The economic analysis of commodity systems: Extending the Policy Analysis Matrix to account for environmental effects and transactions costs

Abstract

In a context in which the framework of economic policy is changing radically, the objective of agricultural research programmes should be to support the development of systems which look likely to be ‘winners’ in the future. The Policy Analysis Matrix (PAM) framework permits sensitivity analysis in which an inventory of possible ‘feasible’ technological developments may be examined for their impact on the underlying comparative advantage (implicitly, the longer-run competitive advantage) of the system. This is a fruitful procedure for the integration of technological and economic analysis, and can make a substantial contribution to the identification of ‘best-bet’ lines of technological development. This paper begins with a brief account of the role and usefulness of the PAM, a relatively straightforward logical framework for policy analysis, from which a range of ‘policy indicators’ may be estimated. The most important of these indicators is the Domestic Resource Cost (DRC) ratio, an approximate indicator of the ‘underlying comparative advantage’ of a commodity system, a characteristic which may be obscured by an overlay of policy interventions and ‘market failures’. The paper then explores two areas in which the use of the PAM can be extended. First, it examines the possibilities offered by the application of ‘new institutional economics’ (NIE) in a PAM context to changing rural market conditions precipitated by withdrawal of the state. Second, the paper reviews how PAM may be modified to incorporate environmental costs and benefits, and so address more adequately the sustainability of commodity systems.