Nobel Peace Prize-winning economist Muhammad Yunus outlines his vision for a new business model. Yunus, the founder and managing director of Grameen Bank, a pioneer of microcredit, an economic movement that has lifted millions of families out of poverty, analyzes the ability of business to tackle social problems from poverty and pollution to inadequate health care. An excerpt from Chapter 1 of "Creating a World Without Poverty," titled, "A New Kind of Business."
Since the fall of the Soviet Union in 1991, free markets have swept the globe. Free-market economics has taken root in China, Southeast
Asia, much of South America, Eastern Europe, and even the former
Soviet Union. There are many things that free markets do extraordinarily well. When we look at countries with long histories under capitalist systems—in Western Europe and North America— we see evidence of great wealth. We also see remarkable technological innovation, scientific discovery, and educational and social progress.
The emergence of modern capitalism three hundred years ago made possible material progress of a kind never before seen. Today, however—almost a generation after the Soviet Union fell—a sense of disillusionment is setting in.
To be sure, capitalism is thriving. Businesses continue to grow, global trade is booming, multinational corporations are spreading into markets in the developing world and the former Soviet bloc, and technological advancements continue to multiply. But not everyone is benefiting. Global income distribution tells the story: Ninety-four percent of world income goes to 40 percent of the people, while the other 60 percent must live on only 6 percent of world income. Half of the world lives on two dollars a day or less, while almost a billion people live on less than one dollar a day.
Poverty is not distributed evenly around the world; specific regions suffer its worst effects. In sub-Saharan Africa, South Asia, and Latin America, hundreds of millions of poor people struggle for survival.
Periodic disasters, such as the 2004 tsunami that devastated regions on the Indian Ocean, continue to kill hundreds of thousands of poor and vulnerable people. The divide between the global North and South— between the world’s richest and the rest—has widened.
Some of the countries that have enjoyed economic success over the past three decades have paid a heavy price, however. Since China introduced economic reforms in the late 1970s, it has experienced rapid economic growth, and, according to the World Bank, over 400 million Chinese have escaped poverty. (As a result, India has now become the nation with the largest population of poor people, even though China has a bigger overall population.)
But all of this progress has brought with it a worsening of social problems. In their rush to grow, Chinese officials have looked the other way when companies polluted the water and air. And despite the improved lot of many poor, the divide between the haves and have-nots is widening. As measured by technical indicators such as the Gini coefficient, income inequality is worse in China than in India. Even in the United States, with its reputation as the richest country on earth, social progress has been disappointing. After two decades of slow progress, the number of people living in poverty has increased in recent years.1 Some forty-seven million people, nearly a sixth of the population, have no health insurance and have trouble getting basic medical care. After the end of the Cold War, many hoped for a “peace dividend”—defense spending could decline, and social programs for education and medical care would increase. But especially since September 11, 2001, the U.S. government has focused on military action and security measures, ignoring the poor.
These global problems have not gone unnoticed. At the outset of the new millennium, the entire world mobilized to address them. In 2000, world leaders gathered at the United Nations and pledged, among other goals, to reduce poverty by half by 2015. But after half the time has elapsed, the results are disappointing, and most observers think the Millennium Goals will not be met. (My own country of Bangladesh, I’m happy to say, is an exception. It is moving steadily to meet the goals and is clearly on track to reduce poverty by half by 2015.)
What is wrong? In a world where the ideology of free enterprisehas no real challenger, why have free markets failed so many people? As some nations march toward ever greater prosperity, why has so much of the world been left behind?
The reason is simple. Unfettered markets in their current form are not meant to solve social problems and instead may actually exacerbate poverty, disease, pollution, corruption, crime, and inequality. I support the idea of globalization—that free markets should expand beyond national borders, allowing trade among nations and a continuing flow of capital, and with governments wooing international companies by offering them business facilities, operating conveniences, and tax and regulatory advantages. Globalization, as a general business principle, can bring more benefits to the poor than any alternative. But without proper oversight and guidelines, globalization has the potential to be highly destructive.
Global trade is like a hundred-lane highway criss-crossing the world. If it is a free-for-all highway, with no stoplights, speed limits, size restrictions, or even lane markers, its surface will be taken over by the giant trucks from the world’s most powerful economies. Small vehicles— a farmer’s pickup truck or Bangladesh’s bullock carts and human-powered rickshaws—will be forced off the highway.
In order to have win-win globalization, we must have fair traffic laws, traffic signals, and traffic police. The rule of “the strongest takes all” must be replaced by rules that ensure that the poorest have a place on the highway. Otherwise the global free market falls under the control of financial imperialism. In the same way, local, regional, and national markets need reasonable rules and controls to protect the interests of the poor. Without such controls, the rich can easily bend conditions to their own benefit. The negative impact of unlimited single-track capitalism is visible every day—in global corporations that locate factories in the world’s poorest countries, where cheap labor (including children) can be freely exploited to increase profits; in companies that pollute the air, water, and soil to save money on equipment and processes that protect the environment; in deceptive marketing and advertising campaigns that promote harmful or unnecessary products.
Above all, we see it in entire sectors of the economy that ignore the poor, writing off half the world’s population. Instead, businesses in these sectors focus on selling luxury items to people who don’t need them, because that is where the biggest profits are.
I believe in free markets as sources of inspiration and freedom for all, not as architects of decadence for a small elite. The world’s richest countries, in North America, Europe, and parts of Asia, have benefited enormously from the creative energies, efficiencies, and dynamism that free markets produce. I have devoted my life to bringing those same benefits to the world’s most neglected people—the very poor, who are not factored in when economists and business people speak about the market. My experience has shown me that the free market—powerful and useful as it is—could address problems like global poverty and environmental degradation, but not if it must cater solely and relentlessly to the financial goals of its richest shareholders.
Is government the answer?
Many people assume that if free markets can’t solve social problems, government can. Just as private businesses are devoted to individual profit, government is supposed to represent the interests of society as a whole. Therefore, it seems logical to believe that large-scale social problems should be the province of government. Government can help create the kind of world we all want to live in. There are certain social functions that can’t be organized by private individuals or private organizations—national defense, a central bank to regulate the money supply and the banking business, a public school system, and a national health service to ensure medical care for all and minimize the effects of epidemics. Equally important, government establishes and enforces the rules that control and limit capitalism— the traffic laws. In the world economy, rules and regulations concerning globalization are still being debated. An international economic regulatory regime has yet to fully emerge. But on the national and local levels, many governments do a good job of policing free markets. This is especially true in the industrialized world, where capitalism has a long history and where democratic governments have gradually implemented reasonable regulatory systems.
The traffic laws for free markets oversee inspection of food and medicine and include prohibitions against consumer fraud, against selling dangerous or defective products, against false advertising and violation of contracts, and against polluting the environment. These laws also create and regulate the information framework within which business is conducted—the operation of stock markets, disclosure of company financial information, and standardized accounting and auditing practices. These rules ensure that business is conducted on a level playing field. The traffic laws for business are not perfect, and they are not always enforced well. Thus some companies still deceive consumers, foul the environment, or defraud investors. These problems are especially serious in the developing world, with its often weak or corrupt governments. In the developed world, governments usually perform their regulatory tasks reasonably well, although starting in the 1980s, conservative politicians have taken every opportunity to undermine government regulations.
However, even an excellent government regulatory regime for business is not enough to ensure that serious social problems will be confronted, much less solved. It can affect the way business is done, but it cannot address the areas that business neglects. Business cannot be mandated to fix problems; it needs an incentive to want to do so.
Traffic rules can make a place for small cars and trucks and even rickshaws on the global economic highway. But what about the millions of people who don’t own even a modest vehicle? What about the millions of women and children whose basic human needs go unmet? How can the bottom half of the world’s population be brought into the mainstream world economy and given the capability to compete in the free market? Economic stop signs and traffic police can’t make this happen.
Governments have long tried to address these problems. During the late Middle Ages, England had Poor Laws to help those who might otherwise starve. Modern governments have programs that address social problems and employ doctors, nurses, teachers, scientists, social workers, and researchers to try to alleviate them.
In some countries, government agencies have made headway in the battle against poverty, disease, and other social ills. Such is the case with overpopulation in Bangladesh, which is one of the world’s most densely populated countries, with 145 million people in a land area the size of Wisconsin. Or, to put it another way, if the entire population of the world were squeezed into the area of the United States of America, the resulting population density would be slightly less than exists in Bangladesh today! However, Bangladesh has made genuine progress in alleviating population pressure. In the last three decades, the average number of children per mother has fallen from 6.3 in 1975 to 3.3 in 1999, and the decline continues. This remarkable improvement is largely due to government efforts, including the provision of family planning products, information, and services throughclinics around the country. Development and poverty-alleviation efforts by nongovernmental organizations, or NGOs, as well as Grameen Bank have also played an important role.
Governments can do much to address social problems. They are large and powerful, with access to almost every corner of society, and through taxes they can mobilize vast resources. Even the governments of poor countries, where tax revenues are modest, can get international funds in the form of grants and low-interest loans. So it is tempting to simply dump our world’s social problems into the lap of government and say, “Here, fix this.”
But if this approach were effective, the problems would have been solved long ago. Their persistence makes it clear that government alone does not provide the answer. Why not?
There are a number of reasons. One is that governments can be inefficient, slow, prone to corruption, bureaucratic, and self-perpetuating. These are all side effects of the advantages governments possess: Their vast size, power, and reach almost inevitably make them unwieldy as well as attractive to those who want to use them to amass power and wealth for themselves. Government is often good at creating things but not so good at shutting them down when they are no longer needed or become burdens.
Vested interests—especially jobs—are created with any new institution.
In Bangladesh, for example, workers whose sole job was to wind the clocks on the mantelpieces of government administrators retained their positions, and their salaries, for many years after wind-up clocks were superseded by electrical timepieces.
Politics also stands in the way of efficiency in government. Of course, “politics” can mean “accountability.” The fact that groups of people demand that government serve their interests and put pressure on their representatives to uphold those interests is an essential feature
of democracy. But this same aspect of government sometimes means that progress is thwarted in favor of the interests of one or more powerful groups. For example, look at the illogical, jerry-rigged, and inefficient health-care system in the United States, which leaves tens of millions of people with no health insurance. Reform of this system has so far been impossible because of powerful insurance and pharmaceutical companies.
These inherent weaknesses of government help to explain why the state-controlled economies of the Soviet era ultimately collapsed.
They also explain why people around the world are dissatisfied with state-sponsored solutions to social problems.
Government must do its part to help alleviate our worst problems, but government alone cannot solve them.
The contribution of nonprofit organizations
Frustrated with government, many people who care about the problems of the world have started nonprofit organizations. Nonprofits may take various forms and go under many names: not-for-profits, nongovernmental organizations, charitable organizations, benevolent societies, philanthropic foundations, and so on. Charity is rooted in basic human concern for other humans.Every major religion requires its followers to give to the needy. Especially in times of emergency, nonprofit groups help get aid to desperate people. Generous assistance from people within the country and around the world has saved tens of thousands of lives in Bangladesh after floods and tidal waves.
Muhammad Yunus, a native of Bangladesh, was educated at Dhaka University and was awarded a Fulbright scholarship to study economics at Vanderbilt University. In 1972 he became head of the economics department at Chittagong University. He is the founder and managing director of Grameen Bank, a pioneer of microcredit, an economic movement that has helped lift millions of families around the world out of poverty. Yunus and Grameen Bank are winners of the 2006 Nobel Peace Prize.