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Abstract
Over the past three decades, agricultural credit has received considerable
attention in low income countries as governments have tried to stimulate output
and help the rural poor through credit. Recent analyses, however, reveal major
problems in many agricultural credit programmes. Cheap credit policies appear
to fragment rural financial markets so that resources are not allocated
efficiently. Low interest rates also undermine the financial integrity of financial
intermediaries and force them to become highly dependent on loanable funds from
central banks or external aid agencies. Despite the high hopes held for cheap
credit as an effective way to help the rural poor, it tends to increase rather than
decrease income concentration.
In the discussion that follows, we briefly outline four ways that financial
markets affect income distribution--through negative impacts on savers, leverage,
negative real rates of interest, and defaults. We conclude with suggested policy
changes that might reduce the adverse impact financial markets have on income
distributions.