Muhammad Yunus: an economics for peace

About the author
Farida Khan is a Professor of Economics at the University of Wisconsin, Parkside, US.

Muhammad Yunus is the first economist to win a Nobel peace prize. This is in itself worthy of examination; a curiosity. How has economics cultivated peace? The economic reasons for war are far better known, as is the knowledge that wars have been instrumental in sustaining economic growth rates, providing jobs, and ameliorating the problem of insufficient demand. So what is this newfound relationship between economics and peace? And why has Professor Yunus, along with the Grameen Bank he founded, been awarded this prize?

The Nobel peace prize is given to "the person who shall have done the most or the best work for fraternity among nations, for the abolition or reduction of standing armies and for the holding and promotion of peace congresses." It is awarded by a five-member the Norwegian Nobel committee appointed by Norway's Storting (parliament). The economics prize, on the other hand is funded by the Sveriges Riksbank and awarded by the Royal Swedish Academy of Sciences.

The 2006 Nobel committee said that the prize was given to Muhammad Yunus and to Grameen Bank of Bangladesh for their efforts to create economic and social development from below. Lasting peace, the formal announcement said, cannot be achieved unless large population groups find ways in which to break out of poverty; microcredit is one means to achieve this, serving therefore "to advance democracy and human rights."

Farida Khan is a professor of economics at the University of Wisconsin, Parkside, United States

"Getting real about globalisation in Bangladesh"
(15 April 2006)

A banker to the poor

What have Grameen Bank and Muhammad Yunus done? What kind of connection can be made between banking, democracy, and peace?

The Yunus-Grameen story is indeed unique. It begins with Muhammad Yunus's return to Bangladesh after completing his doctorate in economics and then teaching at Middle Tennessee State University in the United States. Yunus had been guided in this path by Nicholas Georgescu-Roegen, a unique thinker who created "evolutionary economics" and influenced Yunus in ways that would help him develop the ideas behind Grameen. Georgescu-Roegen made Yunus understand that without the human side, "economics is just as hard and dry as stone."

Yunus returned in 1972 to the newly independent country and began teaching in Chittagong University. During the famine of 1974, he was very troubled by the disjuncture between academic economics and the reality of people dying from hunger. He found it difficult to teach the elegant economic models which, when properly implemented by governments, were supposed to alleviate destitution.

At this time he came upon Sufia Khatun, a local woman from the village of Jobra, who was weaving and selling cane stools. She had to borrow from the local moneylender to purchase raw materials and made a profit of a penny on each stool. Yunus decided to cut through the monopoly power of usurious lenders and increase her income. He gathered his students to witness a true lesson in economic development, as he lent money to Sufia and forty-one others for their business projects.

Yunus poetically described what followed:

"When she finally receives the twenty-five dollars, she is trembling. The money burns her fingers. Tears roll down her face. She has never seen so much money in her life. She never imagined it in her hands. She carries the bills as she would a delicate bird or a rabbit, until someone advises her to put the money away in a safe place lest it be stolen." (See Muhammad Yunus, Banker to the Poor: Micro-Lending and the Battle Against World Poverty, Public Affairs, 1999)

This led to the establishment of an innovative group-lending system where staggered, collateral interest-free loans were made to group members who were collectively responsible for repayment. The Grameen Bank was formally founded in 1976 and is owned by its borrowers. What was astounding was the success of the organization in strict banking terms. Grameen's initial repayment rates were at 97%, comparable to the most conservative of the large global banks. What was distinctly unusual was its clientele - 95% were women who owned less than half an acre of land.

The formation of groups to borrow Grameen funds became a way to empower women. Being able to borrow and have their own enterprises for income led to greater agency among women - giving them far more power and say within households, more education for their children, and asset-building for "hard core" poor households. At the same time, it resulted in objections and resistance from male spouses and family members, and village power-mongers such as religious leaders.

The Grameen Bank went further than promoting financial and individual empowerment. It had a deliberate intention to raise social consciousness. The sixteen decisions of Grameen that women would recite at every meeting addressed health and sanitation, repeal of dowry, and various other environmental and health measures. Interestingly, these resemble nothing so much as the United Nations' Millennium Development Goals combined with community-building.

Many say that Grameen has helped build a relationship of trust among the rural women and the bankers - a new form of social capital in the face of increased fragmentation and destruction of traditional networks. What is without doubt is that Grameen is an instance of economics confronting power.

The success of Grameen was replicated in rural Arkansas when Bill Clinton was governor. The Arkansas Good Faith Fund model was further copied by South Shore Bank and the Small Business Administration in the inner-city areas of Chicago. Indeed, since the 1970s, the microcredit idea originating with Grameen Bank has been used everywhere - there is probably not a single developing country in the world where microcredit has not been tried as a measure to counter poverty.

The World Bank had experimented with poverty alleviation for decades - now it funds many schemes incorporating microcredit, both in Bangladesh and around the globe. A media-friendly personality, Professor Yunus has spread the idea of microcredit far and wide and tirelessly advocated the notion that credit is a human right.

Also in openDemocracy, a witty, informative take on the "myth" of the Nobel economics prize:

Yves Gingras, "Nobel by association: beautiful mind, non-existent prize"
(23 October 2002)

The ground of development

The response of the poverty-alleviation industry - the multilateral and regional banks, and countless institutions - has been: why didn't we think of it? Microcredit as the answer for eliminating poverty through entrepreneurship and asset-building has now become every welfare-reformer's dream. As the wheels of privatisation and price liberalisation roll through the world, microcredit provides a perfect safety-net without creating government deficits and affecting central-bank rates. Combined with a slew of NGOs who cater to all other needs promised under the Millennium Development Goals, microcredit appears the perfect "capitalist" answer to the problem of destitution.

Yet microcredit does not lack its critics. From right and left, they say that microcredit does not reach the poorest groups, charges an excessively high interest rate, does not empower women because their male relatives are de-facto borrowers, and that microfinance services provided by city-based bankers crowd out the possibility of any genuine political mobilisation in the countryside. A Wall Street Journal article (co-written by Daniel Pearl) criticised Grameen for obscuring its repayment rates.

Grameen has moved on to other areas by providing housing loans, information technology to rural women entrepreneurs through mobile telephones, introducing pension schemes, and reviving the production and marketing of handloom through the introduction of the "Grameen check", now a popular fabric sold at urban retail stores in Bangladesh targeted to middle-class consumers. Grameen Telecom is today the largest provider of mobile phones in Bangladesh.

Muhammad Yunus's knack of finding and applying the right business ideas for rural Bangladesh is what makes him a remarkable development economist. His love for the village and feel for how the rural poor live shines through in his economic experiments. Indeed, Yunus's programme for alleviating poverty could equally have won him the 2006 Nobel prize in economics - though in the event that privilege went to Edmund Phelps, the theoretician behind the US federal reserve's anti-inflationary strategy.

As banks tighten their credit in a privatised world, increasing poverty, misery, and crime in the process, microcredit, NGOs, and the peacemakers will have to do their job, band aid as it may be, to make sure that the violence of starvation and poverty is not perpetuated by global governments who have now all agreed to live by the uniform code of neo-liberalism.