Indonesia | Economics

Friday, October 13, 2006

The two 2006 Nobel Prizes in Economics

To my delight, this year, the Nobel Prize committee acknowledged two contributions in economics. We found out the first, Edmund Phelps, early last week. By the end of the week, the second one was announced. It's for Bangladeshi Muhammad Yunus, shared with the poor's bank that he founded, Grameen Bank. This second Nobel is in the form of the Nobel Peace Prize.

I think this is a well-deserved prize. For all his work's brilliance, Yunus will never get a Nobel Prize in economics... because, instead of dabbling in theory, he went for the practical.

He, and many financial economists, knew the theory — that the barrier to opening access to financing for the poor is the high monitoring cost from the so-called "principal-agent problem". But nobody thought of using the watchful eyes of fellow poor borrowers to solve this problem. His solution — made concrete in his microfinancing scheme to tightly-knit women-managed groups (instead of individuals) — allowed the poor to access the opportunity to better their lives.

I think it was quite a stretch for the Committee to select Yunus for the Nobel Peace Prize, but nonetheless it brings me joy. This decision signals the Committee's acknowledgment, not only of Yunus's significant contribution to poverty alleviation, but also of the fact that peace is more than just the absence of war.

PS: While we are talking about financial innovation, I've just acquired two books on financial market liberalization and development: Mishkin's The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich and Rajan and Zingales's Saving Capitalism from the Capitalists.

Reading them, I am becoming more and more convinced that financial sector development is key to poverty alleviation, and that careful but accelerated financial liberalization is urgent. Here is why, from Mishkin:
[The] only way for poor countries to get rich is for them to provide incentives for capital (including capital devoted to health care and education) to be supplied to its most productive uses.

Update: Here is an article from M. Yunus on why microfinance, courtesy of Greg Mankiw.

Update (17/10): Apparently, it's not the first time the Nobel Peace Prize committee stretched its definition of "peace", with odder winners in the past.


  • Correct if I'm wrong, but is this the first time the Nobel committee gave a the nobel peace prize for poverty alleviation as opposed to conflict resolution? This is a huge stretch for the committee, too bad for SBY though:D

    By Anonymous Pasha, at 10/14/2006 10:01:00 pm  

  • Pasha,
    SBY will have to wait for another 20-30 years, and ‘simply’ come up with a strategy – not many, but one that has proven to alleviate poverty or empower the poor :). Yunus completely deserves the prize: Grameen Bank’s system is a beauty!

    By Blogger Dewi Susanti, at 10/15/2006 01:36:00 am  

  • Dewi,

    I agree with you. I'm just being sarcastic about SBY:) I mean, Yunus clearly deliver results, ingeniously I might add.

    By Anonymous Pasha, at 10/15/2006 02:18:00 pm  

  • Dewi,
    Brokering lasting peace in Aceh is an achievement worth recognizing, so we should not take it for granted.

    Although, the difficult question is: Who deserves it? SBY? Yusuf Kalla? GAM? The former Finland president? Or, as suggested by Tim Noah in Slate, the tsunami?

    By Blogger Arya, at 10/15/2006 05:27:00 pm  

  • Mas Arya, the key is, I think, an easy access to the financial credit for the poor or SME's. Yunus smartly replaced the role of commercial bank. Something do not happen yet in Indonesia although the scheme is there.

    How about the role and function of brokers or middle man in villages (giving a credit). They do almost the same with Yunus but with a high interest?

    By Anonymous Thamrin, at 10/16/2006 09:43:00 pm  

  • Mas Thamrin,
    I agree, but I think it must go beyond just that.

    Both Yunus-type financial sector and formal financial sector for everyone must be pushed forward. We often think that only the former is good for the poor, but as I blogged here, the latter is equally important.

    As for the financial intermediaries (or the so-called "renteneer"), I think it's about time we appreciate the service they provide: Access to (expensive) credit is certainly better than no access.

    On the other hand, in poorest regions, these renteneers can become more than just money-lenders, because of the monopoly they often have over capital combined with possible collusion with village leaders. This is what has been giving renteneers a bad name.

    By Blogger Arya, at 10/16/2006 11:34:00 pm  

  • I think the same too Arya, that even tsunami could be rewarded for a nobel. Try really hard not to laugh for a thought that SBY even wishes for that prize.

    By Anonymous random walker, at 10/18/2006 11:03:00 pm  

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