This paper provides new evidence about the factors influencing the incidence of credit constraints and investment behavior in Mexico’s rural sector. Employing two surveys of individual entrepreneurs (farmers and microentrepreneurs) and registered enterprises, this document seeks to explain why credit to the private sector, including lending by private and development banks, nonbanks, and foreign sources, has diminished in Mexico constantly since 1997. In order to measure the incidence of credit constraints, the authors use this self-reported information to assess whether economic agents have a demand for loans, separating both formal and informal markets.
This paper is organized as follows. After the introduction, in section two, the authors describe the data, while in section three they present an overview of loan providers in Mexico. Through section four, the authors explore their methodology. The fifth section presents indicators of participation in loan markets, measuring the extent of credit constraints and the self-reported demand for loans in both formal and informal markets. Section six analyzes the demand and supply of formal and informal loans. Section seven studies investment behavior and assesses the effect of credit constraints. Finally, section eight concludes and summarizes the main findings.
The authors find that:
Low participation rates in loan markets are partially attributed to a weak demand for loans
The incidence of credit constraints is higher for formal lenders than for informal lenders among individual entrepreneurs
For enterprises, the degree of credit constraints is slightly higher for informal than for formal lenders
Credit constraints influence negatively the investment behavior of individual entrepreneurs and enterprises. This is particularly negative for individual entrepreneurs
The low use of loans has consequences for the amount of investment that occurs in the rural economy, posing obstacles to Mexico’s convergence toward its NAFTA partners