Impact of technical assistance and microcredit among rural households in El Salvador

Abstract

There is an increased interest in knowing whether the provision of nonfinancial, technical services along with microcredit has a positive impact on the performance of borrowers. The combination of these services may help poor households improve their economic performance. Yet, evidence proving this proposition is scarce and results are mixed. This lack of formal evaluation is often a consequence of these services being part of integrated approaches, making the assessment of their impact difficult to disentangle from the sole impact of microcredit. This dissertation provides evidence of joint productivity impact from microcredit and technical assistance received during 1997-1999 by rural household clients of a major microcredit institution in El Salvador. We find that the use of credit has positive effects on farm productivity. It is estimated that for every 1,000 colones of additional credit received there is a 9 percent increase in the value of farm output. These results are at the high end of the range of productivity impact reported in previous studies. When technical assistance is introduced along with credit there is also a positive impact in household productivity. In addition, we find that the pattern of consumption of these two services matters. Households with repeated loans experience smaller changes in productivity than households that borrow for the first time. It is unclear why these patterns of consumption impact productivity in different ways. However, we find that credit and technical assistance contribute to productivity through different paths: increased technical efficiency, technology adoption, and economies of scale. The role of credit and technical assistance in contributing to these productivity elements is assessed through the analysis of the households' production possibility frontier. Technical efficiency improved during these years, mainly from the effect of technical assistance. In addition, we conclude that adoption of new technologies was promoted by both credit and technical assistance. There is also evidence that these households experience increasing returns to scale. Technical assistance may have contributed to the generation of these economies of scale by increasing farmers' skills. Credit may have helped farmers to expand their input use and take advantage of the economies of scale.