Neoclassical Economics and Grameen Bank Free Essays

string(132) " This work is a fundamental rethink on the economic relationship between the rich and the poor, their rights and their obligations\." NEOCLASSICAL ECONOMICS Neoclassical is the most widely taught form of economics in the present world, making it to be the primary take on modern day economics. In a nutshell, neoclassical economics makes an approach to economics that relates supply and demand to an individual’s rationality and his or her ability to maximize utility or profit. Neoclassical economic has also increased the use of mathematical equations in the study of various aspects of the economy. We will write a custom essay sample on Neoclassical Economics and Grameen Bank or any similar topic only for you Order Now While Economic theory tries to explain how scarce resources are allocated to given and alternative ends with an approach that considers these elements as extra-economic ones. The more conceptual framework of the main schools of economic theory is the Neoclassical economics, Austrian economics, Evolutionary economics and others are based on an insufficient understanding of anthropology and this fact limits their explanatory capacity. In the understanding of neoclassical economic theory, the basic tools are elaborated under the following assumptions: (1) The neoclassical individual (consumer and producer) is defined as a given option structure. (2) All the â€Å"means and ends† considered have an equivalent monetary expression. 3) The only channel of communication between individuals is prices. 4) All the social relations and social ambits are considered as market exchange transaction. Concept of Microcredit and Grameen Bank Poverty is one of the vital problems of the third world countries, and to elevate poverty microcredit has become the most popular approach to address this undesirable phenomenon. According to Jonathan Murdoch, Chairman of UN Expe rt Group on Poverty Statistics, â€Å"Microcredit stands as one of the most promising and cost-effective tools in the fight against global poverty. Based on three C (character, capacity and capital ) this model, perceived more than a quarter century ago in Bangladesh, is now being pursued around the globe. In spite of this popularity, there is skepticism about the model’s ability to make â€Å"major dent in the two poverty situation†. These criticisms, however, seem just as weak as the arguments supporting the model. One apparent reason is that both the claims and criticism are founded on the same theoretical perspective of neoclassical economics. The word â€Å"microcredit† did not exist before the seventies. In today’s world microcredit refers to the agricultural credit, or rural credit, or cooperative credit, or consumer credit, credit from the savings and loan associations, or from credit unions, or from money lenders. Microcredit data are compiled and published by different organizations. They are the Number of poor borrowers, and their gender composition, loan disbursed, loan outstanding, balance of savings, etc. under each of these categories, country wise, region wise, and globally. These sets of information will tell us which category of microcredit is serving how many poor borrowers, their gender break-up, their growth during a year or a period, loans disbursed, loans outstanding, savings, etc. simultaneously, Grameen credit is based on the premise that the poor have skills which remain unutilized or under-utilized. It is definitely not the lack of skills which make poor people poor. Grameen believes that the poverty is not created by the poor; it is created by the institutions and policies which surround them. In order to eliminate poverty all we need to do is to make appropriate changes in the institutions and policies, and/or create new ones. Grameen believes that charity is not an answer to poverty. It only helps poverty to continue. It creates dependency and takes away individual’s initiative to break through the wall of poverty. Unleashing of energy and creativity in each human being is the answer to poverty. Grameen Bank brought credit to the poor, women, the illiterate, and the people who pleaded that they did not know how to invest money and earn an income. Grameen created a methodology and an institution around the financial needs of the poor, and created access to credit on reasonable term enabling the poor to build on their existing skill to earn a better income in each cycle of loans. The process of breaking up the vicious cycle of poverty through microcredit is elaborated below: At first a small group of five people is made where only two are granted with a loan. Depending on their performance in repayment the next two borrowers can then apply and, subsequently, the fifth number as well. The assumption is that if individual borrowers are given access to credit, they will be able to identify and engage in viable income-generating activities – simple processing such as paddy husking, lime-making, manufacturing such as pottery, weaving, and garment sewing, storage and marketing and transport services. Women were initially given equal access to the schemes, and proved not only reliable borrowers but astute entrepreneurs. As a result, they have raised their status, lessened their dependency on their husbands and improved their homes and the nutritional standards of their children. Today over 90 percent of borrowers are women. The percent of women members throughout 2002 to 2003 was within close proximity of the 95% mark, from 2004 to 2005 is 96%, in 2006 is 97% and in 2007 it remain same i. e. , 97%. Graph: Percent of Women Members in Grameen Bank. â€Å"If we can come up with a system which allows everybody access to credit while ensuring excellent repayment – I can give you a guarantee that poverty will not last long. † -Nobel Laureate Professor Muhammad Yunus. Founder of the Grameen Bank- Dr. Yunus has set up a ground breaking world record and today has become known throughout the world. Grameen bank’s microcredit program has been replicated in nearly every country. Since October 2006, when Professor Yunus and Grameen Bank jointly received the Nobel Peace Prize, this in interest has grown manifold. Muhammad Yunus’s vision is the total eradication of poverty from the world. ‘Grameen’, he claims, ‘is a message of hope, a program for putting homelessness and destitution in a museum so that one day our children will visit it and ask how we could have allowed such a terrible thing to go on for so long’. 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. Up to 2003, the number of members was 3. 13 million. In 2007, this figure stood at 7. 41 million. It represents an increase of 137. 25% from 2003 to 2007 and an average annual growth of 27. 45% during the year period. Graph: Growth of Membership Credit is the last hope left to those faced with absolute poverty. That is why Muhammad Yunus believes that the right to credit should be recognized as a fundamental human right. It is this struggle and the unique and extraordinary methods he invented to combat human despair that Muhammad Yunus recounts here with humility and conviction. It is also the view of a man familiar with both Eastern and Western cultures on the failures and potential for good of industrial countries. It is an appeal for action: we must concentrate on promoting the will to survive and the courage to build in the first and most essential element of the economic cycle – man. Initially starting on Bangladesh, microcredit system develops its helping flow to almost 43 countries, included U. S. Naming as Grameen America, the bank’s entry into the US, its first in a developed market, comes as mainstream banks’ credibility has been hit by the mortgage meltdown and many people are turning to fringe financial institutions offering loans at exorbitant interest rates. â€Å"It’s actually supposed to help those below a certain poverty line who are looking for self-employment as a route out of poverty. says Raj Desai of the Brookings Institution, U. S. ’s one of the top public policy making organizations. CRITICISM OF MICROCREDIT AND GRAMEEN BANK The microcredit system is really a blessing for the developing country. It deals directly with the poor population of the country. But the microcredit movement does have critics, who say that, some lending programs charge excessive interest rates. Also, there is concern that funding for microcre dit programs will be diverted from other needed programs such as health, water projects and education. Credit programs may enable poor people to improve their situation, but they do not eliminate the need for other basic social and infrastructure services. Some other problems that have been reported with microcredit: * Turning a profit on the loan * Inability to reach the poorest of the poor * Microcredit dependency * Durability of poverty reduction Turning a profit on the loan One of the most fundamental problems with microcredit programs is the difficulty involved in actually turning a profit on the loans. In the first place, borrowers must bear not only the cost of the loan but also interest payments. Since, the interest rate is too high, they have to payback more amount than they had borrowed. Moreover, investments may not turn a profit. In this event the money to repay the loan must come from reduced consumption or borrowing from some other source, usually on worse terms. Inability to reach the poorest of the poor A second important drawback to microcredit programs is that they don’t reach the poorest members of the society. To quote, â€Å"the poorest have a number of constraints (fewer income sources, worse health and education, etc) which prevent them from investing the loan in high-return activity† The same report also writes that â€Å"there appears to be a growing consensus that moderate-poor micro-credit borrowers benefit more than extremely poor borrowers. † The reasons for this are clear. The poorest need tiny loans which are not cost effective even for microcredit programs. The poorest also place the greatest demands on microcredit a training program, which makes the cost of lending even higher. As microcredit programs are pressured to become more self-sufficient, the incentive to lend to such desperately poor borrowers evaporates. (Mayoux, 1997)   Ã‚  Ã‚   This is a major problem for microcredit programs. Although they are raising some people out of poverty and keeping some people from further poverty, they do not appear to be reaching the people who need assistance the most. In fact, such programs may even be increasing the chasm between the poorest and the rest of society. This is clearly a failure for programs whose avowed purpose is to narrow the gap between rich and poor, and rise up the poorest members of society. Micro credit dependency Another possible failure of microcredit programs lies behind seemingly benign statistics. Some researchers have proposed the idea that the high repayment rates, repeated borrowing, and low drop-out rates indicate a dependency on microcredit programs rather than an attraction to successful microcredit programs on the part of poor borrowers. Many borrowers have no alternative to borrowing from microcredit programs, and consequently cannot afford to default. Neither can they afford to stop borrowing or drop-out of the programs. There is nowhere else for them to go. In order to stay in good standing with the microcredit program, borrowers may even be forced to resort to pawnbrokers or other alternate sources of funding. Furthermore, unless borrowers can increase their incomes they may become permanently dependent on microcredit lending . This a very real possibility as was noted above. Again this is a significant failure, as many microcredit programs tout themselves as more progressive alternatives to the existing systems of informal credit which have caused so many problems in poverty stricken areas (systems such as share cropping, debt bondage, and so on). The chances of microcredit programs’ becoming just another form of debt-based oppression is real and must be addressed before microcredit programs can progress much further. And yet it has hardly been discussed up to this point. Durability of Poverty Reduction A related problem is the durability of poverty reduction. Infusions of cash in almost any amount are bound to have some effect on the poverty stricken borrowers. But this does not necessarily mean that the effect will be permanent. The poverty reductions may be rolled back in two ways. First of all, borrowers may use loans for consumption purposes which result in a momentary increase in living standards, but which must be paid for by cuts in future consumption. Secondly, borrowers must make a net profit on their investments. Otherwise, as noted above, they may become dependent on the creditor programs. Even if they do not become dependent on microcredit lenders, they will still have failed to improve their economic position. Again, this would be a failure of microcredit lenders to achieve their goals. Diverted from Other Needs There is concern that funding for microcredit programs will be diverted from other needed programs such as health, water projects and education. Credit programs may enable poor people to improve their situation, but they do not eliminate the need for other basic social and infrastructure services. CRITICISM OF GRAMEEN BANK Negative sides Many people do not appreciate Grameen Bank’s policies. They it’s a money making policy of Dr. Muhammad Yunus. Some critics strongly criticized Grameen bank’s excessive interest rates. It charges simple interest rate of 20% a year, compared with compound interest of 13-16% at Bangladesh’s commercial banks. Sudhirendar Sharma of New Delhi writes that the effect of the Grameen strategy has not been to reduce poverty but only to create a debt trap for borrowers, who are being charged very high rates of interest relative to conventional banks. Jeffrey Tucker says, â€Å"Microcredit basically bunkum and it won’t work at all without the help of massive grants, I believe Yunus has most probably been swindling money! † Even, it has attracted criticism from the present prime minister of Bangladesh, Sheikh Hasina, who commented, â€Å"There is no difference between usurers [Yunus] and corrupt people. Hasina touches upon one criticism of Grameen Bank: the high rate of interest that the bank demands from those seeking credit. Similar to all microfinance institutes, the interest charged by Grameen Bank is higher compared to that of traditional banks, as Grameen’s interest (reducing balance basis) on its main credit product is about 20%. Another source of criticism is that of t he Grameen’s Sixteen Decisions. Critics say that the bank’s Sixteen Decisions force families and borrowers to abide by the rules and regulations set forth by the bank. The bank is very strict about their loan recovery. There are even allegations that they do not consider natural calamities like floods that may prevent repayment of loans quickly. Particular examples include the large number of loan defaults following the flood in 1998. Furthermore, many critics doubt the continued sustainability of the venture, citing the need for large government investment in the program. Positive sides There is no denial that Grameen Bank has changed the rural life of Bangladesh dramatically. Those people who were unable to borrow money from the Agricultural Bank, now easily get money from Grameen bank. On the other hand we can say, it has helped to improve the agriculture of Bangladesh. The poor people are taking the benefit of the small loans. It brings a vital change in the life of the Bangladeshi rural women. In Bangladesh the women were treated badly. But now, Grameen bank has changed their life significantly. Study shows that total number of borrowers’ is 4. 76 million and 96% of those are women. Grameen bank offers some exciting loans at 0% interest rates. Such as: * Higher Education Loan: Interest is 0% i. e. no interest is charged while students are studying. A 5% is charged as service charge after graduation. This scheme allows children of our members to obtain higher education in various fields like healthcare, engineering enabling them to finish their honours and masters degrees. * Struggling Member Program: This special program is designated for beggars, charging 0% interest. As of December 2006, about 90,000 beggars have received loans under this program. * Village Centre Construction Loan: Members take this loan for constructing local village centers. No interest is charged i. e. , interest rate is zero. Having some problems, although, Grameen bank is helping to improve the economic condition of Bangladesh. It’s impossible to eradicate poverty overnight, but so far the process of micro credit is handling the economic condition very well. CONCLUSION Thus, the question that must be raised with respect to eradicating poverty from the Third World is whether microcredit can contribute toward removing the constraints that limit individuals’ liberty. In the current development discourse, this issue is discussed under the category of â€Å"good governance†. It seems obvious that microcredit promoters can hardly challenge the vested interests, which are responsible for producing poverty in the Third World. The second Microcredit Summit (a campaign led by Dr. Yunus himself) to be held next year should seriously take into consideration this point. For the exaggeration of microcredit’s role and success in poverty reduction is apparently driving away society and policy makers’ attention from the real factors causing pervasive poverty in the Third World. Do the activities of the Grameen Bank and other micro-lenders romanticize individual struggles to escape poverty? Yes. Do these programs help some women â€Å"pull themselves up by the bootstraps†? Yes. Will micro-enterprises in the informal sector contribute to ending world poverty? Not a chance. Bibliography 1. Hossain, Mahabub (1988): â€Å"Credit for the Alleviation of Rural Poverty: The Grameen Bank in Bangladesh. † Washington, D. C. : IFPRI, Research Report No. 65. 2. Morduch, Jonathan and Barbara Haley (2001): â€Å"Analysis of the Effects of Microfinance on Poverty Reduction. † NYU working paper. http://www. nyu. edu/wagner/public_html/cgi-bin/workingPapers/wp1014. pdf 3. â€Å"Past Five Years of Grameen Bank. 2008. Grameen Bank. 5 Aug 2009 http://www. grameen-info. org/index. php? option=com_contenttask=viewid=530Itemid=609. 4. Yunus, Muhammad. Creating a World Without Poverty. 1st. New York: Public Affairs, 2007. 5. Brue, Stanley L. The Evolution of Economic Thought. 6th. New York: Harcourt College Publisher, 2000. 6. McConnell, Campbell, Stanley Brue, and Tom Bar biero. Microeconomics. 11th Canadian Edition. McGraw-Hill Ryerson, 2007. 7. Olivier Jean Blanchard (1987). Neoclassical Synthesis, â€Å"The New Palgrave: A Dictionary of Economics†, v. 3, pp. 634-36. . â€Å"Grameen Bank. † Wikipedia, The Free Encyclopedia. 5 Aug 2009, 20:45 UTC. 5 Aug 2009 http://en. wikipedia. org/w/index. php? title=Grameen_Bankoldid=306275868. 9. â€Å"Neoclassical economics. † Wikipedia, The Free Encyclopedia. 31 Jul 2009, 21:21 UTC. 31 Jul 2009 http://en. wikipedia. org/w/index. php? title=Neoclassical_economicsoldid=305342372 10. Bouman, F. A. J. â€Å"The design of microfinance policies and programmes. † The WWW Virtual Library Microcredit and Microfinance. 1989. Web. 5 Aug 2009. http://www. gdrc. org/icm/concept. html. How to cite Neoclassical Economics and Grameen Bank, Papers