Chapter 12, pp. 226-236, of Monke-Pearson provides detailed interpretations of a number of PAMs that can serve as models for interpreting the high productivity paddy PAM.

The first PAM exercise focuses on a single commodity system for which complete information on competing alternatives is not available. Profits this include returns to land and management. Althought private land costs can be obtained from the private rental market, the absence of information on the social profits of competing commodities make social returns to land difficult to define. Consequently, in both the private and social computations, Profits in this PAM equal Profits (Excluding Land)_.That is, profits represent returns to management and land.

The first step in computing a single-commodity PAM for High Yielding Paddy is to insert a new worksheet in the PAMTutorial workbook. Rename it simply PAMs.

To compute the elements of the PAM, utilize the methods used earlier to create the budget tables. Select the cell Private Revenue cell and click on the equals (=) sign in the Formula Bar. Then click on the Total Revenue cell for High Yielding paddy in the Private Budget table (Table 3.3 under the Chapter 3 (Private Budget tab). Click on O.K. Do the same for the social output entry.

Completing the remaining entries requires slightly more effort. To compute the Private Tradable Costs cell, select the cell and begin to write the summation function in the Formula Bar by first clicking on the = sign, then typing SUM and an open parenthesis. The completed entry is =SUM(. A dialog box will pop-up requesting the range over which the function should sum. Click on the Chapter 3 (P-Budget tab) and select the input items (Urea through fuel) that constitute paddy input costs. (If the dialog box obscures the view of the relevant data, drag it to the bottom of the page.) Complete the formula by adding a closing parenthesis. Then click on OK.

Use the same procedure to compute the labor inputs cell and the capital inputs cell. Select the cell to be completed, make sure it is empty, click on the = sign, type SUM(, complete the range by going to the appropriate worksheet and selecting the relevant range, in this case labor and capital, type in a closing parenthesis, and click on OK.

Once data from the budget tables have been entered for Table 5.1, the profits column and the divergences row can be computed. To complete the profits column, subtract the sum of the Inputs, Labor, and Capital cells from the Revenue cell. To compute the divergences row, subtract social entries from private entries. Remember to utilize the copy command as much as possible.

Questions

Interpret the results of the high productivity paddy PAM. To what extent do policies affect paddy prices? What about input subsidies?1

The positive divergence in tradable outputs indicates that farmers are receiving more than the social value for their crop. They are, in effect, being subsidized by the amount of the divergence. The negative divergence in tradable inputs reflects a subsidy to farmers for use of these inputs. Farmers do not pay the full social cost of these inputs and the divergence represents the cost to the government. The difference between the private and social interest rate causes the divergence in the capital column.

Appendix 5.1. Computing Summary Ratios

To compare the profitability and efficiency of different crops, a common numeraire must be used throughout the analysis. The use of ratios is a convenient method of avoiding the problem of a common numeraire, particularly when the production processes and outputs are very dissimilar. Several useful ratios that provide information on private and social profitability can be derived directly from the data in the policy analysis matrix. 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.2

In this part of the exercise, the results from the previous PAMs will be used to calculate the nominal protection coefficient (NPC), the effective protection coefficient (EPC), and the domestic resource cost coefficient (DRC). The ratios will be calculated in a summary table so that the results can be compared easily between crops. The summary table is also convenient for conducting sensitivity analysis on the results.

To create the summary table, Insert a new worksheet in the workbook and rename it Ratios.

The Ratio Table

The summary table consists of four rows: high yielding paddy (wet), rainfed corn, irrigated soybeans (alone), and irrigated soybeans (system). The NPC, EPC, and DRC ratios appear in the columns. (The nominal protection coefficient is calculated separately on outputs and inputs in this example.) See Appendix Table 5.1.1 for the suggested format.

The Nominal Protection Coefficient (NPC)

The bottom row of the PAM indicates the extent of commodity and factor market divergences in the production of each crop. In the absence of market failures, this row measures the effects of distorting policy on inputs and outputs. The nominal protection coefficient, defined by the ratio of private commodity prices and social commodity prices, compares the impact of government policy (or of market failures that are not corrected by efficient policy) between different crops.3

Calculate the NPC for tradable outputs (i.e., crop output) for each commodity shown in Table 5.1 from its corresponding PAM using the formula:

Select the cell to be completed, click on the = sign, then on the PAM tab. Click on the private output cell, type in /, then click on the social output cell. Click on OK. Utilize the same method to compute the NPCI.

An NPC for tradable outputs greater than 1 shows that the market price of the output exceeds the social price. The farmer receives an implicit output subsidy from policies affecting crop prices.

Calculate the NPC for tradable inputs for each commodity shown in Table 5.1.1 from its corresponding PAMs.

An NPC for tradable inputs less than 1 indicates that market prices of inputs fall below the price that would result in the absence of policy. This ratio reveals the presence of input subsidies, taxes, trade restrictions or an inappropriate exchange rate.

The Effective Protection Coefficient (EPC)

The effective protection coefficient, defined as the ratio of value added in private prices to value added in social prices, more completely measures incentives to farmers. The EPC indicates the combined effects of policies in the tradable commodities markets. This is a useful measure because input and output policies, such as commodity price supports and fertilizer subsidies, often constitute part of a comprehensive policy package. For example, governments frequently reduce the price of outputs but then subsidize inputs in an effort to encourage the adoption of new technology.

Calculate the EPC cell in Appendix Table 5.1.1 for each of the commodities using the formula:

To compute the values for the EPC cells, use the methods described earlier for computing the values for the NPCs. Select the cell, click on =, click on the PAMs tab, and complete the formula.

An EPC greater than 1 indicates positive incentive effects of commodity policy (a subsidy to farmers) whereas an EPC less than 1 shows negative incentive effects (a tax on farmers). Both the EPC and the NPC ignore the effects of transfers in the factor market and therefore do not reflect the full extent of incentives to farmers.

The Domestic Resource Cost Coefficient (DRC)

The domestic resource cost coefficient measures the efficiency, or comparative advantage, of crop production. If the social returns to land cannot be identified clearly because full information about alternatives is lacking, the DRC may be calculated with respect to labor and capital only. The DRC serves as a proxy measure for social profits. It is calculated by dividing the cost of labor and capital by value-added at social prices. From Table 3.1, the DRC equals G/(E-F).

Calculate the DRC for the single commodities as:

Where the opportunity cost of land can be clearly identified, the DRC is calculated by including the cost of land (i.e., the social profitability) of the next best alternative crop. The resulting DRC reflects the country's comparative advantage, not only with respect to capital and labor, but within agriculture as well.

Calculate the DRC for the farming system as:

Use the methods described above to compute the values for Appendix Table 5.1.1 under the Ratios tab.

The DRC will be positive unless the social value added in crop production is negative. However, DRCs greater than one indicate that the value of domestic resources used to produce the commodity exceeds its value added in social prices. Production of the commodity, therefore, does not represent an efficient use of the country's resources. DRCs less than one imply that a country has a comparative advantage in producing the commodity. Values less than one mean that the denominator (value added measured at world prices) exceeds the numerator (the cost of the domestic resources measured at their shadow prices).

Chapter 12, pp. 226-236, of Monke-Pearson provides detailed interpretations of a number of PAMs that can serve as models for interpreting the high productivity paddy PAM.

_{For a more detailed discussion of various summary ratios including the DRC, see}M-P pp. 25-29_.

_{"Efficient" policies are interventions deliberately introduced to offset market failures. For a discussion of policies that promote food security in developing countries where imperfect capital and insurance markets make it difficult to obtain a desired protection against risk, see}M-P, pp. 53-54_.