OBSERVERS of world news could be forgiven if they have been left discouraged by this year, filled with reports of bloodshed in the Middle East, nuclear weapons programs in Iran and North Korea and Marxist tyranny in Latin America. In the midst of all these unfavorable events, though, last week a rare bit of positive news was revealed. The Nobel Peace Prize was given to Muhammad Yunus, a Bangladeshi banker and economist, in recognition of his pioneering work on microcredit. History will likely prove Yunus to be the most deserving recipient of the award since Nelson Mandela in 1993, for microcredit is proving to be one of the most effective methods for fighting poverty in the world.
Yunus's microcredit system is exactly what it sounds like: Small loans, usually less than $1000, provided to poor borrowers. To Westerners, these microloans would be insubstantial, but in the developing world, they provide a significant amount of capital. When Yunus first began to focus on fighting poverty in his native Bangladesh in the 1970s, he realized that excessively high interest rates were preventing many in his country from rising out of poverty. Conventional wisdom warned against providing loans to people without collateral, seeing them as risky borrowers. Thus, the poor were forced to take out loans at interest rates so high that they were unable to build wealth. Yunus saw that the interest rates, not the creditworthiness of the poor, was the problem, and decided to provide microloans at much lower interest rates.
Yunus opened the Grameen Bank in 1983. Since then, it has been enormously successful in alleviating poverty in Bangladesh. It has lent over $5.1 billion to $5.3 million people since then, according to the Christian Science Monitor. Most of its recipients, according to The Economist, make less than a dollar a day. Throughout its existence, the vast majority of Grameen's borrowers have been women, who face many social disadvantages in the strict culture of Bangladesh. Grameen uses this factor to its advantage by arranging its borrowers into small support groups. These groups of borrowers support and, if necessary, pressure each other to ensure repayment of their loans. This helps to bring a key principle of free market economics, the sanctity of contracts, into the process.
It is somewhat counterintuitive that microloans are more effective in fighting poverty than simply giving out money. However, by bringing principles of free market economics into action, microcredit introduces a crucial factor often lacking in international aid efforts: accountability. Borrowers understand that they will be required to repay their loans, and accordingly feel pressure to use their money wisely. The bank, through the use of support groups, is very successful at ensuring loan repayment. According to The Christian Science Monitor, the Grameen Bank has a 99 percent repayment rate. These banks, with a limited budget, also tend to be better distributors of money than the large non-profit organizations that traditionally distribute aid.
The microcredit system also has the benefit of being able to reach the poor more efficiently than conventional foreign aid programs. Those programs have the fundamental flaw of being a top-down approach. Ideally, money travels from First World governments and donors, through multinational organizations, and then into the hands of Third World national and local governments, who then spend it to help the local economy. In reality, though, in many countries much of the money ends up in the pockets of corrupt officials. Instead of helping the poor in foreign countries, international aid can actually hurt them by subsidizing corruption and inefficient government.
In contrast to that cumbersome, counterproductive approach, microcredit is a bottom-up strategy. Microloans are able to travel straight from the bank into the hands of the poor, who, over time, should be able to improve their local economies. Both short-term and long-term benefits come from this approach.
Microcredit alone will not be sufficient to end world poverty as we know it. There will continue to be a place for the traditional coordinated development aid programs that build up the long-term economic infrastructure of countries. However, microcredit is an exciting innovation that has already improved the lives of millions of the most impoverished people in the world. It represents a bold, economically brilliant way to alleviate poverty, and its pioneer Muhammad Yunus deserves all the praise he is receiving.
Stephen Parsley's column usually appears Wednesdays in The Cavalier Daily. He can be reached at sparsley@cavalierdaily.com.
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