main limitation as an indicator of incentives is that it does not incorporate any effects of policies that influence factor prices. This omission means that EPC results should be interpreted as measures of the incen

Box 12.2 Tradable -Input Transfers in a Portuguese Wheat System
	Tradable input costs (in escudos per kilogram)
	Fertilizer (urea)	Spare parts (for repairs)	Other	Total
Private prices	1.35	1.93	6.25	9.53
Social prices	2.21	1.58	8.00	11.79
Effects of divergences	-0.86	0.35	-1.75	-2.26
(private prices less social prices)
As in Box 12.1, the effects of divergences are the result of distorting policy only, not of market failures. A number of distorting policies caused the observed market (private) prices of tradable inputs to differ from comparable world prices. The government provided a subsidy on all sales of urea fertilizer, including that produced locally and that imported; this subsidy amounted to 0.86 escudos per kilogram, or 39 percent of the cif import price: (2.21 - 1.35) / 2.21 x 100 percent. In contrast, the government levied an import tariff on tradable spare parts (used in making repairs), which increased the average domestic price for these inputs by 22 percent: (1.93 - 1.58) / 1.58 x 100 percent.The tariff on tradable inputs thus caused domestic producers of wheat to have to pay more for their spare parts than they would have without the tariff. This policy, therefore, created a negative transfer of 0.35. Numerous other tradable inputs are aggregated in the column titled "Other." The most important of these inputs is compound fertilizer, nitrogen-phosphorus-potassium (NPK), which was subsidized to 38 percent of the cif import price. That subsidy accounted for most of the positive transfer on "other" tradable inputs. The last column in the table shows that the wheat system enjoyed a total positive transfer of 2.26 escudos per kilogram on its tradable-input costs. If the government had not intervened, the wheat farmers would have had to pay 11.79 escudos per kilogram, but the actual policies permitted this cost to be reduced to 9.53. This total positive transfer of 2.26 resulted from the policy combination of subsidies on urea fertilizer of 0.86 and on other tradable inputs (mostly compound fertilizer) of 1.75 and of an import tariff on spare parts that created a negative transfer of (0.35). The signs for entries in the table are the opposite of those here because each input transfer is subtracted from the output transfer in the calculation of net transfers (L = I - J - K). The NPCI allows the analyst to contrast the effects of distorting policies on tradable-input costs in two or more agricultural systems that produce either identical or dissimilar tradable outputs. An NPCI equal to 1 indicates no transfer, an NPCI greater than 1 shows a negative transfer (because input costs are raised by policy), and an NPCI less than 1 denotes a positive transfer (since input costs are lowered by policy). In this example, the NPCI for urea fertilizer is 1.35 / 2.21 = 0.61, and that for other inputs is 6.25 / 8.00 = 0.78, both showing the effects of the subsidies. However, the NPCI for spare parts, 1.93 / 1.58 = 1.22, exceeds 1 because the price-raising import tariff created a negative transfer. The average NPCI for all tradable inputs is 9.53 / 11.79 = 0.81, which again points to the positive transfer from the entire set of policies affecting tradable inputs.

Box 12.3. Effective Protection Coefficient for a Portuguese Wheat System
	Amounts (in escudos per kilogram)
	Revenues	Tradable-input costs
Private prices	27.42 (A)	9.53 (B)
Social prices	22.79 (E)	11.79 (F)
Effects of divergences	4.63(l)	2.26 (J)
The EPC is the ratio of the difference between revenues and tradable-input costs in private prices to that in social prices. In PAM notation, EPC = (A - B) / (E - F). The numerator of EPC, A - B, is value added in private prices; the denominator, E - F, is value added in world prices. The ratio thus shows by how much policies in the product markets cause observed value added to differ from what it would be in the absence of commodity price policies. EPC is an indicator of the net incentive or disincentive effect of all commodity policies affecting prices of tradable outputs and inputs. An EPC greater than 1 means that private profits are higher than they would be without commodity policies; the transfer from both output and tradable-input policies, taken together, is positive. An EPC less than 1 indicates the opposite result; the net effect of policies that alter prices in product markets is to reduce private profits, and the combined transfer effect is thus negative. An EPC can be calculated for each agricultural system. For the wheat system of this example, it is (27.42 - 9.53 = 17.89) / (22.79 - 11.79 = 11.00) = 1.63. The interpretation of this result is that the net impact of government policy influencing product markets-that is, output price policy and tradable-input price policy-is to allow the wheat system depicted to have a value added in private prices 63 percent greater than the value added without policy transfers (as measured in world prices). The NPCO (A / E) of 1.20 indicates that policies caused output prices to be 20 percent higher than they would have been if world prices had been allowed to set domestic prices. The NPCI (B / F) on all tradable inputs of 0.81 showed that costs of tradable inputs were only 81 percent of what they would have been at world prices. The EPC is a single indicator that combines these two results by using the data from both. It is a useful measure of the combined effects of commodity price policies, but it does not account for any effects of policy in factor markets.

tive effects of commodity price policies but not as indicators of the total impact of policies that influence prices and costs.