Pride of the nation

How often do we cry joyful tears? For a nation locked in political impasse, struggling to alleviate poverty and basic human needs, one of its sons getting a Nobel prize is a milestone of momentous import in its essence and dimensions. Dr Muhammad Yunus, congratulations to you on behalf of all the expatriate Bangladeshis who are relishing the pride you have brought to our impoverished nation!

Unlike many controversial Nobel Peace Prize winners of yesteryears, Dr Yunus is a very deserving candidate. In modern times, the prestige of the Peace Prize has become questionable because it has gone to some very dubious people, such as Le Duc Tho and Henry Kissinger in 1973; Anwar Sadat and Menacham Begin in 1978; and Shimon Perez and Yasser Arafat in 1997. Of them, only Le Duc Tho of Vietnam refused to accept the prize. This year again, some very questionable names tiptoed to the nomination list but the Nobel Committee could not be duped to bypass the name of "the banker of the un-bankable."

Norway's second largest newspaper Aftenposten claimed that many in Norway were calling the award a victory for the fight against poverty. The peace prize generally gives an enormous lift to the causes championed by its winner.

The paper stated: "Not only will Yunus and the Grameen Bank, which makes tiny loans to the poorest of the world's poor, now get a large cash infusion for their efforts, but they'll get the international recognition that may lead to further support in the years ahead."

The Norwegian Nobel Committee (NNC) said it awarded the peace prize to Yunus and the Grameen Bank because "lasting peace can't be created unless large portions of the population find ways to break out of poverty. Micro-credit is such a way."

It was Alfred Nobel's will that required for the prestigious peace prize to be awarded by a committee appointed by the Norwegian parliament. The Nobel prize in other fields such as physics, chemistry, medicine, and literature is awarded by committees in Sweden.

Many of the members of parliament who appoint the committee claimed that the NNC's decision to award this year's peace prize to a financier for the world's poor was a worthy one: "Helping people rise out of poverty contributes to their empowerment and that can in turn lead to more peace in the world."

The Committee has had to sift through 191 nominations in choosing this year's winner, including 168 individuals and 23 organizations.

Prime Minister Jens Stoltenberg called Yunus and the Grameen Bank "a wise choice." He said their initiative in making tiny loans to poverty-stricken individuals, especially women, is an important means of helping them launch their own means of support.

"I think it's a very good award choice, really a good winner," said Erna Solberg, head of Norway's Conservative Party and a member of parliament. She said that the micro-credit work begun by Muhammad Yunus and the Grameen Bank has become "one of the important grass-roots mobilizing efforts in the world."

Over 100 countries have adopted the concept of micro-finance to the poor. There are numerous stories of its impact on poverty reduction, giving an honourable wage-earning scheme to the poverty-ridden poor. The evidence from all countries using micro-credit indicates that the poor households, reached by the micro-finance organizations, who were all near the poverty line are now "the richest of the poor."

Micro-credit programs become sustainable institutions when net benefits to the community exceed total costs. Benefits accrue in the community when new businesses are successful and incomes increase. Micro-credit fills a niche that banks are reluctant to fill. For obvious reasons, it is not feasible for commercial banks to administer micro- credit programs profitably.

Lack of a credit history, absence of a track record of business operations, and inability to provide collateral make them unworthy candidates to commercial lenders. High costs coupled with high risks put off banks from entering the micro-credit market. To take up where the bank leaves off, micro-credit programs generally fulfill two objectives:

• Allow people access to small amounts of capital that would otherwise be inaccessible;
• Provide a training ground for entrepreneurs, some of whom may expand their operations to a point where they can look for working capital from commercial banks.

Micro-credit programs are not meant to be a substitute for capital markets. They are a gateway to capitalism for those who cannot yet access the macro-credit market. Real economic benefits kick in when borrowers graduate to commercial sources of capital.

If people are using the program and graduating to commercial sources of credit, then the program is successful, and sustainable. The sustainable program then becomes entrenched in the local community.

Economics professors Christian Ahlin and Neville Jiang of Vanderbilt University examined the long-run effects of micro-credit on development in an occupational choice model. They modeled micro-credit as a pure refinement in the credit market that opens up self-employment options to some agents who otherwise could only work for wages or make ends meet. The authors argue that micro-credit can either raise or lower long-run GDP, since it can lower use of both subsistence and full-scale industrial technologies.

The analysis predicts that micro-credit typically lower long-run inequality and poverty, by making subsistence payoffs less widespread. A case exists, however, in which micro-credit both lowers per capita GDP and raises poverty in the long run.

The key to micro-credit's long-run effects is dependent on the "graduation" rate: the rate at which the self-employed build up enough capital to start full-scale business firms. The model identifies two avenues for graduation: "winner" graduation (due to supernormal returns) and "saver" graduation (due to accumulation of normal returns).

The analysis indicate that "winner" graduation, however high its rate of return, cannot alone bring long-term development. In contrast, if the saving rate and normal returns in self-employment are jointly high enough, then micro-credit can bring an economy from stagnation to full development via "saver" graduation. The lasting effects of micro-credit may thus partially depend on simultaneous facilitation of micro-saving.

Many Bangladeshi friends asked me why the award is bestowed as a Nobel prize for peace but not economics even though micro-credit is an applied area of the discipline of economics. I have an answer, a simple one. Few care about who gets the Nobel prize in economics, and it is less important than the prize for peace.

There are only a few economics Nobel prize winners whose contributions are as path-breaking as those in physics, chemistry, and medicine, to say nothing of the peace prize winners.

It is only rarely that the economics prize is bestowed on one who truly deserves it and has done truly unique work, such Amartya Sen. More often, the prize is bestowed on mediocrities. There is no doubt in my mind that the contribution of this year's recipient of the Nobel prize in economics, Edmund Phelps, has been marginal at best.

The peace prize is the one that is the most important and honoured, and the impact of Dr Yunus winning the prize will be considerable, both for the cause of poverty alleviation world-wide, and, hopefully, for Bangladesh as well.

Dr Abdullah A Dewan is Professor of Economics at Eastern Michigan University.