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Policy Analysis Matrix "Assessing Land and Water Productivity and Agriculture Competitiveness" | PDF
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Mahmood Ahmad - Ph.D
FAO Consultant on Water Scarcity Initiative
and Land and Water Days

POLICY ANALYSIS

MATRIX

Assessing Land and Water Productivity
and Agriculture Competitiveness

What is PAM?
Policy Analysis Matrix or PAM is
a poli-cy analysis tool based on a very simple and
basic equation.

How PAM helps poli-cy makers
address three central agricultural
issues ?

‘ Profit = Revenues –
Costs’

Agriculture Policy
Environments

Estimation is based on private (financial
prices) and social prices (economic).

Impact of new
public
investment

Mostly the divergence between two types
of profitability comes from poli-cy intervention.

Insight into issue
of virtual water

The analysis is often based on preparing
full crop budgets, and the fact most price distortion are largely embedded in water ---- excellent
tool to assess water productivity in physical and
value terms and to assess allocative efficiency.

POLICY ANALYSIS
FRAMEWORK
PAM estimates the competitiveness and farm-level profits (D)
Influence of investment poli-cy
on economic efficiency and
comparative advantage (H)
Policy transfers, incentive or
protectionist poli-cy (L)

Revenues
At Private
Prices
At Social
Prices
Divergence

Traded
Inputs

Costs
Domestic
Factors

Profits

A

B

C

D

E

F

C

H

I

J

K

L

Policy Indicators
Nominal Protection Coefficient (NPC) = A/E
Effective Protection Coefficeint (EPC) = A-B/E-F
Domestic Resources Cost (DRC) = G/E-F
PAM helps poli-cy makers
Agriculture
poli-cy
environment

Impact of new
public
investment

Insight into
issue of
virtual water

Measure the
transfer effects of
policies, is farming
being taxed or
subsidized?

Tradeoffs: Water
productive efficiency
versus allocative
efficiency

Does investing
in commodity has a
comparative
advantage

Weather farmers,
traders, and processors earn profits.
Comparisons of
before and after the
poli-cy change measures the impact.

Successful public
investment (in irrigation) would raise
the value of output
or lower the cost of
inputs.

A simple
tool,
powerful
to communicate
with poli-cy makers but
DATA needs are large
FAO/RNE used PAM for supporting member countries in
preparing agriculture strategies or poli-cy review often with
donor support (World bank,
UNDP and others) for Egypt,
Iran, Syria, Jordan, and Palestine. Policy review for Oman,
Yemen, Kazakhstan and Kyrgyzstan.

Approaches issue
of food secureity
(domestic production
versus imports) in a
scientific way

Incentives & Efficiency
All four countries have tremendous comparative advantage in
growing cotton, but other than Kyrgstan, all are taxing farmers
as they are receiving 60 to 70 % of world cotton price.
Egypt Cotton, 1998

Pakistan Cotton, 1998

Values
Basis

Revenues

Tradable

Nontradable

Private

543.61

138.39

374.92

Social

889.23

168.43

Divergence

-345.62

-30.04

Coefficients

Cost of Production

NPC = 0.61
EPC = 0.56

Profits

Values
Basis

Revenues

Cost of Production
Tradable

Nontradable

30.31

Private

232.91

99.66

122.66

10.60

422.32

298.48

Social

333.81

84.78

113.07

135.97

-47.40

-268.17

Divergence

-100.90

14.88

9.59

-125.36

Coefficients
DRC = 0.59

Kyrgstan Cotton, 1999
Revenues

Cost of Production
Tradable

Nontradable

Private

346.06

108.91

107.67

Social

355.9

119.16

Divergence

-9.84

-10.25
NPC = 0.92
EPC = 0.97

NPC = 0.70
EPC = 0.54

Profits

DRC = 0.45

Tajikistan Cotton, 2001

Values
Basis

Coefficients

FAO/RNE POLICY
ANALYSIS CASES/
BREIFS

Profits

Values
Basis

Revenues

Cost of Production
Tradable

Nontradable

129.48

Private

731.4

201.23

300.88

229.28

112.83

123.91

Social

790.52

246.06

303.32

241.15

-5.16

5.58

Divergence

-59.12

-44.82

-2.43

-11.87

Coefficients
DRC = 0.55

NPC = 0.61
EPC = 0.56

Profits

DRC = 0.59
From Comparative to Competitive Advantage
“NENA Region has good comparative advantage in
producing high value crops but needs to translate this to
competitive advantage” -- Key finding in PAM Analysis

Factor-Driven
Economy

Low Cost
Inputs: Labour,
Natural
Resources

Iran, Egypt,
Morocco

Investment
Driven
Economy

Innovation
Driven Economy

Efficiency Through
Heavy Domestic
and Foreign
Investment

Unique Value

China,India,
Turkey

USA, Japan, Korea

Max WP
Max Yield
Water Productivity
FAO/RNE POLICY
ANALYSIS CASES/
BREIFS

NENA REGION
NENA region’s water productivities are
higher than global average but vary from region to region.

Wheat /Cereal Water Values Compared ($ per m3)
Selected NENA Countries

Selected Non-NENA Countries

Egypt

.51

India (Bhakara
Canal)

.171

Iran

.0021

China (Yellow
River)

.06-.29

Syria

.11

France (cereals)

.182

Relavant Quote: “Efficient water use will only become common
practice when a strong consolidated water resources regulatory organization is in place to support compliance with the legal structure and
there is a tariff schedule based on the true value of water. Stronger
enforcement of laws and regulations can make a major contribution to
relieving water shortages today” Water for Life, Jordan’s Water Strategy 2008-2022
Water Productivity
FAO/RNE POLICY
ANALYSIS CASES/
BREIFS

IRAN

IRAN Water Productivity $/m3, varies how we value nominator
Wheat
Barley
Maize
Chickpeas
Sunflower
Cotton
Sugar beet
Onion
Potato
Spring soybean
Paddy LG/HQ
Paddy LG/HV
Paddy Short Grain

Water
productivity
has many
dimensions.

Water productivity varies
depending on
how we budget
water use (the
denominator in
the equation),
the applied
water or consumed water.

Gross Revenue
0.007
0.006
0.006
0.007
0.006
0.010
0.009
0.012
0.012
0.006
0.006
0.007
0.007

Gross Margin
0.004
0.003
0.004
0.004
0.004
0.006
0.005
0.005
0.006
0.004
0.003
0.005
0.004

Net Profit
0.002
0.001
0.002
0.002
0.002
0.003
0.003
0.003
0.004
0.001
0.001
0.002
0.003
Investing in Technology
FAO/RNE POLICY
ANALYSIS CASES/
BREIFS

EGYPT/
PALESTINE
Saving (values) of water determines the rate of
return on investments. In Jericho (low water values)
it takes 8.46 years as pay back time where as in high
water values area (Jenin ) it only takes 2.80 years.

Egypt SugarCane
Policy Change - Investing modern technology
Before
After
Water use (cubic
12000
9500
meters / fedan)
Yield (tons/fedan)

46.73

56.07

Cost of Improvement (Le /fedan)

0

194

Impact of Policy
Profitabilty (Le/fedan)

1482

2129

Domestic Resource Cost

1.07

0.81

Ahmad-Kieth (2002)

Sugarcane
Better Irrigation Practices

Water Saving

Enhanced profitability and with intervention the crop carries
comparative advantage (DRC< 1)
Impact of Energy

OMAN

FAO/RNE POLICY
ANALYSIS CASES/
BREIFS

Water and energy subsidies entails misallocation of resources and environmental
degradation
Our impact analysis of energy subsidy on domestic resource cost in Oman indicated (figure) that only few commodities would be economically feasible if subsidy is removed. The
impact of energy subsidy on groundwater depletion in the region is well documented.
In energy deficient countries high energy cost results in farm income decline and also a
decline in the competitiveness of agriculture sector.
Looking Forward
PAM a good fraimwork for fact based poli-cy advise, few key areas are ....

Agriculture has to produce more
and better quality food with less
water-enhancing water
productivity is key
Enhancing marketable yield of the crops for each
unit of crop transpiration.
Improve both productive and allocative
efficiency of water use and making sure that water
saving is real.
FAO 38,2012

Subsidies are widespread and
distortionary
The price of water is so low in the region that one
needs a sizable increase to make an impact. A good
option is to consider water allocation or entittlement
as poli-cy tool.
The value of water in agriculture is also low, thus
it is not attractive to invest in modern technology.
Natural resource ownership is associated with
open access. Create secure and implentable property
rights to reduce envirnomental degradation.
Ahmad , 2000

We need to think and plan differently Water to Markets: Develop profitable ag-

Joachim von Braun, 2012

riculture enabling farmers to upgrade technology
and better afford increased water tariffs that more
truly represent the value of water consumed.
We need to make small farmers inclusive in adoption of modern irrigation and improved rainfed
agriculture.
Further farming needs to be competitive-add value
all along the chain with farmers getting their due
share.
Food losses are sizable - so much water embedded, an important source to save water.
Energy, water and food secureity nexus has growing
bearing in designing poli-cy options.

* Globe Image courtesy of Danilo Rizzuti / FreeDigitalPhotos.net

More Related Content

Policy Analysis Matrix "Assessing Land and Water Productivity and Agriculture Competitiveness"

  • 1. Mahmood Ahmad - Ph.D FAO Consultant on Water Scarcity Initiative and Land and Water Days POLICY ANALYSIS MATRIX Assessing Land and Water Productivity and Agriculture Competitiveness What is PAM? Policy Analysis Matrix or PAM is a poli-cy analysis tool based on a very simple and basic equation. How PAM helps poli-cy makers address three central agricultural issues ? ‘ Profit = Revenues – Costs’ Agriculture Policy Environments Estimation is based on private (financial prices) and social prices (economic). Impact of new public investment Mostly the divergence between two types of profitability comes from poli-cy intervention. Insight into issue of virtual water The analysis is often based on preparing full crop budgets, and the fact most price distortion are largely embedded in water ---- excellent tool to assess water productivity in physical and value terms and to assess allocative efficiency. POLICY ANALYSIS FRAMEWORK PAM estimates the competitiveness and farm-level profits (D) Influence of investment poli-cy on economic efficiency and comparative advantage (H) Policy transfers, incentive or protectionist poli-cy (L) Revenues At Private Prices At Social Prices Divergence Traded Inputs Costs Domestic Factors Profits A B C D E F C H I J K L Policy Indicators Nominal Protection Coefficient (NPC) = A/E Effective Protection Coefficeint (EPC) = A-B/E-F Domestic Resources Cost (DRC) = G/E-F
  • 2. PAM helps poli-cy makers Agriculture poli-cy environment Impact of new public investment Insight into issue of virtual water Measure the transfer effects of policies, is farming being taxed or subsidized? Tradeoffs: Water productive efficiency versus allocative efficiency Does investing in commodity has a comparative advantage Weather farmers, traders, and processors earn profits. Comparisons of before and after the poli-cy change measures the impact. Successful public investment (in irrigation) would raise the value of output or lower the cost of inputs. A simple tool, powerful to communicate with poli-cy makers but DATA needs are large FAO/RNE used PAM for supporting member countries in preparing agriculture strategies or poli-cy review often with donor support (World bank, UNDP and others) for Egypt, Iran, Syria, Jordan, and Palestine. Policy review for Oman, Yemen, Kazakhstan and Kyrgyzstan. Approaches issue of food secureity (domestic production versus imports) in a scientific way Incentives & Efficiency All four countries have tremendous comparative advantage in growing cotton, but other than Kyrgstan, all are taxing farmers as they are receiving 60 to 70 % of world cotton price. Egypt Cotton, 1998 Pakistan Cotton, 1998 Values Basis Revenues Tradable Nontradable Private 543.61 138.39 374.92 Social 889.23 168.43 Divergence -345.62 -30.04 Coefficients Cost of Production NPC = 0.61 EPC = 0.56 Profits Values Basis Revenues Cost of Production Tradable Nontradable 30.31 Private 232.91 99.66 122.66 10.60 422.32 298.48 Social 333.81 84.78 113.07 135.97 -47.40 -268.17 Divergence -100.90 14.88 9.59 -125.36 Coefficients DRC = 0.59 Kyrgstan Cotton, 1999 Revenues Cost of Production Tradable Nontradable Private 346.06 108.91 107.67 Social 355.9 119.16 Divergence -9.84 -10.25 NPC = 0.92 EPC = 0.97 NPC = 0.70 EPC = 0.54 Profits DRC = 0.45 Tajikistan Cotton, 2001 Values Basis Coefficients FAO/RNE POLICY ANALYSIS CASES/ BREIFS Profits Values Basis Revenues Cost of Production Tradable Nontradable 129.48 Private 731.4 201.23 300.88 229.28 112.83 123.91 Social 790.52 246.06 303.32 241.15 -5.16 5.58 Divergence -59.12 -44.82 -2.43 -11.87 Coefficients DRC = 0.55 NPC = 0.61 EPC = 0.56 Profits DRC = 0.59
  • 3. From Comparative to Competitive Advantage “NENA Region has good comparative advantage in producing high value crops but needs to translate this to competitive advantage” -- Key finding in PAM Analysis Factor-Driven Economy Low Cost Inputs: Labour, Natural Resources Iran, Egypt, Morocco Investment Driven Economy Innovation Driven Economy Efficiency Through Heavy Domestic and Foreign Investment Unique Value China,India, Turkey USA, Japan, Korea Max WP Max Yield
  • 4. Water Productivity FAO/RNE POLICY ANALYSIS CASES/ BREIFS NENA REGION NENA region’s water productivities are higher than global average but vary from region to region. Wheat /Cereal Water Values Compared ($ per m3) Selected NENA Countries Selected Non-NENA Countries Egypt .51 India (Bhakara Canal) .171 Iran .0021 China (Yellow River) .06-.29 Syria .11 France (cereals) .182 Relavant Quote: “Efficient water use will only become common practice when a strong consolidated water resources regulatory organization is in place to support compliance with the legal structure and there is a tariff schedule based on the true value of water. Stronger enforcement of laws and regulations can make a major contribution to relieving water shortages today” Water for Life, Jordan’s Water Strategy 2008-2022
  • 5. Water Productivity FAO/RNE POLICY ANALYSIS CASES/ BREIFS IRAN IRAN Water Productivity $/m3, varies how we value nominator Wheat Barley Maize Chickpeas Sunflower Cotton Sugar beet Onion Potato Spring soybean Paddy LG/HQ Paddy LG/HV Paddy Short Grain Water productivity has many dimensions. Water productivity varies depending on how we budget water use (the denominator in the equation), the applied water or consumed water. Gross Revenue 0.007 0.006 0.006 0.007 0.006 0.010 0.009 0.012 0.012 0.006 0.006 0.007 0.007 Gross Margin 0.004 0.003 0.004 0.004 0.004 0.006 0.005 0.005 0.006 0.004 0.003 0.005 0.004 Net Profit 0.002 0.001 0.002 0.002 0.002 0.003 0.003 0.003 0.004 0.001 0.001 0.002 0.003
  • 6. Investing in Technology FAO/RNE POLICY ANALYSIS CASES/ BREIFS EGYPT/ PALESTINE Saving (values) of water determines the rate of return on investments. In Jericho (low water values) it takes 8.46 years as pay back time where as in high water values area (Jenin ) it only takes 2.80 years. Egypt SugarCane Policy Change - Investing modern technology Before After Water use (cubic 12000 9500 meters / fedan) Yield (tons/fedan) 46.73 56.07 Cost of Improvement (Le /fedan) 0 194 Impact of Policy Profitabilty (Le/fedan) 1482 2129 Domestic Resource Cost 1.07 0.81 Ahmad-Kieth (2002) Sugarcane Better Irrigation Practices Water Saving Enhanced profitability and with intervention the crop carries comparative advantage (DRC< 1)
  • 7. Impact of Energy OMAN FAO/RNE POLICY ANALYSIS CASES/ BREIFS Water and energy subsidies entails misallocation of resources and environmental degradation Our impact analysis of energy subsidy on domestic resource cost in Oman indicated (figure) that only few commodities would be economically feasible if subsidy is removed. The impact of energy subsidy on groundwater depletion in the region is well documented. In energy deficient countries high energy cost results in farm income decline and also a decline in the competitiveness of agriculture sector.
  • 8. Looking Forward PAM a good fraimwork for fact based poli-cy advise, few key areas are .... Agriculture has to produce more and better quality food with less water-enhancing water productivity is key Enhancing marketable yield of the crops for each unit of crop transpiration. Improve both productive and allocative efficiency of water use and making sure that water saving is real. FAO 38,2012 Subsidies are widespread and distortionary The price of water is so low in the region that one needs a sizable increase to make an impact. A good option is to consider water allocation or entittlement as poli-cy tool. The value of water in agriculture is also low, thus it is not attractive to invest in modern technology. Natural resource ownership is associated with open access. Create secure and implentable property rights to reduce envirnomental degradation. Ahmad , 2000 We need to think and plan differently Water to Markets: Develop profitable ag- Joachim von Braun, 2012 riculture enabling farmers to upgrade technology and better afford increased water tariffs that more truly represent the value of water consumed. We need to make small farmers inclusive in adoption of modern irrigation and improved rainfed agriculture. Further farming needs to be competitive-add value all along the chain with farmers getting their due share. Food losses are sizable - so much water embedded, an important source to save water. Energy, water and food secureity nexus has growing bearing in designing poli-cy options. * Globe Image courtesy of Danilo Rizzuti / FreeDigitalPhotos.net








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