Microcredit and the Nobel Peace Prize

Let me join Jason Kuznicki in applauding the Nobel committee for choosing Muhammad Yunus and the Grameen Bank for this year's Nobel Peace Prize. Yunus is the man who pioneered the concept of microcredit, small loans that conventional banks would not give, targeted to the poorest of the poor to enable them to start their own businesses. It started in the 1970s when Yunus loaned $27 to a group of Bangladeshi women who started a business making bamboo stools. That gave him the idea to start Grameen Bank to do that all over Bangladesh, and it has spawned similar efforts all over the world in poor countries.

As Jason pointed out earlier, many Americans have gotten involved as well. Another blog neighbor, Trey of Daddy, Papa and Me, has gotten involved and made small loans to two young entrepeneurs in Uganda, loans that allowed them to build and expand their businesses (one a hair salon, the other a pharmacy). They are both repaying their loans and will have them completely paid off in the next couple months. This is the sort of thing that can make a real difference in people's lives. He made his loans through the Kiva organization.

I think this is an absolutely brilliant idea and it has enormous potential. It's a practical, workable solution to poverty that avoids the problems that plague foreign aid programs (which primarily benefit the wealthy elites, both here and in the countries they go to). And it can have far-reaching political effects, particularly in third world countries. Jason has it about right:

Microcredit does things differently, because it funds the people who really enrich a society -- the business owners, employers, and purveyors of goods and services. It's not another government-run boondoggle, like a huge hydroelectric dam or (God forbid) a nuclear power plant. Just set up a vegetable market, a clothing shop, a pharmacy, each with a local owner -- and already, an entire village is permanently improved.

What's more, I suspect that there are political benefits from encouraging entrepreneurship, too. Consider the massive socialistic projects that foreign aid too often subsidizes: These only breed pull-peddlers, contractors whose sole client -- and therefore whose sole genuine interest -- is the government itself. The people who are the chief products of these undertakings, those who make their livelihoods from them, will vote for, fight for, and finance the socialist and interventionist states that, of all regions, the developing world can least afford.

Meanwhile, entrepreneurs will tend to agitate for the rule of law, sound currency, private property rights, and individual liberties. Their livelihoods depend on nothing less. Now, I freely admit that big businesses can and do lobby their governments for improper favors -- but small businesses have a much harder time of it, and small business owners are therefore among the most pro-capitalist elements of a society. Small business owners tend to learn firsthand the lesson that money freely exchanged is a great guarantor of fairness, that it dispels petty religious and tribal differences, and that it is a token not of vice, but of virtue.

Do we really want to see successful development in Africa? And how can we measure a society's success, if not through individual wealth and achievement, repeated thousands and millions of times? Wouldn't we vastly prefer to see more people offering more goods in the market? Shouldn't people in developing countries trade and compete and make profits, exactly as we do?

That is, after all, how we got so wealthy. Why should we expect differently of them?

And he's also correct about the reasons why loans are preferable to simply giving the money:

Now wait a minute, you may say: Why make loans to these entrepreneurs -- rather than donations? Several reasons: First, loans build a credit history, establishing a record of a firm's responsibility by which other creditors may judge it. Loans show that these firms can and do treat fairly with others. Good credit is vitally important to successful enterprises, and good credit is hard to find in developing countries.

Second, loans establish a tie of trust between people in the developed and developing worlds. It is often said that capitalism is an atomizing system, and that individuals become rootless and disconnected when they take part in it. But this is nonsense, and one proof lies in the far-flung connections that Kiva now creates, connections that are only possible when money and information both flow freely. Who knows what opportunities may exist, now that these new intercontinental relationships have been set in place?

The individual attains his greatest fulfillment only in a society with other individuals. He does this by exchanging goods, services, and ideas with them in a fair and competitive market. It's an old paradox of capitalism: Individual development and social cooperation are, at last, one and the same thing. Each can only be attained voluntarily, and each develops in the presence of the other. International microcredit demonstrates this principle better than almost any institution I can imagine.

Quite right. That's why I love this whole idea. Is it gonna change the world? No. But it's already changing a lot of lives and improving the lives of others in villages all over the world, in the places where it's needed most.

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You seem excited about the whole concept. How about sending me $27?

I think it's interesting that Yunus and Grameen got the Peace prize, not the Economics prize.

By Mustafa Mond, FCD (not verified) on 16 Oct 2006 #permalink

I learned many details of how Unis did his work, from the young American, in '97 who followed him around through villages,and reported on the movement in "Give Us Credit," his book, which came out when we were in Dhaka, were I taught for three semesters.

The beauty of a simple idea: "elegance" as termed in science, is only seriously limited, to my knowedge, nine years later, is that microcredit does not "help the poorest of the poor," but sure helps many who WE would consider such....If a woman owned a little New York City-closet-sized stall, and had one or two items, a loan from Grameen, enabled her to sell a third item, making her a bit more money... So, a second poin worth mentioning, is to set a do-able goal to try to get Grameen even more up to speed, where it could add about 5%-25% more income to such a woman's enterprise.... But,a remarkable ride Unis's effort has taken.
Its what American's pride themselves on: problem solving..but are American's slipping on that front, as measured by inventions per year and other measures and outcomes? The slippage in of home-grown US science majors over 40 years, is beginning to be scary.

It's good idea and certainly deserving of the award, but I will note that microcredit doesn't go to the poorest of the poor. It goes to people who are already business owners (or sometimes to those who are capable of starting one), and would like to expand or hire new employees. It's a good charity but the people we're talking about are already self-sufficient to a degree that the vast majority of the people in these countries only dream about. It's a good work-around corruption in predatory states but can't be seen as the only solution, because it misses most people without the means to get the loans.

The loans also go to people trying to start businesses, not just those who already have them. Either way, there's still a big benefit in the local area as it can allow them to hire or at least raise the standard of living in the area. It's not a panacea, but it's a big help.

I find Jason's libertarian cant here to be a bit tiresome. One of the biggest problems faced by developing countries is that either through lack of funds or corruption, their governments are unable provide good security, law enforcement, courts, basic infrastructure, education, etc. All the things that businesses need to thrive.

Microcredit is a great idea and seems to be paying off handsomely, but let's not foolishly pretend as if it makes a good argument for neglecting or defunding the public sector.

Steve:

You read far too much into my words. If you wish to make me into an anarchist, you are mistaken. I am not an anarchist.

I recognize tht respect for property rights, law enforcement, courts, and the like are necessary. But I also think that these things will arrive only if their presence is valued and understood by the people. An entrepreneurial class depends on these institutions more than any other, and I find that encouraging small businesses will do much to encourage demand for the legitimate functions of government as well.

Jason, fair enough. Maybe I did read too much into your words. It's things like this though that led me to that view:

Microcredit does things differently, because it funds the people who really enrich a society -- the business owners, employers, and purveyors of goods and services. It's not another government-run boondoggle, like a huge hydroelectric dam or (God forbid) a nuclear power plant.

In my opinion, there's no reason to assume a priori that a huge hydroelectric dam isn't a good thing to spend aid money on, unless you're automatically against governement-run anything.

But I do take your point about building a middle class as being good for political freedom.

Mr. Reuland: Actually, there is a big reason to rule out the hydroelectric dam on a priori principles: Top-down economies simply don't work as efficiently as bottom-up models like microcredit. Even leaving aside corruption, the bottom-up model allows limited aid money to help more people.

In the bigger picture, it appears that the science of economics is making some big changes recently. When I was in school (mid-80s) we were essentially taught Keynes via Marshall, with a bit of Buchanan thrown in to placate any conservatives in the department. I think the new realization is that microeconomics is where the action is, at least from the standpoint of policy efficiency. I'm excited by the changes.

I was going to say what Kehrsam said, but I see I arrived too late. I'd probably have emphasized the corruption a bit more, too, since political theory rather than economics is more my forte. But what he said.