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Paper Title: Fighting Third World Poverty: Comparing the World Bank and the Grameen Bank to Find Solutions

Written by Jessica Albon
Submitted to Professor Klimova
GS 450: Portfolio Project, Research Paper

Note: You may wish to visit the glossary for this paper

Pull Quote: Poverty is a growing problem in the third world. What can be done to eliminate poverty?

In their 1996 Human Development Report, the United Nations reported that worldwide 70 developing countries saw their incomes drop below levels from the '60s and '70s in 1996 (Porter and Sheppard, 13-14). Theirs is not the only report that describes increasing economic problems in the third world. In fact, the Center for Economic and Policy Research (CEPR) offers evidence in their report, "The Emperor Has No Growth," that the economies of many third world nations have stagnated or shrunk. Between 1960 and 1980, Latin America's per capita GDP increased by 75%, but between 1980 and 1998, it grew only 6%, the report reveals. The report also explains that in sub-Saharan Africa, where per capita GDP grew 36% from 1960 to 1980, it actually declined by 15% during the second eighteen years. It seems relatively clear, then, that poverty is a growing third world problem. The question then becomes: What shall be done to eliminate or reduce poverty? This paper will attempt to answer this question by first observing how two well-known organizations are attempting to dissolve third world poverty and then offering a solution of its own.

The first of the two organizations to be studied, the World Bank, seeks to encourage economic development by pursuing unrestrained capitalism and making significant loans to member countries. The second of these organizations, the Grameen Bank makes micro-credit loans to individuals. The World Bank believes a country cannot prosper without physical infrastructure and the size of the loans made reflect this. On the other hand, the Grameen Bank believes an individual cannot prosper without financial support, empowerment, and education. The World Bank and the Grameen Bank could scarcely be more opposite in their approaches and thus seem like good institutions to compare for a well-rounded observation of efforts to eradicate poverty.

To compare these organizations and offer a solution, this paper will take the following structure. First, each of the organizations will be introduced separately with respective histories presented, missions discussed, and the opposition considered. Second, the organizations will be compared so that the reader may better see the similarities and differences. Third, the problem of third world poverty and the approaches of these institutions will be analyzed. Finally, after comparing these institutions, considering their opposition, and examining their records in the third world, a possible solution to the problem of third world poverty will be presented.

Heading: The Limitations of this Paper

In its exploration of the potential solutions to third world debt offered by both the World Bank and the Grameen Bank, this paper makes certain assumptions. First, it assumes that eliminating poverty for all is a worthwhile goal. Second, it takes for granted that a nation must strengthen its economy (whether that economy is formal or informal [activities not taxed or supervised by the government]) in order to eradicate poverty. While these assumptions may be a mark of oversimplification, and may indeed be inaccurate, they seem necessary in order to address the efforts of the World Bank and Grameen Bank in the third world. In an effort to comply with space and time constraints, this paper will work within these definitions and hopes the reader will forgive any omissions that may occur as a result.

 

 

Acronyms: IMF: International Monetary Fund; IBRD: International Bank for Reconstruction and Development; IDA: International Development Association; IFC: International Finance Corporation; MIGA: Multilateral Investment Guarantee Agency; ICSID: International Centre for Settlement of Investment Disputes


Heading: The World Bank: What it Is, What it Does

Created by the Bretton Woods conference of 1944, the World Bank (initially the IBRD), began with 44 member nations (The World Bank). Member nations believed "global development requires the full convertibility of currencies in addition to free trade" and thus established both the World Bank and the International Monetary Fund (IMF) to make loans to member nations and establish a currency standard (determining also that the US dollar, linked to a gold standard, would be the principal currency) (Porter & Sheppard, 368-69).

Today, the World Bank has five agencies (the IBRD, IDA, IFC, MIGA, ICSID) that offer loans to the members of the World Bank. By making these loans, they attempt to: "fight poverty with passion and professionalism for lasting results[;] [and,]…help people help themselves and their environment" (The World Bank). They believe this mission is best accomplished by loaning developing countries large sums of money for governmental projects that are designed to provide resources and build capacity (such as power plants). They also believe that by encouraging the third world to rely on first world businesses (as is often required for these large projects because third world industries typically lack the training and technology necessary) will strengthen worldwide bonds between the first and third world. World Bank loans come with hefty terms in most cases however with typical terms including structural adjustment programs (SAPs) that limit governmental spending and eliminate barriers to trade such as tariffs and taxes (CorpWatch).

The World Bank's belief that the way the third world should develop is through trade and foreign investment is based on modernization theory. Philip Porter and Eric Sheppard explain modernization theory in their text, A World of Difference, a book that examines links between geography and current economic inequalities. They write that modernization theory holds that "all nations occupy positions on a spectrum running from 'traditional' societies at one extreme to 'modern' societies at the other, and that nations may move from the former to the latter group by adopting the characteristics of 'modern' societies" (Porter and Sheppard, 82). As proponents of modernization theory, the World Bank seeks to help the third world develop along a proscribed path similar to that which the first world traveled.

 

 

 

 

 

 

 

 

 

 

Can first world officials truly understand the poverty of the third world?


Opposition to the World Bank

Many believe, along with the World Bank, that modernization is the only way for the third world to escape poverty. Others, however, including Fifty Years is Enough (a grassroots organization that researches the impacts of the World Bank) believe that modernization means homogenization of the world's cultures and that such a limiting of diversity is undesirable. Fifty Years is Enough actually goes further, arguing that the World Bank's practices are intended to strengthen the economies of the first world, not the third.

By looking at the voting structure of the World Bank, it seems that there is grounds for suspicion. It would seem reasonable that in an organization that tries to strengthen the economies of the third world, each member nation would have an equal share of the vote. This would allow for all members to have an equal say in the use of money regardless of that member's contribution. In the World Bank, however, members cast votes according to the size of their monetary contribution to the bank. As a result, the G-7 (Britain, Canada, France, Germany, Italy, Japan, and the United States) holds 45% of the vote (CorpWatch).

Beyond the obvious inequality of 7 countries having 45% of the vote while 176 share the remaining 55%, critics contend that this division of votes may result in World Bank-supported projects that will result in increased revenue for first world countries and increased degradation of the third world (Fifty Years is Enough). They suggest the World Bank's large-scale projects often require expertise, supplies, and machinery that the third world cannot find domestically and must instead purchase from private companies in the first world. Another reason some criticize the World Bank is that the board members of the World Bank are from the first world and many question whether they can truly understand the cultures and needs of the third world. Criticisms abound that the World Bank simply does not understand poverty. In fact, their own officials acknowledge that $450 billion dollars in third world aid has left little "to show for the money except some grandiose infrastructure projects" (Skousen). Even the UN criticizes the World Bank's first world viewpoint. In the report, "Strategy for the Cross-Cutting Theme 'Eradication of Poverty, Especially Extreme Poverty,'" UNESCO writes,

Too often they [the World Bank and IMF] do not fully take into account the central role of education, the cultural dimension of development, gender equity, water and other natural resources, environmental considerations and governance arrangements… The ultimate goal must be the formulation of comprehensive country-owned strategies developed in a participatory and inclusive manner, together with other multi- and bilateral partners

 

 

 

 

 

 

 

 

Pull Quote: Borrowers from traditional "money sharks" often find themselves deeper in debt at the end of the loan.

 

Heading: The Grameen Bank: What it Is, What it Does

The Grameen Bank's origins are entirely different from the origins of the World Bank. The Grameen Bank was established by and individual instead of a mass of people. Thus, it seems less steeped in bureaucracy. Indeed, when Grameen Bank borrowers protested payment policies, those policies were immediately reconsidered (Pepall). The World Bank's policies are more difficult to change as they must pass through several layers of control. Additionally, the Grameen Bank's founder, Muhammad Yusuf, is a Bangladeshi himself. Thus he has a tie to the people of Bangladesh and is seen as less intrusive than an organization perpetuated by the first world. The Grameen Bank is more organic to the problems of the third world, having arisen from Yusuf's own observations of the culture and economic situation that surrounded him in Bangladesh. In 1983, Yusuf met Sophia Katoon, a Bangladeshi furniture maker who was deeply in debt to money sharks (Porter & Sheppard, 526). He gave her several dollars as a loan; within just a few months, her income increased seven fold, and she repaid the loan easily (Grameen Bank Introduction).

Today, the Grameen Bank continues to make such small loans to individuals who will use that money to create a better life for themselves and their families. By offering micro-credit loans for businesses and homes to the "poorest of the poor," the Grameen Bank has become something of a legacy in the micro-credit world. They require no collateral from their borrowers, but offer a significant improvement over the common lenders (often referred to as "money sharks") who generally charge interest rates so high that borrowers become even deeper in debt. Interest rates are higher than typical bank rates, however, as the bank maintains self-sufficiency and must charge enough interest to keep it solvent.

The Grameen Bank makes loans primarily to women (94% of borrowers are women) as they have found that the money made by women tends to have a more direct effect on the health and quality of life of the entire family, whereas men are more likely to spend their money on personal luxuries (Grameen Bank Introduction). Also, in keeping with their mission to serve the poorest of the poor, the Grameen Bank has recognized that women are more often marginalized than men and are less likely to have access to traditional credit (Ibid.).

In order to serve women without collateral, the Grameen Bank requires that prospective borrowers organize into groups of five. Of these five group members, only two are eligible to receive loans at a time (Grameen Bank Introduction). After one year, if both members have repaid their loans (which typically last fifty weeks), other group members become eligible for loans. If a loan is ever not repaid, the remaining members become ineligible. This group pressure ensures that loans are repaid on time. In fact, the Grameen Bank is able to boast of a 98% repayment rate as a result of these practices.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pull Quote: "there are still many borrowers who become vulnerable and trapped by the system. They are unable to succeed"


Heading: Opposition to the Grameen Bank

The Grameen Bank has been lauded by many world leaders, including then-United-States-President Clinton as the solution to world poverty. Because it developed in the third world, it is often looked upon more favorably than organizations that have been superimposed upon the third world. However, there are those who argue the Grameen Bank's efforts will not have long-term effects. While statistics provided by the Grameen Bank indicate that the average household income of those who have borrowed from the bank is approximately 50% higher than the average incomes found in their villages, some argue that micro-lending alone simply cannot eliminate poverty (Grameen Bank Introduction).

Indeed, it seems worthwhile to consider whether the empowerment of individuals is enough. The World Bank believes that infrastructure must be provided in order for an economy to prosper while the Grameen Bank seems to take an opposite approach. Surely lack of infrastructure holds back the borrowers of the Grameen Bank in many ways. While first world business owners would be able to take advantage of easy access to well-maintained roads, third world borrowers must face difficulty in transporting their products to markets. They also likely pay more for supplies as they are more expensive to deliver. Though such concerns may be entirely first worldly and may not affect the Grameen Bank's borrowers at all, it does seem relevant to consider the importance of infrastructure in economics.

Critics also contend that the Grameen Bank requires a certain cultural environment. In Bangladesh, women have great concern about their personal reputations and worry that people will gossip if they do not repay their loans. This seems to indicate that such a structure might not work in cultures that are more individualistic (concerned more with self than community) instead of tending towards the collectivistic (concerned more with community than self). In other areas of the world, including the United States, where group opinions are not such a concern, Grameen replications have been unsuccessful. Additionally, the Grameen Bank requires that the government support micro-enterprises within the informal sector. As informal economic activity is generally discouraged by more "modern" governments, Grameen reproductions may be unlikely in such areas (Buntin).

Another criticism of the Grameen Bank is that though the loans are almost always made to women, the women may not have control over these loans. According to Aminur Rahman, a University of Manitoba doctoral student who visited Bangladesh to study the Grameen Bank in 1994, "'there are still many borrowers who become vulnerable and trapped by the system. They are unable to succeed'" (qtd. in Pepall). He spoke with 120 female borrowers and found that 108 were told to pursue a Grameen Bank loan by men (generally a husband or brother) and that 72 of those loans were then used by men. Economic journalist Gina Neff also reports that women retained control over the businesses for which a loan was taken out only 37% of the time (Pepall and Neff). Rahman believes that while the Grameen Bank has an appropriate philosophy, in practice it has not been enough to empower women. In fact, in her article, "Bangladeshi Women and the Grameen Bank," Jennifer Pepall reports that men are more likely to abuse their wives, sisters, and daughters following loans from the Grameen Bank. This increase in violence, she says, often comes as a result of the politics surrounding the loans, because women may refuse to take out additional loans, or because a woman may refuse to use the money in the way that her husband, brother or father expects. Thus, though the Grameen Bank is largely lauded as an institution of empowerment, it may not have delivered on that promise just yet.

 

 

 

 

 

 

 

 

 

 


Heading: Comparing the World Bank and the Grameen Bank

These two institutions, the World Bank, and the Grameen Bank represent vastly different philosophies in lending. The World Bank prefers to work with governments while the Grameen Bank works only on an individual level (through small groups). While the World Bank makes loans of hundreds of millions of dollars, the Grameen Bank's average loan is about $100. The World Bank makes strict requirements for members borrowing funds, but the Grameen Bank doesn't care what the borrower does with the loan as long as it is paid back on time with interest (Stackhouse). According to Yusuf, founder of the Grameen Bank,

The World Bank wants to give the money, the experts, the ideas, everything. The only responsibility the World Bank wants to give the borrower is the blame when things go wrong. At Grameen, we follow the principle that the borrower knows best. We have the money. Our borrowers have the ideas (Ibid.).

It seems especially important to Yusuf that the ideas of the poor be given weight, that their views and opinions be validated. He works to empower them, not to change them or improve them. On the other hand, the World Bank seems to see itself as a kind of parent, ready to guide the third world to development. Though the World Bank does have the experience of leading first world economists shaping policy, it seems one-sided to believe that they can show the third world the only path to development.

 

 

 

Pull Quote: the world's 1.3 billion poor will have a long wait for help from the Grameen Bank; after twenty years, the bank has only 2 million members

One of the major differences between the World Bank and the Grameen Bank, aside from approach, involves money. In 1994, the World Bank's budget measured US$17 billion annually (Fifty Years is Enough). On the other hand, the Grameen Bank has managed to raise only a little over three billion dollars in the twenty years they've been giving loans (Grameen Bank Introduction). This three billion dollars that the Grameen Bank has raised has been used for loans, growth, and all the expenses that accompany the bank including staff and facilities. However, according to many accounts, the Grameen Bank has made a much more substantial difference. While the Grameen Bank has helped 54% of their borrowers rise above the poverty line, the World Bank has acknowledged that the world added 200 million impoverished people to the population between 1993 and 1998 (Grameen Bank Introduction & The Whirled Bank).

Because of their comparably small budget, the Grameen Bank does not have the resources to change the world as rapidly as the World Bank might be able to. Additionally, by insisting that the bank be self-sufficient, the Grameen Bank limits its annual growth. While this is a reasonable way to approach growth, it seems that the world's 1.3 billion impoverished citizens will have to wait a very long time to be helped by the Grameen Bank, as currently there are only a little more than 2 million members (Grameen Bank Official Website).


Heading: The Problem of Third World Poverty and a Potential Solution

In the last thirty years, the gap between the first world and the third has widened. Thus, the world sees such disparate GNPs as the $37,400 million of Luxembourg versus the $740 million of the Solomon Islands (they each had a population of approximately .4 million in 1995) (Porter & Sheppard, 9-13). Now that this paper has attempted to provide an overview of both the World Bank and the Grameen Bank as well as a comparison of each organization, it will work to examine what the attributes of each organization are and how those attributes might be combined to construct a reasonable solution to third world poverty. This paper will consider how the World Bank might consider the influence of the Grameen Bank and adapt its policies and structure in order to better empower and support the third world. Though this paper could just as easily consider how the Grameen Bank might expand its influence, it seems more practical to consider potential changes to the World Bank as the World Bank already has the financial support of nearly the entire world.

As has already been established, the World Bank has an enormous annual budget. It also is not required to be self-sufficient as the world supports it with financial contributions each year. Though the Grameen Bank's goal to be self-sufficient seems admirable, it also seems that eradicating poverty is such a demanding goal that it might be too much of a challenge to do both. The World Bank has the power and financial support of the world behind it. In order for the third world to readily find financial freedom, this power needs to be mobilized to aid the third world. By supporting localized programs that eradicated poverty on an individual level, it seems likely the World Bank would be able to effect change much more rapidly than the Grameen Bank is currently able on its own. In considering this idea, however, it is important to recognize that a key reason for the Grameen Bank's success is that Yusuf is from Bangladesh and constructed a program that would work with the area's unique culture. Each area is different and these differences must be considered by people who are intimately involved with these areas.

For these reasons, this paper proposes that the World Bank establish training centers in each of the third world countries to solicit feedback from individuals within these countries as to what programs they would find most beneficial. Next, a nation's leading economic figures might be called together to offer their opinions on each of these programs. The World Bank should restrict its role to only offer the financial support and perhaps also information resources to the third world that would help each nation develop its own plan of action.

 

Pull Quote: By focusing on individuals, the World Bank could engage each citizen, ensuring involvement on a most basic level.

By addressing the people of a nation and not the government of a nation, the World Bank would be much more likely to see results. By starting such programs on an individual level, the citizens of each nation would feel involved with the process and would have a more lasting commitment to that process. By discovering what the individuals of a nation want for their nation's future, the World Bank could take on the approach of the Grameen Bank-they would no longer tell anyone how to spend the money, but would rather provide support when needed.

Also necessary is a restructuring of the voting process of the World Bank. While it could be argued that it is primarily the first world's money and therefore they should decide how it is spent, this may not be the wisest way to use this money. The first world cannot possibly know what programs will work best in the third world and instead should follow Yusuf's example. In order to allow the third world this improved role, each country's vote should be equal and the board of directors of the World Bank should represent each country equally. The first world should realize that by empowering the third world to take control of the future, their money will be more secure and the third world will be more likely to be able to better participate in the world economy.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Heading: Conclusion

This paper has attempted to determine how poverty in the third world might be eradicated. In order to seek out such a solution, it first explored two highly influential financial organizations in the third world, the World Bank and the Grameen Bank. First their histories were examined, then their missions, and finally their approaches. Following this examination, this paper considered how the World Bank could more effectively evaluate the needs of the third world and thereby have a more significant impact. The World Bank currently focuses on entire countries as a unit instead of considering the individuals within those countries. As a result, the World Bank is not as effective at empowering the poor as it might be. The Grameen Bank, on the other hand, supports the poorest of the poor, enabling them to seek a future beyond poverty, however it lacks the financial and governmental resources of the World Bank.

By allowing the third world to take a more active role in their financial future, the World Bank would ensure that each country would be enabled to make its own decisions. Currently, the World Bank only loans money to countries and NGOs that agree to certain terms. The Grameen Bank, on the other hand, allows the poor to take such an active role in determining their own future and it seems likely that this allowance encourages the poor to accomplish the impossible. As Yusef has said himself, he cares only that borrowers repay their loans, not what they do with the money. Thus, the Grameen Bank encourages third world borrowers to make their own choices and determine their own course while the World Bank sees the first world's path as the only way to grow. The World Bank's philosophy is to build an infrastructure to support a growing economy, while the Grameen Bank's goal is to strengthen the economy from the individual upward.

 

Pull Quote: Merging the philosophies and goals of the two lending institutions would better serve the third world economy.

If the philosophies and goals of the two lending institutions could be merged and refined, the third world economy would be far better served. By encouraging the third world to follow individual paths to development, as does the Grameen Bank, instead of the dictates of the World Bank, sustainable development can be achieved. The World Bank has the resources of the entire world at its command. These resources should be used to make a difference in the world, to empower the poor. Currently, the World Bank has little to show for its huge investments of money and time, however, by becoming more sensitive to the local cultures of the countries they give loans to, they would likely see much improvement. Likewise, the Grameen Bank, for all its individual successes, has made little progress in eliminating world poverty. This is mainly due to their limited resources. Together, the two financial institutions could present a formidable opponent to third world poverty.

See Works Cited