Practical Issues Addressed

Three principal issues-the impact of policy on competitiveness and farm-level profits, the influence of investment policy on economic efficiency and comparative advantage, and the effects of agricultural research policy on changing technologies-can be investigated with the PAM approach. The results can be used to identify what kinds of farmers-categorized by the commodities they grow, the technologies they use, and the agroclimatic zones in which their farms are located are competitive under current policies affecting crop and input prices and how their profits change as the policies are altered. This issue of farm policy-how agricultural prices affect farming profits-is of primary importance to ministries of agriculture. In the PAM approach, farm budget data (sales revenues and input costs) are collected for the principa, agricultural systems. The determination of profit actually received by farmers is a straightforward and important initial result of the analysis. It shows which farmers are currently competitive and how their profits might change if price policies were changed.

A second issue concerns the economic efficiency (or comparative advantage) of agricultural systems and how additional public investment might change the current pattern of efficiency. In what commodity production systems, defined by technology and agroclimatic zone, does the country currently exhibit strong or weak comparative advantage, and how might new investments, using government revenues or foreign aid funds, improve this picture? Investment policy is of primary interest to economic planners who allocate capital budgets, including foreign aid, in attempts to increase efficiency and speed the growth of national income.

With the PAM method, the analyst reassesses the revenues, costs, and profits indicated in farm-level and marketing budgets. Efficiency valuations of outputs and inputs are meant to lead to the highest possible levels of national income. The difference between revenues and costs for a system-both valued in social prices-is social profits, a measure of economic efficiency. New investments that reduce social costs also increase social profits and improve efficiency. An understanding of the array of social profitabilities of agricultural systems greatly reduces the number of detailed benefit-cost analyses needed to evaluate investment alternatives.

A third and closely related set of issues is how best to allocate funds for agricultural research. How can economic analysis be used to help determine the most fruitful directions for primary and applied research to raise crop yields and reduce social costs, thereby increasing social profits? This question is faced by decision-makers in the international agricultural research centers, in several international organizations, and in the agricultural research establishments of certain countries. It is a question also asked by central planners who make allocations to agricultural research budgets.

The approach used in PAM analysis begins with the calculation of existing levels of private (actual market) and social (efficiency) revenues, costs, and profits. This calculation reveals the extent to which actual profits are generated by policy transfers rather than by underlying economic efficiency. Next, agricultural scientists need to project changes in yields and inputs resulting from alternative research programs. The effectiveness of such changes can then be gauged by an examination of how they alter private and social profits of current technologies.