While Bangladesh’s new “caretaker,” Muhammad Yunus, has been widely recognized for pioneering the field of microfinance, mainstream economics has largely dismissed insights from this development model as folksy, feel-good anecdotes. But there is reason to think that they are much more than that.
CAMBRIDGE – “Economics is a meaningless subject,” Muhammad Yunus, the Nobel Peace Prize winner, microfinance pioneer, and rogue economist toldTime magazine a few months ago. Little did he realize that he would soon have an opportunity to demonstrate what he meant. Following the ouster of Bangladesh’s authoritarian prime minister, Sheikh Hasina, earlier this month, Yunus was chosen to lead the country’s caretaker government.
Founded in 1971 after a bloody war of independence, Bangladesh is an unlikely candidate to be a poster child for development, given its exploding population and acute vulnerability to natural disasters. Yet by the 1990s, it had a credible claim to this title. When many other developing countries were being suffocated by the neoliberal Washington Consensus, Bangladeshi figures like Yunus (with his Grameen Bank) and Fazle Hasan Abed (the founder of the anti-poverty nonprofit BRAC) were leveraging a third tool beyond the state and the market: civil society.
Working as a young development scholar in Bangladesh in the early 2000s, I witnessed these pioneering NGOs’ early work firsthand. They sought solutions not on the blackboard but in the field, creating a global petri dish for innovations in development. As one of my interviewees put it, Bangladesh was “the Wall Street of development.”
Like the real Wall Street, however, Bangladesh’s model ran into trouble around 15 years ago, when Hasina returned to power (she had previously served as prime minister from 1996 to 2001). The leader of the secular Awami League and the daughter of Bangladesh’s “founding father,” Mujibur Rahman, Hasina was originally seen as a symbol of democracy. But her tenure took an alarming turn toward authoritarianism and rampant corruption, and matters finally came to a head this summer, when she tried to order a violent crackdown against peaceful student protesters.
This year’s unrest was a reaction not only to Hasina’s repressive politics, but also to her economic policies. To be sure, rapid GDP growth and infrastructure improvements gave Bangladesh a reputation as an economic “miracle.” But Hasina had clamped down on the very civil-society organizations that had put Bangladesh on the development map in the first place. She was especially contemptuous of Yunus, whom she called a “bloodsucker.” After driving him out of his position as the head of Grameen Bank in 2011, her government pursued various trumped-up legal charges against him.
Hasina’s own economic strategy was to take a page out of the conventional development-economics playbook. To harness export-led growth, she positioned Bangladesh as a low-cost manufacturing hub for garments. With staggeringly low wages and minimal regulation, the country became the world’s fast-fashion sweatshop.
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One consequence of this strategy was that there were very few employment opportunities for college graduates outside of government jobs, which are allocated through a corrupt, nepotistic quota system. It was this system – along with high inflation and other lingering effects from the pandemic – that triggered the summer protests.
Now that the revolutionary youth have furnished Yunus with an unprecedented degree of influence on the national and international stage, Bangladesh’s development credentials face a big test. Was the civil-society-centric “Bangladesh model” always just a quirky aberration from neoclassical economics and its policy prescriptions, or does it represent a genuine challenge?
As I have documented elsewhere, microfinance’s big innovative breakthrough lay in providing loans without the kinds of economic or legal guarantees (such as collateral and binding contracts) that conventional economics insists are necessary. Contrary to what the textbook perspective would predict, microfinance institutions (MFIs) around the world report repayment rates of well over 90%.
While Yunus was widely recognized for his role in introducing one of the most important development interventions of the past few decades, I have long suspected that the psychological insight at the center of the microfinance model could reshape our thinking more broadly.
Rather than assuming that borrowers (mostly poor women in Bangladeshi villages) were utility-maximizing “rational actors” for whom repayment would be irrational in the absence of coercion, MFIs took a chance on them. And instead of targeting individuals, MFIs lent to groups of five or so women. Since individuals are almost always embedded in groups, the logic of this approach is obvious. Yet intra-group dynamics remain notoriously undertheorized in economics (where households and firms are the main decision-making agents and units of analysis).
By taking this approach, MFIs create social cohesion within the recipient groups, which generally hold regular meetings and public repayment rituals, thereby eliciting prosocial behavior from all participants. As I have noted in work contrasting India’s SKS Microfinance with Grameen Bank’s track record, it is these social-reinforcement mechanisms, rather than the economic incentives, that underpin the model’s success.
Another valuable insight from microfinance is that it is important to get group size right, which in this case generally means keeping groups small. While theorists like Leopold Kohr and E.F. Schumacher made this point in the past, mainstream economists remain obsessed with economies of scale (bigger is always better).
Having been replicated in more than a hundred countries, the Bangladeshi microfinance model is distinctive for having been incubated in, rather than imported into, the Global South. This provenance makes it well suited to the cultural context in which it operates. For example, since borrowers in heavily rural, agriculture-based economies generally find it difficult to access banking services, microfinance bankers have recognized the need to go out to the villages.
Mainstream economics has largely dismissed the insights from microfinance as folksy, feel-good anecdotes. But in a new project, in collaboration with a team of scientists, I explore the potentially profound significance of “social preferences” in economic arrangements.
Could an institution designed to engage individuals’ “instinctual” rather than “deliberative” system elicit systematically different behavior? What if we start with the assumption of a prosocial economic agent, rather than a selfish, atomistic one? What if we reconfigure our networks to make them more cooperative? Perhaps we could avert economics’ self-fulfilling prophecy of a tragedy of the commons. If we stop “crowding out” our intrinsic goodness, perhaps we can build what Samuel Bowles calls a “moral economy.”
One hopes that Yunus can help steer Bangladesh away from being the world’s sweatshop, and back toward serving as the world’s laboratory for human development and social progress. At a time when many are debating what comes after neoliberalism, the “banker to the poor” can help imbue economics with the real-world experience and spirit of innovation it so sorely needs.
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CAMBRIDGE – “Economics is a meaningless subject,” Muhammad Yunus, the Nobel Peace Prize winner, microfinance pioneer, and rogue economist toldTime magazine a few months ago. Little did he realize that he would soon have an opportunity to demonstrate what he meant. Following the ouster of Bangladesh’s authoritarian prime minister, Sheikh Hasina, earlier this month, Yunus was chosen to lead the country’s caretaker government.
Founded in 1971 after a bloody war of independence, Bangladesh is an unlikely candidate to be a poster child for development, given its exploding population and acute vulnerability to natural disasters. Yet by the 1990s, it had a credible claim to this title. When many other developing countries were being suffocated by the neoliberal Washington Consensus, Bangladeshi figures like Yunus (with his Grameen Bank) and Fazle Hasan Abed (the founder of the anti-poverty nonprofit BRAC) were leveraging a third tool beyond the state and the market: civil society.
Working as a young development scholar in Bangladesh in the early 2000s, I witnessed these pioneering NGOs’ early work firsthand. They sought solutions not on the blackboard but in the field, creating a global petri dish for innovations in development. As one of my interviewees put it, Bangladesh was “the Wall Street of development.”
Like the real Wall Street, however, Bangladesh’s model ran into trouble around 15 years ago, when Hasina returned to power (she had previously served as prime minister from 1996 to 2001). The leader of the secular Awami League and the daughter of Bangladesh’s “founding father,” Mujibur Rahman, Hasina was originally seen as a symbol of democracy. But her tenure took an alarming turn toward authoritarianism and rampant corruption, and matters finally came to a head this summer, when she tried to order a violent crackdown against peaceful student protesters.
This year’s unrest was a reaction not only to Hasina’s repressive politics, but also to her economic policies. To be sure, rapid GDP growth and infrastructure improvements gave Bangladesh a reputation as an economic “miracle.” But Hasina had clamped down on the very civil-society organizations that had put Bangladesh on the development map in the first place. She was especially contemptuous of Yunus, whom she called a “bloodsucker.” After driving him out of his position as the head of Grameen Bank in 2011, her government pursued various trumped-up legal charges against him.
Hasina’s own economic strategy was to take a page out of the conventional development-economics playbook. To harness export-led growth, she positioned Bangladesh as a low-cost manufacturing hub for garments. With staggeringly low wages and minimal regulation, the country became the world’s fast-fashion sweatshop.
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At a time when democracy is under threat, there is an urgent need for incisive, informed analysis of the issues and questions driving the news – just what PS has always provided. Subscribe now and save $50 on a new subscription.
Subscribe Now
One consequence of this strategy was that there were very few employment opportunities for college graduates outside of government jobs, which are allocated through a corrupt, nepotistic quota system. It was this system – along with high inflation and other lingering effects from the pandemic – that triggered the summer protests.
Now that the revolutionary youth have furnished Yunus with an unprecedented degree of influence on the national and international stage, Bangladesh’s development credentials face a big test. Was the civil-society-centric “Bangladesh model” always just a quirky aberration from neoclassical economics and its policy prescriptions, or does it represent a genuine challenge?
As I have documented elsewhere, microfinance’s big innovative breakthrough lay in providing loans without the kinds of economic or legal guarantees (such as collateral and binding contracts) that conventional economics insists are necessary. Contrary to what the textbook perspective would predict, microfinance institutions (MFIs) around the world report repayment rates of well over 90%.
While Yunus was widely recognized for his role in introducing one of the most important development interventions of the past few decades, I have long suspected that the psychological insight at the center of the microfinance model could reshape our thinking more broadly.
Rather than assuming that borrowers (mostly poor women in Bangladeshi villages) were utility-maximizing “rational actors” for whom repayment would be irrational in the absence of coercion, MFIs took a chance on them. And instead of targeting individuals, MFIs lent to groups of five or so women. Since individuals are almost always embedded in groups, the logic of this approach is obvious. Yet intra-group dynamics remain notoriously undertheorized in economics (where households and firms are the main decision-making agents and units of analysis).
By taking this approach, MFIs create social cohesion within the recipient groups, which generally hold regular meetings and public repayment rituals, thereby eliciting prosocial behavior from all participants. As I have noted in work contrasting India’s SKS Microfinance with Grameen Bank’s track record, it is these social-reinforcement mechanisms, rather than the economic incentives, that underpin the model’s success.
Another valuable insight from microfinance is that it is important to get group size right, which in this case generally means keeping groups small. While theorists like Leopold Kohr and E.F. Schumacher made this point in the past, mainstream economists remain obsessed with economies of scale (bigger is always better).
Having been replicated in more than a hundred countries, the Bangladeshi microfinance model is distinctive for having been incubated in, rather than imported into, the Global South. This provenance makes it well suited to the cultural context in which it operates. For example, since borrowers in heavily rural, agriculture-based economies generally find it difficult to access banking services, microfinance bankers have recognized the need to go out to the villages.
Mainstream economics has largely dismissed the insights from microfinance as folksy, feel-good anecdotes. But in a new project, in collaboration with a team of scientists, I explore the potentially profound significance of “social preferences” in economic arrangements.
Could an institution designed to engage individuals’ “instinctual” rather than “deliberative” system elicit systematically different behavior? What if we start with the assumption of a prosocial economic agent, rather than a selfish, atomistic one? What if we reconfigure our networks to make them more cooperative? Perhaps we could avert economics’ self-fulfilling prophecy of a tragedy of the commons. If we stop “crowding out” our intrinsic goodness, perhaps we can build what Samuel Bowles calls a “moral economy.”
One hopes that Yunus can help steer Bangladesh away from being the world’s sweatshop, and back toward serving as the world’s laboratory for human development and social progress. At a time when many are debating what comes after neoliberalism, the “banker to the poor” can help imbue economics with the real-world experience and spirit of innovation it so sorely needs.