Muhammad Yunus wins Nobel Peace Prize for microfinance

Muhammad Yunus and the microfinance bank he founded, the Grameen Bank, today won the Nobel Peace Prize 2006. It was an award well deserved. I'm someone who does a lot of work in the microfinance and development finance area - I currently chair the board of the nonprofit media venture fund MDLF, which has emerged as financially the largest media assistance organization in the world - and like anyone else in the field, I have studied Grameen Bank closely and intensively. Yunus' contributions to the improvement of possibilities for poor have been very great, in large part because they point crucially in the direction of understanding the role of markets in improving the lives of the poor. Markets are not just for the benefit of the global middle classes and above. Indeed, the implications of his work for understanding the economic conditions of poverty have long made me think that he perhaps ought to have been awarded the economics Nobel (For that matter, I also thought that the Nobel prize in medicine ought to have been awarded to Heimlich of the Heimlich maneuver.)

My views on microfinance itself are somewhat complex, and are explored in an academic article from 2002 in the Yale Human Rights and Development Law Journal, here. It is a decent academic primer on the theoretical literature on microfinance, as well as expressing a somewhat complicated view about the relationship of microfinance to globalization and the global market system. There is some new, very good literature in the microfinance field, and I'll try to post about it later on.

So I applaud Yunus his Nobel Prize. Yet let me also add something important. I am not a starry-eyed worshipper of microfinance as a silver bullet in international development. If you read over my article, you'll see that I think has significant limitations. Some of them can be summarized as follows:

First, hard evidence that microcredit actually substantially shifts longterm household outcomes is not as easy to come by as you might think or hope. I strongly think it is in fact true, but if asked to show hard data to prove it, that task is much more difficult than you might have thought. And for ripple effects on whole communities, the hard data task is that much more difficult. The often-touted repayment rate is some indication of success of the program, but it is mostly an indicator of the success - survival, really - of the lending institution. It is not directly a measure of improvement of longterm household income.

Second, Grameen bank itself is not really a model of what microfinance has been said to mean among the most enthusiastic - the poor bootstrapping themselves out of poverty. The bank itself receives various subsidies, including indirectly from the Bangladeshi government. Moreover, the bank is one of the least transparent financial institutions I have ever studied. And the whole sector of microfinance worldwide is and has to be massively subsidized. That is not going to change - nor should it. The measurement of microfinance's success is not the fact that it requires subsidies, but that it produces outcomes exceeding those of any other available social investment policy at the household and community level.

Third, the microfinance model is gradually coming to be seen less as an income generation mechanism on its own - it is unlikely that it generates that much revenue - than as a technical training program to bring poor people into the market economy. As a financial resource, it is extraordinarily labor intensive; the repayment rates are impressive, but they do not take into account the monitoring costs that such repayment rates seem worldwide to require in microfinance - and when those transaction costs are taken into account, the business model requires massive subsidies. Those subsidies can be justified, but largely as a training and educational tool, not as finance. (This is counterintuitive, and very hard to do in practice - essentially operating as a genuine business, and requiring market discipline even within your subsidized environment, while at the same time being aware (sort of at the meta-level) that fundamentally your contribution is as much or more technical knowledge and assistance to people without real experience of money, markets, and credit institutions. It is hard to maintain business discipline institutionally if you know somewhere in the back of your mind that you are also, or mostly, an species of training or educational institution - it produces a difficult mismatch of expectations within NGO mission terms.)

Fourth, although in the first decades of microfinance, the vision was one of the poor financing themselves out of poverty with, essentially, seed capital, it is now widely acknowledged that it must go hand in hand with public investments in public goods - health, education, and so on. Those goals tend to reinforce microfinance and viceversa, but essentially as consciousness raising tools to persuade people of the value of those public goods, such as education, especially for girls who would otherwise be left out.

Fifth, microfinance does not really address the problems of the "poorest of the poor" - it is really about the poor, rather than the really, really poor. This is something now acknowledged pretty much across the board. The poorest of the poor tend to live in areas of high insecurity and failed states - and in those places, it is practically impossible to run a microfinance program, or any other form of investment, public or private. I am a huge fan, and practitioner, in the microfinance area, but it is not a silver bullet.

Sixth, the whole microfinance as women's development is somewhat oversold to credulous, on the one hand, and ideological, on the other, Western aid agencies with agendas, and in part is an artefact of those Western agendas. The utility of focus on women's empowerment is true in part, but much less so - much less universal - than prevalent ideology would suggest - and there is a gradual recognition that it is better in many situations to focus on households rather than women as such as the micro-development unit. At the same time, it is no accident that Grameen Bank and its projects have been targets of Islamist violence in Bangladesh, because of their identification with women's empowerment.

Seventh, it is not always clear in particular circumstances whether microfinance is about drawing poor people upwards into the global market (and simultaneously the market down to them), or whether it is about creating a permanently subsidized, "faux" market that never really draws the poor into the larger economy beyond that created by NGO funding itself. One has to look case by case to see what the economic interconnections are. (I discuss this in much greater depth in my Yale article.)

One could make other critiques, but this is enough to indicate a certain caution about overselling the idea.

But - and this is a big but - all that said by way of caution, let's please not lose sight of the forest for the trees. The big picture - the one that justified the Nobel Peace Prize - is the recognition that markets matter to poor people too. That they have to be drawn into globalization. That the worst thing is, as (of all people) Kofi Annan said, back in 2000, the problem is not globalization, but those who are left out of globalization, those with no skills or anything of any use to contribute. The condition of the world's poorest people is not one of exploitation, in the old fashioned marxist sense - if it were, the world's poor would have something with which to bargain. On the contrary, the tragedy of the world's poorest people, especially, is that they are genuinely surplus. They are too poor to even be worth exploiting.

And surplus in the ugliest way - looking at Africa, for example, I would say that secret wish of the world's bourgeosie is not that Africa get richer, but that somehow Africa would be (humanely, of course) depopulated and turned into one big game park and environmental preserve. Of course, we don't want anything bad to happen to all those poor people - but if they suddenly just somehow hadn't ever existed, really, wouldn't that have been the best thing? That's what I mean by describing them as superfluous, surplus population.

Microfinance in the very large picture of things is one of those ideas that helps bring poor people into the market, to find a place in the market, rather than being part of the superfluous population of the world - people less valuable, apparently, than cheetahs. It is not the only idea in this vein - Hernan de Soto's views on property rights and collateral, for example, are another - sure, they aren't the only thing, and evidence suggests that that concept, too, has been oversold (the Economist recently had a story on exaclty that). So is the broad concept that Wolfowitz for a while was attempting to push at the World Bank, until the European socialist globalcrats overrode him - that the problem in the developing world in the first place is governance, because without it, public or private investment is bound to fail.

This cluster of ideas about drawing poor people into the world's economic platform is fantastically important, if only to get us beyond the dirigiste, global socialist concept of international development as simply shoveling money that never seems to accomplish its purposes. That's the point - no, of course it never works out as well as promised in theory, and it has real limitations, but don't lose sight of the larger picture - the one for which Yunus deserves the prize. And the fact that he comes to it from the subcontinent's Left is only all the better; he is not a neo-liberal, far from it.

A few relatively new microfinance readings: Beatriz Armendariz de Aghion and Jonathan Morduch, The Economics of Microfinance (MIT Press 2005), absolutely superb; David Hulme, Microfinance: A Reader (Routledge, 2006, costs a fortune), coming out end of October 2006, haven't seen it yet; and Joanna Ledgerwood and Victoria White, Transforming Microfinance Institutions (World Bank 2006), essential practical how-to manual for institutions, but also a great introduction.

(As a side note. There has been some discussion over at Opinio Juris and other places about the curriculum for teaching international economic law. I have taught international business transactions and other international economic law courses for a long time, now, and I find that I am able to usefully integrate many of the international development transactions that I actively do in the development finance area in the course of my pro bono practice into my IBT teaching. Lending transactions, equity deals, joint ventures, letters of credit, services agreements, licensing, etc. - teaching as I do an IBT class that focuses exclusively on transactions (at our school, we make trade a separate intro class, which I think is extremely sensible), I find development transactions both interesting for students and, in some ways, helpful teaching tools because of the fact that these transactions often involve signficant risks, political and legal risks that are obvious to beginning students in ways that risks in developed country transactions are not. Here is a link to my 2005 IBT final exam, involving post-war reconstruction in Africa, conflict diamonds, and other things.)