This paper assesses the problems of financing Central and Eastern European agriculture during the present transitionary period and what the role of government is in this process. Initially the paper looks at why credit markets work imperfectly, even in well developed market economies, focusing on the problems related to asymmetric information, adverse selection, moral hazard, credit rationing, the choice of optimal debt instrument and why initial wealth matters. It shows why these and related problems may cause transaction costs to high enough so that credit rationing and high interest rates are rational and efficient responses by lenders to the imperfect information problems of the agricultural sector. Then a series of specific, transition-related issues are discussed which have worsened these problems within the Central and Eastern European agricultural sector. This leads to a discussion of the potential roles for governments in solving these issues, specifically the use of credit subsidies, loan guarantees and specialised agricultural lending institutions. Finally, the paper reviews the actual government intervention which have occurred within the Central and Eastern European countries.


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