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Unformatted text preview: ECON 4411A, Fall 2011 Development Economics Summary Notes: Week Nine, Lesson 1 Credit in the Rural Economy Quote of the day: It seems to me that people have vast potential. Most people can do extraordinary things if they have the confidence or take the risks. Yet most people dont. They sit in front of the telly and treat life as if it goes on forever. Philip Adams Introduction This week we would take a closer look at credit markets in rural economics and theories of credit and insurance. There are three markets for credits in rural areas. First, the market for fixed capital. This is the market that caters for the need for new startups, product expansion, purchase of machines or building of warehouses and factories. Second, is the market for working capital. This is the market that meets the need for ongoing production activities. For example a poor producer who intend to supply goods to a buyer might take a credit advance for the goods they intend to produce and receive the net from the buyer once the good are produced and supplied. The third and very central market in rural economies is the credit market for consumption credit. This is the market through which the poor demand money for different purposes including sudden downturn in production or sudden fall in the price of product or for other shocks or planned expenses ( weddings, deaths, festivals etc). The existence of this consumption credit market demand sometimes creates the need for a form of mutual insurance. We mentioned this kind of mutual insurance last week, which involves some form of reciprocity relationship. For example, If Mr A has a sudden credit market demand his other group members can help out and he in turn would help out other group members in future as the need arises. We focus on the consumption and working capital markets because they are so key to the functioning of the rural economy. However, we do acknowledge that the fixed capital market is also very important in terms of long term growth in these communities. However in the day to day life of the rural economy, the other two kinds of markets are more prominent. For example, a farmer is faced with a lot of risk and uncertainty that needs to be studied. At the beginning of the planting season, several questions come to the mind of the farmer. How would he get seeds, fertilizers, pesticides; and question on how would he deal with crop failure if it occurs. These questions lead to different transactions and arrangement these farmers get into and development economists are interested in looking at the efficiencies or inefficiencies of these arrangement and how to improve the questions and conditions faced by these economies....
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- Fall '11