Impact of Credit Policy on Agricultural Expansion and Deforestaion

The causes of tropical deforestation are classified into three levels: direct (first-level), intermediate (second-level) and indirect (third-level). The direct causes include expansion of agricultural land, cattle ranching, logging, etc. The intermediate causes are the decision parameters influencing the direct causes. Some possible examples are agricultural input and output prices, level of technology, land distribution, wage levels, property rights, etc. The indirect causes are macro-level variables and policy instruments that influence deforestation through the other two levels. Agricultural expansion is the major direct cause of deforestation. The model of Angelsen et al. (Journal of Development Economics (1999) 58, 185-218) hypothesizes the effects of several of the intermediate causes on agricultural expansion and deforestation. The model discusses two approaches, i.e., subsistence versus market approaches, behind forest clearing (deforestation) for agricultural production. However, the model does not explicitly consider the effect of agricultural credit on the farmer's decision making with respect to the purchase of the optimal amount of fertilizer and its effect on deforestation. Since agricultural credit programmes have been an important policy tool for improving agricultural productivity and the incomes of traditional farmers, it is argued that the model needs to be extended to incorporate the effect of credit constraint on agricultural expansion and deforestation. While extending the theoretical model for this aspect, this paper also derives a fertilizer demand function with respect to credit and other socio-economic factors, and presents empirical evidence on the effect of the removal of credit subsidy for fertilizer use. The evidence from Zambia suggests that the credit constraint of farmers needs to be considered explicitly in the theoretical model of agricultural expansion.