Credit's effect on productivity in Chinese agriculture : a microeconomic model of disequilibrium

Many government programs want to provide more credit to the farm sector to increase agricultural productivity. If the marginal effect on productivity is small, those resources might be put to better use elsewhere. The authors conducted an econometric analysis of the effect of credit on output supply which recognizies that credit markets are not necessarily at equilibrium - so that credit rationing and nonborrowing are both possible. Only about 37 percent of the farmers in the study area were constrained by inadequate formal credit. Informal credit sources provided funds for specific non-agricultural activities that were not fungible. The results indicate that one additional yuan of liquidity yielded 0.235 yuan of additional gross value of output. These results suggest that for the area of China covered in the study, a good part of the short-term credit may actually be used for consumption and investment. Two conclusions are suggested for evaluating the probable effect of expanding agricultural credit. First, not all farmers, and sometimes only a minority, are constrained in their farming operations by inadequate credit. And second, greater supplies of formal credit will be diverted in part to consumption, so the likely effect on output will be smaller than what one might expect if all funds are assumed to be used productively.