Reaping the Gains from Trade: Constraints and Opportunities of Agricultural Credit Markets
International trade liberalisation often implies increased potentials for export production. For investing in increasing capacity in agriculture, farmers need to have credit access. However, farmers in many countries are credit constrained, e.g. due to collateral reasons, which is the case in Central Europe and East Africa, among others. A model illustrates the additional producer gains from having access to credit; the gains are composed of a price effect, an investment effect, and a social capital externality. Improvement of agricultural credit can be achieved by relying on existing social structures, such as farmers' social capital. This approach tackles the collateral issue and can furthermore entail benefits external to the investment decision. The paper concludes that these externalities need to be addressed when designing optimal agricultural credit institutions.
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