We present the evidence of government intervention in rural credit markets of LDCs in the past three decades and confront it with modern theory. That evidence shows a significant failure of subsidized credit programs either to achieve an increase of agricultural output cost-effectively or to improve rural income distribution and alleviate poverty. In addition, many of the financial institutions that were created to channel rural credit have been shown to be inept and lacking accountability. Modern theory has focused mostly on two areas, credit rationing in competitive markets and interlinking of credit contracts with labor and land contracts. We outline the policy implications of these theories and find them insufficient to account for the empirical evidence. We contend that a more systematic and rigorous analysis of institutions and institutional environments is essential for understanding and implementing effective policy reforms of rural credit markets. We present suggestions for undertaking such an analysis.
ASJC Scopus subject areas
- Geography, Planning and Development
- Sociology and Political Science
- Economics and Econometrics