Agricultural finance and rural credit in poor countries

Abstract

Most of the analytical literature on this topic concerns the adequacy, or otherwise, of the volume, composition and distribution of agricultural finance, as regards both supply and demand. The emerging consensus is that interest rates are much less ‘extortionate’, and farm activities much less often constrained by lack of credit, than was once thought. The arguments for the consensus are reviewed in Section 2, and some doubts (connected with aggregation, risk, local monopoly, and the causes of ‘misincentives’) are presented. The new consensus, while a most valuable corrective to past errors involving stock figures (conservative peasants, wicked moneylenders, etc.), may itself be in basic error. It isolates individual credit transactions that can be identified as having productive purposes the purchase of fixed capital, working inputs, labour or land. Yet most rural credit markets link the class containing borrowers with the class containing lenders in multiplex social relationships within a village community, and do so in ways that invalidate neat distinctions between credit for production and for consumption. Section 3 considers the implications of these facts for the adequacy or otherwise of agricultural finance. The conclusions for theory and for policy conveniently be dealt with together Giction 4). Most policy approaches international as well as national have involved creating extra rural credit through new, usually subsidized, institutions. Such approaches are thrown into doubt by both practical experience and the new interpretative consensus. The latter suggests a tough, rharket-oriented credit policy. A more structuralist approach, taking off from the evidence outlined in the previous paragraph, suggests a different but just possibly complementary policy, taking into account the proven savings capacity of small farmers and the case for increasing agriculture’s share of total credit, and more fundamentally the role of asset redistribution in any just or efficient credit policy. In the analysis of rural credit as elsewhere, either neo-Marxist or neoclassical approaches may offer more hopeful solutions than mainstream methods. By offering alternatives to such methods, neo-Marxism and neo-classicism could ‘converge’ on something more developmentally hopeful (and more intellectually exciting) than a Fabian middle ground: on a genuine synthesis of theory based on class interest with theory based on individual optimization.