TCS Daily


Either a Borrower or a Lender Be

By Alvaro Vargas Llosa - October 20, 2006 12:00 AM

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.

Alvaro Vargas Llosa, author of "Liberty for Latin America," is the director of the Center on Global Prosperity at the Independent Institute. His e-mail address is AVLlosa@independent.org.

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30 Comments

So why did they get it?
The focus in most of the reporting I have seen on this group has been on the fact that they have a very strict affirmative action policy. Apparently they noticed that women did more good with the money than men, and now loan most of their money to women.

Political Correctness won them this Nobel Prize, it is just a coincidence that they also happen to be doing something reasonable for the poor.

The Question Is. . .
. . .did they stumble onto this by accident, or did they intentionally seek to achieve something?

Also, I wouldn't call that "affirmative action." They aren't hiring anybody, they are just using actuarial stats to increase the results.

increasing the sum
Sometimes there is a whole essay or even book to write about a single sentence. The line from Genesis: "Noah was a good man in his time." is one example. Now we have the beaut: "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."

Start by noting the author's projection of his distain for the prize, substituting a piece of personal snark for the purpose of the prize, promoting peace. It's too common today (e.g. opposing the Iraq war = hating troops). Next note the blatant falsity: microloans are effective exactly because they make poor people less poor using very little capital. They are a clever way to add to the poor without subtracting from the rich. Great peacemakers have long understood the principle of non-negativity for both parties. Nelson Mandela convinced South African blacks not to take retribution against whites in return for whites not continuing to earn it. Finally, note the author's Scrooge like contempt for people trying to do good in the world. (e.g. the purpose of the Salvation Army is to block the exits of department stores).


In anticipation of the nonsense this article will generate...
This approach works and works well. I've seen and followed it up close. At first I doubted if it could be sustained over time. Yunus began it with his own money, and i didn't think the repayment methods would work. Clearly they did.

It focused on women because women in rual Bangladesh (and often in Dhaka as well) have virtually no legal or social identity. It is also the case that Bangladeshi women had proven themselves responsible on another important development issue: reducing the fertility rate from about 6 to less than 3 per woman. This was done on house-to-house, woman-to-woman efforts on family planning.

Doubters of the validity of this approach are invited to review "The Mystery of Capital" and "The White Man's Burden." "Mystery" builds on the theme of capital ownership. "Burden" contrasts entrepreneurial "seekers" with the monolithic "planners" of the UN and western do-gooder governments.

So before too many fools start turning this into a PC issue, you'd best be checking your facts. Keep politics and political views out of this, as Yunus has done (by moving this out of the government partnership and into a fully private enterprise.

If you want to compare Peace Prize winners, think of the sillines of Carter, Arafat, Menchu and others and compare what they were recognized for with the merits of Yunus' contribution.

The libertarian way out of poverty and government control
"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."

Libertarianism works, especially when government screws everything up, which it inevitably will.

LG: "Start by noting the author's projection of his distain for the prize, substituting a piece of personal snark for the purpose of the prize, promoting peace. "

Is this what you mean? "Nobel Peace Prizes are not supposed to go to those who believe the poor can fend for themselves."

List of recent Nobel Peace Prize recipients:


# 2005 - International Atomic Energy Agency, Mohamed ElBaradei
# 2004 - Wangari Maathai
# 2003 - Shirin Ebadi
# 2002 - Jimmy Carter
# 2001 - United Nations, Kofi Annan
# 2000 - Kim Dae-jung
# 1999 - Médecins Sans Frontières
# 1998 - John Hume, David Trimble
# 1997 - International Campaign to Ban Landmines, Jody Williams
# 1996 - Carlos Filipe Ximenes Belo, José Ramos-Horta
# 1995 - Joseph Rotblat, Pugwash Conferences on Science and World Affairs
# 1994 - Yasser Arafat, Shimon Peres, Yitzhak Rabin
# 1993 - Nelson Mandela, F.W. de Klerk
# 1992 - Rigoberta Menchú Tum
# 1991 - Aung San Suu Kyi
# 1990 - Mikhail Gorbachev
# 1989 - The 14th Dalai Lama
# 1988 - United Nations Peacekeeping Forces
# 1987 - Oscar Arias Sánchez
# 1986 - Elie Wiesel
# 1985 - International Physicians for the Prevention of Nuclear War
# 1984 - Desmond Tutu
# 1983 - Lech Walesa
# 1982 - Alva Myrdal, Alfonso García Robles
# 1981 - Office of the United Nations High Commissioner for Refugees
# 1980 - Adolfo Pérez Esquivel

http://nobelprize.org/nobel_prizes/peace/laureates/index.html

How many of these believed, advocated or implemented free market solutions to peace and prosperity?

LG: " Finally, note the author's Scrooge like contempt for people trying to do good in the world. (e.g. the purpose of the Salvation Army is to block the exits of department stores). "

Where did you read this?

recognizing reality is now snarkiness?
The vast majority of Nobel Peace prizes in recent decades, have been awarded solely on the willingness of the recipient to verbally abuse the US.

Right On
Vargas Llosa's father, Mario, is a world famous novelist, but Alvaro is a poet of sorts. Right on. Liberal Goodman's comments about it make no sense at all. Liberal, are you actually serious? Easterly points out that way over $2 trillion is has been spent to spend down poverty in the third world, and they are actually worse off. Did you actually read the article or just decide to spin off into your own worldview? I mean really. If you read TCS on this matter you will know that a number of writers here note that not a single country has graduated from foreign aid regime to any sort of modernity. You want more of this and less of Yunus? Dear me...

interesting article
The point is that making money available to those who need it can pay pretty good dividends. Free markets, and available cash, can help any economy grow.

verbal abuse of the US
What a thin skinned coward you are Mark the Great-The Country was built on protest, and the US could use some verbal "abuse". Abused children can't speak for themselves and we have lots of those in the US, we have too many smokers and drinkers and overeaters and they should all be bad mouthed, the racist prison system and courts and red-lining banks are all in much needed reform, and it usually starts with verbal complaints, which does not constitute abuse at all, but legally justified "Redressing of Grievances".Speakers against abortion and gun violence are effective as well. So if you are such a generous American and proud to defend this densely populated tower of babel, why don't you use your real name and give us concrete evidence that you should get a prize for anything other than impugning integrity of Nobel Prize recipients and their supposed anti-American bias?

speaking of thin skinned.
Your only purpose in life seems to make stupid irrational comments regarding my posts.

LG couldn't find reality if he was sitting on it.
You on the other hand, couldn't find LG if he was sitting on you.

You're right about the term...
... "affirmative action." It was used imprecisely here, but I think it works as a metaphor. The basic idea is that affirmative action institutes a preference for one group over another, and this bank does the same. However, if they instituted a preference in favor of men, they would be called racists. Instead, they won a Nobel Prize specifically because they gave out loans to women.

Fools, eh?
Did anyone say Yunus was engaged in politics?

Did anyone say Yunus had a bad idea that would never work?

No, everybody said the Nobel Committee was the one playing politics. According to the wacko lefties at NPR the Committee was almost entirely composed of women this year, and everyone expected someone who had done something for women would get the prize. Yunus wins.

Find out what people are saying before you call them fools.

Poverty
Absolutely right. William Easterly, the former economist has written two books about the misguided policy of the World Bank which has doled out billions to African dictators and then the G8 steps in and forgives the debt! Talk about a disincentivization program.

PC?
Excuse me. As i understand the term, it would have been more politically correct of them to not discriminate by gender but to open the program to all persons wanting microloans. They didn't do that.

From the start, Yunus noticed that families were being kept in poverty because of a cultural more. The man owned his pay, as he was the one who went out and worked for it. So on payday in many rural areas (both in Bangla Desh and around the world), it was common for the man to stay out drinking, gambling and whoring until the last of his money was gone. This left the woman with no way to feed her babies.

Yunus correctly calculated that a woman having access to seed money would want to be able to feed her babies. So overwhlmingly (98-99% of the time) she would invest the money wisely, work hard and pay the money back on time.

There is more to life
There is more to life than cutting taxes. Are you saying Elie Wiesel should not worthy because he spend his life opposing genocide rather than high taxes? Maybe you think genocide is caused by government regulations and could not happen in a free market economy.

What about a Christian man like Desmond Tutu? The Bible says men become good through acts of charity. Is that true even if those acts of charity do not include lessons on the benefits of capitalism?

"genocide is caused by government regulations and could not happen in a free market economy. "
Can you point out any genocidal acts performed by a free market economy? Why would they want to kill any customers?

I can point out many acts of genocide conducted by totalitarian governments which also restrict economic activity.

"The Bible says men become good through acts of charity."

Yes, if it is really charity, voluntary contributions, not coerced taxes.

Why is it so hard to understand that people can be economically free without the 'help' of a government?

Or do you believe people should be dependent upon governments for their lives?

You do not understand Political Correctness, then...
You are entirely correct about Yunus's reasoning, and that reasoning is sound. I am not suggesting that Yunus's plan itself was PC, but that the reason he recieved the Prize was because of the work he had done for women, not the fact that he had started a revolution in the means of dealing with poverty.

Do not forget, roy, that the "Politically Correct" bandwagon includes programs like Affirmative Action and Title IX. Programs that clearly favor one group over another on the basis of race, sex, sexual preference, etc. As long as it does not help men, or to be more specific, White Christians, on the basis of race, it can qualify as PC.

You TOTALLY missed the point....
The author's disdain for the Peace Prize has come about because of the number of thug dictators, socialist thieves and murderers and Western weaklings who have received it. If the Prize truly rewarded those who produced peace, they would have awarded Ronald Reagen for winning the Cold War, or George W. Bush for disarming Libya without a fight by convincing every dictator in the Middle East that they could be next. But no, it rewarded Jimmy Carter and Yasser Arafat. A delusional weakling, and a terrorist. The disdain which many people feel for this Prize has more to do with disgust over hypocrisy than it does with disdain for peace.

Second, the author is suggesting that he is surprised that somebody who used a market-based method for solving poverty recieved the award at all. This does not normally occur, given the record of commiesw winning this Prize. The fact that somebody did win who had actually done a lot of good for the poor is an encouraging sign. Take a look at his last line: "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."

What about NPLs?
In all the stories about this guy I've never seen anything about what their rate of 'non-performing loans' is. It would be intesing to see the stats on this outfit. If there is no decent return on equity, yield, etc. then it's just another kind of charity. RE the Nobel prize though, everybody knows that it's PC biased towards anti-american leftists; like the billionaire terrorist Arafat, and that stupid indian woman rigoberto , or the loser jimmy carter.
Soon we can probably except prizes to say, Osama for 'resisting imperialism', maybe to Chavez for 'role model for keeping latin america backward, perhaps one for Castro, the Ceaucescu of the Caribbean, for 'encouraging dieting amongst his captive population'.

A prima facie case of discrimination
Out of all the things there are in the world worth fretting about, you've picked an odd one. The men have been on top (undeservedly, IMO) for the past ten thousand years, and finally women win some slight advantage, with a loan program dedicated toward them. And the fact is celebrated!

Life just ain't fair. The prize should have gone, as it normally does, to some man doing some manly thing.

Maybe they could take the award back. Then you could be happy again.

I would bet their rate of non-performing loans is pretty low...
They use shame to keep people repaying loans in this bank, and I will bet it works. Shunning people who default is something we don't do in America anymore, in fact we write entire books about how to use bankruptcy to your financial advantage... Maybe if we did a little bit of this we would have less people filing for Chapter 11.

Anyway, they are making a profit.

what about the interest rate then?
If their interest rate is less than the market value, then it's also a charity? But I conceed your point that in primitive cultures, shuning can often enforce behavior. I think those amish and mennonite tribes used to count on that too.

Re: A prima facie case of discrimination
Is your insurance company responsible for PC-like discrimination when it charges higher rates for young male drivers (in particular) compared to young females? Or is it just sensible business practice based on the known facts?

Genocide etc
Nazi Germany was a free-market economy.

All I know about their interest-rates is what the article says...
...that they are higher than normal for loans, but that the loans are paid down on a principal-first basis to make it easier to pay off.

I suppose that if you made enough of these sorts of loans you could make a decent profit. You would have to set yourself up as the Wal-Mart of loans, however, and rely on economies of scale for your profit...

The question is: Why did he get the Prize?
I answered: Because what he did fits the worldview of the PC crowd.

I do not ever recall critizing his program or suggesting that lending primarily to women was wrong. However, any married man can tell you not to let your wife have the credit card when she is within a mile of a mall...

NAZI Germany free market economy?
I would like to see the proof of that.

***** were socialists.

Not quite what he was saying
Don't you think you're wandering away from the point? Publius was saying that the only reason Yunus won the Peace Prize was because his loan program favored women. And my point was that this argument is idiotic on the face of it. The Grameen Bank does in fact favor women as sensible business practise based on known facts. And it is a tremendous innovation freeing people from poverty at no cost-- in fact at a certain profit.

Care to weigh in?

interest
Points taken this and other your posts. Even if it turns out that the guy is subsidizing the bank, if it's his own money, then i have no problem with it; same same warren bufffet and bill gates give a lot away of their own money.

It may have been prior to the ***** taking over
But the ***** quickly implemented their socialist agenda after taking power. By the time the war was started, the govt called all the shots in the economic sphere, as well as the political/social sphere.

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