Debt, Poverty and Resource Management in a Rural Smallholder Economy

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.

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Fig. 1

Notes

  1. 1.

    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).

  2. 2.

    The assumption of constant returns to scale considerably reduces algebraic clutter but does not affect the qualitative results.

  3. 3.

    To simplify the analysis we assume that the household population is constant.

  4. 4.

    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).

  5. 5.

    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.

  6. 6.

    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.

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Correspondence to Edward B. Barbier.

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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

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Keywords

  • Debt
  • Land degradation
  • Poverty traps
  • Less favoured agricultural land
  • Rural credit
  • Rural households

JEL Classification

  • Q0
  • Q2
  • O1