Three cheers for the Nobel committee for awarding this year's Peace Prize to Mohammad Younus. The Bangladeshi economist won the prestigious award for his pioneering and successful idea of micro-credit that helped millions of his countrymen to avail of loans without any collateral.
Younus was a pro-independence Bangladeshi student in the United States when Bangladesh became independent. He returned home flush with nationalistic patriotism and keen to contribute to the development of his homeland. It was a time after the collapse of colonialism when it was natural for enthusiastic nationalistic new governments to look beyond their past masters' policies and seek brave new models to emulate. Russia had leap-frogged from a wretched and feudal society to leading the space race personified by Sputnik.
That attracted many to the Russian model of development. Younus, working for his government, became disgusted with economic planners and their failures, earlier than most, and left the safe government service to return to university life. Perhaps he read about the Soviet economist visiting London in the 1970s who demanded to meet whoever was in charge of bread production, and was confused to be told, "no-one". Noticing that local fields lie idle and unproductive for several seasons during the devastating 1974 famine, he realised he could multiply productivity with a small water pump.
The cost was so small, no bank was interested. The transaction costs too high to bother and the people who needed the pump had no money or assets to borrow against. From this simple realisation, he established the Grameen Bank - grameen means village or rural in Bangladesh. His first loan was from his own pocket - $27 shared among 42 people for weaving stools. His bank has lent out $5.72 billion, 98.5 per cent is repaid, 96 per cent goes to women and most loans are under $100.
The borrowers own 94 per cent of the bank and the government 6 per cent. Such small sums elbows out corrupt bureaucrats and politicians are sidelined.
Another idea
Another big idea that should be read by every business person, bureaucrat and politician is explained in C.K. Prahalad's remarkable book entitled The Fortune At The Bottom of The Pyramid on how to eradicate poverty through profits.
He looks at purchasing power parity and finds India, China, Brazil, Mexico, Russia, Indonesia, Turkey and South Africa combined have a GDP of over $12 trillion, larger than Japan, Germany, Italy, UK and France. Then he studies companies that are tapping the bottom of this market, lifting living standards and providing jobs and consumers with a better deal. The poor are price-sensitive, ambitious and welcome technology.
Mobile phones are growing at 1.5 million a month in India which now has more mobile phones than China. Brazil already has 35-40 million mobile phones. New low cost PC kiosks are liberating villagers in many countries. Internet connectivity increases poor farmers' and fishermen's incomes by 5-10 per cent. Big global brands, who meet the needs of the very poor can make good profits. Avon has 800,000 ladies managing distribution in Brazil alone, Amway, in India has 600,000 representatives running their own little businesses. Four billion people who have the opportunity of becoming consumers represents a profound change in the global economy.
The third big idea in this trifecta is that governments still matter, especially the quality and professionalism of the civil service. Hernando De Soto, who should get the next Nobel Prize, is a Peruvian economist and his splendid work on why capitalism works in some countries and not others, offers another profound insight. Poor countries have enormous assets but lack capital. Those assets cannot be unlocked because of poor legal titles, assets cannot be bought, sold or borrowed against. Mexico, De Soto claims, has $300 billion of trapped resources and to work within the existing system in places such as Egypt where to purchase land you have to go to over 30 agencies and navigate 70 procedures, means people are smarter to work in the black economy, which produces two-thirds of the jobs in poor countries.
Legalising people's properties which they already own, allowing them access to credit and providing services through markets has worked for the rich countries - why not poor countries? The legal empowerment of the poor, through democracy, property rights, access to credit, access to courts, access to information, the ability to organise in a civil society and open trade - these are the opportunities that, when available to people, take nations out of extreme poverty. There's a United Nations Commission working on this very agenda now, I am its least distinguished member.
Mike Moore is a former prime minister of New Zealand and a former director-general of the World Trade Organisation.
