Can Credit Program Improve Agricultural Productivity? Evidence from Indonesia

Abstract

Agricultural credit is a vital policy in improving farm performance since agricultural households face financial constraints in their business. This study aims to: (1) examine the impact of credit s on agricultural productivity while investigating the difference in impact generated by loans originating from governmental program loans and nonprogram loans and; (2) identify the characteristics of farm households that influence the use of credit in their business. This study employed cross-sectional micro-data at the household level drawn from the 2013 Indonesian Agricultural Census, in which 86,922 rice farm households were randomly selected as the research sample. The model was examined by using Two-Stage Least Square to avoid the selectivity bias. Results show that credit originated from government programs has a small impact on agricultural productivity, although the significant correlation appears. Furthermore, the use of credit, both government programs, and non-programs are determined by socio-economic aspects, agricultural subsidy, perceptions on risks, and perception on-farm profitability. Based on the results, the provision of credit to agricultural activities has to be supported by the provision of supporting incentives, such as agricultural counseling and irrigation facilities, in order to boost agricultural productivity effectively.