More Gratuitous Grameen Bashing

Posted by John Carney, Nov 09, 2006, 3:04pm

yunus.jpgWhen we linked to some mild criticism of Nobel Peace Prizer Muhammed Yunus and his Grameen Bank of Bangladesh—and then expanded on these thoughts on an episode of WallStrip—the fans of microcredit went a bit berserk. So, of course, we’re coming back for more.

Today’s critique comes from Jeff Tucker of the Mises Institute. Now admittedly, Jeff has never been a fan of Grameen or Yunus. In the past he’s said that Grameen “is more of a cult than a financial institution” and said that “[a]t best, its operations are wasteful and Ponzi-like; at worst, they are parasitical, usurious, and communistic.”

So you won’t be surprised that Jeff hasn’t exactly been won over to Grameen by the Nobel Committee. Writing at the Mises Institute’s website, Jeff says:

We are told that Yunus discovered a wonderful new way of making profitable loans to the poor by doing something that all conventional bankers in Bangladesh had overlooked. Half the population lives below the poverty line in Bangladesh. Are we really supposed to believe that banks blithely overlooked millions of poor people out of bias or hatred or snobbery?

Even if we can accept that he had some sort of entrepreneurial insight that no one else had, Grameen has been giving loans to poor women for thirty years. Are we really supposed to believe that conventional bankers were so stupid as not to spot this opportunity even after decades of demonstration? Yunus says that he discovered that the poor are "bankable" but if this were true in the way that he says, others would have discovered the same profit opportunities and done it without help from government.

Actually, Grameen is not really free enterprise at all. Yunus's first pile of cash came from the United Nations. Then he went to the Bangladesh government. Then he went to US foundations. In the 1980s and '90s, the bank received nearly $150 million in grants. At the same time, he started borrowing at low interest rates from governments around the world, and lending out the same money at higher rates. His institution keeps the difference.

Microcredit or Macrowelfare: The Myth of Grameen [Mises.org]

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Posted in: Banks, Economics, Microfinance, Nobel Prize

Comments

Posted by , Nov 09, 2006 3:35PM

These idots have no idea about the 'logic' of the third world. Look at how profitable African banks are. Few of them have ROA less than 200%. How do they make so much money when they hardly ever lend to local businesses? Talking big business here not even the tiny little micro loans. Why lend to a business with credit risk when you can lend to the governments which have an amazing apetite for this shit (not totally risk free but as risk free as there is in the country)?

It is impossible to get a loan (and that is a collateralized by hard assets loan) in any third world country. Access to capital is so taken for granted in the west that this guy would not be called out for the idiot that he is....

Posted by Nick Bradley, Nov 09, 2006 3:54PM

As a Mises devotee, I must say that you really need to read the article.

He presented two irrefutable facts: Grameen gets money from governments and loans it out, making the arbitrage.

You must have also overlooked his claim that free-marketeers in the West put to much emphasis on access to credit in order to achieve capital accumulation. Wages can perform the same function.

Posted by ., Nov 09, 2006 3:57PM

I remain sceptical of Gameen, but micro-loans sound like a good idea if they could help stem the flow of third world immigrants to the West.

Posted by Ben_H, Nov 09, 2006 4:27PM

Impossible? Maybe a few years ago, but in the last 2-3 years, consumer credit in EM has exploded and lending standards are ridiculously lax. Take a look at consumer debt growth in Russia, Ukraine, Kazakhstan, Brazil, and ARgentina. Flying in all these places. Average loan sizes are quite small and approval is very quick (maybe too quick) and far from document intensive.

Posted by , Nov 09, 2006 4:30PM

ok.
two irrefutable facts:

1) Grameen gets money from governments and loans it out, making the arbitrage. : I don't understand why that is so wrong? If the government doesn't have the capacity/experts to run its own bank (which is true) it sets up some sort of an agency that it uses to help channel the funds to nurture business. It's like the poor man's ExIm bank (or Bank of Boeing, as I'd like to think of it). As long as it helps the businesses (individuals)..what's the beef? For profit entities are the only ones that will do well. For years, 'free' unaccountable money has destroyed any chance for true development.

2) ahh. wages. and who pays these wages? most of these countries, the largest employer is the gvt. which can't pay higher wages b/c of inadequate tax revenues… who pays taxes. private enterprises. ..what makes up 'private enterprises'...small/medium businesses.... small/medium businesses are nonexistent ..why?...well, no access to capital.
chicken..egg..chicken egg.

Posted by , Nov 09, 2006 4:33PM

Ben,
I speak not of EM but of Not-yet-emerged countries that are talking about $50 - $200 dollar loans. How lax is that standard. 90% of the loan needs are that small. Which bank has the patience/resources to dole that out in teenie tiny portions?

Posted by Johnny Debacle, Nov 09, 2006 4:39PM

NB-

Irrefutable Fact #1: Who cares? Do you think the income generated off the float (which essentially represents what govs are compensating Grameen with) is spent worse than it would have been in typical foreign aid?

Irrefutable Fact #2: PE firms don't need any L in their LBO's, and they put too much emphasis on it. Cash inflows from the sky can perform the same function as debt.

Most economists are very very pro-micro credit. MarginalRevolution.com for one (http://www.marginalrevolution.com/marginalrevolution/2006/08/the_economics_o.html or you can search their site for any number of posts on it).

The 3rd World is not an efficient capital market, and the avg 3rd worlder has no access to capital, even if they have decent collateral. In fact, most have no interaction with any banking system in their entire life. But beyond capital, debt serves the function of aligning interests more productively and with more focus on generating cash flow.

Here is a real world example. Say Larry Ellison was worth $5bn, almost all in his company stock, and he had no debt. He wanted to buy a $4bn sex robot to rent out to his obscenely wealthy friends at $100mm per month. There was also an $8bn sex robot that he thought he could rent out at $20mm per month but he would have to finance it with 50% debt. Which one do you think he would operate more efficientlly?

Obviously the debt finance sex robot. Point proven.

Posted by Bulging Bracket, Nov 09, 2006 6:11PM

I love the criticism that "it's idiotic to think that they will get rich lending to each other", seen here and around the web in the past. Yeah, just like how it's idiotic to think that the West would get rich loaning money to itself, though in larger amounts. Shockingly, markets do exactly that, increasing the velocity and size of the money supply.

Just goes to show you that it is not only (though definitely in the vast majority of cases) the liberal/leftist economists who forget or deny basic economics in their policy prescriptions and criticisms (yes, I am calling out Paul Krugman with that one).

Microcredit is an excellent way of getting around the problems identified by Hernando De Soto in The Mystery of Capital, namely that the lower 99% of Thrid World economies are plagued by dead capital. You get around inefficient and overregulated traditional banks that are usually legally compelled to only serve the interests of the ruling elite. This is true even in major and up-and-coming systems like France, Japan, and China where the government owns/controls the major sources of financing and requires it be provided to SOEs or state favoured entreprises. Plus the elite have expensive jobs in the banks, while Grameen hires the poor to work for it, making high volume low margin transactions feasible.

Hate to say it, because the Mises Institute is good people, but they are VERY wrong on this issue, as you are Carney.

Posted by Dan, Nov 17, 2006 3:21PM

Microcredit is not a way to get around the problem of lack of property rights, which is the primary problem in less developed countries. De Soto seems to be on the mark with his strategy. Without strong property rights, the gains from microcredit can never be leveraged and are illusory. Grameen, even if it was a new concept that could be profitable without the arbitrage from low rate government loans, can never permanently lift people out of poverty if property rights don't protect the gains they make.

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