Agricultural and rural development

UNITED NATIONS

AFRICAN INSTITUTE FOR ECONOMIC DEVELOPMENT AND PLANNING

I

9 DAKAR

4

I

STUDENTS' SUMMER COURSE ^- 1967

AGRICULTURAL AND RURAL DEVELOPMENT

J. C. SAIGAL

i

I

> 4

C>.,< ^va oÍ~t\-1

^ <

INEP/ET/CUS/881 5^5Í

AUGUST 1967

UNITED NATIONS

IDEP/ET/CUS/881-1

AFRICAN INSTITUTE FOR ECONOMIC

TTJ y ,q67

DEVELOPMENT AND PLANNING

y '

DAKAR Mr. J. C. SAIGAL

LECTURE No. t

THE PATTERN OF INVESTMENT FOR AGRICULTURAL AND

RURAL DEVELOPMENT

1. Although there are wide differences in the economic structure and

resource endowment of developing countries, almost all these countries

have two common features:

(i)

Agriculture occupies the dominant position in these economies.

For example, in developing countries of Africa the contribution

of agriculture to gross domestic product

(GPP)

varies between 30 to 75 per cent. In these economies agriculture is the ^means

of livelihood for the bulk of population. The proportion of

active population engaged in agriculture in most of the African

2

/

economies ranges between 60 to 90 per cent.—' Furthermore, in

most of these countries, agriculture constitutes the. main source oJ export earning; agricultural exports as a proportion of total

exports are as high as

98$

in Ethiopia and Sudan and are alightly

less in

others.-^/

(ii)

Income per capita in these countries are very low

^,

^{hence very}

low capacity to save. This results in scarcely limited capital

resources for investment in these countries. Very often internal

resources are augmented by inflow of capital from developed coun¬

tries in the form of loans, grants and foreign investment, but, nevertheless., capital resources remain very scarce in these

countries.

JJ Appendix table

1.

2j Ibid.

3/

Ibid.

4/

Appendix table 2.

I-DEP/ET/CUS /8'81

^-!1 Page 2

The above features are pointers to the need in developing countries

for making best use of scarce resources

(i.e.. capital)

and according

1/

high priority to agriculture —' m the overall development programme, since it is the key sector on which all development depends in most of

these countries. — -

How best to allocate limited resources between agriculture and

other sectors of the economy and also among different programmes and projects within each sector to achieve the desired development objective

is one of the fundamental problems that planners and policy makers face

in developing countries. In other words, one of the most important

tasks of planners is to determine the most desired pattern of investment in general as well within each sector.

In our present discussion we will, however, limit ourselves to the problem of the pattern of investment for agricultural development, although it is well recognized and will be implied in our discussion

that the problem of the pattern of investment within agricultural sector cannot be considered in isolation from the pattern of investment in general.

Share of Agriculture in Total and in Public Investment

Appendix Table 3 indicates the share of agriculture in total

investment and in public investment in the development plans of some of the African countries. It _may be noted that investment in agricul¬

ture features substantially in the development plans of most of the

countries. Except in Congo

(Brazzaville),

Ghana and Kenya, the share

of agriculture in total investment ranges between 15 - 34 per cent.

The differences are largely accounted for by the importance attached

_1J

It is gratifying to note that in Nigeria and Ghana detailed sub-plans

for Agricultural Development were prepared along with the overall development plans.

IDEP/ET/CUS/881—1

Page 3

to the agricultural sector. More striking is to note the share of

agriculture in public investment, which ranges between 14 - 42 per cent.

The tendency in most of the developing countries is to assume responsi¬

bility for a large share of investment in agriculture. The reasons for

this are obvious. In the first place, it is governed by the considera¬

tion to build _up the productive base in agriculture, which is necessary to raise substantially productivity per man and yield per acre. Large

scale irrigation and land reclamation programme,, although they build

up the long-term production potentials of the economy, involve too large

an investment to be undertaken by the State. Some projects, such as afforestation and soil conservation etc., are not attractive to private

investment either because their returns are too remote in time or too low and uncertain. Investments in development and extension services like agricultural education and research which are vital to agricultural

and rural development progiammes invariably fall in the public sector

because they are not valued directly in the market and therefore do not appeal to the private investment.

In the second place, public investment is the means of achieving

social objectives in rural development like agrarian reforms and organi-

zation^of production and distribution

on

co-operative basis. Public

investment is also a means of influencing the quantum and direction of private investment so as to keep a balance between the various branches

within agriculture, crops, animal husbandry, fisheries and foresting, et

The above are some of the considerations which account for the

substantial role of public investment in agriculture at least in the early stages of development in developing countries. This does not mean however that private investment in agriculture is unimportant. In some of the African countries, the private investment is expected to play a

significant role in agricultural development. In the Ten Year Plan of economic development of

Sudan;(1961/62

^-

1970/71)

for instance, the

ratio of private to total investment in agriculture is 25 per cent| in

IDBP/ET/CUB/881-1

Page 4

the plan of Cameroun

(

1961

—65)

^>

19%

a11"! was

26%

in the

1961-64

plan

*

of Senegal. Further, in the.private sector, a substantial amount of non-monetary investment usually takes place in agriculture. Since such*

investments

(for

instance, construction of roads, field works

etc),

play an important role in agricultural development, it is essential

to ensure satisfactory incentives for the farmers to undertake such non-monetary investments on a large scale.

The Determination of the Pattern of Investment in the Agricultural Sector When we consider the problem of the pattern of investment

(or

resource

allocation)

^for agricultural development, it cannot be seen,

as mentioned earlier, in isolation from the pattern of investment in general. The two are necessarily interdependent, especially in the developing countries where agriculture constitutes bulk of national

income and employment. Similarly, the pattern of investment in

agriculture is closely related with various targets of production that

have to be set, and these two therefore have to be considered together.

1/

^-

One of the _ways to do this exercise is to proceed step by step — irom

the pattern of investment for the economy as a whole to the

pattern

of

investment within agriculture to the targets for various agricultural commodities, or the other way round. However* once one starts it, one has to keep the other two steps in view and must also reverse the process

to check the results arrived at privious step. In other words, the

exercise has to be done in successive approximation, a well known method

in mathematics and logic.

Strategy of Development

In considering the pattern of investment in general as well as within agricultural sector, it is important first to work out a broad strategy of long-term development, that is to take a long look ahead

(say

15 or 20

years)

and have some idea of the perspective of development In deciding upon a strategy, the first thing is of course to take a look at the current situation in regard to resources available, structure of

the economy and how the different sectors have developed, and then to

idep/et/cus/88i-i

Page 5

view how the sectors can he developed

(feasibility),

how one can best,

use the resources that one has, within the various limitations in which

the _economy works, in order to produce the optimum results over a long period of, say, 15 or 20 years

(optimality).

Needless to say that in deciding upon a strategy limits are also set by political factors and

very often they are dominant.

After the decision has been taken _upon the broad strategy for the

economy as a whole, then is the stage for determining the quantam and pattern of investment in agriculture over the plan period. This will depend on a number of factors, which are considered below.

Factors affecting the Pattern of Investment in the Agricultural Sector In general the pattern of investment in agriculture has to conform

to the overall objectives of development and to the specific agricultural objectives such as increasing food supply, improving productivity, diver¬

sification of the agricultural economy, creation of production potential

in future, expansion of employment or reduction of under-employmont in agriculture, and improvement of the institutional structure since deve¬

lopment programme in agriculture is usually a mixture of different types

of projects and programmes, choice between them has to be guided by the

extent of the contribution that these _programmes and projects can make

towards the achievement of the objectives.

Short-Term vs Long-Term Projects

One of the basic factors in determining the distribution of invest¬

ment in agriculture is the relative emphasis to be placed on short-term and long-term projects, or projects which are quick maturing and those which have ^a long gestation period. Generally, quick maturing projects

like small irrigation works do not contribute much to long-term production potential and sustained growth, hut may be desired for realizing more immediate benefits in the form of production increases. Long-term project like major irrigation, land reclamation, soil conservation, afforestation, drainage schemes, although they do not yield results in the short-run,

IDEP/ET/CUS/881-1

Page 6

build _up the long-term production potential of the economy. It is essentia*

in the distribution of investment to keep a balance between these two types

of projects, which will largely depend upon the general strategy for ♦

agricultural development the country has in view and the availability of long-term capital which normally comes from abroad. One has also to consider

the linkage between short- and long-term projects. For example, small irrigation schemes like wells and tanks give quick results but do not give complete insurance against adverse weather, so that in certain areas they

have to be followed _up with major irrigation projects.

Complementarity in Investment

13. ,-j. Anpther important factor affecting the

distribution

of investment in agriculture is the consideration of complementarity in investment to realize maximum benefits. For example, investment in directly productive activity

like _crop production involving provision of improved se.eds, fertilizers, adoption of plant protection measures etc., is in many ways complementary

to investment in infrastructure, because provision of improved seeds and

fertilizers etc. combined with irrigation produce the maximum impact on yield. A package investment is therefore more effective than investments separately in view of the benefits from mutually supporting interactions.

This package should also include adequate provision of working capital to

farmers in the form of credit for purchasing fertilizers, improved planting material, pesticides, etc.

Investment in Development Services

14. Investment in develojjment services such as agricultural education, * research and extension schemes often tends to be overlooked in resource

allocation. They are one of the most critical components of the agricul- *

tural development programme and as such should receive more recognition

than have received so far in the development plans of the less developed

countries.

IDEP/ET/CIJS/881-1

Page 7

Improvement in the Institutional Structure

Institutional facilities such as improved credit and marketing and

reform of the structure are an essential precondition for expansion of agriculture. The allocation of investment for this depends largely on an assessment of the extent to which social, economic and institutional

deficiencies are acting as a brake on agricultural development. In some of the countries of Africa, the proportion of investment in institutional improvements varies between 4-17 per cent of public investment in agricul-

ture.

V

-1

Concentration of Resources in Favourable Limited Areas

If the best use is to be made of the limited resources available,

intensive regional programmes in favourable areas are likely to be the

most economic and efficient in the short run. Thus in determining the pattern of investment, limited areas may be chosen for more intensive development so that largest and quickest returns may be realized. Bui all

the same, for political and social reasons the rest of the agricultural

economy cannot be kept completely uncovered, nor would it be desirable

from tbe point of view of the long-term development of the country. There¬

fore, "impact programmes" for specified regions, e.g. the Intensive

Agricultural District Programmes in India, Pakistan and Senegal

(Casamance)

have to be supplemented by extensive programmes for the agricultural development of the country as a whole.

Thus finally, we may conclude the discussion by a remark thax the patte

of investment or resource allocation within agricultural sector, as in general, is governed by many considerations which aim at making the optimum

utilization of the limited resources available from the short- and long- term point of view.

1/

IDEP/ET/CUS/881-1

Page 8

APPENDIX

Table 1

Significance of Agriculture in Selected Countries of Africa in Relation to GDP, Active Population and Exports —'

TT

Sub-Region and Countries

Agriculture

as

#

of GDP

Active Population in Agriculture as

fo

of Total Active Population

Agricultural

*

Exports as

<4

of Total Exports

North Africa Morocco Tunisia Sudan U.A.R.

West Africa Ghana Guinea Ivory Coast Nigeria

Senegal

East Africa Ethiopia Kenya Tanzania

Uganda

Zambia

Central Africa Congo

(Leop.)

Cameroon

32 29 57 31

49 48 49 63 28

76 40 59 61 15

31 46

57 68 86 57

58 87 65 78

90 80

85

98 74

67

91

y4

92 4

78

jj

Source: Economic

Bulletin

for Africa? June 1962 Vol. II No. 2, United Nations.

idep/et/cus/881-1

Page 9

APPENDIX

Table 2

Estimates of _per capita gross domestic product in African countries

(expressed

in United States

dollars)

1964

US$

Congoj Dem. Rep. of ⁶⁸

Ghana 232

Ivory Coast ²⁰⁶

Kenya 85

Liberia 25O

Libya ²¹²

Morocco 172

Senegal ¹⁶⁸

Tunisia 184

Uganda 77

Zambia 187

Sources Yearbook of National Accounts Statistics

U.N./1965.

idep/et/cïïs/881-1

Page 10

APPENDIX

Table 3

Share of Agriculture in Total Investment and in Public Investment

in Selected African Countries

Country Plan Period

Share of Agriculture in

1

Total Investment

J Public Investment

per cent

j per cent

Cameroun 1961-65 ^{22 -}

Congo

(Br.)

1964-68 ^{6 -}

Dahomey 1966-70 ^{34 -}

Ethiopia

1962/63-1966/67

^{21 -}

Ghana

1963/64-1969/70

^{6 14}

Kenya 1964-70 4 14

Mauritius 1962-65 ^- 24

Niger 1965-68 ^{31 -}

Senegal

1965/66-1968/69

^{20 42}

Sudan

1961/62-1970/71

^{21 25}

Tanzania

1964/65-1968/69

^{15 28}

Togo 1966-70 23 26

Tunisia 1965-68 ³¹ 45

Uganda 1966-71 ^- 23

U.A.E.

1960/61-1964/65

^{— 25}

Note : The agricultural sector includes crop production, livestock,

fisheries, forestry, irrigation, land reclamation, community development

and agricultural extension etc.

APPENDIX

IDEP/ET/CUS/881-1

Page 11 Table 4

The Pattern of Investment in Agriculture in Selected African Countries

Percentage Distribution of Public Investment in Agriculture

; Infrastructure

(irrigation;

drainage, land

reclamation

etc)

Directive Productive Activity ^Research

Extension

& Agric.

Education

Insti¬

tutional

Improve¬

ments

Cour,try ^{Plan Period} Crops ^{Livestock Fisheries} Forestry

Ethiopia

1962/63-1966/67

^{- 69 1.0 - 3.0 18.0 9.0}

Ghana 1963-1970 ^{14 32 2o 0 17=0} 4.0 14.0 17.0

Sierra Leone

1962/63-197l/72

^{47 5 23.0 12.0 2.3 4.3 4.3}

Sudan

1961/62-1970/71

^{80 10 2.0}

sJ

^{3.0 1.5 3.7}

TT.A.R.

1960/61-1964/65

^{86 9 3.3}

V

^1.0

a/

included under livestock

b/

included under crops

Source: Mr. R.N. Poduval's lecture in Cairo Course.

UNITED NATIONS

IDEP/ET/CUS/881-2

AFRICAN INSTITUTE FOR ECONOMIC

TIJTY iq6?

DEVELOPMENT AND PLANNING

y '

DAKAR Mr. J. C. SAIGAL

LECTURE No. 2

THE ROLE OF CREDIT IN AGRICULTURAL DEVELOPMENT AND SOCIO-ECONOMIC PROBLEMS OF AGRICULTURAL FINANCE MP CREDIT IN DEVELOPING COUNTRIES

1. In order to examine and appreciate, in right perspective, the contri¬

bution agricultural credit and finance can make to agricultural development;

it is desirable first to emphasise the most important differences between

the social and economic structures of advanced and developing countries

insofar ^as they are of importance for agricultural credit and finance.

2. One of the most salient differences is the overwhelming importance

of agriculture in developing countries and the fact that agriculture

determines the socioeconomic pattern of these countries. As indicated in

the previous lecture, in most developing countries of Africa and Asia, 80 to 90 per cent of population derives, partly or entirely, its livelihood

from agriculture. In spite of the vigorous attempts made in some of the developing countries

(e.g.

India, Pakistan,

U.A.R.)

to build up their

industries, only a small percentage of the population has been able to find

its livelihood outside agriculture. This fact has lead to unbelievable density of population in the rural areas as, for instance, in south and

east Asia and in some parts of north Africa, although a great density of

population is not characteristic of all developing countries, since in various

African and Latin-American countries large areas of fertile waste land

remain uncultivated.

3. This accompanied by rapid growth of population and relatively slow expansion of industry in most countries of Asia, Africa and Latin America

increases further the pressure on land and results in continual subdivision of holdings, which in most cases are already uneconomic. "Agriculture

must continue to give employment ^to the unemployed, be it only underemployed

or disguisedly unemployed" is the common phenomenon in most developing

countries.

IDE?/ET/CUS/88i-2

Page 2

Another important structural difference "between advanced and develo¬

ping countries is found in the nature of agriculture. In advanced coun¬

tries, agriculture has become fully commercialized and the approach of

the farmer to production does not essentially differ from that of the

-■industrialist-. -Un" the-' other"hand,' in~most developing countries, th^; greater part erf- agriculturrrl'S still ~s~ubSistencë"farming." 'Although the rapid development during the last few decades of the means and communi¬

cation and of world trade-has increased the need which the average farmer

in developing countries can only'meet by spending money, this has not

altered the fact that subsistence farming has remained the basis of his

life. Moreover barter trade still continues -to be predominant in rural

areas in _many parts■ófoÁfrica and Asia.

The fact that a farmer in developing countries has often to usa a considerable part of his land for growing cash crops or has to market a large proportion of his grain produce does not necessarily indicate that

subsistence farming is rapidly disappearing in these countries. Usually

it means that the farmer has béôn driven deeper and deeper into monetary

economy.

In the eyes of the subsistence farmer in these countries it is the product's use value and not its exchange value that counts. It has been

noticed that the farmer often reacts to an increase in the price of food grains by marketing lëss of his produce, because ,he can then afford to keep more food' for his own consumption.

• ï- j.

Another striking feature

unfamiliar^yt.p ..western

world

is that profit-

seeking in the modern sense is not, and cannot be, .the basis -of agricul¬

tural production for the overwhelming majority of the farmers in develo¬

ping countries. Agricultural production in most of these countries conti¬

nues to be based on, and to be directed toward, the satisfaction of the direct needs of the farmer and his family. This phenomenon is largely

due to his pattern of life and his scale of values, which are different

from those of his counterparts in advanced countries. Rural society in

ilep/et/cus/88i-2

Page 3

developing countries is so tradition bound that the pattern of consumption

as well as the pattern of production are prescribed by tradition.

8. For the agricultural sector this implies that the methods of produc¬

tion are not only traditional and primitive but that tradition also

determines as to what, how much and when to be produced. The traditional pattern of life, which is rigid, also dictates to a large extent the quantities of each agricultural product to be consumed.

9. Although it is true that in general the social status decides to a very large extent the character and volume of needs, it should be noted

that in most developing countries, rural communities show relatively little social and economic differentiation.

The contribution credit and finance can make to agricultural development 10. It is against this background that one should examine the role

which finance and credit can and should play in agricultural development.

It is quite obvious that serious empediments to developing agricultural

credit and co-operation are to be faced in developing countries, where

centuries' old powerful traditions lay down the norms of production as well as that of consumption, where the self-sufficiency of the family-

has been the social norm for centuries, and where the social ideal is stability and conservation and not economic progress.

11. However, this should not suggest that change is not possible at all

in these societies. It is only to emphasize that the change for subsis¬

tence farming bounded by tradition to full-fledged market production

based on profit seeking is an extremely difficult and complicated process,

a very long road, on which most of the developing countries stand only

at the _very beginning.

12. Experience tells that even where some progressive farmers have shown willingness to try using better seeds and methods of production, physical conditions, risks involved and administrative deficiencies have prevented them from doing so. It should be clear that in developing countries the

small farmer is so appallingly poor that he cannot risk _anything but his

idep/et/cus/88i-2 Page 4

labour. In numerous cases, extreme fragmentation of land holdings and land»

tenure system stands in the way of using modern methods of production.

13. Where neither risk nor physical conditions constitute an obstacle

to the introduction of improvements in agriculture, the farmer

is often prevented from doing so because the better seeds, fertilizers supply are not available at proper time and proper place due to adminis¬

trative inefficiency.

14. There is however ample evidence to believe that wherever favourable physical conditions and enough safeguards against risks havd been created

and agricultural credit meets certain preconditions, it can make substan¬

tial contribution to the increase of agricultural production inasmuch as it provides the farmer financial means of improving his land, using

modern too1s •and- machincry, -ancl_..Qf_..introducing better methods òf culti¬

vation. _{; j U.}

15. But, at the èame time, it should be clear that one should not over¬

rate the importance of agricultural credit as if it were a panacea. It

is only one of many prerequisites or one of the factors playing a role

in agricultural development.

16. Further, agricultural credit projects will have only limited impact,

or no impact at all, unless, simultaneously, attempts are made to bring

about conditions in which the projects can yield adequate results. For example, the contribution that agricultural credit and finance can make

may be neutralized to a large extent or completely, if the farmer does not get a proper price for his produce. One of the important aspects of

the Increase in agricultural production is, therefore, marketing problem.

And marketing is a problem with many aspects. In the first place, it is

thatj)

of building up infrastructure i.e. the availability of roads, railroads§ means of transport, warehousing! cold storage and other facilities. The ..organization of a sufficient number of markets and of an efficient system

to inform the producers of current market prices being very essential to prevent prices varying from place to place is another aspect of the marketing problem in these countries.

IDEP/ET/CUS/881-2

Page 5

17. However, provision of adequate agricultural credit and proper marketing

facilities lose much of their impact, if the prices of agricultural pro¬

duce are not properly controlled and a proper balance of trade between agricultural sector and industry is not maintained.

18. Two other important factors are adequate economic planning and

efficient government administration. Efficiency of government administra¬

tion is the key factor for the successful implementation of plans dealing

with ail aspects of agricultural development.

19= We may close the discussion by emphasizing that all these programmer-

integrated, as they should be, with the programmes of agricultural credit

and finance do need the existence of a proper system of land tenure.

UNITED NATIONS

IDEP/ET/CUS/881-3

RICAN INSTITUTE POR ECONOMIC .

DEVELOPMENT AND PLANNING

iyb'

DAKAR Mr. J. C. S AI GAL

LECTURE. No. 3

AGRICULTURAL CREDIT NEEDS AND THE STRUCTURE OF

AGRICULTURAL CREDIT IN DEVELOPING COUNTRIES

1. In developing countries the greater part of agriculture is

subsistence

farming and the overwhelming majority of the population is small farmers

with _very small means, or no means at all. This has a hearing on the

nature of agricultural credit needs and the character of its utilization

in these countries.

Agricultural Credit Needs

2. One of the

implications

of subsistence farming facilities is that it

would be unrealistic to expect that there would be a great spontaneous

demand for agricultural credit for development purposes. This does not

mean, that such a demand is completely lacking. Fortunately, in several countries, it is steadily growing with the transformation of agriculture

based on subsistence farming into that based on market production. How¬

ever, the fact remains that the basis of agricultural economy in most

of the developing countries is subsistence farming and hence the needs of

an average farmer for long-term credit for development purposes are very- small in comparison with medium- and short-term credit. For the same reason, the needs of medium-term credit, although much larger than those

of long-term credit, are usually much smaller than the needs of short-term agricultural credit which meet the immediate needs of the farmers. A striking illustration of this phenomenon may be given from the U.A.R.,

where vigorous efforts have been made to improve the conditions of the

small peasants. According to statistics collected by ^a F.A.O. ^group of experts —'1/, the total agricultural credit of E£ 57 million was composed

j/ Agricultural

Credit Through Cò-operatives and

Other Institutions,

F.A.0. , Rome 1965°

IDEE/ET/CUS/881-3

Page 2

of approximately E£ 56 million of short-term credit9 E£ 0.7 million

medium-term credit, and only E£ 0.3 million of long-term credit. F.A.0.

group was also of the opinion that composition was not essentially diffe¬

rent in other developing countries.

Character of Agricultural Credit Utilization

Short-Term Credits

3. Short-term agricultural credit usually refers to "crop loan". Its

main purpose is to enable the small- and medium- size farmers to meet

their _expenses in raising food and cash crops, such as the cost of the purchase of seeds, fertilizers, hired labour, pesticides, etc.

4. Past experience shows that in all developing countries considerable proportion of "crop loans", which are intended for clearly

productive

purposes, is very often diverted by an average farmer to consumptive aims

such as meeting the cost of his household, of marriage, religious cere¬

monies and other social obligations.

5. It is, though understandable, that many credit institutions and co-operatives in developing countries have therefore adopted the strict

rule of providing credit to farmers for strictly productive purposes, it would nevertheless be _very unrealistic to expect that in subsistence farming-credit is utilized only for what the economic theory calls

"productive purposes". The reason is simples the scale of values of an average farmer in developing countries is such that firstly, he does not distinguish his economic needs from his social needs and secondly, very often he attaches more importance to the immediate fulfillment of his

social obligations than of his economic needs. The obvious consequence of this attitude is that the _average farmer is tempted to borrow money which is indispensable for meeting what he sees as most pressing need, irrespective of the question whether an economist or a more enlightened

person than he may call it an economic or a social need. This fact usually results in what has so often been branded as "misuse of institu¬

tional credit". Despite all precaution taken by credit institutions

(such

^as providing credit in

kind),

the small farmer is- always able to

idep/et/cus,/88i-3

Page 3

find, _ways and means to di ;rt loans to consumption.

6. Undoubtedly9 all these needs of credit for consumptive purposes would not exist if the _average farmer was less improvident and less poor.

But such is not the case in developing countries, and, therefore, as long

as the conditions of life and mentality of rural population do not change,

it would he wiser for credit institutions to face these facts. Credit institutions should realize that the potential danger is not that the

farmer borrows for unproductive purposes, hut that he shows a

propensity

to borrow more than his repayment capacity warrants. More useful policy would, therefore, he not to make a strict distinction between the

farmer's

credit needs for so-called "productive" and

"consumptive"

purposes, as Ion

1/

as his borrowings remain within the limits of his repayment capacity.- 7. It is thus imperative that as long as the subsistence

farming

prevailing in-'developing countries. has not been replaced by

full-fledged

market production, all

credit

to small- and medium-size farmers is bounc.

to include a consumptive as well as a productive elementi. There is

therefore no point in the early stages of agricultural

development

in

these countries to cut out all credit for consumptive purposes. Of cours.-:

care should be taken that as much as possible of the "crop loan" which

should be provided to the farmer in kind, but enough margin should be

left to the farmer to apply a part of the loan to not immediately produc¬

tive purposes, if it is necessary.

Medium- and Long-Term Credit

8. Generally speaking, medium- and long-term loans have, to a large

extent than _crop loans, the character of real "agricultural production

credit" in -the sense of promotion and development credit. Such loans

are meant for digging wells, installing water pumps, buying fencing materials, planting of orchards, irrigation and drainage, works, buying tractors, combine-harvesters, implements and plow cattle, etc.

_1J "Agricultural

Credit Through Co-operatives and Other Institutions",

FAQ, 1963.

idep/et/cus/88i-3

Page 4

9. Medium- and long-term loans also include loans for redemption of all

debts which, in theory, may have been contracted for productive ^as well

as consumptive purposes. But practice shows that in most cases, this

kind of credit is financing, to a large extent, excessive consumption

in the past. Thus although in comparison with short-term credit,

medium-

and long-term credit is much more productive in character, a considerable part of these loans is still used by the ^average farmer in developing ooun tries for financing his past or present consumption.

10. It is pertinent to remark here that although the needs for long- and

medium-term credit for productive purposes is rapidly increasing in severs

developing countries, its volume is bound to remain very limited as long

as attempts to change the mentality of rural population and transform

subsistence farming into market production do not receive satisfactory

success.

Structure of the Agricultural Credit

11. The main source of rural credit in developing countries still conti¬

nues to be either the trinity money lender - trader - shopkeeper or relatives and friends. From the _surveys conducted in several of the developing countries by different research organization and official agencies it appears that in most of the countries more than 90 per cent

of agricultural credit is provided by money lenders, traders, friends and relatives, more than

50%

of which is provided by money lenders and traders

This obviously explains that in most developing countries credit insti¬

tutions do not yet play preponderent role in the provision of rural credit

12. Institutional credit is usually provided by co-operative credit organizations, official agricultural banks, development banks or develop¬

ment boards, and sometimes by marketing boards and price stabilization

boards.

ï]

Ibid.

idep/et/cus/881-3

Page 5

Difficulties with Institutional Credit

13. In the beginning it was believed that the mere fact that institu¬

tional credit was much cheaper than the credit from private sources would

make it easier for co-operatives and other credit institutions to drive

out the money lender, if sufficient funds were available» In practice

it has been far from _easy to substitute money lender.

14. The explanation given by officials and policy makers in several of

the developing countries for the unsatisfactory slow pace 'of substitution

of ncn-institutional credit by institutional credit is the lack of finan¬

cial resources and trained personnel of the credit institutions in these

countries. It is, though, well recognized that the sufficiency of financial

resources and trained personnel is ^a prerequisite for the successful operation of credit institutions, the vulnerable spot of institutional

credit lies somewhere else, i.e. its impersonal character and all that

flows from it.

15. The strong point of institutional credit

(low

rate of

interest),

which is the only weak point of non-institutional credit, is outweighed by many disadvantages of institutional credit against the advantages of

non-institutional credit.

16. In the first place, non-institutional credit, being personal, can b

obtained by average farmer within hours. Since a good deal of borrowing by the average farmer in these countries is for consumptive purposes, it often takes the form of emergency credit^ this personal character of non- institutional credit is an enormous advantage and its impersonal charact c

a disadvantage.

17. Secondly, non-institutional credit is granted without all the burden

of administrative formalities

(such

^as detailed application forms with

their numerous indiscreet questions, loan investigations, registration

of deeds, disbursement of loans in installment,

etc.)

inherent in insti¬

tutional credit.

idep/et/cus/881-3

Page 6

18. Thirdly, maximum credit limits observed by-!credit institutions are very low as compared to the ones observed by money lenders.

19» All these disadvantages of institutional credit are, in the ^eyes of

average farmer ih developing countries, too painful to be counterbalanced by the one advantage of its much lower rate of interest.

20. Thus, thé conclusion we draw from the foregoing is that the policy

of driving out money lenders and replacing private credit by institution"!

credit cannot be just thought of in terms of rates of interest, as many leaders of agricultural-banks and co-operative credit organizations in developing countries think.

Policy Implications

21. For the development of sound agricultural credit in developing

countries previous discussion spells out a few policy suggestions which

are discussed belows

(i)

A system of strict supervision of agricultural credit from the beginning to the end is essential;

(ii)

To avoid excessive diversion of loans meant for development ^purposes

to consumptive aims it is desirable to provide credit as much as ..possible in kind and the part which has been granted in cash, in

-•••.. .installments. "...

(iii)

Methods and procedures followed by credit institution for granting

loans to farmer must be made less rigid and less cumbersome adminis¬

tratively, so that the farmers may be able to obtain loans at proper- time and place, without going through unnecessary administrative

formalities which cause redtapism.

(iv)

The cost of providing agricultural credit in developing countries

must be relatively high.

UNITED NATION'S

AFRICAN INSTITUTE FOR ECONOMIC DEVELOPMENT AND PLANNING

DAKAR

LECTURE No. 4

FINANCING OF THE DEVELOPMENT OF AGRICULTURAL CREDIT INSTITUTIONS

Various Methods of Financing Agriculture

1. In most developing countries institutional credit, as mentioned in

the previous lecture, does not yet play a significant role in the provision

of agricultural credit. Institutional credit in most developing countries

1 / constitutes much less than 10 per cent of the total agricultural credit.—

There is,- therefore, genuine necessity for expanding institutional

agricultural credit considerably in near future. This calls for tapping

as efficiently as possible the existing sources of finance and finding

new sources either within the country or abroad. Although many different

ways can be followed in creating funds necessary for financing agriculture, they ultimately boil down to the following three methods:

(a)

Increasing the volume of local currency by the central bank.

(b)

Internal savings and foreign loans and grants in local currency.

(c)

Foreign loans and grants in foreign currency.

2. In general, when choosing between the various methods of financing agriculture the main consideration should always be how much each of

them affects the internal and the external economic balance of the country concerned. In other words, the criterion is to see whether the way'-envisaged is

lii^ly

^{to give rise to serious} inflationary or defla¬

tionary tendencies, or enable the government to keep the national economy

relatively in equilibrium.

3. Another important point to be considered in deciding how to finance agricultural development schemes is the provision to be made for the foreign exchange necessary to pay for the imports directly or indirectly

involved in their implementation. Thus, in short,"choosing the appro¬

priate way of financing any specific programme for expanding agricultural

IDEP/ET/CUS/881-4

JULY 1967

Mr. J. C. SAIGAL

1/

Agricultural Credit Through Cò-operatives and Other Institutions.

F.A. 0, , 1965.