Economics on Trial
IDEAS ON LIBERTY
November 1999

A Private-Sector Solution to Poverty
by Mark Skousen

"The able bodied poor don't want or need charity. . . . All they need is financial capital." --Muhammad Yunus

For years free-market economists have protested the waste and abuse of foreign aid programs, International Monetary Fund loans, and World Bank projects.(1) P.T. Bauer has been in the forefront as a dissenter against government development programs. For the past 50 years, he has argued forcefully that government assistance in developing nations only retards economic growth.(2)

But if IMF lending, foreign aid, and the World Bank are abolished, what should be done to alleviate poverty? Bauer and other classical liberals advocate reducing trade barriers; increasing foreign investment; establishing property rights, the rule of law, and a stable monetary policy; and encouraging free markets and limited government domestically.

Private-Sector Micro Lending

Yet market advocates have been surprisingly silent on a burgeoning private-sector success story known as "micro lending," the lending of extremely small amounts of money to self-employed entrepreneurs in the Third World by independent banks and institutions. The most famous of these micro-lenders is the Grameen Bank, founded by Muhammad Yunus in Bangladesh, the world's poorest country, in 1983. Yunus is an economics professor at Chittagong University in Bangladesh.

When I say "small loans," I mean minuscule. The Grameen Bank lends only $30 to $200 per borrower. Applicants don't have to read or write to qualify. No collateral or credit check is required. Amazingly, the Grameen Bank has made these micro loans to millions of poverty-stricken people in Bangladesh, $2.5 billion so far. These loans are not interest-free. The Grameen Bank is a for-profit private-sector self-help bank that charges 18 percent interest rates. The default rate? Less than 2 percent. This remarkable record is due to the requirement that borrowers must join small support groups. If anyone in the group defaults, no one else can borrow more.

The bank lends to entrepreneurs, overwhelmingly female, who need only a few dollars to buy supplies and tools. Borrowers might be makers of bamboo chairs, sellers of goat's milk, or drivers of rickshaws. By avoiding the outrageous rates charged by other money-lenders (often 20 percent a month), these people are finally able to break the cycle of poverty. Their small businesses grow, and some use their profits to build new homes or repair existing ones (often using a $300 Grameen house loan). Thousands of Grameen borrowers now own land, homes, and even cell phones. And they are no longer starving. Yunus has plans to issue private stock and eventually go public with his antipoverty program.

His bank has been so successful that other micro-lending institutions have sprung up throughout the world. The `concept has gained credence everywhere, to the point that even the World Bank and other government agencies have gotten into the million-dollar micro-loans business.

Saying No to the World Bank

But Yunus won't have anything to do with the World Bank. In his new autobiography, Banker to the Poor (highly recommended), Yunus decries the World Bank: "We at the Grameen Bank have never wanted or accepted World Bank funding because we do not like the way the bank conducts business."

Nor does he much like foreign aid: "Most rich nations use their foreign aid budgets mainly to employ their own people and to sell their own goods, with poverty reduction as an afterthought. . . . Aid-funding projects create massive bureaucracies, which quickly become corrupt and inefficient, incurring huge losses. . . . Aid money still goes to expand government spending, often acting

against the interests of the market economy. . . Foreign aid becomes a kind of charity for the powerful while the poor get poorer."(3) Peter Bauer couldn't have said it better.

From Marxism to Marketism

Yunus's statements are all the more amazing given that he grew up under the influence of Marxist economics. But after getting a Ph.D. in economics at Vanderbilt University he saw firsthand "how the market [in the United States] liberates the individual" and rejected socialism. "I do believe in the power of the global free-market economy and in using capitalist tools. . . . I also believe that providing unemployment benefits is not the best way to address poverty." Believing that "all human beings are potential entrepreneurs," Yunus is convinced that poverty can be eradicated by lending poor people the capital they need to engage in profitable businesses, not by giving them a government handout or engaging in population control.

His former Marxist colleagues call it a capitalist conspiracy. "What you are really doing," a communist professor told him, "is giving little bits of opium to the poor people. . . . Their revolutionary zeal cools down. Therefore, Grameen is the enemy of the revolution."(4) Precisely.

1. The latest examples are Paul Craig Roberts and Karen LaFollette Araujo, The Capitalist Revolution in Latin America (New York: Oxford University Press, 1997) and James A. Dorn, Steve H. Hanke, and Alan A. Walters, eds., The Revolution in Development Economics (Washington. D.C.: Cato Institute. 1998).
2. See P.T. Bauer, The Development Frontier (Cambridge, Mass.: Harvard University Press, 1991), Equality, the Third World and Economic Delusion (Cambridge, Mass.: Harvard University Press, 1981), and Dissent on Development (Cambridge, Mass.: Harvard University Press, 1976).
3. Muhammad Yunus, Banker for the Poor (New York: Public-Affairs, 1999), pp. 145-46.
4. Ibid., pp. 203-205.