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Effect of Credit Programmes on Farm Productivity

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Published: 6th Dec 2019

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Tagged: Economics

The research by (Taylor, Drummond, & Gomes, 1986) related to effectiveness of subsidized credit programs in improving the productivity of traditional farmers in developing countries the credit program known as PRODEMATA. The empirical results suggested that PRODEMATA had no desire impact on technical efficiency and a slightly negative effect on allocative productivity (it was defined as a theoretical measure of the advantage or utility resulting from a planned or actual choice in the distribution or distribution of resources).

The “poor but efficient” hypothesis stated that the provision of agricultural credit would be ineffective in improving productivity and incomes since investment opportunities were found limited. Traditional farmers were hypothesized to be efficient but faced with technological barriers that cannot be overcome by the mere influx of capital provided by credit programs alone.

Further, the economics of credit in Brazil was analyzed and concluded there was an underutilization of capital on small farms and that credit would relieve capital shortages and improve output. However, after analyzing the farm-level production, it was found that technological barriers were present which would prevent credit programs from having a significant impact on capital formation and incomes.

The traditional agriculture in southern Brazil concluded that the increased investment capital formation, such as use of mechanized equipment and fertilizer, alone was not the answer to increasing crop production.

Information sources and consumption of resources were found significant and equally emphasized if any advantage was to be anticipated from increasing disbursement on these inputs.” The implication here was, while credit availability may afford traditional farmers, the opportunity to invest in modernized inputs, there would be no guarantee that these inputs would be used in such manner as to recognize the full level of output gains possible.

It thus seems appropriate that the effectiveness of subsidized credit in traditional farming depended on concerns of technical as well as allocative efficiency.

The research above illustrated credit program named as PRODEMATA. The result participated in the program compared to those of nonparticipating farms indicated that the program was not successful as measured by technical efficiency gains the reason behind this was allocative efficiency there if allocative efficiency is not there results cannot be achieved by such credit programs therefore production efficiency is depend on allocative efficiency.(What is this sentence??)

According to research by (Stefanou & Saxena, 1988) it was stated that various kinds of trainings could help the farm operator to enhance profitability. This training influenced the0 production decision making, it was found relevant to consider allocative efficiency. This focused on the impact of training on operator decision making and developed an implement able theoretical framework that linked training variables to allocative efficiency.

However, relative efficiency could be achieved for four of six possible input combinations. Education and experience were found to be substitutes and played a significant role in the level of efficiency.

The differential access to support credit from government has been extensively believed that it plays important role in explaining practical differences in input use for the better results in yield

across farms in developing countries. As a result, it is frequently argued that rural development must originate with agricultural credit reform. There is, however, little empirical evidence that farm production has been effectively constrained by lack of access to formal or government controlled credit. While credit reform may be desirable for any number of reasons, reform of other input markets may have a larger impact on farm incomes.

In other cases, the small amounts necessary to finance working capital requirements might be readily available at relatively low cost from “informal” sources such as relatives and friends and other farm households. Households also may be able to substitute for formal credit through a variety of rental markets. Under such conditions lack of access to formal credit may not constrain the production decisions of farm households.

The formal sector borrowers do have an advantage in the tenancy market, this advantage resulted not from their access to formal credit, but from their superior resource position, particularly as it related to irrigated land. Because households did not equilibrate access to formal credit through the land rental market, such access would not determine variable input use. Informal credit did improve the probability of renting land for households who lack access to the formal sector. The effect of informal credit appeared to be less important than ownership of resources such as irrigation, draft power, and family labor.

According to research by (Murgai, Ali, & Byerlee, 2001) measuring the productivity of Pakistani and for the production systems in both countries Indian Punjab has provided enumerating trends origination of the Green Revolution. It is determined that Indian Punjab has more productivity than Pakistani Punjab.

The reason Indian Punjab is more productive Statistics from official resources of Pakistan have frequently viewed as motivated by a desire to current a picture rosier than the ugly and terrifying ground truth and hence often viewed as erroneous and on the superior side in case of efficiency and lower when it comes to scarcity and population expansion. Two of the main cash crops of the two provinces are rice and wheat. Pakistan’s yields in both crops are far behind the other Punjab. For instance, Indian Punjab has shown an annual production growth rate of 11.03 per cent for rice whiles it has been a mere 3.08 per cent for Pakistani Punjab.

The production by Pakistani Punjab was 13.13 million tons from 5.9 million ha. As comparison as on the other hand Indian Punjab output was 14.36 millions tons of wheat in the year 1996-1998 from the area of 3.3 million hectares.

Even in other periods, productivity on the other side of Wahga had been consistently higher.

As a result, the Indian state followed a policy of trying to produce more from less land while in Pakistan, more land is brought under cultivation every year to enhance the total yield and meet domestic consumption needs. At the same time, it was well known that Pakistan can ill afford to increase area of cultivated land because of scarcity as also deteriorating quality of water.

The difference between the productivity of the two sides reflected sadly on the state of affairs in Pakistan’s Punjab. According to a study by three Pakistani and Indian experts, “if India were to produce the same amount of rice with Pakistan’s productivity level, it would have to devote an additional area of more than one million hectares under rice”.

The picture of wheat was found worse. Pakistan would bring an area of about ‘four million ha’ to reach Indian Punjab’s produce. The experts ask the question why yields vary so much under fairly similar ‘agro-climatic, socio economic and managerial conditions’.

Their analyses identified some of the factors contributing to this discrepancy in productivity. The productivity performance was found effected by differences in input and cropping intensity, with the use of technology and resource quality.

The interval between adoption of Green Revolution technologies and recognition of effectiveness gains is belong to learning- induced efficiency gains, improved utilization of capital investments over troubles and time with the ordinary methods of productivity measurement that downwardly bias measurements, particularly throughout the Green Revolution period. Secondly the input growth accounted for most of the production growth in both Punjab’s during the time phase under study. In the wheat rice system the third escalation outcomes in resource degradation means exploiting substitution possibilities among inputs and crops) in both Punjabs. Pakistani agriculture data shows that the over all productivity has been reduced by resource degradation and the growth that has been delivered by technological modify and from one third change in infrastructure, education and investment. These conclusions imply the need for policies that encourage Sustainability and agricultural productivity through investments in education, roads, and for research purposes by public; and that diminish resource degradation by declining or reducing subsidies that promote intensification.

Land was found suffering a process of degradation in Pakistan. India countered the problem with ‘widespread use of gypsum to combat secondary salinity from tube well irrigation and provided gypsum at subsidized rates to states facing salinity. An organization has been established for this purpose. Pakistan did not undertake any such measure. The result obtained was a rapid degradation of land contributing towards a decline in productivity.

Punjab was hurt by a steep decline in the water table, while rising water levels in the wheat-cotton zone led to severe water logging in the wheat-cotton zone.

First, empirical evidence from areas of Asia experienced rapid Green Revolution-induced change. It suggested that when new technologies were first adopted, inefficiency was fairly high (about 30 percent). In general, high levels of technical inefficiency are due mainly to deficiencies in information and technical skills and these were probably serious factors in both Punjabs, where poorly educated farmers switched, in a single generation, from traditional agriculture to complex multiple cropping systems dependent on significant levels of modern inputs.

The increase in technical efficiency a few years later, during the second period, could be attributed to learning by doing, as farmers gained experience using the new technologies; and also to an increase in human capital as education levels rose in both states. Indeed, evidence from India suggested that Green Revolution technological change directly increased the returns to education by spurring greater private investment in schooling, particularly in states such as the Punjab.

Third, low TFP (Total factor productivity) growth during the Green Revolution related in part to limitations of the conventional method of productivity measurement when technical change was biased toward saving one or more factors.

When technical change was found biased in this sense, it was impossible to separate the contribution of technical change from that of factor accumulation, because part of the contribution of technical change used to capture in changes in the factor shares used to aggregate inputs. In the case of land- and labor-saving technologies, conventional TFP calculations underestimated the contribution of technical change to growth, particularly during the Green Revolution period.

Soil and water degradation reduced productivity in all regions, highlighting the effect of natural resource variables on productivity. In the wheat-rice system, resource degradation more than canceled the productivity-enhancing contributions of technological change, education, and infrastructure. The indefinite “other factors” captured by coefficients on the regional time-trend variable also reduced efficiency quite strongly in all but the wheat-cotton system.

In particular, constant underinvestment in operational and management costs has critically reduced the efficiency of the irrigation system resulting in such problems as regular breaches, unnecessary seepage, and limited water supplies for the conclusion reaches of distributaries.

Research and spending also fell in real terms in the 1990s and accounted for a falling share of the agriculture budget. Across the border in India, even though the share of public resources devoted to agriculture has risen steadily since the early 19 80s; subsidies to agriculture have increased three times faster than other expenditures (World Bank 1996).

Apart from crowding out productivity-enhancing expenditures, input subsidies have also been a major cause of overcapitalization, inefficient use of inputs, and a shift in cropping patterns toward water- and fertilizer-intensive crops, thus contributing, in India, to soil degradation, salinity problems, and overexploitation of ground- water. In Pakistan, the subsidy on canal water prices has led to inefficient use of water and contributed to the water logging and salinity problem. In addition, the flat rate structure of water and electricity prices, together with a subsidy on tube well drilling without regulation of the number of tube wells, distorted the efficient use of water Johnson 1989). Resource degradation is not, in itself, a reason for policy intervention if it is internalized in producer decision making.

Finally, a large number of institutions in the two Punjabs have overlapping mandated to address soil and water management problems in irrigated agriculture and their efforts are poorly coordinated. In the Pakistan Punjab alone, for example, nearly a dozen institutions were found working on salinity problems. Information about land and water problems is also institutionally dispersed, as is policymaking. It was considered important to establish a central agency in each Punjab to regularly provide farmers and policymakers with current information on the status of land and water resources in irrigated areas.

Investment (both public and private) played a central role in productivity growth, there was, in Punjabs, a considerable lag between investment in infrastructure and Green Revolution inputs and the realization of productivity growth. This seemed to relate in part to learning by doing and investment in human capital, which took time to produce improvements in technical efficiency; and in part to the better utilization of lumpy capital investments over time, especially tube well capacity. For policymakers, this lag suggested that a long-term commitment is needed to realize complementarities between investment in technologies and supporting infrastructure.

According to research by (Looney, 1994) over the past decade, the agriculture sector undergone major technological and policy transformations. By introducing technical changes offering production incentives, and increasing the availability of fertilizer, water, and credit, Pakistan increased it was exportable surplus of cotton and became close to self-sufficiency in wheat. For the 1980-88 periods the corresponding figure was 4.3 percent, up from 3.3 over the 1965-80 period. Since then overall growth had been maintained at similar levels. As in most semiarid developing countries, however, considerable variations existed in annual and seasonal production owing to adverse weather, pest incidence, and uncertain irrigation supply.

Pakistan’s agriculture is also characterized by regional disparities: Sindh and Punjab is the granary of Pakistan, whereas North West Frontier Province (NWFP) and Balochistan were found the food-deficit regions. Average wheat yields in Balochistan and NWFP are about 25 percent lower than in Sindh and Punjab. Low fertilizer applications, traditional farming practices, limited extension services, mountainous terrain, and a smaller share of irrigated land explain the slower pace of agricultural development in these two provinces.

Given the difficulties of increasing the cultivated area, the extent to which raising yields and labor productivity could contribute to future output growth would be critical determinants of the country’s food situation. The potential for productivity increases was limited by several major constraints-inadequate input management and institutional support, labor-supply bottlenecks, environmental degradation, and the supply of water. Of these, the supply of water was obtained probably the most severe. Water is a binding limitation to land extension for agriculture.

The greatest scope for further important increments in irrigation water supply was likely to lie at the intensive margin of agriculture and came through better operating policies for the irrigation system, an increasing water conveyance efficiency, and better on-farm management. Currently conveyance losses from river to distributaries canal amounts to an estimated 25 percent, and from the distributaries canal outlet to farmers’ field to another 40 percent. (where does this inverted comma closed)“I Studied modeling the Indus Basin have demonstrated that better operating policies for the irrigation system can bring about major improvements in operating efficiencies, and hence reduce crop losses.’2 In addition to the difficulty of water availability, deficient use and management of inputs is an important constraint to agricultural growth. Pakistani agriculture still ranks low in input use relative to other developing countries despite progress over the last several decades. Greater use of inputs may increase yields if they are managed properly. Although fertilizer use grew rapidly from 1970 to 1980 (14 percent per annum and close to 9 percent since 1980), crop yields did not. Limited water availability and inappropriate nutrient balance were often cited as reasons for this lack of yield response.

These revised sector objectives were confirmed in the Ministry of Food and Agriculture’s Policy Framework Paper (PFP) issued in 1988. The PFP stressed the importance of enhancing productivity through adequate funding of investment and appropriate price incentives to farmers. Priority was to be given to accelerating privatization of tube wells in fresh groundwater areas, adjusting support prices, promoting private sector participation in rice and cotton exports, removing the fertilizer subsidy as well as all distribution controls, and ensuring full recovery of operations and maintenance costs for irrigation and draining systems.

Production Efficiency and Agriculture Credit

According to research done by (Kahn, 1994) on World Bank-its role in farm mechanization

For the appropriate functioning of farm production main role is played by agriculture credit as a result of development in agriculture the farmer’s earnings will raise and will have its impact on his family and the community as a whole. Improvement of rural population and over all population in general is done a lot by Pakistan agriculture. If there is any project that has been designed for rural development the objective should be to promote the agriculture. This is important because the agriculture sector have more labor incorporation capacity as relates to other sectors. The implementation of newest technologies and the use of improved inputs and enterprise which has changed the whole view of farm have given climb to an enlarged vital role has been played by World Bank for the increase in the demand of credit for agriculture.

Financial services have lengthened substantially during the past four half decade especially in small earnings group society of Pakistan. Many new financial institutions which contain major boost in volume of formal loans have some steps toward mobilization of the resources which are local in the shape of monetary saving in the rural areas. The main purposes of these actions have been taken to increase agricultural production and to relieve rural poverty. Thus there is a rising recognition between Pakistani farmers of the effective of better inputs and use of newest technology on both agricultural yield and cropping.

The main constraint in the mechanization of in Pakistan had been the paucity of foreign exchange and availability of standardized agricultural machinery. To over-come these shortcomings ADBP during 1965-69 arranged foreign credit which was primarily for the importation of popular makes of tractors and for financing the installation of tube wells act of which in fact is the milestone in the history of this part of sub-continent.

Farm mechanization is an important factor in agricultural development. Increased production could result from new techniques put into practice on farm. Thus the modernization of our agriculture could take place without the transfer of technology aspect of which to greater extent become possible mainly through World Bank as was evident from foregoing narration of this text.

According to research by (Lambert & Bayda, 2005) its states that Farm financial structure may influence equally long-run and short-run input usage, thus affecting farm efficiency. Any inefficiencies taking place due to the selection of inputs can be exaggerated over time as credit constraints continue to influence the usage of inputs.

Farm financial needs included current-year borrowing to cover production costs; intermediate funds needed for equipment, machinery, and farm-improvement investments; and long-term capital required for investments in land and other real estate. Balancing internal and external sources of funds to cover farm costs may reflect farm financial targets, farm household income, farmer risk attitudes, credit constraints imposed by lenders, or the relative costs of internal versus external funds. The latter two considerations may reflect lender confidence in the payback abilities of the farmer, based on projected farm income or on past experience with the farmer’s production efficiency relative to the lender’s portfolio of borrowers.

Reliance on external funds could affect farm production decisions. In particular, debt financing could influence factor usage and potentially affect farm costs and efficiency. Greater reliance on short-term credit, could be costly or constrained by lender limits, may reduce farm expenditures on necessary repairs and maintenance, decreasing the efficiency of owned assets and, consequently, overall farm efficiency. Increasing intermediate- or long-term debt, on the other hand, may increase farm efficiency through adoption of technological innovations embodied in new equipment, buildings, or storage facilities. When input choice affected external financing, disparities between input costs and marginal value products may occur, and in turn resulted in increasing farm costs and, as a consequence, decreasing farm efficiency.

Further in the study it was studied about “Costs, Debt, and Production Efficiency” There was a little agreement about the relationship of financial structure, farm costs, and production efficiency. In the agricultural setting, farmers with higher debt obligations were induced to exert greater efforts on behalf of lenders (Barry and Robinson), which would result in a positive relationship between farm debt and production efficiency.

Alternatively, the higher relative costs of external to internal funds might result in higher costs and induce production inefficiency. Agency cost implied monitoring, bonding, and adverse-incentive costs were largely passed on by lenders to borrowers through interest rate adjustments, origination fees, collateral requirements, and other transfer mechanisms. These costs, in turn, reduced the borrower’s technical efficiency when compared with farms having less reliance on borrowed funds. The agency-cost concept implied a negative relationship between technical efficiency and financial leverage.

Increasing intermediate and long-term assets through debt financing may positively influence farm efficiency because improvements in equipment and other farm capital facilities can improve farm efficiency. The relationship between financial structure and scale efficiency may depend on whether farms exhibit decreasing or increasing returns to scale. In another research it was found that no statistically significant relationship between debt structure and scale efficiency for farms operating under decreasing returns to scale. Conversely, for farms exhibiting increasing returns to scale, they found a significant negative relationship between intermediate debt and a positive relationship between long-term debt and scale efficiency.

Farm technical efficiency was found to be influenced by debt structure. A significant negative relationship was found between technical efficiency and the current debt-to-asset ratio. Two nonexclusive rationales may explain the nature of these impacts. First, the negative relationship supported the agency-cost concept, in which the higher costs of external to internal funds result in input misallocation. An alternative explanation, especially in a state subject to adverse weather events during the production year, may be increased reliance on operating loans to compensate for production shocks during the year. Increased borrowing may be necessary to cover costs required to bring in a crop or, alternatively, localized crop damage may reduce output levels below those attainable for the level and composition of farm inputs, including operating loans, employed.

According to research by (Olagunju, 2007) it was stated that Agricultural credit had long been identified as a major input in the development of the agricultural sector in Nigeria Credit determines access to all of the resources on which Farmers depended. Consequently, provision of macroeconomic policies and enabling institutional finance for agricultural development had been directed to the provision of infrastructure capable of facilitating agricultural development with a view to enhancing the contribution of the sector in the generation of employment, income and foreign exchange. One of the reasons for the decline in the contribution of agriculture to the economy was Lack of a formal national credit policy and paucity of credit institutions, which could assist farmers. Credit or loan able funds viewed as more than just another resource such as labor, land, equipment and raw materials.

Therefore, by injecting capital into agriculture, it was possible to increase the rate of agricultural development since credit has frequently been considered as one of the main factors in overcoming agricultural stagnation that helps to expand farmland size and production.

Credit facilities as well as the use of agricultural capital and labor Resources accelerate adoption process and expand the scale of production. He further ascertained that with the introduction of credit, the farmers would be able to make possible a better combination of resources that could be employed to facilitate an increase in resource productivity.

According to research by (Ruben & Kolk, 2005) it is stated that Rural households used financial services for a wide variety of purpose credit could be applied in the production process as a device for hiring-in land, purchasing external inputs or contracting wage labor. In addition credit could also be used to consumptive process like acquisition of food and non-food items, durables for making investments in education or health.

In this research they compared two types of farmers. One which used micro credit and the other did not use it. It was further stated that credit could be helpful for substituting hired for family labor, albeit at the cost of reduced labor it was usually thought that credit and could be applied to substitute materials inputs for land, but its impact on labor use is well known.

The findings of this research paper was that the impact of credit use on resource use and income distribution among rural farmers in Lempira department of Honduras, the farmers used credit rely on a more input and labor intensive maize production technology compared to those who didn’t use credit. This was partly due to the substitution of land by capital inputs, but could also be attributed to the emerging complementarities fertilizers and labor.

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