US funded rural finance activities in Latin America and the Caribbean, 1942-1990 : a new strategy for the 1990s

bilateral assistance efforts in Latin America for several decades. This study examines the performance of these activities from 1942-1990 and outlays a new strategy for the Agency to pursue during the 1990"s. A.I.D."s most effective efforts have been in encouraging liberalization of financial market policies. While some interest rates are still too low and inflexible, several countries have adopted relatively flexible interest rate policies that are related to market forces. In addition, the Agency has largely backed away from using financial markets to handle income transfers, placed more emphasis on viable financial institutions, and sponsored research in a few countries that is useful in policy dialogue and financial market assessments. A.I.D. has also been innovative in applying new thinking about rural finance in pilot projects, especially in the Dominican Republic. A.I.D. has made less progress in stimulating deposit mobilization, in developing equity markets, in encouraging macroeconomic policies more favorable to vigorous financial markets, and in moving away from targeted lending. Further, the extremely large number of A.I.D. projects in Latin America with targeted credit components are troublesome to manage, yield results that are suspect, and cause substantial wear and tear on financial markets. In the future A.I.D. should: (1) add a position in A.I.D./W to coordinate and backstop mission programs in rural finance; (2) undertake less targeted lending; (3) prepare sector studies of rural financial markets, including informal mechanisms; (4) design sector projects aimed at improving overall performance of rural financial markets; (5) emphasize deposit mobilization in rural finance programs; and (6) conduct long-term dialogue with local decisionmakers on controversial issues in rural finance.