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Home > Capital Markets Viewpoints > The Financial Crisis and the World’s Poor

Capital Markets Viewpoints

The Financial Crisis and the World’s Poor

by Muhammad Yunus

Introduction

Professor Muhammad Yunus is the founder and Managing Director of Grameen Bank which provides micro-credit to millions of poor people in Bangladesh. In 2006 he was awarded the Nobel Peace Prize.

Yunus pioneered microcredit, the innovative banking program that provides the poor—mainly women—with small loans they use to launch businesses and lift their families out of poverty. Yunus’s vision is the total eradication of poverty from the world. This work is a fundamental rethink on the economic relationship between the rich and the poor, their rights and their obligations. The World Bank recently acknowledged that “this business approach to the alleviation of poverty has allowed millions of individuals to work their way out of poverty with dignity.” Credit is the last hope left to those faced with absolute poverty. That is why Yunus believes that the right to credit should be recognized as a fundamental human right.

Yunus serves on the boards of many national and international organisations. Besides Grameen Bank he has created a number of companies in Bangladesh to address diverse issues of poverty and development.

Developing Countries and the Crisis

The recession of 2008–2009 has well and truly shaken the foundations of global finance. Financial pundits and central banks are now analyzing how they got here and how to prevent things from crashing through the floor. The stimulus packages announced in the richest economies of the world are being widely judged as being insufficient. Quarter on quarter output changes published in The Economist for the G7 countries are painting a ghastly picture. There is much concern that the developed world is not spending enough on stimulus packages (despite Obama’s fiscal stimulus package of US$787 billion—the largest in US history, and China, which is spending 6.9% of its GDP), which will, in turn, hurt the developing countries that sell goods and services to them.

The developing countries are not expected to enter into stimulus spending on this large scale, mainly because they do not have the liquidity to borrow in the first place. Financial pundits in Bangladesh, for example, are in fact trying to explain the “time lag” between the global recessionary economy and Bangladesh’s own economy, which is partially shielded from feeling the aftershocks. They are, however, advising the government to take advantage of the time lag by designing stimulus packages for the banking system and government spending with the goals of creating new jobs and improving the long-term competitiveness of the economy. They are creating financial packages so that they can lend more to retail and business customers.

All of this, no doubt, makes sound financial sense, but I would like to ask a few questions: What is the future of global capitalism when there is no financial package for the protection of the world’s poorest? What is the goal of financial planning at a time of recession if no one talks about those who are too poor to even have a bank account? What kind of changes should we be looking for that protect the interests of people who have no access to food and nutrition even when the markets are bullish?

Capitalism and Poverty

Poverty is not created by the poor. Rather, it is created by the economic and social system that we have designed for the world. It is created by the institutions that we have built, the concepts we have developed, by the policies borne out of our reasoning and theoretical framework. In order to overcome poverty, we have to go back to the drawing board and redesign our concepts and institutions of capitalism. There is something fundamentally wrong with an institution that leaves out more than half the population of the world, because they are not considered creditworthy. This is what my work with Grameen Bank has been about, to design a banking method that can deliver the financial service to the people left out, particularly for the women who are the most difficult to reach.

In the context of the global banking crisis of 2008–2009, it is paramount that we redesign the way finance is handled globally, which has been described in the media as casino capitalism or irresponsible capitalism. Credit markets were originally created to serve human needs to provide business people with capital to start or expand companies and to enable families to buy homes. In return for these services, bankers and other lenders earned a reasonable profit. Everyone benefited. In recent years, however, the credit markets have been distorted by a relative handful of individuals and companies with a different goal in mind, to earn unrealistically high rates of return through clever feats of financial engineering. They repackaged mortgages and other loans into sophisticated instruments whose risk level and other characteristics were hidden or disguised. Then they sold and resold these instruments, earning a slice of profit on every transaction. All the while, investors eagerly bid up the prices, scrambling for unsustainable growth, and gambling that the underlying weakness of the system would never come to light. The poor, as usual, will feel the worst effects. As economies falter, as government budgets collapse, and as contributions to charities and NGOs dwindle, efforts to help the poor will diminish. With the slowing down of economies everywhere, the poor will lose their jobs and income from self-employment.

Even if we can overcome the problem of the financial crisis, we will still be left with some fundamental questions about the effectiveness of capitalism in tackling many other unresolved problems. In my view, the theoretical framework of capitalism that is in practice today is a half-done structure. The theory of capitalism holds that the marketplace is only for those who are interested in making money, for the people who are interested in profit only. This interpretation of human beings in the theory treats people as one-dimensional beings. But people are multi-dimensional. While they have their selfish dimensions, at the same time they also have their selfless dimensions. Capitalism, and the marketplace that has grown up around the theory, makes no room for people’s selfless dimensions. If some of the self-sacrificing drives and motivations that exist in people could be brought into the business arena to tackle problems that face the world, there would be very few problems that we could not solve.

The present structure of the economic theory does not allow these dimensions of people to play out in the marketplace. I argue that, given the opportunity, people will come into the marketplace to express their selfless urges by running special types of businesses, let us call them social businesses, to make a change in the world. In the absence of such opportunity in the marketplace, people express their selflessness through charities. Charitable efforts have been with us always, and they are noble and needed. But we have seen that business is able to innovate, expand, and reach more and more people through the power of the free market. Imagine what we could achieve if talented entrepreneurs and business executives around the world devoted themselves to ending, say, malnutrition, without any intention of making money for themselves or investors?

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