A Private-Sector Solution; M. Skousen

Economics on Trial 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 F or years freemarket economists have protested the waste and abuse of foreign aid programs, International Monetary Fund loans, and World Bank projects.! ~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 bar riers; increasing foreign investment; estab lishing 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 surpris ingly 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 Mark Skousen (http://www.mskousen.com; mskousen @aol.com) is an economist at Rollins College, Department ofEconomics, Winter Park, FL 32789, a Forbes columnist, and editor of Forecasts & Strate gies. His textbook, Economic Logic, is now available from FEE. 52 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 pro fessor at Chittagong University in Bangladesh. When I say "small loans," I mean minus cule. 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 borrow ers must join small support groups. If anyone in the group defaults, no one else can borrow more.

The bank lends to entrepreneurs, over whelmingly female, who need only a few dol lars 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 peo ple are finally able to break the cycle of pover ty. Their small businesses grow, and some use 53 their profits to build new homes or repair exist ing 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 agen cies 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 amaz ing 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 freemarket 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 entrepre neurs," 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 cap italist 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 revo lution."4 Precisely. 0 1. The latest examples are Paul Craig Roberts and Karen LaFol lette 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 Econom ics (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.: Har vard University Press, 1976). 3. Muhammad Yunus, Banker for the Poor (New York: Public Affairs, 1999), pp. 145--46.

4. Ibid., pp. 203-205. Professor Skousen's Economic Logic Now Available -DON BOUDREAUX The first volume of Mark Skousen's breakthrough college textbook, Economic Logic has just. ~een published. This "micro" text covers supply and demand, monopoly vs. ' competition, entrepreneurship, wages, capital and interest, and the financial markets. Economic Logic is a no-compromise freemarket college textbook, with a hands-on approach (it begins with a profit-and-Ioss income statement). Special price: $21.95 each. Send your order to: FEE, or call (800) 452-3518. Instructors should e-mail requests to mskousen@aol.com for a review copy. "Economic Logic is a first-rate and exciting introduction to economics. It's clear and accessible, uncommon among today's textbooks."