4. The Role of the Government in Agricultural Credit Markets
The transition to a market economy in agriculture involves not only a withering
away of the state, but a fundamental redefinition of its role. The role of government is,
however, not always clear. For instance, capital market imperfections give rise to a
demand for government intervention, but government is not necessarily at an informational
advantage relative to private lenders (Stiglitz, 1994).
Governments often intervene in agricultural credit markets, e.g. by providing
guarantees to banks for loans, by setting up credit institutions special for agriculture and by
subsiding credit to agricultural producers. Is this a response to a market failure, or to
pressure from those in the agricultural sector for hidden subsidies ? Stiglitz (1993, p. 33)
argues that "[t]here is a growing consensus that if the government goes where the private
market fairs to tread, it should do so only cautiously and with safeguards. The government
faces the same (and sometimes worse) information problems; it is no better a screener of
loan applications, and no better monitor. Worse still, it often faces political pressures."
There is an extensive literature looking at government intervention in
agricultural credit markets. Much of the initial efforts, based on the empirical and
theoretical research following the evaluation studies of large scale (often World Bank
supported) rural credit programs in the 1960s and 1970s, were done by, among others,
Dale Adams and John Von Pischke (see e.g. Von Pischke et al. (1983); Adams et al.
(1984); Adams and Fitchett (1992). Excellent non-technical summaries of their insights are
Von Pischke (1991) and Fry (1988). See also Karp and Stefanou (1994)).
This section reviews a number of the basic economic arguments on the most frequently
used government interventions in agricultural credit markets and draws your attention to
critical issues related to the CEEC transitional economies. Specifically looking at the