Microfinance & Peace Prize

MUHAMMAD YUNUS, recently awarded the Nobel Peace Prize, suggests ($$ WSJ) that microfinance might be useful in the United States:

"Many people ask, Why not just give free cash, especially under such dire circumstances? In Bangladesh, we've learned that when aid is free, not only do the poor get the least of it, but everyone inflates their needs. While some handouts are clearly necessary in such times, we focus on lending small amounts of money. This lets us keep costs down and rebuild funds for the next disaster. Most importantly, our Grameen banks are ready to act at a moment's notice. They can respond to a disaster without waiting for anyone's permission, immediately becoming like humanitarian agencies by suspending loan payments, and providing cash, food and medicines. Once rebuilding starts, the bankers keep detailed records of the money lent, and people are allowed to repay bit by bit.

That is the strategy we followed after the 1998 flooding, which covered 50% of Bangladesh's land and affected customers at about 70% of our branches. More than 700 Grameen borrowers or their family members were killed and just over half (a million borrowers) were affected by the flooding. That represents a small percentage of the overall population affected, but the Bank and its staff where there right away to help with immediate needs. Later, microlenders helped people restructure their loans or gave out new loans on more favorable terms.

Microlending has already helped millions reach a better life through their own initiative. It has also given them valuable skills as well as crucial financial back-up in case they ever face a natural disaster like Katrina. So it might be time to think about another type of support for Katrina's victims: the microloan. As our small, flood-battered country has learned, giving someone a hand up doesn't always require a handout. The most important thing is to help people get back to work while letting them hold on to their self-respect. Microloans can do just that."

PETER BOETTKE offers an interesting insight:

"I have long thought that the discipline of economics should be given the Nobel Prize for Peace in recognition of the demonstration of how social cooperation under the division of labor results in a regime of private property and freedom of trade. From David Hume and Adam Smith to J. B. Say and Frederic Bastiat to Ludwig Mises and F. A. Hayek, the demonstration of how the harmony of interest can emerge on the market through the pursuit of mutually advantageous exchange is the core message of the discipline of economics and the foundation for peaceful coexistence among all people.

Well the committee got it right this year when they gave the award to Muhammad Yunus for his work with micro-lending and the positive impact it has had on the world's poor.

Work at GMU has long addressed the issue of micro-lending and economic development. Emily Chamlee-Wright's thesis work under the late Don Lavoie was based on field work on micro-lending among female entrepreneurs in Ghana. Emily's work was subsequently published as The Cultural Foundations of Economic Development and is an excellent work. More recently, Steve Daley and Frederic Sautet have published a study of micro-finance in the Philippines, which raises several very critical issues that go to establish the limits of micro-finance as a panacea for economic development. Micro-lending can get people started, but the crucial issue is the graduation into the commercial market."