Poverty Alleviation: Is Economics Any Help? Lessons from the Grameen Bank Experience.

• Author: Yunus, Muhammad

Monsoons, floods, cyclones and tornadoes are natural disasters that, throughout history have consistently been linked to life and death in Bangladesh. Is there something wrong with Bangladesh? It appears to be a country existing only to shuttle from one disaster to the next. Yet, it would be incorrect to argue that Bangladesh is simply a victim at the mercy of the whims of nature. A cyclone at 235 kilometers per hour or a tidal surge of 12 to 18 feet in a country where people are wealthy enough to build stable homes, and governments resourceful enough to build protective systems and strong embankments, will not cause human misery on the magnitude seen in Bangladesh. It is poverty that pushes countless poor Bangladeshis to seek their livelihood in increasingly risky areas of the country. While natural disasters do wreak havoc among the poor in Bangladesh and many other developing nations all over the world, they do not cause poverty. Abject poverty is a creation of mankind, not of nature.

The reason there is so much poverty in the world is that we have never correctly addressed it as an issue. The starting point for most economic theories was an investigation into the causes of the wealth of nations. Only supplementary theories were created to look at the poverty of nations. This led to the creation of concepts, institutions, legislation and political programs befitting those theories. In traditional economics literature, poverty on the micro-level was seen within this framework. It was perceived to be caused by the failure of an individual to find a job, either due to his or her lack of skills or education (what is commonly referred to as "human capital"), or due to a lack demand for labor. The way to increase the demand for labor was to apply macroeconomic measures that increased overall economic growth. In addition, improving access to basic education and vocational training was seen as a means of addressing the issue of deficient human capital.

In this paper, I will argue that this approach to poverty reduction at the macro-level is inadequate. The primary causes of poverty are not lack of human capital or lack of demand for labor. Lack of demand for labor is only a symptom, not a cause, of poverty. Poverty is caused by our inadequate understanding of human capabilities and by our failure to create enabling theoretical frameworks, concepts, institutions and policies to support those capabilities. My main argument is that economics as we know it is not only unhelpful in getting the poor out of poverty; it may even be a hindrance. In this paper, I would like to explore those institutions that perpetuate poverty, share my experiences with an effective poverty alleviation institution, and present my thoughts on the future of poverty alleviation. Before addressing these points, however, I would like to provide a useful framework to define the concept of "the poor" more concretely

DEFINING THE POOR

The inability to reach the poorest of the poor is a problem that plagues most poverty alleviation programs. As Gresham's Law(1) reminds us, if the poor and non-poor are combined within a single program, the non-poor will always drive out the poor. To be effective, the delivery system must be designed and operated exclusively for the poor. That requires a strict definition of who the poor are--there is no room for conceptual vagueness.

Quite frequently in the development literature, one will encounter the words "rural" and "poor" being used virtually interchangeably Another common practice is to speak about the "small" or "marginal" farmer, as if these were synonymous with "the poor." In reality, "the poor" may or may not include small and marginal farmers. This is fundamentally dependent upon the economic make-up of a particular country. For example, in Bangladesh, half the population is landless, and poorer than the small and marginal farmers.

The tendency of policymakers to identify a particular occupational group, such as farmers, artisans or small-scale producers, as representing the totality of the poor is equally misleading. Once again, in the case of Bangladesh, farming is a male occupation. As soon as we start substituting the word "farmer" for the word "poor," our thinking process unfortunately becomes drawn into exclusively male issues. Half of the population--the women--thus sinks into oblivion. If policymakers remember women at all, it is usually in their role as minor helpers of the male members of the household. Policymakers should avoid making sweeping generalizations that label groups of people as "poor" in order to allow them to call any project targeting a particular sector, occupational group or region a "poverty alleviation program."

Disaggregating categories like "farmers" or "small-scale producers" or "people living in northwestern Bangladesh" into groups of individuals considered to be "extremely poor," "marginally poor," "middle class" and/or "wealthy" takes considerable effort, at least in the initial stages. It also risks revealing that many programs aimed at the development of a particular sector or region are not poverty reduction programs at all. But if reaching the poorest of the poor is to become a priority in order to target needy populations more fairly and effectively, then defining the poor more rigorously by gradations, not occupations, is a necessary precondition.

A HISTORY OF THE GRAMEEN BANK

In 1971, I returned home to newly independent Bangladesh with a doctorate in economics from Vanderbilt University and joined Chittagong University as chairman of the Department of Economics. After Bangladesh won independence through a terrible war of liberation, I--along with many others--was full of optimism that the situation in the country would improve dramatically However, my optimism was short-lived. The euphoria of creating a dreamland for 75 million people waned rapidly as the economy deteriorated due to economic mismanagement and corruption. The food distribution system, in particular, was extremely inefficient. By 1974, Bangladesh was suffering its worst famine in 30 years.

All the "brilliant" theories that I was teaching my students were of no assistance in reducing the hunger and starvation of millions of people. It became exceedingly difficult for me to focus on the hypothetics of classroom economics with my fellow human beings dying around me. At that point, I lost faith in textbooks and the world of abstraction. I wanted to understand the lives of poor people and confront the causes of what made them so vulnerable to famine. I wanted to avoid the tendency of viewing complex developments through a lens of overarching theoretical frameworks and focus instead on solving one small problem at a time. This was a much more effective approach because it was grounded in reality.

I went into the village of Jobra, just outside of Chittagong University, where I met a woman--a bamboo weaver. Her name was Sufiya Khatun. She was a widow with two daughters--her other five children had died. She made beautiful bamboo stools. Based on her work, I felt that she must have been making a decent amount of money. I was shocked when I discovered that she only made two cents (U.S.$0.02) each day. Two cents! And the reason for such a small amount? She was unable to afford the working capital necessary to purchase the bamboo from the market. Consequently, she had to borrow the money from a local moneylender. The money was lent on the condition that Sufiya sell back the stools at a price dictated by the moneylender.

Initially, I did not try to come up with a solution to this woman's problems. I simply saw why she suffered. The cost of the bamboo was five taka (worth about U.S.$0.20 at the time). She lacked the money, the start-up capital, to avoid exploitation by the moneylenders. Sufiya's life was miserable because she was condemned to an existence within a self-sustaining cycle: borrowing from the trader and selling to him--unable to receive the fruits of her labor. Yet, the dilemma of her struggle to survive day after day boiled down to a simple issue. All that was necessary was to lend her five taka and the problem would be solved. But how?

In 1976, I began a research project to find out how prevalent this practice of virtual bonded labor or enslavement to moneylenders was. I performed a quick survey in the village of Jobra. What was the amount of working capital necessary to free the stool makers from exploitation by traders and moneylenders?

With the help of some assistants, I compiled a list of 42 people, and the grand total was U.S.$27. It is vital that this point be understood loudly and clearly: that for lack of U.S.$27, 42 persons were spending their lives engulfed within a vicious cycle of poverty And this is not a situation unique to the village of Jobra, or to the country of Bangladesh, for that matter.

My initial response was to find a way to lend these people the U.S.$27 they needed. But I later realized that it would have been better to find a more sustainable solution, such as working with them to build a link with their local bank. In this manner, they would be able to borrow money whenever they wanted. Thus, I took responsibility for establishing a link between the poor of the village and the bank. However, when I explained to the bank manager what I had in mind, he was convinced that I was joking. When he realized that I was serious, he explained that banks cannot lend money to the poor. He argued that banks are reliant on collateral, which the poor cannot provide.

I proceeded to meet with higher officials in the bank and argue with them, without any luck. Finally, I offered myself as the guarantor of the loans. I was determined to show the bank officials that their fear was unfounded. I loaned money and people repaid me, convincing me that loaning to the poor entails no more risk than lending money to those who can provide collateral. Unfortunately, the banks remained...