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PAM and the Evaluation of Macroeconomic Policies
The evaluation of macroeconomic policy will usually take the analyst well beyond PAM's focus on production efficiency and relative profitabilities. Budgetary policy issues, the structure and feasibility of various tax collection systems, and approaches to monetary management and financial regulation are each entire disciplines. But as in the consideration of commodity policy and factor policy, the PAM can provide useful insights into some of the critical aspects of macroeconomic policy.
Fiscal Balance and Revenue Generation
Taxes create potentially large efficiency losses in production, and the PAM approach allows a focus on the revenue-efficiency tradeoffs that result. Net impacts on income are represented by H. The fiscal contribution of a system requires consideration of the specific instruments used to effect policy transfers (the third line of the matrix). Trade taxes or subsidies, for example, affect government revenue only when exports or imports are involved. Domestic production of these commodities generates no revenue.
The PAM results are also helpful in identifying ways to generate revenue more efficiently. The social profitabilities of various commodities provide an indication of a feasible set of taxes on a fixed input, such as land. The producer will have no incentive to shift out of a particular commodity so long as its profitability (D) remains positive and the commodity retains its ranking among alternative crops. A proportional profits tax meets these requirements. If there are no divergences in the output or input markets, the PAM matrix for a particular system becomes the following.
Comparison of the social profitabilities of alternative crops in a region gives information about the potential for various levels of land taxes. Systems with higher social profits, ceteris paribus, will generate larger contributions to government revenue. As H increases, so does kH. But in general, the estimation of revenue effects requires aggregation of representative systems to the national output level. Small tax revenues per unit of output can become relatively important sources of aggregate revenue if total output is large. Subsequent calculation of the impact of taxes on private profits gives insights into whether commodity production patterns will be consistent with taxes on social profits. Because other divergences will cause private profits to differ from social profit, socially efficient taxes may be infeasible without the changes in the incentives given to alternative commodity systems.
Foreign-Exchange Balance
Governments that consider their short-run needs for foreign exchange to be inelastic have an interest in examining the direct foreign-exchange burden of particular agricultural systems. This burden is measured in social prices, based on world prices for inputs and outputs. Private prices are not relevant for this calculation, since they include the impact of domestic taxes or subsidies and thus do not reflect full foreign-exchange value. If the product is exported, the direct foreignexchange impact (in PAM notation) is equal to E - F, where F represents tradable inputs that are actually imported. But foreign-exchange impacts can also occur indirectly, because domestic production substitutes for imports. If the country is a net importer of its staple food, for example, domestic staple food production earns no foreign exchange directly. But by being substituted for imports of the commodity, domestic production saves foreign exchange. A similar argument applies to inputs that are produced and used domestically but are potentially bought or sold on international markets. Consequently, a full measure of short-run foreign-exchange impacts is value added at world prices (E - F).
The value of E - F gives the immediate foreign-exchange impact of particular systems. But this measure is relevant only for a time period in which the domestic factors of labor and capital are immobile. In the long run, the social profitability of systems measures their impact on foreign-exchange supplies. The use of domestic factors by a particular system requires their withdrawal from some other production activity that can directly earn or save foreign exchange. The social value of domestic factors can thus be interpreted as an opportunity cost, measured in terms of potential foreign-exchange earning power. Allocating capital to the domestic production of rice, for example, denies the use of that same capital for the production of some other export or importsubstituting commodity. Analogous reasoning applies to nontradable outputs. Ultimately, these products substitute at the consumer level for tradable goods. So long as consumers spend all of their incomes, withdrawal of a nontradable good is associated with increased consumption of some other good. Therefore, the full measure of the foreign-exchange effect is E - F - G = H; the long-run foreign-exchange impact of an agricultural system is identical to its social profitability.
Policy-makers do not necessarily face difficult tradeoffs in comparing long- and short-run availabilities of foreign exchange. A ranking of systems in terms of E - F is likely to be quite different from a ranking of systems according to E - F - G = H. But a shift toward policies that promote socially profitable systems need not have adverse short-run impacts on availabilities of foreign exchange. Because resources move out of relatively inefficient systems (high values of E - F but low values of H) into more efficient systems (high values of H), these shifts in
production patterns generally increase the net supply of foreign exchange. This effect on foreign-exchange supplies is immediate, because both the direct and indirect impacts on foreign exchange occur instantaneously. A given quantity of domestic factor inputs earns more foreign exchange in efficient systems than in inefficient systems. The net foreign-exchange supply will be adversely affected only if domestic resources are underused during the transition from inefficient to efficient production. Hence, foreign-exchange goals are fully compatible with efficiency maximization.
These results are illustrated in Table 5.1. The country has two ways of producing a commodity, represented by system 1 and system 2. System 1 offers a value-added in domestic prices of 25 - 10 = 15, whereas system 2's value-added in domestic prices is 100 - 60 = 40. The cost of domestic factors is subsidized in system 1 and taxed in system 2. With the initial policy, system 1 technology is preferred by producers, because it offers higher private profitability than system 2 does (+ 5 versus - 20). Because of its negative private profitability, system 2 does not operate. After the policy change, system 1 does not operate, because private profit is negative, whereas system 2 generates 100 - 60 = 40 units of foreign exchange. By choosing a policy that encourages operation of the system with the highest social profitability, the country increases direct foreign-exchange
generation by 40 - 15 = 25. This example illustrates that both relative domestic
factor costs and relative tradable-input costs are essential elements in the estimation of foreign exchange effects. A shift in policy toward greater efficiency increases the availability of foreign exchange. Therefore, a foreign-exchange balance, if pursued correctly, need not be a nonefficiency objective.
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