Abstract
This paper develops a model to capture the key features of poverty, credit constraints and resource management faced by poor rural households. We assume that, due to the existence of asymmetric information and moral hazard, the household faces an increasing cost of credit as its debt/equity ratio rises. A household exploiting a natural resource may fall into a poverty trap, but only if it is unable to afford the increasing borrowing costs implied by increasing debt to allow it to avoid such a trap, or if it discounts future utility so much that a balanced growth path cannot be financed at any level of long-run borrowing. In contrast, along an optimal balanced growth path, the household’s asset wealth, purchased inputs, resource stock and consumption increase at the same constant rate. However, over the long run there may be carrying capacity limits that prevent the resource from improving further. The household may then direct its savings to accumulating financial assets, and eventually under certain conditions may become a net creditor with resource exploitation becoming a less and less important source of its income.
Similar content being viewed by others
Notes
Alternatively, one may assume that households face quantitative constraints on credit availability instead of increasing cost of borrowing as we do here. Both assumptions yield similar results, and thus it is common to represent credit rationing in economic models as increasing the cost of borrowing (Jaffee and Stiglitz 1989; Stiglitz and Weiss 1981).
The assumption of constant returns to scale considerably reduces algebraic clutter but does not affect the qualitative results.
To simplify the analysis we assume that the household population is constant.
The assumption that optimal depletion is a function of the level of inputs used in production is particularly common for models of optimal depletion of soils in developing countries, which also generally assume that this semi-renewable resource that replenishes at a constant rate; e.g. see Barbier (1990), Barrett (1991) and Grepperud (1995). However, we have simplified our analysis of the rural smallholder resource degradation problem to abstract from such problems as the role of climate variability in influencing land degradation decisions (Grepperud 1997) and the soil erosion problem in the context of a common property bush-fallow rotation system (López 1997) or shifting cultivation (Pascual and Barbier 2007). We also do not consider the potential impacts of varying property right regimes on the resource degradation problem (Larson and Bromley 1990).
Thus the analysis presumes that the rural economy is part of a larger economy that includes a financial market, with \(r^{M}\) the prevailing interest rate determined in the latter market. We therefore assume in our model that \(r^{M}\) is exogenously determined, but as will be discussed further below, not necessarily fixed over time.
The transversality condition implies that the value of the assets converges to zero as time approaches infinity, but it does not necessarily imply that the physical level of the asset asymptotically converges to zero.
References
Bai ZG, Dent DL, Olsson L, Schaepman ME (2008) Proxy global assessment of land degradation. Soil Use Manag 24:223–234
Banerjee AV, Duflo E (2007) The economic lives of the poor. J Econ Perspect 21(1):141–168
Banerjee AV, Duflo E (2010) Giving credit where it is due. J Econ Perspect 24(3):61–80
Barbier EB (1990) The farm-level economics of soil conservation: the uplands of Java. Land Econ 66(2):199–211
Barbier EB (2010) Poverty, development and environment. Environ Dev Econ 15:635–660
Barrett S (1991) Optimal soil conservation and the reform of agricultural pricing policies. J Dev Econ 36:167–187
Barrett CB (2008) Smallholder market participation: concepts and evidence from eastern and southern Africa. Food Policy 33:299–317
Besley T (1995) Property rights and investment incentives: theory and evidence from Ghana. J Polit Econ 103(5):903–907
Binswanger HP, Deininger K (1997) Explaining agricultural and agrarian policies in developing countries. J Econ Lit 35:1958–2005
Binswanger HP, Sillers DA (1983) Risk aversion and credit constraints in farmers’ decision-making: a reinterpretation. J Dev Stud 22:504–539
Boucher S, Guirkinger C (2007) Risk, wealth, and sectoral choice in rural credit markets. Am J Agric Econ 89(4):991–1004
Brasselle A-S, Gaspart F, Platteau J-P (2002) Land tenure security and investment incentives: puzzling evidence from Burkina Faso. J Dev Econ 67:272–418
Carter MR, Barrett CB (2006) The economics of poverty traps and persistent poverty: an asset-based approach. J Dev Stud 42(2):178–199
Caviglia-Harris JL (2004) Household production and forest clearing: the role of farming in the development of the Amazon. Environ Dev Econ 9:181–202
Chaves RA, Sánchez SM (1998) Poverty, entrepreneurs and financial markets in the rural areas of Mexico. In: López R, Valdés A (eds) Rural poverty in Latin America. The World Bank, Washington DC
Dasgupta P (1993) An inquiry into well-being and destitution. Oxford University Press, Oxford
de Jong R, de Bruin S, Schaepman M, Dent D (2011) Quantitative mapping of land degradation using Earth observations. Int J Remote Sens 32:6823–6853
Deininger K, Minten B (1999) Poverty, policies and deforestation: the case of Mexico. Econ Dev Cult Change 47(2):313–344
Deininger K, Jin S (2006) Tenure security and land-related investment: evidence from Ethiopia. Eur Econ Rev 50(5):1245–1277
Feder G (1985) The relation between farm size and farm productivity: the role of family labor, supervision and credit constraints. J Dev Econ 18:297–313
Feder G, Onchan T (1987) Land ownership security and farm investment in Thailand. Am J Agric Econ 69:311–320
Gray LC, Mosley WG (2005) A geographical perspective on poverty–environment interactions. Geogr J 171(1):9–23
Grepperud S (1995) Soil conservation and governmental policies in tropical areas: does aid worsen the incentives for arresting erosion? Agric Econ 12:129–140
Grepperud S (1997) Poverty, land degradation and climatic uncertainty. Oxford Econ Papers 49(4):586–608
Hoff K, Stiglitz JE (1990) Introduction: imperfect information and rural credit markets—puzzles and policy perspectives. World Bank Econ Rev 4(3):235–250
Hoff K, Braverman A, Stiglitz JE (eds) (1993) The economics of rural organization: theory, practice and policy. Oxford University Press, Oxford
Jaffee D, Stiglitz J (1989) Credit rationing. The Macmillan Press Ltd, London
Kraay A, McKenzie D (2014) Do poverty traps exist? Assessing the evidence. J Econ Perspect 28:127–148
Kraay A, Raddatz C (2007) Poverty traps, aid, and growth. J Dev Econ 82:315–347
Lambin EF, Meyfroidt P (2011) Global land use change, economic globalization, and the looming land scarcity. Proc Natl Acad Sci 108:3465–3472
Larson BA, Bromley DW (1990) Property rights, externalities, and resource degradation. J Dev Econ 33:235–262
Lipton M (1997) ‘Exogenous’ interest rates, technology, and farm prices versus ‘endogenous’ conservation incentives and policies. In: Vosti SA, Reardon T (eds) Sustainability, growth and poverty alleviation: a policy and agroecological perspective. The Johns Hopkins University Press, Baltimore, pp 146–153
López R (1997) Environmental externalities in traditional agriculture and the impact of trade liberalization: the case of Ghana. J Dev Econ 53:17–39
López R (1998) The tragedy of the commons in Côte d’Ivoire agriculture: evidence and implications for evaluating trade policies. World Bank Econ Rev 12:105–131
López R, Schiff M (2013) Interactive dynamics between natural and man-made assets: the impact of external shocks. J Dev Econ 104:1–15
López R, Valdés A (eds) (1998) Rural poverty in Latin Amercia. The World Bank, Washington DC
Markandya A (1998) Poverty, income distribution and policy making. Environ Resour Econ 11:459–472
Matsuyama K (1992) Agricultural productivity, comparative advantage, and economic growth. J Econ Theory 58:317–334
Murphy KM, Shleifer A, Vishny RW (1989) Industrialization and the big push. J Polit Econ 97:1003–1026
Pascual U, Barbier EB (2007) On price liberalization, poverty, and shifting cultivation: an example from Mexico. Land Econ 83(2):192–216
Pattanayak SK, Mercer DE, Sills E, Yang J-C (2003) Taking stock of agroforestry adoption studies. Agrofor Syst 57:173–186
Sachs JD, Warner AM (2001) The curse of natural resources. Eur Econ Rev 45:827–838
Stiglitz JE (1987) Some theoretical aspects of agricultural policies. World Bank Res Obs 2(1):43–53
Stiglitz JE, Weiss A (1981) Credit rationing in markets with imperfect information. Am Econ Rev 71:393–410
van der Ploeg R (2011) Natural resources: curse or blessing? J Econ Lit 49:366–420
World Bank (2003) World Development Report 2003. World Bank, Washington DC
World Bank (2008) Word Development Report 2008: Agricultural Development. The World Bank, Washington DC
World Bank (2014) Word Development Indicators. The World Bank, Washington DC. Available from the World Databank at http://databank.worldbank.org/data/views/variableselection/selectvariables.aspx?source=world-development-indicators
Zeller M, Schreider G, von Braun J, Heidhues F (1997) Rural finance for food security for the poor. Food Policy Review No. 4, International Food Policy Research Institute, Washington DC
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Barbier, E.B., López, R.E. & Hochard, J.P. Debt, Poverty and Resource Management in a Rural Smallholder Economy. Environ Resource Econ 63, 411–427 (2016). https://doi.org/10.1007/s10640-015-9890-4
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10640-015-9890-4