The document provides an analysis of the Policy Analysis Matrix (PAM) as a tool for evaluating agricultural policy by comparing private and social profits across different crops in Sri Lanka. It examines the impact of government policies on the agricultural sector, particularly focusing on profitability, degree of protection, and comparative advantage amidst the challenges posed by the COVID-19 pandemic. The findings highlight the potential costs to taxpayers of expanding certain crop cultivations and recommend adjustments to agricultural policy to enhance economic efficiency.

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Policy Analysis Matrix
Class 4
August 10, 2024
10/8/2024

2. 2
Law of one price
• The law of one price (LOOP) is an economic theory that states that the
price of identical commodities should be equal across countries.
• It is based on many assumptions like the absence of trade frictions,
and presence of free competition, flexible pricing, and perfect
commodity arbitrage.
• It is commonly applied to the commodities traded in the financial
markets. However, it is also the basis for many economic theories.
• The violation of LOOP occurs due to transport costs, trade restrictions,
and the limits placed on the level of rational arbitrageurs’
intervention.
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3. 3
Aim of this lesson
• To introduce the Policy Analysis Matrix
• To help students to understand the difference between market prices
and opportunity costs
• To comprehend data required to perform an analysis using PAM
• To provide hands-on experience on analysis using PAM
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4. 4
ILOs
• Perform an analysis using a PAM for a selected agricultural industry
and describe the degree of protection provided and comparative
advantage of the industry.
• Degree of protection – the extent to which domestic prices deviate from
world market prices
• Comparative advantage – the opportunity cost of production in the home
country versus ROW
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Policy Analysis Matrix (PAM)
• This lesson is based on Monke and Pearson (1989)
• The PAM approach was first developed in 1981 by researchers at the
University of Arizona and Stanford University to study changes in
agricultural policies in Portugal.
• The seminal book applying this analytical approach is Scott R. Pearson
et al., Portuguese Agriculture in Transition, 1987.
• An empirical application of this framework to rice in Indonesia is
found in Scott Pearson et al., Rice Policy in Indonesia, 1991, Chapter 7,
pp. 114-120, 131-137.
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What is PAM
• Matrix: A matrix is an array of numbers (or symbols) that follows two
rules of accounting – one defining relationships across the columns of
the matrix and the other defining relationships down the rows of the
matrix.
• The profitability identity in PAM is the accounting relationship across
the columns of the matrix.
• The divergences identity in PAM is the relationship down the rows of
the matrix.
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• The Policy Analysis Matrix (PAM) is a central tool for regional
agricultural policy analysis.
• It provides information to help policy makers address three central
issues of agricultural policy analysis.
• Competitiveness,
• Efficiency, and
• Extent of policy transfers.
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Framework of PAM: Value of production of …… (sector) per ……(ha) in …..…….(season)
Items Revenue
Costs
Profit
…….., ….., ……
(Tradable Inputs)
….., ……, …..
(Non- Tradable
Inputs)
Private Price A B C D
Private profit (D) = A-(B+C). Use cost of cultivation reports
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Framework of PAM: Value of production of …… (sector) per ……(kg or ha) in …..…….(year/season)
Items
Rev
enu
e
Costs
Profi
t
Tradable Inputs Non- Tradable Inputs)
Private
Price
A B1 B2 B3 B4 C1 C2 C3 D
Social
Price
E F1 F2 F3 F4 G1 G2 G3 H
Diverge
nce
I J1 J2 J3 J4 K1 K2 K3 L
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Usefulness
• Whether agricultural systems are competitive: A comparison of
private profitability before and after the policy change measures the
impact of the policy change on competitiveness.
• Impact of new public investment in infrastructure/research on the
efficiency of agricultural systems: A comparison of social profits
before and after the new public investment measures the increase in
social profits.
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Measures of profitability and transfers
• Private profits: D = A - B - C.
• Social profits: H = E – F - G.
• Output transfers: I = A - E.
• Input transfers: J = B - F.
• Factor transfers: K = C - G.
• Net transfers: L = D – H = I - J - K.
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Revenue Cost Profit
Tradable Domestic
Private prices A B C D
Social prices E F G H
Divergences I J K L

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Ratio Indicators
• 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
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Revenue Cost Profit
Tradable Domestic
Private
prices
A B C D
Social
prices
E F G H
Divergenc
es
I J K L

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Policy Transfers in PAM
• PAM compares returns, costs, and profits of agricultural systems in
private (actual market) prices and in social (efficiency) prices.
• This enables the PAM to provide measures of the extent of policy
transfers and of market failures.
• The results show how policies individually and collectively affect
private profitability.
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Product market transfers in PAM
• To analyze how policies affect tradable outputs and inputs, one must
thoroughly understand the process of price determination and the
gains from international trade.
• Inefficient policies change prices, interfere with the gains from trade,
and create efficiency losses.
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• Governments use subsidies or international trade restrictions (tariffs
or quotas) to raise product prices.
• Good policy analysts measure the impacts of price policy on quantities
produced, consumed, and traded, on the welfare of producers, consumers and
the treasury, and on efficiency.
• Governments use subsidies on imports of food or on all food
consumption to lower the domestic price of food.
• Policy analysts investigate the effects of policy on quantities consumed,
produced, and imported, on transfers among consumers, producers, and the
treasury, and on efficiency.
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Input markets in PAM
• Understanding factor markets, those for labor, capital, and land, is
critical in analyzing agriculture.
• The key is to discover whether policy distortions or market
imperfections cause observed factor prices to diverge from efficient
ones.
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Exchange Rate Policy in PAM
• Exchange rate policy determines whether the prices of tradables
(those linked to foreign markets) keep up with the prices of
nontradables.
• It thus has a central influence on the competitiveness of agricultural
commodities in world markets.
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Benefit Cost Analysis in PAM
• The basic PAM calculations focus on the divergences between private
and social prices that signal the impact of government policy
• Distorting policies or market failures cause divergences between
private and social prices.
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PAM indices
Nominal Protection Coefficient Output
Effective Protection Coefficient
Domestic Resource Cost Ratio
NPCO>1,
System Is Protected By Policies
EPC>1,
Government policies protect producers
DRC<1
Country has comparative advantage
Tax Payer Cost
Positive value shows taxpayers are
transferring the amount equivalent to
TPC
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Policy Support for Paddy and Other Food Crops in Sri Lanka:
How Large are the Transfers to Farm Producers?
Sara Sahibzada and Jeevika Weerahewa
22/1/2021
Post Graduated Institute of Agriculture,
University of Peradeniya
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Introduction- COVID 19 and Sri Lanka NFP
• COVID-19 is a pressing global concern
• Economic repercussions began impacting Sri Lanka at all levels in March
2020
• The most impacts : labor-intensive food crops
• Fruits, vegetables, dairy, products, and meat processing
• Production and distribution of agri-food needed to be supported
• Support package during COVID-19 in Sri Lanka:
• Speed up the implementation of its National Food Production (NFP)
program
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Introduction- Protection and Comparative advantage
• Food production is distorted in Sri Lanka through a myriad of input and
output taxes and subsidies
• Decisions to expand food crop cultivation could have some significant
implications on the taxpayers
• The magnitude of such effects is dependent on the degree of protection
given to each sector
• Therefore, needed to evaluate the degree of protection and
comparative advantage of food crops before expand the cultivation
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Objective
•To analyze and compare the social returns of
paddy and six other food crops in Sri Lanka using
a Policy Analysis Matrix (PAM) framework
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Paddy
M
aize
Potato
B
onion
B
gourd
Cabbage
Pole
bean
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
500000
Private Profitability of Paddy and
OFCs
P
a
d
d
y
M
a
i
z
e
P
o
t
a
t
o
B
o
n
i
o
n
B
g
o
u
r
d
C
a
b
b
a
g
e
P
o
l
e
b
e
a
n
-400000
-200000
0
200000
400000
600000
800000
Social Profitibility of Paddy and
OFCs
Profitability of Paddy and OFCs production (SLKR )
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Protection Coefficients and Comparative Advantage
PAM
Indicators
Paddy Maize Potato B onion B gourd Cabbage Pole
bean
NPC 0.68 1.02 1.64 1.25 0.61 0.51 0.86
EPC 0.86 1.09 6.05 1.35 0.59 0.44 0.92
DRC 0.62 1.10 4.88 1.00 0.31 0.28 0.59
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Taxpayer costs in production of paddy and OFCs (SLKR )
Paddy Maize Potato B onion B gourd Cabbage Pole bean
-600,000
-500,000
-400,000
-300,000
-200,000
-100,000
0
100,000
200,000
300,000
400,000
Taxpayer Cost on paddy and OFCs production. SLKR/ha
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Conclusions
• The taxpayer will have to bear costs largely if cultivation of maize, potato, and
big onion expanded.
• cultivation of cabbage, bitter gourd, and pole bean, which currently are not
included in the NFP program, provide some benefits to the society when the
cultivation of the same is expanded.
• The study recommends a revisiting of the types of crops chosen for NFP to
minimize the burden on the taxpayers.
• The inclusion of the later in the NFP program and providing market intelligence
to reach export markets are recommended.
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In class exercise: Prepare a PAM
for a product of your choice
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Data requirement
• Private costs: activity budgets (farming, marketing, and processing) for
each agricultural system.
• Social costs: come partly from the system budgets and partly from
government documents or industry sources.
• Information on input-output relationships (quantities of inputs needed
per hectare or per ton of output) typically are assumed to be the same
in both private and social analysis and thus are obtained from the
system budgets (and then from the first row of PAM).
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• The entries for social valuation of domestic factor costs (G) cannot be
observed directly in the field or taken from government or industry
documents (because comparable world prices do not exist for
factors).
• Instead, field researchers study rural factor markets to search for the
presence or absence of divergences in each factor market – effective
distorting policies or significant market failures.
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Exercise – Compare profitability and protection coefficients
of Central Java and East Java (from a websource)
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Using the PAM given, answer the following
questions
• What is the degree of protection provided by the government on the
output produced by this industry?
• What is the degree of protection provided by the government on the
tradable inputs used by this industry?
• What is the overall protection provided to the industry when
protection provided to outputs and inputs are considered?
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• How big are the transfers from the government to the industry?
• Does this industry posses a comparative advantage?
• How distorted are the factor markets?
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Assignment
• Select an agriculture sub-sector; year; season
• Identify tradable inputs and domestic factors of production
• Peruse activity budgets and obtain the first row of PAM
• Find out government interventions on outputs, tradable inputs and
factors of production
• Do some approximations and obtain the second row of PAM
• Compute the third row of PAM
• Compute NPC, EPC and DRC
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Selected data sources
• Cost of cultivation of agricultural crops
• https://www.doa.gov.lk/SEPC/images/PDF/CostofCulti_08_26.pdf
• https://www.doa.gov.lk/ICC/images/publication/Books/Fruit_B/CropEnterpris
eBudjet_Book.pdf
• http://www.statistics.gov.lk/agriculture/data/TeaCoconutRubberTotal.htm
• World market prices of agricultural items
• https://www.doa.gov.lk/SEPC/images/PDF/AgStat.pdf
• Policy levels
• http://www.customs.gov.lk/classification/tarrif
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Thank you!
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