The Policy Analysis Matrix

The policy analysis matrix is a product of two accounting identities, one defining profitability as the difference between revenues and costs and the other measuring the effects of divergences (distorting policies and market failures) as the difference between observed parameters and parameters that would exist if the divergences were removed. By filling in the elements of the PAM for an agricultural system, an analyst can measure both the extent of transfers occasioned by the set of policies acting on the system and the inherent economic efficiency of the system.

Profits are defined as the difference between total (or per unit) sales revenues and costs of production. This definition generates the first identity of the accounting matrix. In the PAM, profitability is measured horizontally, across the columns of the matrix, as demonstrated in Table 2.1. Profits, shown in the right-hand column, are found by the subtraction of costs, given in the two middle columns, from revenues, indicated in the left-hand column. Each of the column entries is thus a component of the profits identity-revenues less costs equals profits.

Each PAM contains two cost columns, one for tradable inputs and the other for domestic factors. Intermediate inputs-including fertilizer, pesticides, purchased seeds, compound feeds, electricity, transportation, and fuel-are divided into their tradable-input and domestic factor components. This process of disaggregation of intermediate goods or services separates intermediate costs into four categories-tradable inputs, domestic factors, transfers (taxes or subsidies that are set aside

Table 2.1: Policy Analysis Matrix

	Revenues	Costs		Profit
		Tradable Inputs	Domestic Factors
Private Prices	A	B	C	D
Social Prices	E	F	G	H
Divergences	I	J	K	L

Table Notes:

Private profits, D, equal A minus B minus C. Social profits, H, equal E minus F minus G. 'Output transfers, 1, equal A minus E. 1nput transfers, J, equal B minus F. Factor transfers, K, equal C minus G. Net transfers, L, equal D minus H; they also equal I minus J minus K.

Ratio Indicators for Comparison of Unlike Outputs:

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

in social evaluations), and nontradable inputs (which themselves have to be further disaggregated so that ultimately all component costs are classified as tradable inputs, domestic factors, or transfers).

An example illustrates the process of disaggregating intermediate goods or services. Fertilizer is for most countries a tradable intermediate input. If a particular country is a net importer of fertilizer, the social valuation of a specific kind of fertilizer for its agricultural system is given by the cif (costs, insurance, freight) import price for that fertilizer plus the social costs of moving the input to the representative location in the system. Finding the import price is usually straightforward. Finding the social valuation of the domestic marketing costs is another story, however. It is necessary to study the transportation industry-road or rail-and disaggregate the costs into labor, capital, fuel, and so forth. Each type of cost then needs to be further broken down through use of an appropriate world price and an estimate of local transportation costs.