Effects Of Credit Constraints On Technical Efficiency Of Farm Household

Agricultural sector in Pakistan is considered as a cornerstone of the national economy.This sector contributes approximately 20.9 percent to the national gross domestic product(GDP)and generates employment for more than 45 percent of the country's total labor force that supports directly or indirectly about 67 percent of the population for their sustenance.Accelerated growth in agricultural sector directly helps in reduction of rural poverty and may provide better livelihoods to the farmers and a desired level of nutritious food.Despite substantial contribution to the national economy,the agricultural sector in Pakistan has remained largely underdeveloped in terms of infrastructure,marketing channels,research and development,and production for both the domestic and export market.Though,farmers in Pakistan are in an ideal position to fulfill the country's food demand and go on to lead the international agricultural market,they have lack of resources and desperate need of finance.In such a dynamics,these farmers need to enhance their efficiency and productivity level,which in turn is possible only if they have an improved access to credit.Credit constraints are identified as an important indicator which limits the efficiency of farm households.Credit constraints can have both direct and indirect effects on farm production: directly,they can affect the purchasing power of producers to finance operating expenses;indirectly,they can affect the risk attitude of farmers in the selection of improved technologies.Most farmers in rural Pakistan are trapped in vicious cycle of poverty and debt.They even cannot afford key production inputs from their own source.On the other side,the financial institutions in rural Pakistan are reluctant to approve financing in farming sector considering the risks and exogenous uncertainties involves in this sector.Like other developing countries,the financial market in rural Pakistan operates under imperfect conditions that affect the investment and risk reluctant behavior of farm households.In such a dynamics,farm households in Pakistan fail to explore their actual yield potential that are resulting in low productivity and rising gap between the demand and supply for agricultural commodities in Pakistan.Therefore,the study at hand empirically examined the technicalefficiency of farm households under the interaction of supply-side and demand-side credit constraints in Punjab province,Pakistan.This study is based on the data collected from the farm households in Punjab province of Pakistan over the course of 2016.Direct elicitation method was used to identify the households as credit constrained and credit non-constrained.Further,I designed a theoretical model that explains the possible consequences of credit constraints and indicates that credit constraints cannot just only be embodied by quantity rationing but also arose by transaction cost and households risk reluctance behavior.Different econometric techniques were used to fulfill the objectives of the study.To identify factors affect farm households' likelihood of facing credit constraints Probit regression model was employed.The results of the analysis revealed that education level of the household head,farm capital,farm size all had significant negative effect impacts on credit constraints,followed by district Gujrat.Contrary,the results showed that dependency ratio and households' expenditures had significant positive effects on credit constraints of farm households in selected districts of the Punjab region.To estimate the effects of credit constraints on technical efficiency of farm household,I employed stochastic frontier and inefficiency effect model.The results indicate that credit constrained wheat growers were 9 % less efficient than credit non-constrained.The key findings of this study later disclosed that demand side credit constraints had negative effect on technical efficiency of wheat growers,while the supply-side credit constraints were had negative effect but found non-significant.In addition,the results indicate that credit constrained rice growers were 7.1%less efficient than credit non-constrained.The findings show that demand-side credit constraints had significant negative effect,while supply side credit constraints had positive but non-significant effect on technical efficiency of rice growers.