Charles S. Morris

New Sources of Financing for Rural Development

Many rural states and communities are planning and implementing rural development programs to bolster their lagging economies in the 1990s. One central strategy in these efforts is to make capital more available to rural businesses. State and local government officials often cite lack of financing as the culprit for anemic rural economic growth. To remedy that situation, many planned programs will subsidize capital flows to rural businesses. Government efforts to encourage rural capital formation need to be weighed carefully. Although rural bank lending has slowed in the 1980s compared with the 1970s, the slowdown apparently has not resulted from inefficiencies in rural financial markets. To the contrary, rural capital markets appear to be more efficient than any time in the past, suggesting an ample supply of rural financing in the future. The basis for public rural finance programs, therefore, is fairly limited. The demand for funds probably will be the critical determinant of rural financial activity in the 1990s. This paper examines recent developments in rural financial markets and evaluates proposed rural capital programs. The paper concludes that, while rural lending has slowed in the 1980s, most of the slowdown is caused by the weak rural economy, not to excessive caution on the part of lenders. Nevertheless, an uneven rural economy has given rise to great geographic variation in the availability of funds to rural businesses. The first section reviews trends in rural commercial bank lending, the best available indicator of rural financial activity. The second section analyzes empirically why rural commercial bank lending has slowed significantly in the 1980s. The third section considers rural capital programs in light of the information presented in the first two sections.