^AM. 19 q HOW DO MARKET FAILURES JUSTIFY INTERVENTIONS IN RURAL CREDIT MARKETS?

Understanding of the economic causes and consequences of market failure in credit markets has progressed a great deal in recent years. This article draws on these developments to appraise the case for government intervention in rural fi-nancial markets in developing countries and to discover whether the theoretical findings can be used to identify directives for policy. Before debating the when and how of intervention, the article defines market failure, emphasizing the need to consider the full array of constraints that combine to make a market work imperfectly. The various reasons for market failure are dis-cussed and set in the context in which credit markets function in developing coun-tries. The article then looks at recurrent problems that may be cited as failures of the market justifying intervention. Among these problems are enforcement; imper-fect information, especially adverse selection and moral hazard; the risk of bank runs; and the need for safeguards against the monopoly power of some lenders. The review concludes with a discussion of interventions, focusing on the learning process that must take place for financial markets to operate effectively. Interventions in rural credit markets in developing countries are common and take many different forms. Chief among them is government ownership of banks; India and Mexico, for example, nationalized their major banks in 1969 and 1982, respectively. In these cases the government can compel its banks to set up branches in rural areas and to lend to farmers. Governments in other countries, such as Nigeria, have imposed a similar obligation on com-mercial banks (see Okorie 1990). So the presence of a bank in a particular area is not sufficient reason to assume that the bank has chosen to operate there or that it is operating profitably. Regulations have also affected the day-to-day operation of banking. Straightforward subsidization of credit is a standard policy in many countries