"CREATING A POVERTY-FREE WORLD"
AN ESSAY BY MUHAMMAD YUNUS

Why we have so much poverty in the world is because we have not addressed the issue right. Poverty is not created by poor people or by the lack of demand for labor. It is created by our failure to create a theoretical framework, institutions, and policies to support human capabilities.

In 1971, I returned home to my newly independent country of Bangladesh after having received my doctorate in economics from Vanderbilt University in the United States. I joined Chittagong University as chairman of the economics department. I was full of optimism that good things would necessarily occur after such a terrible war. However, the euphoria of creating a dreamland for 75 million people died down rapidly as the economy took a nosedive, resulting in a famine in 1974.

All the brilliant theories I was teaching my students did not alleviate the starvation of millions of people. It became difficult for me to focus on the theories of classroom economics while, around me, my fellow human beings were dying. I wanted to understand the lives of poor people, to find out what had made them so vulnerable to famine.

I went into the village of Jobra, just outside of Chittagong University. I wanted to rid myself of the arrogance that accompanies a PhD: the tendency to view situations with a bird's-eye view. I attempted to obtain a worm's-eye view-to focus on one tiny problem and try to surmount it-a much more effective strategy because it is grounded in reality.

I met a woman in the village of Jobra, a bamboo weaver named Sufiya Khatun. She was a widow with two daughters. Sufiya made such beautiful bamboo stools, I thought that she must be making a decent amount of money. Imagine my shock when I discovered that she only earned two U.S. cents each day. Two cents!

The reason for this meager amount? Sufiya had to borrow the money at 10% interest from a local moneylender, who lent it to her on the condition that she sold the stools back to him at a price he set, at a measly profit.

I realized why this woman suffered: the cost of the bamboo was five taka, about 20 U.S. cents, but she lacked the start-up capital. It was so simple: all that was necessary was to lend Sufiya the five taka and her problem was solved.

Sufiya's predicament was prevalent among the stool-makers in the village of Jobra. What was the amount of working capital necessary to free them from the exploitation by traders and moneylenders? After a quick survey, we compiled a list of 42 people and the grand total came up to US$27.

For a lack of US$27, 42 persons were spending their lives within a vicious cycle of poverty. And this was not a situation unique to the village of Jobra. In country after country, from Bolivia to the Philippines to South Africa, I had seen exactly the same phenomenon-hard-working people condemned to a life of misery because they lacked access to tiny amounts of capital. If it were possible to bring financial capital into the hands of the poor, there would be an opportunity for them to enjoy the fruits of their labor.

But in reality, the existing economic machinery is designed in such a way that the earnings of others can make a handful of people richer every day while, at the same time, turning a large number of people into paupers. At the heart of this economic machinery is the failure of economics as a social science.

Three fundamental assumptions have misled economists away from solving the problem of poverty: credit is a neutral tool; entrepreneurs belong to a select group of people; and capitalism is reliant upon maximizing profit .

Credit Is a Neutral Tool

The poor are poor because they are not able to retain the genuine returns to their labor; they work for the benefit of someone who controls the capital. The poor have no control over capital. They do not inherit any capital, nor does anybody give them access to capital or credit.

Most economists have consistently failed to understand the social power of credit. Credit creates entitlement to resources. Consequently, credit creates economic power, which, in turn, creates social power.

Thus, the responsibility for deciding who will get credit. How much, and on what terms, is an important social question. A lending institution can make or break an entire segment of society by favoring or rejecting its members. Banks pronounced a death sentence on the poor with the announcement that the poor are not creditworthy.

In the village of Jobra, I lent US$27 of my own money to 42 people. After a few days, I thought it would be better to find a sustainable solution, such as linking these people with their local bank. However, when I went to the bank manager and explained to him what I had in mind, he was convinced that I was joking. When he realized that I was completely serious, he explained to me that banks could not lend money to the poor because they could not provide any collateral.

I did not give up and proceeded to meet with higher officials in the bank and argued with them. No luck. Finally, I offered myself as the guarantor of the loans. I was determined to show the bank officers that their fear was unfounded. I loaned the money and people paid back, convincing me that loaning to the poor entailed no more risk than lending money to the rich with collateral.

Unfortunately, the bank officers remained unconvinced. Even after I demonstrated the success of the program in five districts, with excellent results, they refused to adopt it as part of their regular business. So in 1983, I decided to set up Grameen Bank as a separate bank for the poor.

Today, Grameen operates in 39,000 out of a total of 68,000 villages in Bangladesh. It lends to 2.4 million borrowers, 94% of whom are poor women. Our 97% repayment rate, which is higher than most lending institutions, confirms that loans do not need to be tied with collateral to be repaid.

Grameen is not just a traditional bank which happens to serve a poor population. To be successful, both as a poverty alleviation program and as a bank, Grameen had to do two things: reach the poorest and ensure credit discipline.

Quite frequently in the literature, one will encounter situations where "rural" and "poor" are being used interchangeably. Another common practice is to speak about the "small" or "marginal" farmer, armed with some firm belief that this is a synonym for the poor.

Instead of identifying occupations or geographic locations, the conceptually safe policy would be to define them as some bottom x% of the population. Grameen's target is the bottom 50% of the population below the poverty line, primarily women, as they bear the greater burden of poverty. In a Muslim country like Bangladesh, it is an impossible situation to attract women borrowers. Faced with the opposition from the religious leaders and frightening rumors about what will happen to a woman if she takes a loan from Grameen, it is only the desperate women who finally push their way through to form the first group.

These groups gradually set the level of economic conditions for future members. The less poor stay away because they do not enjoy being classified with the destitute. In addition, all the work of Grameen is done at the doorstep of the members. Therefore, it is very difficult to conceal one's economic status from Grameen.

The second issue is that of credit discipline. Credit without strict discipline is nothing but charity. Charity does not help overcome poverty. Poverty is like being surrounded completely by high walls. Charity is a package thrown into this walled-in existence that will lighten the load for a few days. A meaningful poverty alleviation program is one that helps people gather the strength to make cracks in the walls around them.

We achieve credit discipline through our system of "social collateral." Borrowers are landless women who form groups of five to receive loans. The two poorest women receive their loans first. The other women in the group begin receiving their loans until the first two begin regular payments. This provides a strong peer pressure/peer support network: peer pressure at times when a member willfully tries to violate Grameen's rules, and peer support at times when a member falls into difficulty in pursuing his economic activity.

Entrepreneurs Are a Select Group of People

In many Third World countries, the overwhelming majority of people make a living through self-employment. Because economists are unable to fit this phenomenon into their rigid framework, self-employment becomes lumped into a category called the "informal sector," something that is not seen as a desirable situation. In fact, economists argue that the sooner these countries eliminate the informal sector, the better off they will be.

What a shame! Instead of supporting the creativity of the people by creating empowering policies and institutions, we become eager to fit them into boxes that we have created. Yet the informal sector resulted from people's effort to create their own jobs. Anyone with a minimum understanding of people and society would have come forward with hope to build upon what exists and take it to higher levels, rather than pulling the rug from under it.

Reduction of poverty must be a continuous process of asset creation, so that the asset base of a poor family becomes stronger at each economic cycle, enabling them to earn, invest, and save. Poor people cannot ensure a larger share of return for their work because their initial economic base is paper-thin. Only when one can gradually build up an asset base can one command a better share for one's work.

Self-employment, supported by credit, has greater potential of improving the asset base than wage-employment. In addition, the capital cost for generation of each wage employment job is quite high. Thus, there is a strong case for self-employment based on sound economic reasons.

The most important distinction between wage and self-employment concerns the role of women. When plans are made for providing employment for the vast population, planners often think about job facilities for men only. Poor women simply do not enter the economic picture at all. And yet the skills that they attain from doing all kinds of work within the home can easily be channelled into income-generating activities. Making handicraft items, raising domestic animals, and growing fruits and vegetables-all these can open the doors to earnings for many women.

If we truly seek to help the poorest, we must serve women. Women traditionally stay home and run the family with virtually nothing to manage with. If one member of the family has to starve, there seems to be an unwritten rule that it should be the mother.

Consequently, given the opportunity to fight against hunger and poverty, a poor woman turns out to be a superior fighter compared to a poor man. Poor women have an intense drive to move up: they are hard working, concerned about their human dignity, and willing to make sacrifices for the well-being of their children.

Credit provides a woman an income-generating activity without the usual sacrifies required under a wage-employment situation. She does not have to leave her habitat and her children. She does not have to learn a new skill or adapt herself to a new job. She can do whatever she does best and earn money doing it.

At Grameen, we follow the principle that the borrower knows best. We encourage our borrowers to make their won decisions. When a nervous borrower asks a member of the Grameen staff to tell her what would be a good business idea for her, the staff member is trained to respond in the following way: "I am sorry, but I am not smart enough to give you a good business idea. Grameen has lots of money, but no business ideas. If Grameen had good business ideas also, do you think Grameen would have given the money to you? It would have used the money itself, and made more money."

Consequently, not only do women generate income, but they also becomes empowered in the process. The social impact of Grameen speaks for itself. I firmly believe that all human beings are potential entrepreneurs; Grameen has shown this to be true.

Capitalism Is Reliant upon Profit Maxnimization

We are convinced that the capitalist economy must be fuelled only by greed. Only profit maximizers are willing to play in the marketplace and try their luck.

However, I profoundly believe, and Grameen's experience substantially affirms this point, that social goals can replace greed as a powerful motivational force. Approached methodically, enterprises driven by social consciousness can become an effective force in the marketplace.

The success of such enterprises can be seen with the Grameen companies. Grameen Phone is a nationwide cellular phone company which serves customers in the urban and rural areas of Bangladesh. Many of the Grameen borrowers become the telephone ladies of the village. They own cellular phones and sell the service of the phone to the villagers earning better incomes. Ultimately, the Grameen borrowers will own the telephone company, by buying up the shares, as occurred in the case of Grameen Bank.

Another company that Grameen has created is Grameen Cybernet. The company was started in 1996 to offer Internet access to over 2,500 customers in Dhaka. It will extend its services to the rural areas as Grameen Phone covers the villages with their telephone network. The Internet will bring the global job market to remote villages. Young people can work on jobs in data entry, Web-page design, answering services through dedicated telephones and the like without leaving their villages. Again, Grameen Cybernet will be owned by the poor.

A third company is Grameen Energy. Its purpose is to bring solar and other renewable energy sources to Bangladeshi villages, 65% of which do not have grid energy. Grameen Energy will operate by creating mirco-power companies, owned, and operated by the local poor.

In conventional development strategy, power plants, telecommunications, and other forms of infrastructure are either owned by the richest in the country, or multinationals, or both and, consequently, serve their interests. Grameen and mircocredit lead the way in acting in a poor-friendly way.

Lastly, we cannot solve the problem of poverty with the same theoretical framework under which we have created it. It is time we got serious about reducing poverty and searched for a new framework that would help us fulfill this responsibility.

From "Asian Business Wisdom: From Deals to Dot.Coms"
Revised Edition
Edited by Dinna Louise C. Dayao