Micromarkets

This year's Nobel Peace Prize winner, economist Muhammad Yunus, revolutionized poor people's economies by re-inventing micro-credits. In an effort to alleviate worldwide poverty, Yunus created a system of small individual loans to borrowers without any collateral. Interest rates are high, up to twenty percent. Yet, astonishingly, most borrowers repay their loans. Originally established in Bangladesh, Yunus' Grameen Bank became a model for microlending across the world. Now, despite the Nobel committee's anointment, competitors in the microcredit business are contesting Yunus' approach.

In this week's New Yorker, Connie Bruck's article "Millions for Millions" describes the controversy. Bruck reports an emerging battle between Yunus's philanthropic approach to credit and a hard-nosed alternative treating micro-credits as just another market. Although Yunus has necessarily paid attention to keeping the loan fund solvent, on the whole he has considered these loans to be a form of assistance that will help very poor people exit from poverty. His market-oriented competitors take a very different line: they see the basic value of micro-credits as the integration of poor people into markets that will eventually both profit them and educate them.

As articulated by eBay founder Pierre Omidyar, the market-oriented approaches go even farther. Philanthropy, Omidyar warns, distorts market efficiency. By preserving microcredits as unprofitable charity payments, he argues, in the long run, the programs undermine their own ultimate goals. Profit-making microfinance programs, on the other hand, will guarantee their success. They'll do better than charity because they create efficient markets, integrate poor people into those markets, and make savvy entrepreneurs out of poor people in the process.

To make sure that happens, Omidyar donated $100 million to Tufts University, with the principal earmarked for promoting profitable microfinance investment opportunities. Yunus strongly disagrees. For him and his followers, ordinary profit seeking contradicts microcredits' social goals. He told Bruck: "[Omidyar] says people should make money. I said, Let them make money -- but why do you want to make money off the poor people? You make money somewhere else. Here, you come to help them."

The Yunus-Omidyar dispute pivots around separate spheres/hostile worlds ideas I mentioned in yesterday's posting. For Yunus and his followers, mixing aid to the poor with profit-making taints their effort. Commercialization necessarily undermines microcredits' virtuous goals, corrupting relations between lenders and borrowers on one side and among borrowers on the other. Hostile worlds fears run in the other direction as well. For Omidyar, philanthropic sentimentality corrupts market efficiency by preserving unprofitable ventures and teaching people to expect handouts.

Both approaches, however, challenge another standard myth in the study of economic change. Here the mistaken dichotomy divides a so-called "real" economy of firms and corporations from allegedly peripheral economic activity. The periphery includes micro-credits but also, among others, immigrant remittances, household economies, gift exchanges, and the underground economy. The real economy, in this mythology, consists of transactions that go on in the world's central markets.

What's wrong with this view? First, across the world billions of people depend for their economic survival not on jobs or investments in firms, but on micro-credits, remittances, household economic activity, gift exchanges, and underground economies. Second, in the aggregate those supposedly peripheral transactions are not trivial. They have large macroeconomic consequences. For example, the World Bank estimates there are 7.000 microfinance institutions that serve 16 million people in developing countries. The total cash turnover of MFIs world wide, according to the World Bank, is estimated at US 2.5 billion. The New Yorker article mentions that the Grameen Bank has distributed more than $5.3 billion to nearly 7 million borrowers. When it comes to migrant remittances, World Bank estimates places the total for 2005 at around US $ 250 billion. In addition to being crucial to the lives of their participants, microcredits and migrant remittances add up to major elements in worldwide transfers of capital.

Microcredits have an additional feature that leads many observers to label them as peripheral: most borrowers are poor women who use the small loans to start tiny local businesses. More about that tomorrow.