Nobel Peace Prize to Yunus and Grameen Bank
This year's Nobel Peace Prize has been awarded to Muhammad Yunus and The Grameen Bank of Bangladesh "for their efforts to create economic and social development from below," via micro-credit.
After finishing a Ph.D in Economics at Vanderbilt University Professor Yunus returned to his native country (soon to become Bangladesh) in 1974, the year of a terrible famine that killed nearly 1.5 million people. Yunus was determined to set out to understand the factors that kept people poor and to try to make a difference. He soon concluded that many people were poor not for lack of hard work or entrepreneurial spirit but because of a lack of working capital. He started experimenting with giving out very small loans -- his first loan was reportedly for the equivalent of US$0.05 -- to finance the daily working capital needs of very poor women artisans and traders. Because the borrowers had little or no collateral he could not ask for security and instead experimented with the idea of forming women into small borrowing circles of jointly liable borrowers (if one borrower were to default the other borrowers in the group would find it more difficult to obtain access to their own loan). Virtually all his borrowers repaid in full and saw their incomes rise.
Wanting to extend the idea he approached bankers, but they showed little interest in lending to such poor people who they deemed uncreditworthy and a serious banking risk. Thirty years later the Grameen Bank provides financial services in 71,371 villages and has approximately 6.7 million active borrowers, 97 percent of which are women. It also now boasts a loan repayment rate of 97 percent which puts the conventional banking sector to shame. The bank now raises money for its operations through savings deposits (also from poor people), bond issues on private capital markets, and some continuing loans from multilateral institutions.
Many other microfinance institutions have been set up up around the world in the past few decades, many directly inspired by the Grameen model, reaching tens of millions of borrowers. If you are interested in the more technical aspects of contract designs and incentives in microfinance, I have a few papers on that.
Appropriately, half the amount of the Prize went to Yunus, the other half to the shareholders of Grameen Bank (it's a borrower owned institution) who deserve as much credit for the success of the experiment .
So how is this related to international trade? In the models we've discussed an increase in the relative price of a good leads individuals to move resources to expand output in that sector to take advantage of the initial increase of profitability. In practice it often takes access to credit markets to be able to move capital into a newly profitable sector. Our models have implicitly been assuming that anybody with a profitable investment can borrow the money to pay for the resources to expand production in that sector. But if financial markets are incomplete, and credit goes primarily to people who have investment opportunities and own collateral assets, rather than to all people with good investment opportunities, then the distribution of the gains to trade will be more unequally distributed. For this reason it is important to understand better how credit markets work, and sometimes fail to work, and to support the work of social entreprenneurs such as Muhammad Yunus who are expanding the access to financial services for the poor.
After finishing a Ph.D in Economics at Vanderbilt University Professor Yunus returned to his native country (soon to become Bangladesh) in 1974, the year of a terrible famine that killed nearly 1.5 million people. Yunus was determined to set out to understand the factors that kept people poor and to try to make a difference. He soon concluded that many people were poor not for lack of hard work or entrepreneurial spirit but because of a lack of working capital. He started experimenting with giving out very small loans -- his first loan was reportedly for the equivalent of US$0.05 -- to finance the daily working capital needs of very poor women artisans and traders. Because the borrowers had little or no collateral he could not ask for security and instead experimented with the idea of forming women into small borrowing circles of jointly liable borrowers (if one borrower were to default the other borrowers in the group would find it more difficult to obtain access to their own loan). Virtually all his borrowers repaid in full and saw their incomes rise.
Wanting to extend the idea he approached bankers, but they showed little interest in lending to such poor people who they deemed uncreditworthy and a serious banking risk. Thirty years later the Grameen Bank provides financial services in 71,371 villages and has approximately 6.7 million active borrowers, 97 percent of which are women. It also now boasts a loan repayment rate of 97 percent which puts the conventional banking sector to shame. The bank now raises money for its operations through savings deposits (also from poor people), bond issues on private capital markets, and some continuing loans from multilateral institutions.
Many other microfinance institutions have been set up up around the world in the past few decades, many directly inspired by the Grameen model, reaching tens of millions of borrowers. If you are interested in the more technical aspects of contract designs and incentives in microfinance, I have a few papers on that.
Appropriately, half the amount of the Prize went to Yunus, the other half to the shareholders of Grameen Bank (it's a borrower owned institution) who deserve as much credit for the success of the experiment .
So how is this related to international trade? In the models we've discussed an increase in the relative price of a good leads individuals to move resources to expand output in that sector to take advantage of the initial increase of profitability. In practice it often takes access to credit markets to be able to move capital into a newly profitable sector. Our models have implicitly been assuming that anybody with a profitable investment can borrow the money to pay for the resources to expand production in that sector. But if financial markets are incomplete, and credit goes primarily to people who have investment opportunities and own collateral assets, rather than to all people with good investment opportunities, then the distribution of the gains to trade will be more unequally distributed. For this reason it is important to understand better how credit markets work, and sometimes fail to work, and to support the work of social entreprenneurs such as Muhammad Yunus who are expanding the access to financial services for the poor.
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