Financial Intermediation and Poverty Trap Dynamics over the Life Cycle

In this paper, we analyze poverty traps that emerge because farmers are unable to afford the adoption and retention of higher-productivity technologies that are risky and require lumpy investments. Although access to deposit facilities and credit play an important role in breaking up poverty traps, farmers' stage in the life cycle and underlying market conditions like credit limits and interest rates on deposits and loans determine the effect of the financial policies. First, our numerical results show that in economies with scant financial development (stringent loan-size limits and large gap between interest rates), the access to only savings deposits represents a superior policy (relative to only access to credit) to increase the sustained adoption of advanced technologies and that its effectiveness is even higher when the target population is young. Additionally, the results indicate that only if the demographic structure is young and farmers have simultaneous access to both deposit facilities and credit, full financial transformation can be achieved through credit expansion. Otherwise, the effects of larger credit-limits vanish. Finally, the results indicate that policies of loan rates in credit-constrained economies have null effects on technology transformation, irrespective of the demographic structure. In contrast, sustained adoption rates increase with higher deposit rates, in young and credit-constrained economies. In aging economies, however, an opposite effect can be realized due to substitution between the yields of deposits and of the advanced technology.