Lessons from the Poor
October 18, 2006
WASHINGTON—Nobel Peace Prizes are not supposed to go to those who believe the poor can fend for themselves.
Yet this year’s worthy winner, the Grameen Bank of Bangladesh, is essentially a commercial operation and its founder, Muhammad Yunus, has clearly spelled out politically incorrect views regarding poverty: “Grameen believes that charity is not an answer to poverty. … It creates dependency. … Unleashing of energy and creativity in each human being is the answer to poverty.” The bank lends tiny amounts of money to village-dwellers so they can start small businesses. The scale can be so modest as to involve the purchase of a cow in order to sell milk. Since no collateral or credit history is required, the system works on the basis of trust and peer pressure: Lenders are placed in groups of five, with part of the group guaranteeing the loans of the rest. If a loan is not repaid, the community shuns the borrower.
More than 6 million people have borrowed money from Grameen and the bank makes millions in profit. It charges higher interest rates than most banks, but since the principal is repaid before the interest—interest, therefore, is calculated on the basis of diminishing principal—borrowers end up paying less than they would pay other banks. Thanks to these private loans that very poor and uneducated Bangladeshis have put to entrepreneurial use, many people have been able to pull themselves out of extreme poverty.
At its inception, Grameen Bank was partly owned by the government because the founders figured that was the only way to channel foreign loans from outside sources. Today, it is a totally private and profit-oriented operation in which the borrowers themselves own shares.
For half a century, wealthy nations—and rock stars—have focused on foreign aid as the way to spur development. Foreign aid started with President Harry Truman’s “Point Four’’ program at the end of the 1940s, partly to pre-empt the spread of communism. To judge by ever increasing budgets and last year’s call at the United Nations for a doubling of aid by 2015, it continues to be the fundamental focus of efforts to bring about prosperity in poor countries. No attention is paid to the fact that in sub-Saharan Africa, the region to which most of the foreign aid has gone in the last quarter-century, per capita income has dropped by 11 percent.
Numerous government programs involving handouts and training have also failed to do the trick in many countries. What the poor really want is an environment in which undertaking a profitable venture is not a nightmarish bureaucratic and legal process. The world is full of examples of poor and uneducated communities that have been able to create wealth thanks to entrepreneurship, rather than governmental assistance. I have been looking at cases of entrepreneurial success around the world for the past year and the conclusion is overwhelming: The best way to fight poverty is to eliminate barriers that currently hold back private enterprise among the poor.
Half a century ago, William Mangin, an American anthropologist, went to live in one of the shantytowns that had sprung up around Lima, Peru. He found out that the poor were entrepreneurial and that through voluntary cooperation, they were able to provide many of the services the government was not delivering, including the adjudication of disputes. He wrote a number of scholarly papers concluding that these urban poor were “not the problem but the solution.” A few years later, anthropologist Keith Hart reached the same conclusion in Kenya. If the world had listened to them, half a century of misguided ideas about development, of useless fund transfers that often ended up in Swiss bank accounts of dictators and their cronies, and of schemes that entrenched dependency might have been avoided.
Nobel Peace Prizes are supposed to go to those who think wealth is a zero-sum game whereby rich nations are rich because poor nations are poor. The Nobel award to Yunus and Grameen Bank is a good occasion to reflect on the colossal error of judgment the rich have made about the poor and a reminder that enterprise, not aid, is the real answer to poverty.
