Effective Public Policy - Rural Credit and Extension

Experience in Canada

Rural credit and agricultural extension have been critical to the development of Canadian agriculture. Rural credit has been important in a number of ways: (1) personal financial services (e.g., savings accounts, loans) were provided to farmers and rural residents; (2) financing was provided for the purchase of seasonal inputs, machinery and buildings, and land; (3) formal loan requirements led to greater emphasis on farm accounting and farm management; and (4) a well functioning financial system allowed excess funds to move back and forth between agriculture and other sectors in the economy as they were needed. Agricultural technology extension encouraged the adoption of new technologies, which in turn lead to major productivity increases and/or improvements in the environment.

In retrospect, an overall policy framework in Canada can be identified. For both agricultural credit and extension, this framework included government involvement, private sector commercial activity and collective action by farmers and rural residents (e.g., credit unions, farmer associations), with the timing and magnitude of these three elements differing between the two areas. This framework, however, was not developed in advance. Instead, it was reactive - it was created and modified over time in response to the needs of farmers, rural residents and the agricultural industry. While there were important pieces of legislation that created the foundation for this framework (this legislation included acts establishing the experimental farms, credit unions, the Prairie Farm Rehabilitation Administration, and Farm Credit Canada), most of the framework was created by using this and other legislation in ways that addressed problems as they arose.

Experience in China

The rural credit system and the agricultural technology extension system are also very important to agriculture in China. Although the two systems have had a long history and have at times worked very well, there is an understanding that both systems are facing a number of problems at the current time.

For agricultural extension, these problems include: (1) a lack of investment in agricultural technology extension (China lags behind other countries in the percentage of the value of gross agricultural production that is devoted to extension); (2) a relative lack of extension personnel in the crop and animal areas; (3) a lack of extension personnel with professional knowledge; (4) a lack of attention given to the needs of farmers; and (5) insufficient time for agricultural extension personnel to carry out extension activities because they are being asked to do other things.

The rural credit system is also facing a number of challenges. Although the formal credit institutions (Agricultural Bank of China, Rural Credit Cooperatives, and Postal Savings) provide financing to farmers, in many areas the largest source of credit is from private money houses or relatives and friends; many rural residents also do not have access to places where they are able to make deposits. The Rural Credit Cooperatives lack competition at the local level, and both they and the Agricultural Bank of China have pulled out of many rural areas in favour of more lucrative urban markets. The Rural Credit Cooperatives are often too closely linked with the local township government, a situation that has resulted in excessive levels of bad debts in some areas. The consequence is that on average farmers are not able to get access to the capital they require to support and develop their farming operations and the rural businesses they wish to start (the latter are much more capital intensive than farming and require large loans). The lack of access to funds is exacerbated by high interest rates and short loan periods.

What Did I Learn?

Although there are many reasons for the poor performance of the current Chinese system, a number of key (and interrelated) factors can be identified: (1) there has been a reliance at particular times on either government or commercial enterprises, rather than allowing both to emerge and co-exist; (2) farmers and rural residents have not been allowed/encouraged to directly participate via producer associations and credit unions; (3) the organizations that do exist have often become politicized or captured by political/business interests; (4) staff professionalism has not been encouraged or rewarded; and (5) legislation in this area has been prescriptive rather than enabling.

In addition to providing a roadmap for what could be done in China to address its problems, the above list serves as a reminder of what has been responsible for the success we have had in Canada. Effective policies do not just happen; instead they are the direct result of paying attention to institutions and ensuring that they work properly, of developing and rewarding professional management and staff, of allowing farmers to be actively involved, and of using policy in innovative ways while ensuring that it is not captured by specific interests. And while these observations and lessons were obtained from an examination of rural credit and extension, they apply to virtually every area of agricultural activity in Canada today.

This blog entry was authored by Murray Fulton. To read additional Illative Blog entries or to leave comments on this entry, please visit www.illativeblog.ca. The Illative Blog is an initiative by the Knowledge Impact in Society (KIS) Project based out of the University of Saskatchewan. Email correspondence can be sent to kis.project@usask.ca