Net Transfers

Net transfers, L, are output transfers (I) minus tradable input transfers (J) minus factor transfers (K). Because each of the components of the net transfer is defined as the effects of divergences between private and social valuations, L is the net difference between private profits (D) and social profits (H). This double accounting definition of L follows directly from PAM's two accounting identities.

The measure of net transfer, a principal result of the PAM approach, is illustrated in Box 12.5. The value of L shows the extent of inefficiency in an agricultural system. If market failures are a large source of the net transfer, this measure indicates how much long-term government effort (price policy, investment, and regulation) will be required eventually to permit the economy to operate efficiently. If, instead, most of the L is traced to distorting policies, the government can increase efficiency by reducing the degree of distortion-unless such changes will seriously impair the attainment of nonefficiency objectives. L is, therefore, a key input into policy analysis.

These measures of net transfer can be applied to a wide range of agricultural and nonagricultural systems. Comparisons can be made among different systems producing the same output, a variety of agricultural systems, and different sectors in the economy. However, L alone is not sufficient for such comparisons, because it is denominated in currency units per hectare, per ton or kilogram of the commodity produced. Once again, ratios are required so that the indicators will be free of specific units.

The profitability coefficient (PC), defined as PC = D / H, is a measure of the degree to which net transfers have caused private profits to exceed social profits. Because D = (A - B - C) and H = (E - F - G), the PC extends the effective protection coefficient-defined earlier as (A - B) / (E - F)-to include factor transfers. PC is a more complete measure than EPC because it provides an indication of the total incentive effect

Box 12.4 Factor Transfers in a Portuguese Wheat System
	Factor costs (in escudos per kilo)
	Unskilled labor	Skilled labor	Capital	Total
Private prices	0.02	3.48	3.90	7.40
Social prices	0.02	2.82	5.13	7.97
Effects of divergences	0.00	0.66	-1.23	-0.57
The effects of divergences in the factor markets are the result of both underlying market failures and distorting policies. Both of these distorting influences typically cause observed factor prices to diverge from their social valuations. Three primary factors were identified in the illustrated wheat system; but only two of them, skilled labor and capital, were important costs. Unskilled labor was a minor cost element, amounting to only 0.02 escudos per kilogram in both private and social prices. The factor transfer for unskilled labor is thus 0. The private wage rate is taken as a reasonable indicator of the social price of unskilled labor because neither significant market failures nor distorting policies were identified after careful observation. Information about employment opportunities was widely available to potential searchers, and a considerable amount of seasonal and multiyear migration of unskilled laborers occurred. Government policies to have employees pay pension contributions and health insurance were largely unenforced and thus were ignored by unskilled labor in agriculture. For skilled labor, market failures were also judged to be absent. Again, ample information and widespread migration of workers showed evidence of a well-functioning market for skilled labor. The wage rate paid by wheat farmers and millers exceeded the social wage rate for skilled laborers because of distorting government policy. Above the market wage, employers also had to pay a percentage of the wage as a tax to provide funds for employee health insurance and pensions (akin to social security in the United States). These policies caused private wages for skilled labor to be an estimated 23 percent higher than social wages-that is, the level that might have been expected without the policies. The result for the system was a negative factor transfer of (0.66) because the social price, 2.82, was raised by policy to a higher private price, 3.48. The factor transfer for capital was in the opposite direction. The social opportunity cost of capital was estimated at 8 percent plus inflation for the country. The actual interest rates being paid by wheat farmers, which ranged between 2 and 6 percent plus inflation, were less than the estimated social rate. This divergence resulted from the market failure of an underdeveloped capital market, associated with insufficient numbers of financial institutions in rural areas; a government subsidy on agricultural credit for borrowers, usually larger farmers, who qualified for it; and a government policy to ration credit at controlled interest rates that were below market-clearing levels. As a result of these divergences, the private costs of capital, 3.90, were only 76 percent of their full social value, 5.13; the level of the positive factor transfer was 1.23. The total factor transfer is found by summation of the amounts for the individual factors. In this example, the negative transfer of (0.66) resulting from the tax on skilled labor is more than offset by the positive transfer of 1.23 caused by the capital subsidizing policies. The net result is a small positive factor transfer of 0.57

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Box 12.5 Net Transfers, Profitability Coefficient, and Subsidy Ratios to Producers for a Portuguese Wheat System
		Tradable factor (escudos/kilo)
	Revenues	Input costs	Costs	Profits
Private prices	27.42(A)	9.53 (B)	7.40(C)	10.49(D)
Social prices	22.79(E)	11.79(F)	7.97(G)	3.03(H)
Effects of divergence	4.63(I)	-2.26(J)	-0.57(K)	7.46(L)
The net transfer, L, of 7.46 escudos per kilogram is the output transfer, 4.63, less the tradable input transfer, (2.26), less the factor transfer, (0.57). By definition, L = I - J - K. The net transfer is also the difference between private profits and social profits. Hence, L = D - H; and in the example, 7.46 = 10.49 - 3.03. The net transfer is the sum of all divergences that cause private profits to differ from social profits. In the illustrated wheat system, all of the transfers, except part of the transfer from capital, were the result of distorting policy, not of market failures. All three categories of policy transfers were positive, indicating that the government was providing support to the wheat system in each instance. Because social profits, 3.03 escudos per kilogram, were positive, the system could have operated profitably without any policy transfers. These transfers, 7.46, raised the profits actually received by farmers and millers from 3.03 to 10.49. The measure of net transfer, L, cannot be used for comparisons among systems producing unlike outputs. The ratio formed for this purpose is the profitability coefficient: PC = (A - B - C) / (E - F - G) = D / H. It shows the extent to which private profits exceed social profits. In the example, PC = 10.49 / 3.03 = 3.46. Policy transfers (and a capital market failure) have permitted private profits nearly 3.5 times greater than social profits. The subsidy ratio to producers is SRP = L / E, the ratio of the net transfer to the social value of revenues. The purpose of this indicator is to show the level of transfers from divergences as a proportion of the undistorted value of the system revenues. If market failures are not an important component of the divergences, the SRP shows the extent to which a system's revenues have been increased or decreased because of policy. For the wheat example, the SRP is 7.46 / 22.79 = 0.33. This result means that divergences-almost entirely distorting policies in this example-have increased the gross revenues of the system by one-third. If, hypothetically, all policies on tradable inputs and factors were removed, the wheat system's NPCO would have to be increased from 1.20 to 1.33 to permit the system to maintain the same level of private profits.

of policies, including those influencing factor markets. An illustration of PC is also provided in Box 12.5.

A second ratio indicator, used to measure net transfers across dissimilar systems, is the subsidy ratio to producers (SRP), defined as L /E. It shows how large net transfers from divergences are in relation to the social revenues of the system. The smaller the SRP, the less distorted the agricultural system. The SRP, converted to a percentage, also shows the output tariff equivalent required to maintain existing private profits if all other policy distortions and market failures are eliminated. It thus indicates how much incentive or disincentive the system is receiving from all the effects of divergences. Box 12.5 illustrates the calculation and interpretation of the SRP ratio.