I was thrilled this morning when I learned that a banker, Muhammad Yunus, had unexpectedly won the 2006 Nobel Peace Prize. He isn’t just any banker, but a pioneer in the microcredit lending world.
Microcredit extends very small loans averaging $200, usually without collateral, to people too poor to qualify for traditional bank loans. These loans go toward buying items to create a sustainable small business, such as cows to start a dairy. This creates several very positive effects:
- Poor people, especially women in the case of Yunus’ Grameen Bank, have the opportunity to improve their standard of living.
- Millions of people, 6.6 million Bangladeshis alone via Grameen Bank, are tasting capitalism through entrepreneurship.
- Those millions are pulling themselves out of the never-ending cycle usually created by government handouts.
Well over a year ago we wrote about the coming manufacturing revolution and suggested that over the next decade or two the business world will witness a cataclysmic change. As we noted,
Thomas Friedman’s new book, The World Is Flat, describes how digital technologies have broken down trade, economic, geographical, and political barriers… in effect flattening the world. When you combine a new leveled playing field with new business practices for an interconnected world, and the masses of people who have never been allowed or capable to compete or collaborate before, you have the recipe for a revolution.
Microcredit banks around the world, such as Grameen in Bangladesh, are enabling those masses. The full effect of these millions of new entrepreneurs has yet to be felt. Obviously many of them will fail, just as with any entrepreneur, but many of those that fail will try again. Most of them will continue to run small dairies and chicken egg farms, and will therefore create sustainable livelihoods for their families without the need for handouts. But a few will create growing and prosperous businesses.
Those are the ones to keep a close eye on. Entrepreneurs, especially those that have struggled with virtually no assets, are very much aware of any waste in their new companies. They understand the concepts behind lean from the start.
Many of you know that I’m rather libertarian, fiscally conservative yet socially liberal, equally disgusted with the Democrat’s love of no-tax-is-too-great-especially-if-it-hits-the-rich and the limited-government-but-still-spend-like-no-tomorrow-and-tell-me-what-my-morals-should-be Republicans. Because of this I’ve been a long-time supporter of the Cato Institute, which in 2004 awarded Hernando de Soto its Milton Friedman Prize for Advancing Liberty. I’ve always identified with him as I spent seven years in Peru, which is where de Soto and his Institute of Liberty and Democracy are located. Military dictatorships transitioning to struggling democracies are fascinating to experience.
Microcredit loans to foster millions of small-scale entrepreneurs is one thing, but as de Soto points out, one fundamental requirement for success is a strong legal system for ensuring property rights. History gives us a huge example of this: in the 1930s and 40s Peru and Brazil had per capita GNP’s 25% and 50% greater than that of Japan. What happened in the last 50 years that made Japan 10 times richer per capita than Peru?
After WWII, the Americans destroyed the old feudal system and created a strong widespread private property system. This created a large consituency for a market economy, transforming Japan and its two colonies, Taiwan and South Korea. China is following a similar path, with Mao Zedong’s destruction of the feudal system and Deng Xiaoping’s creation of individual property ownership rights in a supposedly communist country. And we know what’s now happening in China.
de Soto explains the importance of property rights for entrepreneurs and the creation of stable democracies:
If you’re poor, and all you’ve got basically is a piece of land and a place where you work, whether you’re street vending or milking a cow, there is nothing more precious to you than your property. But to preserve it without the law you’ve got to satisfy tribal chiefs, crooked cops, corrupt politicians, bad judges, your difficult neighbors, and even the terrorists. But if the law comes in and says those rights are now recognized, not only by the neighbors but by the police and the whole nation, now you can trade them nationally and even internationally and the law will protect you, then people become interested in the rule of law.
Real wealth grows from the efforts of entrepreneurs who with the support of the rule of law can leverage property to bring resources together. Organizations such as Muhammed Yunus’ Grameen Bank enable the entrepreneur. As more and more countries move to protect property rights, some of those entrepreneurs will be able to grow robust businesses.
And we thought we had a problem with overseas competition today. Just wait.