PAM and the Evaluation of Factor Prices

Some factor policy issues can be addressed fully with PAM. Questions of policy bias toward a particular technology, for example, are addressed by comparisons of private and social profitabilities of alternative technologies for the production of a given commodity. The PAM results indicate the efficiency costs of technologies (if social profit, H, is less than zero or less than its value in alternative systems) as well as the price incentives necessary to elicit adoption of them (private profit, D, is positive and larger than the private profit for alternative systems). If D > 0 and H < 0, policy encourages inefficient technical change; D < 0 and H < 0 reflect conditions where policy discourages efficient technical change.

In most cases, tradeoffs and complementarities with nonefficiency objectives will be central to judgments about factor policies. Comparison of private and social values of factors in the PAM allows the analyst to contrast the consistency of income distribution objectives with production incentives. The impacts of policy on income distribution among factors are found by disaggregation of the factor cost element into returns to individual factors. The private cost of factors, C, can be divided into the returns to capital, C_K, to labor, C_L and to land, C_T; similarly, the social cost of factors can be disaggregated into G_K, G_L and G_T. Ratios of private and social factor cost can then be computed. If the system under study accounts for only a small share of total factor employment, it will not have much influence on income distribution. But if the system has positive private profitability, it can be considered consistent with the observed distribution of income.

Estimation of the net impact on employment requires additional information on the potential aggregate output or the number of producers represented by the system. To expand commodity system results to a national level, one selects estimates of potential aggregate output that conform to the unit of measure of the PAM. If the PAM results are measured in per hectare terms, for example, the analyst needs to estimate the potential area of the system and multiply it by the per hectare labor use to obtain total employment generated by the system. This result gives the gross employment impact of the system. The net contribution to employment then can be determined by comparison with employment declines in alternative commodity systems. The difference between the new aggregate employment of the expanding system under study and that of the contracting systems is the nPt effect on labor demand. This number will be positive if the expanding system is more labor-intensive than the contracting systems.

Evaluation of public investment policies can be made in concert with PAM. The extension of technical changes to new regions sometimes requires the provision of public goods. Adaptive research and modification of a commodity system will be necessary when agroclimatic conditions vary. Transportation, marketing, and information infrastructures might also be needed. Conceptually, the treatment of public goods in the context of PAM is straightforward. The analyst identifies investment policy costs that are complementary to the expansion of socially profitable systems. These costs are considered tradable-input costs (F) and domestic factor costs (G). The analyst is interested in the difference between additions to social profit (H) and public sector investment costs (F + G). If that difference is positive, efforts to support the expansion of the commodity system can be justified in efficiency terms. The costs (F + G) also represent the claim of the public sector on social profits.

Some public goods or services, however, cannot be attributed to

Analyses of land and labor market policy in agriculture have been more limited. A survey of the latter factor is provided in Lyn Squire, Employment Policy in Developing Countries: A Survey of Issues and Evidence (New York: Oxford University Press, 1981). Perhaps the best-known contribution in this area is the induced migration model of John R. Harris and Michael Todaro, "Migration, Unemployment, and Development: A Two Sector Analysis," American Economic Review 60 (March 1970): 126-42. Most recent research has focused on understanding the ways that land and labor markets function and the role of market failures. Two recent works are Hans Binswanger and Mark Rosenzweig, eds., Contractual Arrangements, Employment, and Wages in Rural Labor Markets in Asia (New Haven, Conn.: Yale University Press, 1983); and Pranab Bardhan, Land, Labor and Rural Poverty (New York: Columbia University Press, 1984).

The influence of factor prices in the process of growth and technical change is of prime importance in the induced innovation model of Yujiro Hayami and Vernon Ruttan, Agricultural Development: An International Perspective (Baltimore: Johns Hopkins University Press, 1971). This model is elaborated and extended to incorporate institutional development in Hans Binswanger and Vernon Ruttan, Induced Innovation: Technology, Institutions and Development (Baltimore: Johns Hopkins University Press, 1978).

More elaborate models of the role of policy and dynamic change have been sparse. One such model is developed in Michael Bruno, "Development Policy and Dynamic Comparative Advantage," in The Technology Factor in International Trade_, ed. Raymond Vernon (New York: National Bureau of Economic Research, 1970), pp. 27-64. The comments following this article, by Robert Aliber and Nathan Rosenberg (pp. 65-72), elaborate on many of the reasons for these problems. An example of the projection of future comparative advantage, based on expectations about factor and output prices, is provided in Scott Pearson et al., Portuguese Agriculture in Transition (Ithaca: Cornell University Press, 1987).