Friday, October 13, 2006

An even better economics prize 

Mohamed Yunus and his Grameen Bank have won the Nobel Peace Prize. The BBC reports:

Mr Yunus, an economist, founded the bank, which is one of the pioneers of micro-credit lending schemes for the poor in Bangladesh.

The bank is renowned for lending money to the least well-off, especially women, so that they can launch their own businesses.

Grameen uses a very clever scheme to assure repayment of uncollateralized loans: Potential borrowers are placed in groups of five, and loans are made to two of them. The others can receive loans only from the repayment of the initial two.

Here's the most important thing to know about this as you read about Yunus and Grameen: Much of the developing world's poor have no access to financial systems. Transactions are done by cash; savings is done by hoarding that cash, and thus a financial market where lender and borrower meet is missing. Yunus' model is not just about giving the poor the ability to get a loan to buy a cow or a village cell phone. It's about building an institution and an environment in which lenders and borrowers can connect with each other. For $200, you are jump-starting a market. Loaning to women wasn't about lifting women's rights -- it was because women were more likely to work together and to repay loans. (If it did advance women's rights in Bangladesh, all the better.)

Building the institutions of market capitalism include recognizing, as Grameem does, that access to credit for creating new goods or housing is something to be available to all, determined only by the creditworthiness of the project. Expanding the circle of those able to truck, barter and exchange improves lives for us all. That's a Peace Prize worth celebrating.

Worth reading: a recent AEI report on Grameen.


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