THE POLITICAL ECONOMY OF RURAL CREDIT: THE CASE OF BRAZIL

Abstract

The rural credit default rate in Brazil increased 140% from July 1994, when stabilization Real Plan took place, to September 1997, when the rate reached 55%. As a result of the price stabilization, most of the agricultural production process changed from rent seeking to profit seeking. Since almost all credit comes from public banks, this high rate increase represents a considerable cost to the society. Compared to a developed country, like The U.S., where the default rate ranges from 4% to 5% either in the private or public credit system, the Brazilian rate is definitely too high. Yet, this is aggravated by the fact that a significant part of the total debt ends up being waived or easily renegotiated by monetary authorities. Based upon theoretical grounds, the default rate in agribusiness is determined by: prices received and paid by farmers, financial market interest rate and renegotiation. Quarterly and monthly data from public credit institutions in the period 1991-1997 were applied to limited dependent variable and simultaneous equations econometric models to explain the structure of the defaulting growth rate, by considering: 1) States, regions and Brazil; 2) Size of farms; 3) Types of crops. Based on robust estimates, the results demonstrated that the rural credit default is heavily dependent on both the renegotiations agreements and financial market interest rate. Although the price effect isrelevant, the interest rate effect overlay it, as measured by elasticity coefficients. The reliable estimates of the probabilistic models match with theoretical expectations and the predictions made indicate that for the next future period: a) the probability that there will be defaulting by rice growers is twice as higher as that by coffee ones, with chances of 74.4% and 30.7%, respectively; b) Southeast and Northeast present the lowest probability of defaulting with 57%, whereas the highest chance goes to South with 68%, and Brazil shows a probability of 61%; c) The larger the size of the farm, the higher the chance for defaulting; d)Political power is of considerable importance to dictate rural defaulting of public funds.