06 Aug 2008Working Paper Summaries

Fixing Market Failures or Fixing Elections? Agricultural Credit in India

by Shawn A. Cole

There are strong theoretical reasons to believe that politicians manipulate resources under their control to achieve electoral success. Yet, compelling examples of this manipulation are heretofore rarely documented in scholarly literature. Cole's paper presents evidence that government-owned banks in India serve the electoral interests of politicians. It also analyzes how resources are strategically distributed. Key concepts include:

Findings show that the costs of redistribution are considerable: The estimated effect of 5 to 10 percent higher levels of credit in election years is substantially larger than the average annual growth rate of credit.
Efforts to isolate government banks from political pressure, as is done with many central banks, may reduce these effects.
Agricultural credit lent by public banks is substantially higher in election years.
More loans are made in "swing" districts in which the ruling state party had a narrow margin of victory (or a narrow loss) than in less competitive districts. This targeting is not observed in nonelection years or in private bank lending.

Author Abstract

This paper integrates theories of political budget cycles with theories of tactical electoral redistribution to test for political capture in a novel way. Studying banks in India, I find that government-owned bank lending tracks the electoral cycle, with agricultural credit increasing by 5-10 percentage points in an election year. There is significant cross-sectional targeting, with large increases in districts in which the election is particularly close. This targeting does not occur in non-election years, or in private bank lending. I show capture is costly: elections affect loan repayment, and election year credit booms do not measurably affect agricultural output.