Debt overhang and other barriers to the growth of agriculture in El Salvador

This study examines the link between this underutilization of land and debt delinquency, and recommends policy and institutional changes. Section 1 describes the relationship between delinquency, credit, and agricultural activity, and presents relative measurements of unoccupied agricultural land and the sum total of delinquent debt accumulated by private, medium-sized farmers. Section 2 explains the causes and origins of credit delinquency, focusing on the civil war, the risks inherent in agriculture, and the rent-seeking behavior induced by government policies. The next two sections are analytical in nature. Section 3 presents a model with three major relationships: the first relationship explains the underutilization of land, including the non-use of credit as one of the explanatory factors; the second explains the non-use of credit, including the debt overhang and the use of informal credit as explanatory factors; and the third explains the use of informal credit. Section 4 discusses the reasons for the low profitability of farms and estimates the rate of return for fixed and variable agricultural assets. Section 5 examines the policy instruments used to reduce debt delinquency, principally Decree 292, and discusses the suitability of a supplementary instrument such as an agricultural financing corporation. Conclusions and recommendations are presented in Section 6. Appendices include case studies and a profile of the delinquent farmer. (Author abstract, modified)