Agricultural productivity differences and credit market imperfections

This paper presents a simple model to examine the implication of credit market imperfections when considering the huge variation of agricultural labor productivity across countries. The development of credit markets enables more agents to acquire skills to work in non-agricultural sectors. The expansion of the sectors decreases the labor supply to agriculture as well as increases the supply of modern intermediate inputs to agriculture. Agricultural producers accordingly substitute the relatively cheap intermediate inputs for labor to produce a given level of an agricultural good, and, thereby, the output per worker in agriculture is improved. Poor countries with less developed credit markets are, therefore, far less productive in agriculture than rich countries with well-developed credit markets.