The policy analysis matrix in Zimbabwe: A methodological introduction

Abstract

This paper discusses the methodology behind the policy analysis matrix (PAM), an approach to the study- of incentives and incomes in alternative production activities. The PAM method uses average-cost budgets to list the costs and benefits of each activity, initially at market prices in terms of private income,. and then at opportunity cost in terms of national income. The . market-price budget shows the private profitability of the activity, while the opportunity-cost-budget shows its contribution to the economy as a whole, indicating the degree of ;economic efficiency and comparative advantage enjoyed by the activity. Such datai are needed for project appraisals, and for guiding'public-sector investments towards more productive To complete the PAM, the opportunity-cost budget is subtracted from the budget at market prices, revealing a third budget of "divergences," or income transfers between that.activity and others in the national economy. Such transfers could be caused by government policies,' market failures, or both. In either . case, they represent gains ("rents") or losses ("implicit taxes") which are not justified by'the activity's contribution to - national income. Transfers may be justified by other concerns, such as income distribution or food security, but all, too often they serve no such purpose and actually conflict with government • objectives. By revealing these hidden transfers, showing who : gains and who loses from current policies and market structures, the PAM assists in the formulation of more appropriate ’future price policies and market regulations. The matrix approach works by linking widely-available , microeconomic, sectoral, and macroeconomic data'in a simple, consistent framework, to provide static, partial-equilibrium , indicators of the current situation. Such an approach i-s useful primarily wher^ the historical or cross sectional data and complex modeling tools needed for more sophisticated approaches are unavailable. This paper reviews the strengths and weaknesses of the PAM method in the Zimbabwean context., and discusses bow 'additional information about resource availabilities,, ' , - elasticities of supply and demand, likely changes in technology or , prices over time, differential risk factors, and the crossprice or general equilibrium effects of changing resource . . allocations could be used to extend the analysis, beyond the ; limitations of the indicator approach.