Shadow pricing and choice of technique : an application to Indonesian rice milling

THE SHADOW-PRICING PROCEDURE USED HERE IS A WELFARE ACCOUNTING EXERCISE WHICH ATTEMPTS TO ESTIMATE SOCIAL BENEFITS AND COSTS OF PUBLIC PRODUCTION OR USE OF COMMODITIES IN THE PRESENCE OF MARKET DISTORTIONS. AMONG THE CONCLUSIONS: THE MOST CRITICAL ISSUE AFFECTING CHOICE OF TECHNIQUE IN PUBLIC-SECTOR RICE MILLING IN INDONESIA IS THE ASSUMPTION MADE ABOUT CONSTRAINTS FACING PUBLIC INVESTMENT. IF A "PROJECT" IS DEFINED AS A UNIT OF CAPITAL EXPENDITURE ON RICE MILLING FACILITIES, THE OPTIMAL TECHNIQUE IS THE SMALL RICE MILL. IF A "PROJECT" IS DEFINED AS A UNIT OF ROUGH RICE TRANSFERRED FROM HAND-POUNDING TO MECHANICAL MILLING, THE OPTIMAL CHOICE COULD BE ANY OF THE FOUR TECHNIQUES, DEPENDING ON OTHER ASSUMPTIONS (RICE PRICES, SOURCES OF CAPITAL) AND ON VALUE JUDGEMENTS -- FOR EXAMPLE, THE SOCIAL RATE OF DISCOUNT. NO SPECIFIC TECHNIQUE IS RECOMMENDED, SINCE THE GENERAL CONCLUSION IS THAT "IT ALL DEPENDS ON ... " THIS IS AN IMPORTANT CONCLUSION, BECAUSE ENGINEERS AND ECONOMISTS TEND TO APPLY SIMPLISTIC RULES OF THUMB TO QUESTIONS OF CHOICE OF TECHNIQUE. THE STUDY RESULTS SUGGEST THAT FORMAL ECONOMIC ANALYSIS OF THE ISSUES INVOLVED IS NOT SIMPLY "HELPFUL" BUT INDISPENSABLE.