Agricultural credit problems and policies during the transition to a market economy in Central and Eastern Europe

This paper assesses the problems of financing Central and Eastern European agriculture during the present transitionary period and the role of government in this process. Initially the paper looks at why credit markets work imperfectly, even in well developed market economies, focusing on problems related to asymmetric information, adverse selection, moral hazard, credit rationing, optimal debt instrument choice and initial wealth. It shows why these and related problems may cause transaction costs to be so high that credit rationing and high interest rates are rational and efficient responses by lenders to the imperfect information problems of the agricultural sector. A series of specific, transition-related issues are then discussed which have worsened these problems within the Central and Eastern European agricultural sector. The potential roles of governments in solving these issues and actual observed interventions by Central and Eastern Europe governments through credit subsidies, loan guarantees and specialised agricultural lending institutions are analysed. Finally, the paper discusses how financial market innovations have solved some of the credit market problems and derives the implications for government policies. (C) 1999 Elsevier Science Ltd. All rights reserved.