Why a Bangladeshan won the Nobel Peace Prize

The article appeared in the Patriot News, Wednesday, November 1, 2006.

In 1979, Mother Teresa was awarded the Nobel Peace Prize for her humanitarian work in Calcutta, India. Her Missionaries of Charity provided succor to the destitute, the marginalized and the diseased, and in selecting Mother Teresa for the award, the Nobel committee recognized her "for work undertaken in the struggle to overcome poverty and distress, which also constitute a threat to peace."

Twenty-seven years later, the Nobel peace prize committee has found fit to honor yet another person from the Indian subcontinent, this time an economist, Muhammad Yunus, from Bangladesh.

Economists do not get peace prizes. They get prizes for showing (as the 2006 economics laureate Edmund Phelps did) that policy makers should not try to achieve low unemployment at the expense of higher inflation. Such a tradeoff is illusory --ultimately, you end up with high unemployment and high inflation. Central banks around the world have come to accept this wisdom, and now grapple with the job of curbing inflationary expectations (as a means to keeping actual inflation low).

So the choice of Yunus for the peace prize is remarkable. He earned an economics Ph.D. in the U.S., returned to Bangladesh, and discovered that abject poverty prevented people, especially in villages, from taking the first steps toward economic self-sufficiency. A simple event -- breakdown of a small machine, the death of a cow -- could prove catastrophic for a low-income family. In the absence of suitable collateral, and the relatively high cost of underwriting small amounts, banks were unwilling to make loans in such cases -- thus, families stricken by misfortune would find themselves with no access to credit and without any means of livelihood.

Yunus set about making small loans to villagers, particularly women. He would extend credit to small groups, each member of which would use the money to start a simple business--sewing, raising cattle, etc. But he was making loans which the members of the group had to repay. To increase the probability of repayment, he stipulated that default by an individual borrower would place the entire group's credit at risk.

Amazingly, the system worked. Borrowers, unwilling to bear the disapproval of the peers in the group, were diligent in repaying their loans.

Buoyed by the success of his microcredit experiment, Yunus established the Grameen Bank which has now made loans to millions of low-income borrowers who would have otherwise been shut out of the credit market. And these loans fuel economic development, as the credit is being used to finance disparate entrepreneurial activities in villages all over Bangladesh.

The success of microcredit -- making small loans to fund a large number of small business ventures -- has caught the eye of the World Bank and other development institutions. More capital is being set aside to promote microlending in developing countries; even blighted neighborhoods in the inner cities in the U.S have been experimenting with microcredit as a means to spur economic development at the grass-roots level.

SO WHY THE peace prize for Mr. Yunus? Because economic development, especially the alleviation of poverty, can foster the cause of peace and security. When people are gainfully employed, when incomes are rising, when the future looks less bleak, the likelihood that violence, crime and terrorism will find a hospitable environment diminishes. In due course, democratic institutions may also emerge, making the prospects of conflict even less likely.

That Bangladesh is a Muslim country is also noteworthy. In an era where radical adherents of Islam often take center stage in global affairs, the contributions of a lone economist from Bangladesh remind the rest of the world that developing countries, even those predominantly Islamic, can be the wellspring of powerful ideas to benefit humankind.

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