Tragic Commons No More
THIRTY WOMEN CROWDED into the parlor of the tiny, concrete block home typical of the neighborhood. Chairs were scarce and babies howled but soon the commotion died down for the meeting to begin. “I pledge to strive to increase my income, to use the profits from my loan to pull my family out of poverty,” the participants recited in unison. In reply, two women, rising from a bank ledger at the front of the room, pledged to help the poor improve their livelihood and to “accept nothing, not even a glass of water from the members.” The language was Ilongo, the village was Bacolod in the Philippine island of Negros, and the gathering a weekly meeting of Project Dungganon, a bank for the poor. The women came to make their weekly loan repayment, to put a peso in their group fund for emergencies, to discuss how to help any member close to default, and to assess loans to new borrowers.
One of those present, Caonisa Esmayan, first came to the bank when her fisherman husband fell sick, making her the family’s sole breadwinner. With a $33 loan from Project Dungganon she invested $20 in a pig and the balance in a noodle stall. While the pig was fattening, her noodle stall profits met her weekly debt servicing payments. Four months later, the pig went to market where Caonisa sold it for $40, earning enough profit to add stools and an awning to her stall and a spacious verandah to her dilapidated house. After a year, with the revenues from her noodle stall alone, Caonisa paid off her first loan and set about planning for a second loan. With a 100 per cent repayment record and a growing list of clients across Negros (over 700 women after just one year of operation), Project Dungganon symbolizes a banking revolution sweeping the Third World.
The revolution began in 1976 with Muhammad Yunus, an economics professor at the University of Chittagong in Bangladesh. Unable to convince bankers that the survival skills of the poor made them excellent credit risks, Professor Yunus took out a personal loan and started lending to them himself in an experiment that in 1983 became the Grameen Bank.
Within a decade Grameen became a fully fledged bank, primarily owned by its borrowers, who invested in shares from their accumulated savings. The Grameen Bank today has branches in more than 25 per cent of Bangladesh’s 65,000 villages, a staff of 8,000, and 800,000 borrowers whose quarter of a billion dollars in loans have been paid back at a 98 per cent repayment rate. Grameen-type banks have sprung up throughout Asia, Africa, and Latin America, and Dr. Yunus now hosts central bank governors and officials from international aid agencies eager to support similar banking systems.
The Grameen Bank taps peer pressure and peer support to ensure accountability. Would-be borrowers must form groups of five, of which only two may borrow at a time. These two must repay the loan — average size $60 — in 50 equal weekly installments at commercial interest rates. If one member of the group fails to keep up payments, all five are labeled bad risks and cut off from further loans. That way, says Dr. Yunus, the pressure to repay the money comes not only from the bank but also from fellow villagers, who guard against any tendency to invest frivolously, and have an incentive to help a group member in trouble.
Some accuse the Grameen Bank of standing banking principles on their head: the bank gives loans without collateral, doesn’t require guarantors, prefers women clients, lends to illiterates as long as they can sign their name, and forsakes fancy offices for the dusty doorsteps of the village poor. But Dr. Yunus mocks conventional bankers and their blame-the-poor logic that denigrates poor people’s skills and reliability as investors:
We are not standing on our head. We are the right way up. It is conventional banking which is upside down…. You will be told with 100 per cent certainty that the poor have to be trained before they can do anything. The poor cannot budget, they cannot save. It is useless to offer anything to poor women, they have no skills. The influence of religion and custom is so strong that they cannot move an inch in any direction.
Quite the contrary, contends Dr. Yunus: “The poor have skills or they wouldn’t have been able to survive. All you have to give them is access to capital. Most of them can take it from there.”
In a part of the world known for monumental investment disasters, where the international commercial banks are lucky to recover half their loans and state banks require frequent bail-outs, the Grameen’s repayment record is exemplary. With its pint-size loans to investments in everything from sewing machines to candy vendor carts, this Third World bank ranks among the most successful in the world. And the successes it finances — the tangible, self-selected investments that the Third World’s poor choose for themselves — have an economic reach and impact unmatched by the billion-dollar megaprojects of the international financiers.
Traditional savings and lending systems have existed in societies everywhere for as long as human beings have made investments. While many have been abusive and unfair, like the notorious money-lending practices that entrap borrowers in a debt-bondage relationship akin to slavery, many systems have been accountable, fair, and successful at bringing savers and investors together to their mutual advantage.
In Africa, such financial institutions — whose activities go unrecorded in the national economic statistics — have thrived out of the limelight of ribbon-cutting ceremonies that glamorize state vanity projects. A system of rotating funds — known as susu in Ghana, sanduk in the Sudan, and tontines in Somalia — generally involves neighbors, fellow workers, or relatives. Nigeria’s version, adichi, means “system of traditional cooperation among friends” and also “bring, bring.”
In adichi, each member alternatively acts as a saver and borrower. Salaried workers tend to make monthly deposits, rural workers deposit weekly when they go to market, and city women who work in the markets deposit daily. Members commit to depositing a fixed amount — a salaried worker might decide on 100 nairas a month for 12 months — which, along with everyone else’s deposits, is then lent out to borrowers. When the salaried worker needs money, he can receive up to the 1,200 nairas he had committed to depositing.
In most rotating savings associations, members meet regularly to conduct business: to determine the amounts to be contributed by each, to collect the agreed deposits, and sometimes to decide priorities for disbursing loans. The order of rotation might be determined by seniority, election, drawing lots, negotiation, auction, or the urgency of a member’s need — but in every case by common consent.
Many associations set aside some savings for a common insurance fund to cover emergencies and social services. Others operate social insurance systems. In Ethiopia’s edirs, members make periodic contributions that entitle them to benefits in the event of death or sickness, loss of job, or arbitrary imprisonment.
Still other associations operate like savings banks, participants entrusting their savings to a treasurer for a fixed period. The funds are then lent, earning interest, to members or non-members for ceremonial expenses, for food and clothing in times of distress, and for consumer durables such as cars and appliances.
Traditional lending practices also finance small businesses needing to invest in income-generating purchases such as trucks or grain-grinding mills, and they facilitate international trade by bringing together foreign exchange earners — exporters or citizens working abroad — with importers who require foreign exchange. In Somalia, much of the import-export business and foreign exchange remittances are channeled through such mechanisms.
These small-scale Third World financial systems are commons, but manageable ones. Because borrowers depend on each other, they ensure a high degree of honesty, vigilance, and caution in individual borrowings and investments. The result is a healthy financial system in which pacta sunt servanda — the creed of honoring all contracts so cherished by bankers — reigns. Delinquent though Third World governments may be, their citizens have proved worthy of triple-A credit ratings.
The tragedy of the commons is a tragedy of scale. Commons — in which rights are often informal and self-policed, and where price alone doesn’t govern resource use — exist everywhere. Family members manage their own affairs — sharing goods, chores, and incomes — generally without benefit of market incentives, generally with a great deal of security that their interests will be respected. Within many corporations, resources will be shared: people are generally trusted to use the photocopier prudently, and to incur only necessary expenses.
But when the scale enlarges, the system must adapt or become unmanageable: peer pressure and other forms of self-policing no longer ensure accountability. The more distant the relative, the more formal family relations become. Companies become bureaucracies, enforcing discipline through policies, rules, and regulations: photocopies are tracked and billed, operating divisions make their own investment and have their own budgets, and internal markets may be created to control costs.
Enlarge the scale to a national economy — magnify it many million-fold — and the management problems become overwhelming, too overwhelming to handle without decentralized decisionmaking, just laws, and just law-making procedures upholding societally held values. Attempts to manage national economies centrally by directing an ever larger share of investments through ever more regulations from ever larger bureaucracies — as occurred throughout the Third World — culminated in collapse.
Because people everywhere partake in activities large and small, public and private, their communal property and private property must both be protected. Third World entrepreneurs, needing to finance ventures too large for traditional lending associations, and distrusting their countries’ unpoliced and politicized financial institutions, took their capital and left, or languished with it, or joined in looting the national commons by using it for bribes. But if assured of the integrity of their financial systems, entrepreneurs would have put their capital to more productive use, generally keeping it in the home market that they knew best. When in need of financing, they would have tapped large-scale capital markets, both at home and abroad.
Nearly a decade after the Mexican debt crisis began in 1982, the country’s new-found confidence was performing miracles: Mexican entrepreneurs were bringing back their flight capital from abroad, large-scale privatizations of state-owned enterprises were underway, a North American free-trade agreement was being negotiated, and Mexico’s free-wheeling stock market was among the world’s strongest performers: the Bolsa index — the Mexican Dow Jones equivalent — was up 250 times over its levels in the early 1980s, and trading became so active that the stock exchange’s hours were extended.
The largest stock on the Mexican exchange — the newly privatized telephone and telecommunications company, Telmex — was among the star performers, almost doubling in price when the government decided to give up its majority stake. On the strength of a business plan promising to increase the number of telephone lines by 12 per cent over the next four years, ordinary Mexicans, Telmex employees, and a consortium of Mexican investors and foreign telephone companies snapped up the new issue.
Outside the Mexican stock exchange, Telmex in 1991 listed its shares on the New York Stock Exchange. The issue, oversubscribed by about 50 per cent with over a billion shares sold, was the largest international equity issue ever made by a Third World company and, next to a Fiat issue, the largest in the world. Telmex also arranged Mexico’s largest voluntary borrowing in the international markets since the 1982 debt crisis: $570 million in credit arranged by Citibank and backed by future receivables from long-distance calls, not by the national treasury.
Telmex isn’t alone among Third World companies to turn to the private international capital market: companies from the Philippines and Singapore preceded it, as had Chile’s telephone company, the first Latin American company with a U.S. offering in 27 years. So high was confidence in Compañía de Teléfonos de Chile (CTC) — privatized in 1987 — that its share offering, listed on the New York Stock Exchange, was oversubscribed fourfold. Having capitalized on foreigners, CTC is now tapping Chile’s own wealthy pension funds, aiming to triple telephone services by 1996 to 1.6 million lines and more than 2 million telephones.
Third World enterprises don’t need sovereign guarantees to finance their expansion plans, but they do need sound business plans that can meet the test of scrutinizing markets: Telmex’s issue was thought to be the most intensively researched market stock in the world. Reputable investors will flee from any hint of corruption, but give them a company with transparent operations and a sound balance sheet in a country whose government provides a regulatory and legal environment in which contractual obligations can be enforced and property rights respected, and they will invest freely, without coercive government attempts to keep capital at home.
With Mexico’s new and empowering economic policies, Mexicans are now investing their savings in their own economy. The country no longer needs to borrow on the foreign market because its needs can be met domestically, as Miguel Mancera Aguayo, the director-general of Mexico’s Central Bank was pleased to announce in 1991. The previous year, Mexico had cut its banking debt by $15 billion, or 22 per cent, and the claims on Mexico amounted to $29 billion, about half of the amount owed in 1985.
The financial commons — the free-for-all in which rights were not respected and rules could change arbitrarily and at any time — is ending in Mexico; where it ends, prosperity begins.
THE ENVIRONMENTAL COMMONS will take more time to right itself: damaged ecologies cannot be restored with the same speed as damaged economies. But the same factors empowering people to protect their economies can work to protect their environments too.
Thailand’s age-old muang faai water management system, beleaguered and almost destroyed by invasions of development experts who came to bring development to the millions living in the country’s northern riverine communities, was threatened by more than the new concrete weirs that the Royal Irrigation Department installed. As in Indonesia and other countries, the central government appropriated the forests from the communities that had managed them sustainably, handing them to concessionaires who quickly deforested them.
Branches, logs, and other debris from the logging operations soon clogged the streams, rendering the farmers’ traditional irrigation systems useless, leading to crop failure and sometimes to starvation. Deforestation also triggered tragic mudslides that buried villages and farmland under meters of logs, uprooted trees and sand, and killed hundreds.
The worst of the environmental horrors may become a thing of the past. The muang faai communities — seeing their neighbors’ lands razed and their neighbors impoverished — organized and demanded rights to their land, becoming the vanguard of political change in Thailand. Following two decades of petitions, demonstrations, and legal actions, the central government gave in. In 1989, for the first time, it recognized a local community’s right to forests on nationalized land. At the same time, it revoked concessions by banning commercial logging throughout the country. The concessionaires’ claim to the commons had ended; control over the environment had come closer to those with an interest in maintaining it.
The commons may reappear in Thailand; its governments have not been stable, nor have they had a long tradition of democracy.
But democracy is on the rise throughout the Third World. Most Latin American juntas have disappeared; the totalitarian regimes in Asia are teetering; even the strong men of Africa are abandoning their one-man dictatorships. Replacing these are newly ascendant democracies, fledgling and struggling, but able to draw from indigenous traditions. Where democracy and accountability are on the rise, so will the unmanageable commons, and all of its consequences, be on the decline.
But democracy, too, can be a commons, and unmanageable if its citizens do not vigilantly protect its very underpinnings: protection for all the rights of all its members, and respect for due process of law.
FORGIVING DEBTS on humanitarian grounds, while compelling because of the plight of the Third World’s poor, can only redound to everyone’s sorrow. Asking Western taxpayers to relieve both lenders and borrowers — as do all the bailout plans — will only breed cynicism and feed a deadbeat stereotype of the Third World. Third World elites will learn that corruption pays, and devise new means to borrow anew. The banks, receiving bailouts, will learn that they need not act like banks, need not preoccupy themselves with the stability and legitimacy of those to whom they’re lending, since taxpayers will backstop them should worst come to worst. First and Third World leaders will continue to sacrifice their taxpayers’ pocketbooks and their environments to pet projects or to the exigencies of staying in power.
The Third World should repudiate its debts, not through appeals to charity but by recourse to due process of law. Declaring debts odious will compel the lenders — in order to recover some of the billions they’ve lost — to seek redress by suing, pursuing and, where possible, seizing the booty of the unrepresentative Third World elites which borrowed so recklessly in the name of their people. In so doing the lenders will be discouraging future elites from similar behavior.
More importantly, declaring debts odious will force lax lenders to be accountable for their mistakes, and ensure that they are never again repeated.
Sources and Further Commentary
The story of the Project Dungganon, and of Caonisa Esmayan, comes from “Reproducing Success — Grameen Travels Abroad” by Helen Todd, Third World Network Features, 700/90, based in Malaysia. This news syndication service is provided by the Third World Network, a grouping of organizations and individuals working on Third World and development issues.
Dr. Yunus, founder of the Grameen Bank, has become a legend in his own time. For sources of quotations, and for further information on the Grameen bank revolution see the following: “Novel bank serves poor of Bangladesh” by Susan Delacourt, in The Globe and Mail, Toronto, October 15, 1986; “Bank lending to Bangladesh poor a trail-blazer” by David Stewart-Patterson, in The Globe and Mail, Toronto, July 9, 1987; “Your bank just roared past in a cloud of dust” by Kristin Helmore, in The Christian Science Monitor, U.S., January 25-31, 1988; “The Grameen Bank,” transcript of an interview with Dr. Yunus, on IDEAS, Canadian Broadcasting Corporation, March 5, 1991; “Micro-loans to the world’s poorest” by Clyde H. Farnsworth, in The New York Times, February 21, 1988; “Loans help tiny Third World businesses thrive” by Robert Brehl, in Toronto Star, March 31, 1991; “For Bangladeshi Banker, Credit is a Basic Human Right” by Halinah Todd, in Development Forum, New York, November-December 1989.
The Grameen Bank has many publications as well, including:Grameen Dialogue, a newsletter published by the Grameen Trust, Bangladesh; Participation As Process by Andreas Fuglesang and Dale Chandler, Grameen Bank, 1988; and The Grameen Bank’s Annual Report, which lists loans for everything from blacksmithing, cart repairing, maddy latrine construction, well digging and rubber stamp making to napkin weaving.
Grameen Bank equivalents are springing up all over the Third World. See “Third World debt that is almost always is (sic) paid in full” by Brent Bowers, in The Wall Street Journal, June 9, 1991.
Details on traditional African lending systems come from Sub-Saharan Africa: From Crisis to Sustainable Growth, The World Bank, Washington, D.C. 1989. The system described in Nigeria comes from personal communication with Kole Shettima, a political science graduate student in Toronto.
For details of Mexico’s booming economy see the following articles by Matt Moffett in The Wall Street Journal : “Long-sickly Mexico has investment boom as trade hopes grow,” May 24, 1991; “Mexican conglomerate cuts costs and learns there’s life after debt,” July, 26, 1991; “Mexico boosts role of private investment,” July 12, 1990; also see “Finance Minister of the Year” in Euromoney, U.K., September, 1990.
For more information on the Mexican stock market see Mexico Service, A Publication of International Reports, vol. 11, no. 8, New York, April 10, 1991 and vol. 11, no. 2, January 16, 1991. For considerable detail on the privatization of Telmex (and other privatizations) see Mexico Service, going back to December 14, 1989. For further information on Telmex’s credit arrangement with Citibank see Mexico Service, vol. 11, no. 4, February 13, 1991; “Carnival Time Again For Latin Borrowers” in Euromoney, U.K., September 1990.
For details of how privatizations of state enterprises are lowering budget deficits, see Mexico Service, vol. 10, no. 24, November 28, 1990 and vol. 11, no. 5, February 27, 1991; “Mexico’s Telmex rings up a first” by Linda Sandler, in The Globe and Mail, Toronto, June 10, 1991.
For an indication of the investment optimism in other Third World countries, including Chile, see “Looking for a Bigger Market” by E. Guthrie McTigue, in Global Finance, New York, September 1990; “Smart Money Goes South,” by Melvyn Westlake, in Risk, vol. 4, no. 1, London, December 1990-January 1991.
For Mexico’s Central Bank Executive Director’s quotation see “Mexico’s borrowing position” in The Globe and Mail, Toronto, June 11, 1991.
An excellent source that describes the grassroots movement to reclaim community forests and lands in Thailand is “National Assessment Study on Environment in Thailand” by W. Permpongsacharoen, Project for Ecological Recovery and A. Usher, The Nation, Bangkok.