Alternative to foreign aid


Building the institutions and rule of law for success
Alvaro Vargas Llosa gives the lowdown. Emphasis added.

Yet this year's worthy winner, the Grameen Bank of Bangladesh, is essentially a commercial operation and its founder, Muhammad Yunus, has clearly spelled out politically incorrect views regarding poverty:

"Grameen believes that charity is not an answer to poverty. ... It creates dependency. ... Unleashing of energy and creativity in each human being is the answer to poverty."

The bank lends tiny amounts of money to village-dwellers so they can start small businesses. The scale can be so modest as to involve the purchase of a cow in order to sell milk. Since no collateral or credit history is required, the system works on the basis of trust and peer pressure: Lenders are placed in groups of five, with part of the group guaranteeing the loans of the rest. If a loan is not repaid, the community shuns the borrower.

More than 6 million people have borrowed money from Grameen and the bank makes millions in profit. It charges higher interest rates than most banks, but since the principal is repaid before the interest -- interest, therefore, is calculated on the basis of diminishing principal -- borrowers end up paying less than they would pay other banks. Thanks to these private loans that very poor and uneducated Bangladeshis have put to entrepreneurial use, many people have been able to pull themselves out of extreme poverty.

At its inception, Grameen Bank was partly owned by the government because the founders figured that was the only way to channel foreign loans from outside sources. Today, it is a totally private and profit-oriented operation in which the borrowers themselves own shares.

If you have read Hernando de Soto, you know that the collective capital of the poor far outstrips that of the rich. The difference is in most nations, the poor have no way to establish title and no way to borrow against the assets they do have. Direct foreign aid often props up corrupt governments without going to the people who need it, turning the best intentions into more poverty.

So isn't a locally owned bank with shareholders that are borrowers a better deal for a struggling economy than a bank based in another country? Or a grant that goes through crooked government officials?

If this sounds familiar, it should. The U.S. westward expansion was funded by similar interests.

— NeoWayland

Posted: Sat - October 21, 2006 at 10:44 AM  Tag


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