AGRICULTURAL POLICY ANALYSIS PROJECT Science and Technology, Office of Agriculture Under contract to the Agency for International Development, Bureau for Project Office 4250 Connecticut Avenue, N.W. Washington, D.C 20008 * Telephone: (202) 362-2800 AGRICULTURAL POLICY ANALYSIS TOOLS FOR ECONOMIC DEVELOPMENT APAP MAIN DOCUMENT NO. 2 By: LUTHER G. TWEETEN, Editor, et. al. NOVEMBER, 1988 Submitted to: Dr. William Goodwin U.S. Agency ior International Development S&T/AGR, SA-18 Reor 403 Washington, D.C. 20523 Prime Contractor: At Associates Inc., 55 Wheeler Street. Cambridge. Massachusetts 02138 (617) 492-7100 Subcontractors: Robert R. Nathan Associates, Inc. 1301 Pennsylvania Avenue, NW.. Washington. DC 20004 (202) 393-2700 Abel, Daft & Earigy, 1339 Wisconsin Avenue. NW.. Washington. DC 20007 (202) 342-7620 Oklahoma State University, Department o Agricultural Economics. Stillwater. Oklahoma 74078 (405) 624-6157 AGENCY FOR INTERNATIONAL DEVELOPMENT PPC/CDIE/DI REPORT PROCESSING FORM ENTER INFOPMATION ONLY IF NOT INCLUDED ON COVER OR TITLE PAGE OF DOCUMENT 1. Proiect/Subproiect Number 2. Contract/Grant Number 3. Publication Date APAP/936-4084 DAN-4084-C-00-3087-00 November, 1988 4. Document Title/Translated Title Agricultural Policy Analysis Tools for Economic Development L 5. Author(s) I. Luther G. Tweeten editor, et. al. 3. 6 Contributing Organization(s) IAbt Associates, In., Cambridge, MA ;Robert R. Nathan Associates, Inc., Washington, D.C. Abel, Daft and Earley, Inc., Alexandria, VA A.W Z State ni iv ept. f A-r. nllcwntpr OK 7. a.maon. ort '". SSmberonsorin A I. l-.6 ice_ 393 PAP Main Docunt[ AD/ST/AGR/EPP 10. Abstract (optional - .50 word limit) "Tools" provides approaches to and techniques useful in analyzing very real world problems in agricultural policy analysis. In addition to an Introduction, the 14 chapters cover regression and statistical analysis, use of microcomputers, demand theory, supply theory, elasticity estimation, classical welfare analysis, simulation and systems modeling, enterprise budgets, mathematical programming, investment analysis, natural resources, trade macroeconomic linkages to agri­ culture and index numbers. The book originated out of the APAP microcomputer workshop held annually at Oklahoma State University and thus it serves nicely as a text on agricultural policy analysis to accompany practical, "hands-on" training in policy analysis. 11. Subject Keywords (optional) _ 1. agricultural policy analysis 4. quantitative analysis 2. methods 5. simulation 3. microcomputers 6. supply and demand .12uperentar, Notes 13. Submitting Official 14. Telephone Number 15. Today's Date William R. Goodwin (703) 875-4015 ........................... DO NOT write below this line............................................ 16. DOCID 17. Document Disposition DORD RINVDUPLICATE! WORK SHEET AGRICULTURAL POLICY ANALYSIS TOOLS FOR ECONOMIC DEVELOPMENT By Daniel D. Badger Francis M. Epplin David Henneberry Shida Henneberry Darrel Kletke Eli'on Li David Pyles Daryll E. Ray Dean F. Schreiner Arthur L. Stoecker James N. Trapp Luther Tweeten Michael P. Welsh Edited by Luther Tweeten PREFACE Agricultural Policy Analysis Tools for Economic Development was written to make modem policy analysis methods accessible to policy analysts. All too frequently wrong policy decisions have exacted massive human and material cost in lost opportunities. Tools can improve policy decisions by combining the best analytical methods with the power of analysts' and decision makers' good judgment and with microcomputer hardware and software. This book originated out of a microcomputer workshop held annually at Oldahoma State University for policy analysts from developing countries. Students in the workshop had at least a Bachelors Degree and many had a graduate degree. Hands-on experience with policy analysis tools on microcomputers in the afternoon was preceded in the morning by lectures explicating the conceptual foundation and past applications. AgriculturalPolicy Analysis Tools for Economic Development provided background and elaboration for the lectures. Tools can be used as a text, reference, handbook, or book of readings. Tools can be used as a text in a course in policy analysis methods. It can be used as a major source­ book in courses in economic development, agricultural development, research methodology, agricultural policy, and a host of other courses teaching methods and applications. Chapters are written to be as easily understood as the material allows. The book is written to serve the needs of a wide variety of agricultural policy analysts including the experienced and irexperienced, the young and the old, those from developed or developing countries, and by persons with wide differences in backgrounds. Some parts can be understood by those with little background; other parts require calculus. Chapters of Tools are designed to "stand alone" to meet unique needs. Difficult parts can be omitted by those with limited backgrounds. In cookbook sequences the methods can be applied to very real policy problems by those who prefer to omit the conceptual background. However, understanding of the concepts underlying the tools is highly desirable to avoid unrealistic and inappropriate applications and interpretations. The authors are deeply grateful to the many who made this book possible. Support and encouragement from the U.S. Department of Agriculture and the U.S. Agency for International Development was indispensable. Oklahoma State University and The Ohio State Univer'sity provided a facilitative environment. Cloye Brower was a patient and competent typist. Luther Tweeten The Ohio State University TABLE OF CONTENTS CHAPTER PAGE 1. Introduction ................................................ 1 2. Regression and Statistical Methods ............................ 11 3. Microcomputers in Agricultural Policy Analysis in Developing Countries .............. .... ............... 46 4. Demand Theory and Elasticity Matrix Construction .............. 56 5. Supply and Elasticity Estimation .............................. 73 6. Classical Welfare Analysis ........................... ... ...... 97 7. Simulation and Systems Modeling ................. 129 8. Enterprise Budgets .......................................... 196 9. Mathematical Programming .................... .............. 221 10. Agricultural Project Investment Analysis ....................... 247 11. Policy Applications in Natural Resource Projects ................ 289 12. International Trade Policies .................................. 335 13. Macroeconomic Linkages to Agriculture ........................ 354 14. Index Numbers and Aggregation ............................... 372 - ii ­ 1. INTRODUCTION by Luther Tweeten Policy matters. In recent decades countris with similar resource endowments and culture have experienced sharply different economic progress because of different economic policies. Examples are Kenya versus Tanzania, North Korea versus South Korea, and Taiwan and Japan versus China. Many countries are deeply committed if not desperate to improve economic performance but do not know how. Policy analysis is the process of providing in-depth information to improve policy decisions. The ultimate objective of policy analysis is to improve the well-being of society but the immediate objective is to help administrators, managers, and policy makers make better decisions in allocating scarce resources to meet ends or goals. OBJECTIVES The objectives of this chapter are to: 1. Introduce the role of policy analysis. 2. Outline basic steps in policy analysis. 3. Briefiy describe contents of remaining chapters. KEY FOINTS 1. Microcomputers have placed powerful capabilities at the disposal of policy analysts and decision makers even in less developed countries with limited budgets. The methods and tools presented in this book are often most easily applied using computer analysis. 2. A sound conceptual framework and adequate data are essential for sound policy analysis. Ability to process data by computers complements rather than competes with use of quality data and theory in policy analysis. 3. The policy analyst and decision maker have different roles. The former isto inform, the latter is to make decisions. Public advocacy of policy positions 1 2 Policy Analysis Tools by analysts confuses the two roles and can compromise objectivity and usefulness of the analyst in the policy process. CONCEPTS Policy analysis is a process of interpreting and analyzing data and of communicating results to decision makers. It is typically performed by staff analysts located in various ministries, divisions, and bureaus of government, by public or private research institutions such as institutes and universities, and with contributions from consultants and other sources of expertise. Policy analysis need not be highly sophisticated and formal. Skilled, experienced analysts relying on judgment and a minimum of data and computational devices can make significant contributions to the policy process. However, more sophisticated analysis can help to identify interactions, indirect effects, long-term effects, and the inconsistency in policies that help selected groups but hurt society. The human brain alone cannot integrate the mass of data and concepts required to analyze many policy problems. The microcomputer has made powerful analytical capabilities accessible to policy analysts even in governments of developing countries with tight budgets. However, mechanistic application of undigested numbers generated