NOTES ON THE OECD INDICATORS (PSE) AND THE VCA METHODOLOGY
1. The OECD indicators have been developed with the aim to trace the advancement in trade
barriers removal and protection reduction in the context of developed economies with
increasing production surpluses in a time of technological progress and structural change.
2. They solely refer to agricultural policies.
3. The key theoretical assumption in the estimation of support in the OECD approach is that
agricultural markets are competitive (so that there is price arbitrage). Wedges between
domestic market prices and border prices then have to be due to government
interventions. In the case of African countries however, the assumption of competitive
agricultural markets is very tight and therefore the wedge between domestic market
prices and border prices can be viewed as arising form both policies and market
failures/development gap (as Piero and Lorenzo already mentioned).
4. The PAM that can be computed in the VCA software allows to capture this same price
wedge but without specifying what share of the wedge stems from policies and which
one from market failures.
5. More specifically on the OECD methodology, market price differential (MPD) by the
OECD is estimated as the difference between domestic market price (i.e., at farm gate
level) and an “adjusted” border price which they call “reference price”. That is exactly
what is done in the VCA software, where a wedge between domestic market price and
parity prices (=which is what we call the oecd “reference price”) is computed.
6. Only the wedge at wholesale level is slightly differently computed, for OECD uses the
difference between wholesale price and border price, while in VCA we compare the
domestic wholesale price with an “adjusted” border price (=parity price at wholesale
level).
7. In the OECD methodology, the price gap is usually computed at a certain level (i.e., farm
gate) and then derived for other levels by assuming that the price gap measured at a
higher level of the processing chain (i.e. wholesale) is the same (in absolute values)
as occurs at the farm gate level. In the value chains analyses carried out in Burkina
Faso and Kenya by means of the VCA software, wedges at farm gate and wholesale
levels have been computed without imposing such assumption.
8. Alternatively, the oecd suggests to compute a “rate of protection” and assume that it
is the same at wholesale and farm gate level. This implies that rather than inducing the
same “absolute” price differential, policies affect all agents operating in the chain in the
same “degree” or “proportion”. However, value chain analyses conducted in Burkina
Faso and Kenya don’t seem to confirm this assumption. Not only is the impact on agents
operating in different stages of the chain of different proportions, but also of different
signs. However, this issue is open for further investigation.
9. The VCA software currently computes wedges for: (i) observed market price at wholesale
level and parity price at market level, (ii) observed price at production level (farm gate
level) and parity price at production level, (iii) observed price at market level and
observed price at production level. All this from the private point of view (“private”
parity prices, or parity prices at financial prices). “Private parity prices” are border prices
adjusted to take into account transport/handling and storage costs, margins and
taxes/tariffs.
10. The VCA software also currently computes the PAM matrix using domestic market
prices and “social” parity prices. The latter differ from the above mentioned “private
parity prices” for they take into account externalities, subtract taxes when they are
transfers and are computed on the basis of a shadow exchange rate.