Formal-Informal Credit Market Interlinkage and Development Policies: A General Equilibrium Analysis

Abstract

Globalization has brought about significant changes in the organization of production of emerging market economies. One such change is an emergence of an advanced, export-oriented rural agricultural sector. This advanced sector not only uses land and labor but also uses formal credit for financing its production. This growing importance of formal credit in the agricultural sector motivates us to explore the implications of formal-informal credit market interlinkage using a three sector General Equilibrium trade theoretic structure. In the present paper, we would like to explore the implications of financial deregulation, an increase in amount of formal credit and agricultural trade liberalization. The focus of our examination has been on factor rewards, output composition and national income of a transitional economy. Multiple cross effects, factor intensity ranking and factor specificity are crucial in determining the results.