Topic Area: Agriculture
Geographical Area: Thailand
Focal Question: Has the availability of credit to low and middle income farmers promoted sustainable agricultural development?
Sources:
(1)Flaherty, M. S., and V. R. Filipchuk, 1993. "Forest Management in Northern Thailand: a Rural Thai Perspective." Geoforum, 24(3): 263-275.
(2)Ludwig, H., and D. Gunaratnam, 1994. "Environmental Problems and Technological Choices in Thailand." In: Science, Technology and the Environment. J. R. Fleming and H. A. Gemery, Eds. Akron, Ohio, University of Akron Press: 265-286.
(3)Phantumvanit, D. and K. S. Sathirathai, 1988. "Thailand: Degradation and Development in a Resource-Rich Land." Environment, 30(1): 10(9).
(4)Yaron, Jacob, 1992. Successful Rural Finance Institutions. Washington, D.C.: The World Bank.
(5)Yaron, Jacob, P. B. McDonald, Jr., et al, 1997. Rural Finance: Issues, Design, and Best Practices. Washington, D.C.: The World Bank.
Reviewer: Christina McAlpin, Colby College '99
Review:

In theory, agricultural intensification can allow for productivity gains without expansion onto marginal lands and the subsequent environmental problems of soil degradation, erosion, water pollution, and desertification. Poor capital markets in developing countries limit farmers' access to the funds required for agricultural intensification. Many academics suggest that the provision of credit to rural areas of developing countries would allow landowners to increase crop yields by employing more sophisticated inputs and techniques. Presumably, the productivity increases would limit encroachment onto marginal lands and landowners would have access to inputs that would allow them to minimize land degradation. As a result, the production increases would be sustainable. The evidence from Thailand suggests that the provision of credit for agricultural purposes is not enough by itself to produce sustainable agricultural development.

Rapid population growth is the main cause of many of Thailand's environmental and economic problems. The population was 15 million in 1938 and grew to just under 55 million people by 1990 (Flaherty and Filipchuk, 264). In 1988, 80% of the population lived in rural areas and the rural sector provided employment for 70% of the labor force (Phantumvanit and Sathirathai, 11). From the 1960's through the 1980's, Thailand's national economic development plans focused on agricultural expansion as the way to provide for the country's growing rural population (Ludwig and Gunaratnam, 281). The government policies designed to stimulate agriculture have included road construction and irrigation projects as well as the establishment of the Bank for Agriculture and Agricultural Cooperatives (BAAC) in 1966.

The BAAC, a state-owned bank, is limited to providing loans for agricultural activities. It is exempt from income tax and from reserve requirements on deposits. The BAAC has a large and dependable source of funds because commercial banks are required to invest at least 20 percent of their deposits in agriculture and many do so through the BAAC (Yaron, McDonald, et al, 127).

The BAAC has primarily lent to borrowers in the low-middle income range and tries to keep interest rates one or two percentage points below the rates of commercial banks (Yaron, McDonald, et al, 127). It provides short-term working capital and long-term loans for the purchase of farm equipment, tools, draught animals, tree planting crops, and land development. In 1980, the BAAC established an in-kind credit program so that farmers could have access to inputs such as fertilizer, equipment, tools, breeding stock and agricultural services at competitive prices (Yaron, 105).

The World Bank published papers in 1992 and 1997 that highlight the BAAC as one of three examples of successful rural financial institutions. One of the two main World Bank criteria for measuring success is outreach, which includes average size of loans and deposits, market penetration, growth, women's participation, distribution network, and the terms and conditions for loans. The BAAC serves 76 percent of Thai farming households. During the 1990's, it has greatly expanded assets and deposits, has improved access for clients, has expanded the number and size of loans and deposits, and has applied innovative solutions to information and collateral problems (Yaron, McDonald, et al, 120). 

The second World Bank measurement of success is self-sustainability. The BAAC is only marginally subsidy dependent. Since the bank's operating costs are "very low," its policy of setting interest rates below those of commercial banks is the primary reason for continued subsidy dependence. The high risk of lending exclusively to agriculture may also limit the BAAC's financial performance (Yaron, McDonald, et al, 120).

The government policies aimed at increasing agricultural productivity succeeded during the 1960's and 1970's; The average annual growth rate in agriculture was 5.2 percent during 1965-73 and 3.7 percent during 1973-88 (Yaron, McDonald, et al, 118). Absolute rural poverty decreased from 61 percent in 1963/63 to 36 percent in 1975/76, and to 27 percent in 1980/81 (Yaron, 103). 

The production increases of the 1960's and 1970's proved unsustainable, however. They resulted from the expansion of cultivated land area rather than the intensification of production on previously cultivated land. The farm holding area tripled between 1950 and 1988 from 8 million to 24 million hectares, while forests shrank from 34 million to 14.4 hectares. 4.5 million hectares of unsuitable land were under agricultural production by 1988 (Flaherty and Filipchuk, 264). Average crop yields actually decreased in the 1980's due to soil degradation (Phantumvanit and Sathirathai, 14). Soil losses and runoff of agricultural chemicals have also led to substantial increases in water pollution over the past several decades (Ludwig and Gunaratnam, 281). 

By the 1990's became obvious that "the agricultural sector can not absorb much more new population growth without drastically compounding the already serious encroachment problem." (Ludwig and Gunaratnam, 281) If the agricultural sector has reached capacity, the BAAC should focus on providing credit for development in other sectors of the rural economy. The BAAC's provision of credit could be essential to the development of rural industry. Therefore, the BAAC should evolve from a specialized agricultural bank to a rural financial institution. The 1997 World Bank paper suggests that the BAAC should also charge "interest rates that reflect the nonsubsidized cost of capital and loan-specific credit risk and administrative costs" in order to promote competition and benefit the rural economy (Yaron, McDonald, et al, 128).

Clearly, the BAAC's successful provision of rural credit for agricultural purposes did not produce sustainable rural development. It is possible that the provision of credit failed to produce the sustainable results that are predicted by theory because farmers did not have secure and transferable rights to their land. Up to 90% of property owners in Thailand do not have proof of ownership to their land (Flaherty and Filipchuk, 264). The absence of secure property rights may have created a bias toward extensification over intensification by greatly decreasing the incentives for farmers to invest in their land. Additionally, Thailand's rapid rate of population growth since the 1950's may have also doomed the government's efforts to produce sustainable development.

Finally, the BAAC's lending policies did not specifically promote sustainable development. In the future, the BAAC could realize its potential ability to encourage sustainable agriculture. The BAAC could provide agricultural credit only for intensification and require that a portion of each loan be earmarked for environmental protection. Environmental conscious farming could even be a prerequisite for loan eligibility.