Comparisons among Agricultural Systems Producing Different Outputs

The entries in PAM allow comparisons among agricultural systems that produce identical outputs, either within a single country or across two or more countries. In the accounting matrix, all measures are given as monetary units per physical unit of some commodity. If interest focuses solely on a comparison of one wheat system with another, for example, the matrix entries provide all information necessary for the analysis. Comparisons can be drawn readily by construction of PAM entries for two or more different systems that produce the same quality of wheat. (If necessary, premiums or discounts can be used to correct for quality differences.) Further comparisons can be made between the wheat systems in one country and those in other wheat-producing countries; social exchange rates, incorporating corrections for differential inflation not otherwise offset by exchange-rate changes, are used to convert the other countries' currencies into domestic currency.

Comparisons between wheat and barley-or apples and oranges are another story, however. To permit comparisons among systems producing different outputs, some common numeraire must be generated. One technique involves the expression of all values relative to a constraining domestic factor resource, such as land. A more common method uses ratios. Both the numerator and the denominator of each ratio are PAM entries defined in domestic currency units per physical unit of the commodity. Therefore, the ratio is a pure number free of any commodity or monetary designation.

Private Profitability

For comparisons of systems producing identical outputs, private profits, D = (A - B - C), indicate competitiveness under existing policies. Construction of a ratio is required to permit comparisons among systems producing different commodities. Direct inspection of the data for private profits is not sufficient. Profitability results are residuals and might have come from systems using very different levels of inputs to produce outputs with widely varying prices. This difficulty might.not be apparent in a wheat versus corn example, but it would arise in a comparison of a wheat system with one producing a high-value crop, such as strawberries. This ambiguity is inherent in comparisons of private profits of systems producing different commodities with differing capital intensities.

The problem is circumvented, by construction of a private cost ratio (PCR)-the ratio of domestic factor costs (C) to value added in private prices (A - B); that is, PCR = C/(A - B). Value added is the difference between the value of output and the costs of tradable inputs; it shows how much the system can afford to pay domestic factors (including a normal return to capital) and still remain competitive-that is, break even after earning normal profits, where (A - B - C) = D = 0. The entrepreneurs in the system prefer to earn excess profits (D > 0), and they can achieve this result if their private factor costs (C) are less than their value added in private prices (A - B). Thus they try to minimize the private cost ratio by holding down factor and tradable input costs in order to maximize excess profits.

Social Profitability

Social profits measure efficiency or comparative advantage. For a comparison of identical outputs, results can be taken directly from the second row of the PAM matrix-social profits equal social revenues less social costs, H = (E - F - G). When social profits are negative, a system cannot survive without assistance from the government. Such systems waste scarce resources by producing at social costs that exceed the costs of importing. The choice is clear for efficiency-minded economic planners: enact new policies or remove existing ones to provide private incentives for systems that generate social profits, subject to nonefficiency objectives.

When systems producing different outputs are compared for relative efficiency, the domestic resource cost ratio (DRC), defined as G/(E - F), serves as a proxy measure for social profits. No new information beyond social revenues and costs is required to calculate a DRC. The DRC plays the same substitute role for social profits as does the PCR for private profits; in both instances, the ratio equals 1 if its analogous profitability measure equals 0. Minimizing the DRC is thus equivalent to maximizing social profits. In cross-commodity comparisons, DRC ratios replace social profit measures as indicators of relative degrees of efficiency.

Policy Transfers

Transfers are shown in the third row of the PAM. If market failures are unimportant, these transfers measure mainly the effects of distorting policy. Efficient systems earn excess profits without any help from the government, and subsidizing policy (L > 0) increases the final level of private profits. Because subsidizing policy permits inefficient systems to survive, the consequent waste of resources needs to be justified in terms of nonefficiency objectives.

Comparisons of the extent of policy transfers between two or more systems with different outputs also require the formation of ratios (for reasons analogous to those offered in the discussions of private and social profits). The nominal protection coefficient (NPC) is a ratio that contrasts the observed (private) commodity price with a comparable world (social) price. This ratio indicates the impact of policy (and of any market failures not corrected by efficient policy) that causes a divergence between the two prices. The NPC on tradable outputs (NPCO), defined as A/E, indicates the degree of output transfer; for example, an

NPC of 1.10 shows that policies are increasing the market price to a level 10 percent higher than the world price. Similarly, the NPC on tradable inputs (NPCI), defined as B/F, shows the degree of tradable input transfer. An NPC on inputs of 0.80 shows that policies are reducing input costs; the average market prices for these inputs are only 80 percent of world prices.

The effective protection coefficient (EPC), another indicator of incentives, is the ratio of value added in private prices (A - B) to value added in world prices (E - F), or EPC = (A - B)/(E - F). This coefficient measures the degree of policy transfer from product market-output and tradable-input-policies. But, like the NPC, the EPC ignores the transfer effects of factor market policies. Hence, it is not a complete indicator of incentives.

An extension of the EPC to include factor transfers is the profitability coefficient (PC), the ratio of private and social profits or PC = (A - B - C)/(E - F - G), or D/H. The PC measures the incentive effects of all policies and thus serves as a proxy for the net policy transfer, since L = (D - H). Its usefulness is restricted when private or social profits are negative, since the signs of both entries must be known to allow clear interpretation.

A final incentive indicator is the subsidy ratio to producers (SRP), the net policy transfer as a proportion of total social revenues or SRP = L/E = (D - H)/E. The SRP shows the proportion of revenues in world prices that would be required if a single subsidy or tax were substituted for the entire set of commodity and macroeconomic policies. The SRP permits comparisons of the extent to which all policy subsidizes agricultural systems. The SRP measure can also be disaggregated into component transfers to show separately the effects of output, input, and factor policies.