Professor Mohammed Yunus, founder of the microfinance Grameen Bank in Bangladesh, has just been evicted from managing it by the government. The pretext is that he is too old and should have retired ten years ago at 60. Pretty obviously, this is simply a pretext: it’s an act of revenge by the government.of Sheikh Hasina for Yunus’ ill-advised entry into politics in 2007, when he set up his own political party soon after winning the Nobel Peace prize. By the standards of Bangladeshi politics he got off lightly; politicians there, including Hasina, are regularly charged with murder (here and here).
Yunus is a great man and thoroughly deserves the Nobel awarded jointly to him and the institution he founded. His major insight was an economic discovery: the very poor - and particularly poor women - are at least as honest as the conventionally creditworthy, and conventional collateral can be replaced by community social pressures (if you don’t repay, your neighbours won’t get loans). Carefully designed, a portfolio of microloans to the very poor is just as safe as conservative conventional banking, and much safer than the Liars’ Poker sort. The institutional model of microlending Yunus created has since been replicated in a variety of settings, including rich countries like Britain. A startup loan from the British Princes’ Trust is more likely to be £4,000 for a second-hand van than Grameen’s £40 for a wheelbarrow or a mobile phone for renting, but the principle is the same.
But why did it have to be the peace prize not the economics one? Ah, you and you get the economics prize for proving that if you start with ridiculous microeconomic assumptions about human behaviour, you can rigorously and elegantly deduce ridiculous conclusions without looking out of the window. (Update: Roughly Larry Summers’ take.)
Isaiah Berlin turned a lapidary phrase of Archilochus’ - “the fox knows many little things, but the hedgehog knows one big thing” - into a sparkling dichotomy of types of intellectuals. Yunus is a paradigm hedgehog. His Big Idea was true and he turned it into massive good. Even if Bangadeshi politicians now trash the great institution he built, he will be remembered, and his insight will keep lifting millions out of misery, long after his mean-spirited enemies slide into well-deserved obscurity.
Picture credit: National Geographic
Yunus may be a wonderful guy, but it’s not all sunshine and flowers with microfinance.
I did write “carefully designed”; the World Bank introductory handbook has 304 pages. From a quick look at your links, some the loans in Andhra Pradesh say were used simply for food, not income generation, which is sure to perpetuate debt traps (though presumably at a much lower rate of interest than moneylenders). Subsistence should be assured by cash subsidies (see Bolsa Familia or Otjivero) or public works, not loans.
Well said, mostly. Yunus deserves the honor, and can probably use some publicity.
(Wimberley): “Ah, you and you get the economics prize for proving that if you start with ridiculous microeconomic assumptions about human behaviour, you can rigorously and elegantly deduce ridiculous conclusions without looking out of the window.”
Yunus deserves the tribute. I suspect that the Nobel Peace Prize gets more respect than the Nobel Memorial Economics Prize, despite the award of the Peace Prize to Al Gore, Jimmy Carter, Henry Kissinger, Yasser Arafat, and Barack Obama. Economists do not deserve the slur. Most professionals make “ridiculous” assumptions. Anyone who uses basic arithmetic assumes the postulate of infinity. Anyone who uses calculus assumes continuity. These are simplifying assumptions that probably fail at the extreme. In one of the chapters of his __Essays in Positive Economics__, Milton Friedman addresses the issue of unrealistic assumptions. Theories are tools. Maps don’t have to be wet where they indicate rivers, cold where they indicate glaciers, or rough where they indicate mountains. Most people will not discard an inadequate tool unless they have a better tool to replace it.
If you’re going to use the hedgehog metaphor, you have to take it full tilt. There is one thing that fox knows about hedgehogs that other predators do not know. Hedgehogs are afraid of water. They hate getting wet. What does that mean? When a hedgehog gets wet, he unfurles and tries to run away. This is fox’s opportunity. So what does the fox do? It has no opposable thumbs, so it can’t really carry water to the hedgehog. So it does the next best thing. The fox pees on the hedgehog, the hedgehog tries to run away, the fox bites the hedgehog in the belly and kills him. It does not work every time, but it’s a better return than any other predator. This is actually a good metaphor for what happened here-and is similar to what happens to human rights activists in China. If the government-fox-can’t nail the activist on standard charges because of his high profile, the fox pees on him and bites his belly. It does not matter that it’s not water-the result is the same. Trumped up charges-of enforced retirement laws-work just as well as disturbing the peace. Weiwei gets charged with pornography, Malay minister gets charged with pedophilia, others get charged with “economic crimes”-favorite Soviet weapon (stealing from “the people”, i.e., a government enterprise). It makes no difference if the charges are true-they don’t have to prove anything. It’s a smear that’s followed by another trumped up charge when everyone loses interest-the same thing that happened to Khodorkovskii in Russia. Yeah, most of the non-industrialized world works this way. But it can be the same here-remember Karl Rove getting DOJ to prosecute the Dem governor of Alabama? Yeah, sure, he may be innocent and may even win on appeal. Meanwhile, there are no viable Democratic candidates left in the state. So pee first, ask questions later…
The current state of microfinance is a pretty much class example of too much money chasing after too few qualified borrowers, no?
Malcolm K: the stock defence of unrealistic assumptions had a point when you and I studied economics, but there’s little excuse now, after decades of evidence from behavioural economics and psychology. Real life - the human condition - always has limited and asymmetric information. Real people are both short-sighted, loss averse, and partly altruistic. But the free-market purists, in love with the theorem that a perfectly competitive equilibrium is Pareto-efficient - as if this were the only efficiency that matters, and sod Bernoulli, Mill, and the unlucky - simply won’t accept the corollary that since the assumptions are false, in analysable ways, any attainable market economy is riddled with inefficiencies. As Stiglitz and Greenwald said in 1986, “whenever markets are incomplete and/or information is imperfect (which are true in virtually all economies), even competitive market allocation is not constrained Pareto efficient”. (Wikipedia , citing article behind subwall here). The Stiglitz-Greenwald theorem does not of course imply that the visible hand of government can always put things right; government intervention is exposed to systemic failures in its own way. In a given case, you actually have to look at the facts to assess whether a plausible government intervention to correct a market failure is going to make things worse (French policies on computers and agriculture) or better (French policies on transport, health and electricity).