DIRECTED CREDIT PROGRAMS FOR AGRICULTURE AND INDUSTRY - ARGUMENTS FROM THEORY AND FACT

The motives behind government Programs to provide directed credit to a griculture and industry can be traced to problems of asymmetric inform ation in capital markets and, consequently, to benefits from relaxing the constraints on financing. In agriculture, directed credit programs that help farmers accumulate sufficient wealth to own the land they c ultivate may improve the allocation of resources. In industry, the ben efits of government credit may include product and factor market exter nalities, as well as the direct benefits from relaxing borrowing const raints. In both sectors, government credit can be useful in overcoming obstacles faced by Private intermediaries when lending entails initia l fixed costs that intermediaries cannot recapture. Whether government intervention in credit markets can achieve legitimate objectives depe nds on the mechanism chosen to implement directed credit. In some case s influence-peddling and soft repayment constraints lead to inefficien cies from government involvement. In other cases these problems are av oided by establishing credible mechanisms that ensure the proper alloc ation and repayment of funds. Evidence on industrial credit programs i n Japan shows an apparent link between that country's success in direc ting credit to machine-tool producers and the decisionmaking process t hat governs the distribution of credit.