Subsidies as an Instrument in Agriculture Finance : A Review

This paper presents a literature review
of issues related to recent subsidies and investments in the
financial sector that have been designed to address the
immediate effects of the crises and to develop the financial
institutions necessary to modernize agriculture. Section two
of the paper discusses the impact of recent food, fuel, and
financial crises on developing countries and the emergency
actions taken by countries and international agencies to
reduce the suffering inflicted on poor people. It also
discusses the challenge of finding a balance between
pragmatic immediate responses and longer-term objectives.
The third section discusses the role of finance in
agricultural development and poverty alleviation. Section
four deals with the challenge of creating credit markets in
developing countries. The fifth section covers shifts in the
paradigm used to intervene in credit markets and summarizes
the main features of the old directed-credit and the new
financial systems paradigms. This is followed by a sixth
section that summarizes highlights in the development of the
microfinance industry. It covers guidelines created for
developing microfinance, microfinance penetration into rural
areas and agriculture, innovations and prospects for future
agricultural lending, and insights gained about the impact
of finance on poor households. The seventh section addresses
topics related to the demand for credit, including rates of
return earned in agriculture and in microenterprises, and
research results analyzing sensitivity of loan demand to
interest rates. Section eight describes major interventions
by international agencies and points the way forward for
agricultural credit. It reviews the debates about the use of
grants and subsidies, especially in the food, fertilizer,
and credit markets, and the rationale for smart subsidies.
It then describes experiences in five major areas of
international agency activities: micro-insurance and
weather-index-based insurance, credit guarantee funds,
warehouse receipts, specialized agricultural development
banks, and agricultural investment funds. Section nine
summarizes the main conclusions based on literature
consulted for this review. It identifies major lessons
learned with suggestions for priorities that Improving
Capacity Building in Rural Finance (CABFIN) members might
consider supporting in their projects and programs.