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Improving the Functioning of Land Financial Markets

We use recent farm household survey data from 5 Central European countries to explore the extent to which ill-functioning land and credit markets may present an obstacle to rural development. The first finding is that improved access to credit can, indeed, make a contribution to a more dynamic rural sector. A considerable share of rural households express their desire to expand agricultural cultivation. Local availability of credit, profitability of farming, access to capital assets, as well as young age and the availability of family labor are the most important determinants of this decision. The fact that , in most of the countries, the large majority of those who want to expand their agricultural operations cite credit as the main impediment to doing so and a sizeable share reports to be credit constrained, suggests that further improvement in the availability of credit could have a very positive impact. A second, and equally important piece of evidence is that, apart from credit infrastructure and some household assets, none of the factors (including the amount of land owned) traditionally considered in the literature has any impact on those households’ ability to access credit. This implies that because land, one of their main assets, can not be utilized as a collateral, there is less expansion of households than one would expect. We attribute this to three factors, namely (i) imbalances in the land market, especially a gross overvaluation of land sales as compared to rental prices; (ii) lack of financial infrastructure and skills in rural areas; and (iii) deficiencies in the existing mortgage legislation. This implies that efforts to expand the financial infrastructure and the ability to use movable collateral in rural areas might usefully be complemented by attempts to reduce impediments to the functioning of land markets.