Directed Credit Programs for Agriculture and Industry: Arguments from Theory and Fact

Abstract

The motives behind government programs to provide directed credit to agriculture and industry can be traced to problems of asymmetric information in capital markets and, consequently, to benefits from relaxing the constraints on financing. In agriculture, directed credit programs that help farmers accumulate sufficient wealth to own the land they cultivate may improve the allocation of resources. In industry, the benefits of government credit may include product and factor market externalities, as well as the direct benefits from relaxing borrowing constraints. In both sectors, government credit can be useful in overcoming obstacles faced by private intermediaries when lending entails initial fixed costs that intermediaries cannot recapture. Whether government intervention in credit markets can achieve legitimate objectives depends on the mechanism chosen to implement directed credit. In some cases influence-peddling and soft repayment constraints bad to inefficiencies from government involvement. In other cases these problems are avoided by establishing credible mechanisms that ensure the proper allocation and repayment of funds. Evidence on industrial credit programs in Japan shows an apparent link between that country's success in directing credit to machine-tool producers and the decisionmaking process that governs the distribution of credit.