In
1976, when Yunus
visited a village
called Jobra he
noticed that the
stool makers did
not have the money
to buy bamboo, and
they resorted to
the high cost of
borrowing from village
loan sharks and
traders. That left
them with a meager
amount of money
in earnings. At
the same time, banks
would not lend money
to the poor because
they did not have
any asset that they
could use as collateral.
The hard reality
was the poor who
needed the financial
assistance most
were the ones neglected
by the banking system.
"Out
of frustration,"
Yunus writes in
his book, Banker
to the Poor, "I
had questioned the
most basic banking
premise of collateral.
I did not know if
I was right. I had
no idea what I was
getting myself into."was
right. I
had no idea what
I was getting myself
into."
What he got himself
into was establishing
a framework of micro-credit
-a banking system, exclusively
for the poor-that would
challenge some of the
basic tenets of market
economies and yet work
well within the larger
framework of capitalism.
To appreciate micro-credit-its
impact on the poor and
its contribution to
peace -one has to look
at its role in economic
growth and development.
In the last century
we have seen dramatic
improvement in per capita
income in some countries
across the world. Korea,
which had a per capita
income less than that
of India in the early
1950s, is now vying
with the western economies.
But why do some poor
countries experience
dramatic growth, while
others remain poor?
And more importantly,
how can those impoverished
countries catch up?
Economists have been
at these issues ever
since Adam Smith.
But they have found
the task daunting. Experiences
vary across countries,
and hardly is it possible
to find good data on
poor countries to test
the relevance of any
theory.
Nonetheless valiant
efforts have been made.
Robert Solow, a Nobel
Laureate in Economics,
shows that growth in
output was not only
attributed to capital
per capita, but another
component, which he
termed technological
change, was significant,
as well. His findings
have inspired researchers
to study the impact
of new technology and
research and development
on national output.
Solow's growth model,
however, implies countries
will eventually reach
the same level of capital
and output per capita
(the so-called convergence
problem) and the differences
will diminish across
time-an implication
that cannot be borne
out by real world data.
Later, it was modified
to address the convergence
problem by including
human capital and to
highlight the importance
of education.
And yet, there are countries-such
as Philippines and Korea-that
had similar educational
levels but different
growth experiences.
Robert Lucas, another
Nobel Laureate in Economics,
argues that through
learning-by-doing countries
can enhance their know-how
and exploit new areas
(knowledge "spills
over"), thereby
diversifying their
industrial base.
Further learning-by-doing
in those new areas
takes place and
the virtuous cycle
continues. As
a result, the
countries enjoy
rapid economic
expansion. But
spillover effects
are hard to measure,
and Lucas' model
remains to be
substantiated.
Proponents of
trade theory argue
that countries
should take an
open economy approach
to enjoy the benefits
of trade, and
have access to
foreign technology
and foreign investment.
Institutional
theory suggests rampant
corruption and lack
of property rights in
poor countries create
an unfriendly environment
for investment, holding
back economic growth.
Its prescriptions are:
enact property rights
and build strong institutions.
However, countries like
China, which has experienced
rapid economic expansion
over the last two decades,
have neither grossly
violated nor graciously
embraced property rights
and openness. And during
the same period, most
countries in Latin America,
with the exception of
Chile, that implemented
market economies and
institutions have actually
seen their GDP per capita,
relative to the US,
fall.
There are more theories,
all hotly debated. No
one theory fits all
and probably never will.
But that is not to say
that these efforts have
gone in vain.
Asian countries that
have made remarkable
economic progress were
able to do so by building
comparative advantages
in higher value added
products in a relatively
short period of time.
And in this process
of rapid industrialization,
they attained high levels
of education, invested
in technology, built
their institutions and
took advantage of trade.
We now know more often
than not import substitution
fails. We know there
is a role for education,
technology and institutions
in economic development.
What we don't know is
how all this fits together
to create a miracle
- a formula if followed
would allow poor countries
to reach quickly a level
at par with that of
the developed countries.
Experiences across countries
also show economic growth
process is uneven. So
even if a low-income
country were able to
attain high economic
growth, there would
be still a section of
its population that
would be left behind.
And they are likely
to be the poor.
India has achieved remarkable
growth rates in the
past few years. Some
have attributed this
success to its liberal
economic policies that
were initiated in the
early 90s. Some argue
India had already built
comparative advantages
through protection.
Some say education played
a vital role, the technical
institutes that produced
able graduates, who
are leading India's
fastest growth sector,
IT, in particular.
But the immediate beneficiaries
of this growth were
the middle and high
income groups, the educated
and the skilled. The
vast majority-the poor-failed
to be part of the economic
expansion and they demonstrated
their disappointment
through their votes
in the last general
election.
One would hope that
eventually benefits
of such rapid economic
growth will trickle
down to the poor. But
that is not a guarantee.
And it may take awfully
long before the poor
can actually experience
improved livelihood.
The differences between
the haves and the have-nots
can become too obtrusive,
leading to violence.
We do not have to go
too far into history.
Recent violence in some
Latin American countries
can testify to that.
All in all, poor countries
will do well if they
also use economic policies
that have promises for
economic development,
from below. Micro-credit
is a case in point;
it has worked wonderfully,
especially in the context
of Bangladesh.
For the poor, property
rights have no importance
when they do not have
any "property".
Technology is useless,
if they cannot afford
or wield it. International
trade means nothing
if they do not have
any means to produce
tradable goods. Benefits
from education are not
immediate.
The beauty of micro-credit
lies in the fact that
it needs no preconditions.
And the results are
instantaneous.
And yet, Yunus' Grameen
Bank is not just about
lending petty cash to
village entrepreneurs.
The bank provides other
assistance in their
endeavors-from tips
on managing money to
those on running businesses.
Borrowers are put in
groups and group norms
are imposed. Although
in the event that one
member defaults the
other members are not
financially liable,
group norms seem to
have worked well in
ensuring checks and
balances. The social
capital of the poor
has proven to be worthy
collateral; the repayment
rate of the loans is
as high as 99%, much
higher than conventional
banks.
In a sense, Grameen
Bank is an incubator
for its 6.7 million
borrowers.
The fact that almost
all the borrowers of
the bank are women have
also stirred up a social
movement-women, whose
work was once limited
to household activities,
now have opportunities
for being actively involved
in mainstream economic
activities.
Often a genius contributes
to opening up a vista
of opportunities for
further learning. Solow
did it with his growth
accounting, Lucas with
rational expectations
and Yunus with micro-credit.
Today, those who realize
the significance of
micro-credit probably
have more questions
than answers.
Can we pin down how
much growth in the national
economy is due to micro-credit?
How do varying group
norms and banking tips
change the outcome?
What opportunities can
the poor pursue with
micro-credit, and are
these opportunities
an efficient means of
production?
Further research on
micro-credit has the
potential to advance
the frontiers of a number
of disciplines-economics,
psychology and sociology-and
to further improve the
quality of life.
What started in a small
village of Jobra has
far more implications
than what its originator
probably had in mind-solving
an immediate problem
of the stool makers.
Today, the premise that
the poor will always
remain poor seems no
longer tenable.
Romel Mostafa
is Advisory Editor of
The Executive Times.
