Thesis Abstract of AGS Students

Credit utilization and its impact on farm productivity in Chiang Mai province

Antonio Pajo Abamo (1992)

Inadequacy of productivity impact studies and the fungibility of loan money at the farm-household, pose difficulties in assessing the effect of credit assistance to resource-rich and resource-poor farmers. Hence, farm level understanding of the interrelated credit issues is a critical com-ponent for an effective policy decision support system vis-a-vis expanding rural credit program.

The study hypothesizes that, since loan money is fungible and credit demand is greater than credit supply then, total liquidity of the farm household is a more important determinant of farm output for credit constrained farmers than for credit unconstrained farmers.

A survey was done in the four districts of Chiang Mai Province; two of relatively rich Hangdong and San Pa Tong and, Chomtong and Doi Tao which are poor areas and farther from the town, in order to examine patterns of credit utilization and management, and impact of credit on farm productivity.

Analysis of farm-household socio-economic profile of the two crops (rice and soybean), revealed that average borrowing across the four districts was about Bht. 8,846 per farm. On a per crop basis, soybean and rice cropping system has an average formal indebtedness of Bht. 9,128 and Bht. 6,556 per farm respectively. From the reported indebtedness of the farm-household, 74 percent are from the formal source.

About 5 percent of the reported informal loans were used for production related spending. Mostly are spent for education, religious ceremony, hospitalization and other emergencies.

Assessment of the extent of formal credit constraint among the farm-household across cropping systems revealed that 56 percent of the soybean farmers were credit constrained while about 33 percent of rice farmers were constrained with credit.

About 45 percent of the average formal loan for rice and soybean was spent for labor. Material cost which includes fertilizer, pesticides and other inputs, accounted for 30 percent. Hence, about 25 percent of the loan money in both crops, was diverted to other forms of farm-household spending.

Across cropping systems, 80 percent have no outstanding debts from the formal source. Soybean, with a more stable price, has higher loan repayment after harvest than in rice. Overall, availing of formal loan was perceived by farmers as important support in improving the production potential of the farm.

Two-Stage Switching Regression Model, was employed to make a joint estimation of the likelihood of farmers being credit unconstrained and farm productivity of each cropping system. The first stage estimation, revealed that for rice cropping systems, cultivated land and total initial liquidity of the farm-household are the most important factors influencing the probability of being credit constrained or unconstrained. Farm income, savings in financial institutions and total initial liquidity were identified as highly significant factors in soybean cropping system. Furthermore, the soybean estimation result also shows that farmers from Hangdong and San Pa Tong were less constrained with credit.

The second stage estimation shows that output equations of the two regimes of estimation in rice cropping system are not different from each other. In soybean however, output equations of the constrained and unconstrained regimes differ as shown by the significance of the truncation variable. Land, labor, total liquidity and seed are significant contributors to total farm output across regimes in both crops.

Estimation of marginal value product (MVP) across regimes in both cropping systems, show that all are generally lesser than the marginal factor cost (MFC) of each input, particularly, labor. An important policy implication to this, is that, there is an excess allocation of these inputs to production, implying that, at the present price situation, improvement in farm productivity can be achieved by reallocating inputs e.g. labor, to other purpose or by using improved technology and not necessarily increasing credit limit.

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