An Economist also Won the Nobel Peace Prize

Last week the Nobel Peace Prize was awarded to Muhammad Yunus, who is actually known for his advances in applying economics to helping developing nations. Yunus is known for starting a microfinance organization called Grameen Bank, which gives loans to individuals in developing nations (Grameen operates in Bangladesh).

Here is a basic explanation:
One of the obstacles faced by individuals and families in developing nations is that they have a difficult time obtaining loans (for consumption or starting and running a small business, etc.). Two of the reasons why it is difficult is that poor families do not have anything to offer a collateral, and it is not cost-effective for larger banks to offer such small loans. Since they have no collateral to offer, banks have no way of ensuring repayment.

Yunus started a bank based on the fact that individuals in developing nations have strong social bonds that could be used as a type of collateral. He took advantage of these strong social bonds by having the lenders apply together in groups. If one person in the group defaults on their loan, then everyone in the group is responsible for the loan. Therefore, the bank uses social pressures (the borrower not wanting to let down or burden their peers) as a way to enforce repayment.

The bank has been incrdeibly successful and has a very high repayment rate. Overall, Yunus and Grameen Bank are an example of helping developing nations by helping them build their own economies and their own markets instead of forcing western models upon them or just throwing foreign aid money at the problem.