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Credit, Intermediation and Poverty Reduction

The purpose of this essay is to show how credit markets influence development and to argue that the impact of improvements in credit markets is quantitatively significant. The essay first establishes the fact that access to credit is limited, emphasizing the magnitudes. It then goes on to the potential importance of financial sector development, again quantifying the impact. Toward the end of the essay there is a discussion of the merits of different interventions. The policy recommendations in this essay are based on estimated versions of the Thai reality, filtered through the lens of artificial environments, or what economists call models. For example to understand what the effect. | Credit Intermediation and Poverty Reduction By Robert M. Townsend University of Chicago 1. Introduction The purpose of this essay is to show how credit markets influence development and to argue that the impact of improvements in credit markets is quantitatively significant. The essay first establishes the fact that access to credit is limited emphasizing the magnitudes. It then goes on to the potential importance of financial sector development again quantifying the impact. Toward the end of the essay there is a discussion of the merits of different interventions. The policy recommendations in this essay are based on estimated versions of the Thai reality filtered through the lens of artificial environments or what economists call models. For example to understand what the effect of financial development we create an artificial environment that is structured to imitate key aspects of Thailand in this period where we let financial development take place Further as the logic of the model is made explicit one can trace a particular recommendation to a given set of assumptions or rules. In Thailand where this research is being conducted with the aid of much data gathered in field research specific and concrete policy advice can be given. 2. Credit is Limited A Quantification There is strong evidence from Thailand that credit markets and institutions do not function well that limited credit is a big constraint on the small business sector. That is despite systematic and evident efforts on the part of the Thai government to solve the problem of imperfect and limited credit through the jointliability groups of the government s Bank for Agriculture and Agricultural Cooperatives the BAAC and through village-level institutions such as Production Credit Groups and Poverty Eradication Funds for example many rural and semiurban households still face a simple mechanical relationship between their accumulated wealth and the amount of overall credit they have access to. The .