The awarding of the Nobel Peace Prize to Muhammad Yunus, regarded as the
father of microcredit, comes at a time when microcredit has become
something like a religion to many of the powerful, rich and famous.
Hillary Clinton regularly speaks about going to Bangladesh, Yunus’s
homeland, and being "inspired by the power of these loans to enable even
the poorest of women to start businesses, lifting their families—and
their communities—out of poverty."

Like the liberal Clinton, the neocon Paul Wolfowitz, now president of
the World Bank, has also gotten religion, after a recent trip to the
Indian state of Andhra Pradesh. With the fervor of the convert, he talks
about the “transforming power” of microfinance: "I thought maybe this
was just one successful project in one village, but then I went to the
next village and it was the same story. That evening, I met with more
than a hundred women leaders from self-help groups, and I realized this
program was opening opportunities for poor women and their families in
an entire state of 75 million people."

There is no doubt that Yunus, a Bangladeshi economist, came up with a
winning idea that has transformed the lives of many millions of poor
women, and perhaps for that alone, he deserves the Nobel Prize. But
Yunus—at least the young Yunus, who did not have the support of global
institutions when he started out—did not see his Grameen Bank as a
panacea. Others, like the World Bank and the United Nations, elevated it
to that status (and, some say, convinced Yunus it was a panacea), and
microcredit is now presented as a relatively painless approach to
development. Through its dynamics of collective responsibility for
repayment by a group of women borrowers, microcredit has indeed allowed
many poor women to roll back pervasive poverty. However, it is mainly
the moderately poor rather than the very poor who benefit, and not very
many can claim they have permanently left the instability of poverty.
Likewise, not many would claim that the degree of self-sufficiency and
the ability to send children to school afforded by microcredit are
indicators of their graduating to middle-class prosperity. As economic
journalist Gina Neff notes, "after 8 years of borrowing, 55% of Grameen
households still aren’t able to meet their basic nutritional needs—so
many women are using their loans to buy food rather than invest in
business."

Indeed, one of those who have thoroughly studied the phenomenon, Thomas Dichter, says that the idea that microfinance allows its recipients to
graduate from poverty to entrepreneurship is inflated. He sketches out
the dynamics of microcredit: "It emerges that the clients with the most
experience got started using their own resources, and though they have
not progressed very far—they cannot because the market is just too
limited—they have enough turnover to keep buying and selling, and
probably would have with or without the microcredit. For them the loans
are often diverted to consumption since they can use the relatively
large lump sum of the loan, a luxury they do not come by in their daily
turnover.“He concludes:”Definitely, microcredit has not done what the
majority of microcredit enthusiasts claim it can do—function as capital
aimed at increasing the returns to a business activity.“And so the great microcredit paradox that, as Dichter puts it,”the
poorest people can do little productive with the credit, and the ones
who can do the most with it are those who don’t really need microcredit,
but larger amounts with different (often longer) credit terms."
In other words, microcredit is a great tool as a survival strategy, but
it is not the key to development, which involves not only massive
capital-intensive, state-directed investments to build industries but
also an assault on the structures of inequality such as concentrated
land ownership that systematically deprive the poor of resources to
escape poverty. Microcredit schemes end up coexisting with these
entrenched structures, serving as a safety net for people excluded and
marginalized by them, but not transforming them. No, Paul Wolfowitz,
microcredit is not the key to ending poverty among the 75 million people
in Andhra Pradesh. Dream on.

Perhaps one of the reasons there is such enthusiasm for microcredit in
establishment circles these days is that it is a market-based mechanism
that has enjoyed some success where other market-based programs have
crashed. Structural-adjustment programs promoting trade liberalization,
deregulation and privatization have brought greater poverty and
inequality to most parts of the developing world over the last quarter
century, and have made economic stagnation a permanent condition. Many
of the same institutions that pushed and are continuing to push these
failed macro programs (sometimes under new labels like "Poverty
Reduction Strategy Papers"), like the World Bank, are often the same
institutions pushing microcredit programs. Viewed broadly, microcredit
can be seen as the safety net for millions of people destabilized by the
large-scale macro-failures engendered by structural adjustment.

There have been gains in poverty reduction in a few places—like China,
where, contrary to the myth, state-directed macro policies, not
microcredit, have been central to lifting an estimated 120 million
Chinese from poverty.

So probably the best way we can honor Muhammad Yunus is to say, Yes, he
deserves the Nobel Prize for helping so many women cope with poverty.
His boosters discredit this great honor and engage in hyperbole when
they claim he has invented a new compassionate form of
capitalism—social capitalism, or “social entrepreneurship”—that will
be the magic bullet to end poverty and promote development.