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.
John Orlander says
Fascinating post. The next couple of decades will witness an incredible growth of globalization whether we like it or not. Smart companies will create opportunities out of it and the dumb ones will claim they are victims. Especially appreciate your political views. Refreshing to find someone who can think for themselves instead of blindly following the moonbats of the left or the freepers of the right. -John
Mike Gardner says
Nice post, Kevin. Sometimes the Nobel committee gets it right.
In the flat world we have to compete to survive and the competition just keeps getting tougher. Great. That benefits everyone in the long run with better goods and services at better prices. Bring it on!
Andy Wagner says
Right on, Kevin!
I too was excited when I heard about the Nobel Prize. Desoto’s book, Mystery of Capital was the most exciting thing I’ve read since Lean Thinking. That should tell you something… not sure exactly what, but something.
Ray says
Good post – thanks. Too bad the Nobel wasn’t in Economics to encourage different thinking from economists but the more traditionalists have a lock on that one.
How about a post on immigration? At one time, I think the Cato Institute proposed open borders but I think they’ve pulled back from that because of the ‘terrorism threat’ and their financial supporters. They still have a reasonable approach but I haven’t seen them push it much with the current Administration.
Bill Waddell says
The problem with Yunus’ theory is that it hasn’t really worked anywhere yet. The models – Peru, Cambodia, Bangladesh – are all still mired about where they were before. As a general rule, the banking community has not put much stock in the ‘assets’ the poor folks hold – shanties and old cars held together with duct tape and bailing wire have not proven to be much in the way of collateral. The multi-trillion dollar asset base owned by the poor (upon which Yunus’ whole idea is based) is not recognized by the formal lending community as having nearly so much value.
I think he is also a bit one dimensional. Having title to something is one thing, knowing wat to do with it is quite another. The countries he is promoting his theories upon all suffer from an abysmally poor education system. In Cambodia, after people were granted title to the slum shack in which they lived, many were promptly relieved of those titles for not too much money by unscrupulous real estate investors – all legal, of course. It seems Yunus only succeeded in establishing a vehicle to make it easier for the haves to gain control of the have-nots property.
It is still a great theory, but Yunus’ idea reminds me a bit of Goldratt’s Theory of Constraints, also originally billed as the one great secret to manufacturinng success. Turns out is was good, but only one element of the overall solution.