THE ECONOMIC-ANALYSIS OF COMMODITY SYSTEMS - EXTENDING THE POLICY ANALYSIS MATRIX TO ACCOUNT FOR ENVIRONMENTAL-EFFECTS AND TRANSACTIONS COSTS

In a context in which the framework of economic policy is changing rad ically, 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 sens itivity analysis in which an inventory of possible 'feasible' technolo gical developments may be examined for their impact on the underlying comparative advantage (implicitly, the longer-run competitive advantag e) of the system. This is a fruitful procedure for the integration of technological and economic analysis, and can make a substantial contri bution to the identification of 'best-bet' lines of technological deve lopment. This paper begins with a brief account of the role and useful ness of the PAM, a relatively straightforward logical framework for po licy analysis, fr om which a range of 'policy indicators' may be estim ated. The most important of these indicators is the Domestic Resource Cost (DRC) ratio, an approximate indicator of the 'underlying comparat ive advantage' of a commodity system, a characteristic which may be ob scured by an overlay of policy interventions and 'market failures'. Th e paper then explores two areas in which the use of the PAM can be ext ended. First, it examines the possibilities offered by the application of 'new institutional economics' (NIE) in a PAM context to changing r ural market conditions precipitated by withdrawal of the state. Second , the paper reviews how PAM may be modified to incorporate environment al costs and benefits, and so address more adequately the sustainabili ty of commodity systems. (C) 1997 Published by Elsevier Science Ltd.