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A modified matrix for policy analysis on production
diversification for Thai agriculture
Shujie Yao a
a
Development Economics Research Group, Dept of Economics, University of
Portsmouth, Portsmouth, UK
Online Publication Date: 01 April 1997
To cite this Article: Yao, Shujie (1997) 'A modified matrix for policy analysis on
production diversification for Thai agriculture', Applied Economics Letters, 4:4, 215 218
To link to this article: DOI: 10.1080/758518497
URL: http://dx.doi.org/10.1080/758518497
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Applied Economics Letters, 1997, 3, 2 15-2 18
A modijied matrix for policy analysis on
production diversification for Thai agriculture
SHUJIE YAO
Developnzent Economics Research Group, Dept of Economics, University qf Port.smouth,
Portsmouth PO4 8JF, UK
Received 8 May 1996
A modified policy analysis matrix is developed to study the costs and benefits of crop
production in Thailand. Government intervention in production diversification is assessed
with alternative indicators of comparative advantages. It suggests that intervention may
be socially undesirable but there are exceptional cases, especially when economic
externality exists.
I. INTRODUCTION
Agricultural production in Thailand has been dominated by
rice, but over the last few decades, there has been a deliberate
effort by the government to encourage diversification from
rice to other crops. The Thai government has given a number
of reasons to justify its intervention policy (such as input
subsidies and price protection for non-rice crops) by arguing
that farmers are not fully aware of the long-term benefits of
diversification and require some short-term incentives to
change their traditional production pattern. Many government
officials also point out that rice requires too much water which
has become increasingly scarce due to the competition from
industries and urban centres. Because there are no water
charges in Thailand, the existing incentive structure may have
encouraged too much production of rice. Furthermore, as rice
production requires too much chemical fertilizer and insecticide, it can cause environmental damage and deplete soil
fertility (Thomson, 1995). Therefore, a reduction of rice
production is desirable for the sustainable growth of
agriculture. This latter point in favour of government
intervention is referred to the problem of economic externality
(Timmer 1992).
Given that intervention is already in place, the real question
is not whether the government should intervene but how
government intervention should be assessed. To answer this
question, a modified policy analysis matrix (PAM) is
developed to study the potential costs and benefits of
government intervention. The main conclusion is that intervention can incur efficiency losses if water charging and the
damage on soil fertility are ignored. When externality exists,
1350-585 1 O 1997 Routledge
especially when environmental damage and the depletion of
soil fertility are taken into account, government intervention
may not be as undesirable as it is generally believed to be.
11. A MODIFIED POLICY ANALYSIS MATRIX
(PAM)
A policy analysis matrix (PAM) and its application in policy
analysis is developed in Monke and Pearson (1989). In this
section, I confine myself to brief definitions and explanations
of concepts. Readers are, however, referred to Monke and
Pearson (1989) and Yao (1994) for the theory of PAM and
social pricing. The basic structure of a PAM is modified and
presented in Table I .
All the elements in Table 1 are evaluated on a land unit
basis for a particular crop in a particular location. Each PAM
has three rows. The first row accounts for the revenue ( A ) ,cost
of tradable inputs (B), cost of non-tradable inputs excluding
land (Cl), land rent (C2), net return to land (Dl) and profit ( D )
in private prices. The second row accounts for the revenue (E),
cost of tradable inputs (F), cost of non-tradable inputs
excluding land (GI), the opportunity cost of land (G2), net
return to land ( H 1) and profit (F) measured in social prices.
The third row accounts for the differences of the elements in
the first row minus the corresponding elements in the second
row.
A number of important indicators can be derived from a
PAM to study the comparative advantages of competitive
crops. The most useful indicators are private net return to land
(PNRL), social net return to land (SNRL) and domestic
215
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S. Yao
Table 1 A modified policy analysis matrix (PAM)
Accounts
Revenue
(1)
(2)
Private
Social
Divergence
A
E
I
Tradable
input
cost
(3)
N-tradable
input cost
excl. land
(4)
Land
rents/
cost
(5)
Net
return
to land
(6)
Profit
(7)
B
F
J
C1
GI
KI
C2
G2
K2
D1
H1
LI
D
H
L
N~~~S:(~)D~=A-B-CI;D=D~-C~.(~)H~=E-F-GI;H=H~-G~.(C
...;
) LI==DA- H .E( d;)JL = IB- J -FK ;
I-K2.
resource cost (DRC). PNRL and SNRL are defined by
elements Dl and H 1 respectively in Table 1. DRC is defined
in Equation 1.
DRC =
Domestic factor cost at social prices
or
Value - added measured at social prices '
G -Gl+G2
DRC = -- --E-F
E-F
PNRL indicates the net return to land for the producers. A crop
with a higher value of PNRL is more desirable for the
producers but not necessarily desirable for the society.
Whether the production of a particular crop is socially
beneficial is determined by the value of SNRL or the value
of DRC. If DRC < 1, the crop is said to have comparative
advantage internationally. Thus the smaller the value of DRC,
the more advantage the crop will enjoy.
Three other important indicators in a PAM are nominal
protection coefficient of product (NPC), nominal protection
Table 2 Major indicators of competitive crops in Northern Thailand
(1992-93)
Indicators
EPCs
(Blrai)
PNRLs
(B/rai)
SNRLs
(Blrai)
DRCs
Crops
Nakornsawan
Phitsanulok
Rice
Soybean
Mungbean
Rice
Soybean
Mungbean
Rice
Soybean
Mungbean
Rice
Soybean
Mungbean
Rice
Soybean
Mungbean
Rice
Soybean
Mungbean
Notes: The bold figures indicate the most desirable crop with respect to the
corresponding indicator.
Source: Yao and Tinprapha (1995), Appendices I1 and 111.
coefficient of tradable inputs (NPI), and effective protection
coefficient of product (EPC). NPC measures the ratio of the
private price of a product to its social price. If NPC > 1,
producers are protected for the product. NPI measures the
ratio of the private cost of tradable inputs to their social cost. If
NPI > I , producers are protected for the purchase of inputs.
EPC is the ratio of private value added of a product to its
social value added. If EPC > 1, producers are protected with
respect to the value-added produced. From Table 1, NPC, NPI
and EPC can be defined by Equations 2, 3 and 4.
private price of product - A
social price of product
E
(2)
NPI =
private cost of tradable inputs - B
-social cost of tradable inputs
F
(3)
EPC =
A -B
private value - added -value - added
E-F
(4)
NPC =
111. PAMs OF RICE, SOYBEAN AND MUNGBEAN IN
NORTHERN THAILAND
In policy analysis the selection of crops and locations is an
important issue. Rice, soybean and mungbean are selected for
this study because they are the major competitive crops in the
selected regions.
The basic information needed for compiling a PAM are
yields and input requirements per land unit and market prices
of inputs and outputs. The data of transportation cost,
processing cost, storage cost, port charges, production/input
subsidies, and importlexport tariffs are also required to derive
the social prices. The data are available from the Office of
Agricultural Economics (OAE, 1993) in the Ministry of
Agriculture and Cooperatives of Thailand. About 60 f a m s are
selected from each of the two provinces. The average farm
size is 3.2 hectares. On average, 64% of the crop area is for
rice and less than 20% for soybean and mungbean combined.
The construction of a PAM involves calculating the private
and social prices of products and tradable inputs and
estimating the opportunity costs of domestic resources (land,
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Modified matrix for policy analysis
Table 3 Conditional values or percentage changes in sensitivity analyses
Nakornsawan
Conditions imposed
DRC(S) = DRC(R) = 1
Phitsanulok
DRC(S) = DRC(M)
=
1
Sensitivity analyses
A. Producthnpuf prices
( I ) Rice FOB price
(2) Labour costs for all crops
(3) Fertilizer CIF price for all crops
B. Warer/environment
(4) Conditional water charges on rice
(5) Environmental charges on rice
3 5 0 Baht
-350 Baht
Notes: (a) DRC(S), DRC(R) and DRC(M) are respectively the DRCs of rice, soybean and mungbean. (b) For productlinput prices,
decrease respectively, for waterlenvironment, '+' and '-' signify positive and negative economic externality.
labour and local capital). As there are no water charges to the
farmers, cost of water is ignored in this section but will be
considered in the following section. The detailed construction
of PAMs are referred to Yao and Tinprapha (1995). The
results are reported in Table 2.
In Nakornsawan, soybean is the most profitable crop for the
f a r m e r (PNRL= 1051.7 B l r a i ) , f o l l o w e d by r i c e
(PNRL = 875.3 Blrai). Rice is the most desirable crop for
the society (SNRL = 1045.7 Blrai, DRC = 0.856), followed
by soybean (SNRL = 717.7 Blrai, DRC = 1.204). In Phitsanulok, mungbean is the most profitable crop for the farmer
(PNRL = 494.4 Blrai), followed by rice (PNRL = 398.6).
Rice is the most desirable crop for the society (SNRL = 570.5,
DRC = 0.9 1S), followed by mungbean (SNRL = 420.1 Blrai,
DRC = 1.162).
The results in Table 2 indicate that there is an incentive for
farmers to diversify production from rice to soybean in
Nakornsawan and to mungbean in Phitsanulok. From the
society's viewpoint, such a diversification seems undesirable.
The conflict between private and social interests can be
explained by government intervention as indicated by the
values of NPCs, NPIs and EPCs in Table 2. NPC, NPI and
EPC of soybean in both provinces suggest that soybean
production is heavily subsidized for inputs and protected for
the product (NPC > 1, and NPI < 1). Although rice production is also subsidized for inputs (NPI < I), it is taxed for the
product (NPC < 1). The net effect of production taxation and
input subsidy results in a net taxation on value added
(EPC < 1). Price distortion in mungbean production is similar
to that in rice production (NPC < 1, NPI < 1, EPC < I) but
the extent of implicit taxation on the value added of mungbean
is slightly more severe than that of rice.
- 196 Bahts
- 196
'+' and '-'
Baht
signify increase and
production of rice should bear a negative externality (in terms
of effects on the environment and soil fertility) whilst legume
crops a positive one (detailed discussion on externality, see
Thomson, 1995). In this section, a constrained sensitivity
analysis is conducted to answer the following question: what
additional water charges on rice will make rice and its closest
rival crops equally desirable for the society, ceteris paribus? A
similar constrained analysis is done to derive the conditional
environmental cost of rice production in order to bring the
DRCs of rice and its closest rival crops equal to unity. Because
the government expects that the price of rice will continue to
decline and input prices (fertilizers and labour) will continue
to rise, two more analyses are added to answer a similar
question: how much rise in input prices, or how much decrease
in rice export price, will bring the DRCs of rice and its closest
rival crops equal to unity, ceteris paribus? The results of the
analyses are summarized in Table 3.
According to the results, the comparative advantage
enjoyed by rice as indicated in Table 2 (Section 111) would
be overtaken by soybean in Nakornsawan and mungbean in
Phitsanulok if any of the following conditions holds true: (a)
f.0.b. price of rice drops by 8.5 to 9.0%; (b) labour cost for all
crops increases by 156-1 75% (because rice uses more labour
than the other crops); (c) fertilizer c.i.f. price increases by 89105% (because rice uses more fertilizers than the other crops);
(d) if the opportunity cost of water for rice is higher than that
for the other two crops by 196-350 Bahtlrai, or 7-12% of the
social revenue of rice; or (e) an environmental damage of 196350 Bahtlrai caused by rice.
V. CONCLUSIONS
IV. CONSTRAINED SENSITIVITY ANALYSES
It has long been recognized that water is socially valuable
although it has been provided free to farmers. In addition, the
This paper construct a modified policy analysis matrix to
study the comparative advantages of crop production in
Thailand and to assess the potential costs and benefits of
government intervention in production diversification.
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S. Yao
If water charging and externality were ignored, intervention
would incur efficiency losses if farmers are lured to diversify
production from rice to other crops. The constrained
sensitivity, however, suggest that a number of possible
changes may cause the comparative advantage of rice to fall,
and hence government intervention in diversification may be
socially desirable.
ACKNOWLEDGEMENT
Financial support of the Food and Agricultural Organization
(FAO) of the United Nations is gratefully acknowledged. I
thank many officials in the Ministry of Agriculture in
Thailand, Carlo Cappi, A.I. Abdel-Aziz, Ann Thomson and
Alan Collins for their comments but remain responsible for
any errors or omissions.
REFERENCES
Office of Agricultural Economics (OAE, 1993) Agricultural
Statistics, No. 445, Ministry of Agriculture and Cooperatives,
Bangkok, Thailand.
Monke, E. A. and Pearson, S. R. (1989) The Policy Analysis Matrix
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and London.
Timmer, C.P. (1992) Agricultural diversification in Asia: lessons
from the 1980s and issues for the 1990s. In Trends in
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Paper (1992), no. 180. The World Bank, Washington, D.C.
Thomson, A. (1995) Agricultural Policy Analysis in Thailand: The
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Yao, S. and Tinprapha, C. (1995) Comparative Advantage and Crop
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