Why rural economies must be built as independent economies?
Prof.Dr. Muhammed Yunus
2006 Nobel Barış Ödülü Sahibi
“Economic theory, in its broad and impatient brush, created a sector called
'informal sector' as a catch-all sector for those who could not yet enter the
formal sector.”
Economists always imagined urban economy as the engine of the economy. The
rural economy was assigned the role of supplier of labour and agricultural
inputs.
It may have had justification in the past, given the lack of basic
infrastructure in the rural areas. But not anymore. Although the world has
changed, the urban-rural relationship remains unchanged. Today's rural areas
are endowed with the same basic infrastructure as the urban centres. There is
no reason to keep the rural economy as an appendix to the urban economy, no
reason to send their labour as migrant labour to find livelihoods in the urban
centres. If the right institutions are built, and the right policies are
adopted, they can find their survival livelihoods around their home. The rural
economy must be built as a parallel economy, an independent economy to open up
opportunities for its own human and natural resources.
Informal Sector or Micro-Entrepreneur Sector
The corona crisis revealed many weaknesses of Indian economy - for example, the
helplessness of the people in the so-called 'informal sector'. They constitute
the majority of the workforce of India. We saw how earnings of the daily income
earners suddenly disappeared, how millions of migrant workers had no options
but to head for home thousand miles away, on foot.
Economic theory, in its broad and impatient brush, created a sector called 'informal
sector' as a catch-all sector for those who could not yet enter the formal
sector. It was a convenient way for the theory to keep these people out of
their theoretical sight, and move on with the exciting sector they call 'formal
sector'. The economic theory treats the informal sector as a waiting room
before getting entry into the world of economic activities - the formal sector.
They argue that the bigger the population in the waiting room, the less is the
capacity of the economy because the informal sector doesn't add any capacity to
the economy.
The job comes as the ticket to allow an individual from the informal sector to
enter into the formal world or the economic world. Economists feel their only
obligation to the informal sector is to create jobs. Since jobs are in the
urban centres, they found it justified to remain busy with the urban economy. That
made the informal sector and rural economy a largely forgotten part of
economics.
Working for creating Grameen Bank gave me the realisation that economic theory
interpreted the situation in a completely wrong way. I saw the informal sector
as the powerhouse of the economy. I felt terribly unhappy that because of gross
mis-conceptualisation by theoreticians, so much human creativity gets wasted
every moment.
This misconceptualisation is clearly reflected in the dismissive name they came
up with for this sector, the 'informal sector'. Another strange name they use
for this sector is the 'unorganised sector'. It appears funny to me because
economists, in the first place, refuse to make an effort to organise it, then
blame it by calling it an 'unorganised sector'.
We can divide the sector into two parts, a) one part consisting of wage earners
who sell their labour for a living, with traditional verbal contracts, and b)
the second part is made up with people making a living by petty trading, or
producing various products such as, handicrafts, household products, and
equipment, or by offering services.
I strongly feel that appropriate name for this sector should be 'Micro
Entrepreneur Sector', to reflect what happens inside this sector and to
recognise its entrepreneurial potentials. I see this sector as the creative hub
of the economy. It thrives with the natural energy of human beings. It is the
seed-bed of people's natural entrepreneurship. Many of the people in this
sector are making a living by informal wage jobs, primarily because they could
not find money to start a micro business.
Since economists abandoned the informal sector, micro-entrepreneurs remained
deprived of the attention of the policy-makers, political leaders, legislators,
and academics. On the other hand, with supports from academic and political
sides, the labour in the formal sector continued to attract the attention of
the governments around the world, which led to establishing Ministry of Labour
in every government. In the process, labour got dedicated institutions for
itself and achieved many legal and political rights. In India, after many
campaigns and struggles, some micro-entrepreneurs got recognition as formal
labour by claiming themselves to be 'self-employed labour'. Unfortunately, it
needed them to mis-categorise themselves as 'labour', to have access to some
rights.
COVID-19, revealed massively, how vulnerable the micro-entrepreneurs are in an
economy like India. It made it very urgent that the entire theoretical framework
is reviewed and corrected by recognising the 'micro-entrepreneur sector' and
bringing all the legal, political, social and financial support for this
sector. This sector should be recognised as the massive base of the national
entrepreneurship pyramid, which ranges from multi-billion-dollar entrepreneurs
at the peak, and multi-hundred-dollar micro-entrepreneurs at the bottom.
Viewing them as the base of the entrepreneurship pyramid of the country, it is
easy to recognise them as the most important emerging economic force, rather
than a burden on society. Then policy goals become easy to visualise.
These policy goals would be to support the
micro-entrepreneurs to achieve entrepreneurial successes by creating financial,
legal, and support institutions dedicated to addressing their needs and
problems.
The government can start by providing legal support. Existing rules and
procedures on how to register businesses, how to operate them within the limits
of legal boundaries, how to interact with the government agencies, how to
interact with tax authorities, etc., are all created by keeping large or medium-sized
businesses in mind. If micro-entrepreneurs are asked to comply with all these
laws and regulations, they'll be in a big crisis. These are way above their
heads. They'll have no other way but to go underground, or give up their
businesses and show up in the employment lines for their survival.
To avoid such a situation government may take a general decision that no
existing laws and regulations will apply to micro-entrepreneurs, the government
will make a separate set of rules and regulations specifically for
micro-entrepreneurs. To start the process government may start with making laws
and regulations to support micro-entrepreneurs, rather than taking away any
freedom they enjoy now. For example, the government may recognise them as a
special category of business with a given set of rights in operating their
businesses. The government may make it clear that only the laws and regulations
explicitly made for micro-entrepreneurs will apply to them, not the
pre-existing laws and regulations.
Create the Ministry of Micro-Entrepreneurs
A government traditionally has a Ministry of Labour headed by a full minister.
This displays the political and economic importance given to the labour. Under
the same logic, I see it very important to create a Ministry of Micro-Entrepreneurs
to provide the legal, institutional, and political support to the
micro-entrepreneur sector. After all, they constitute more than half the
population of the country who remained neglected and abandoned for no fault of
their own.
If a government is interested in building rural economy as a parallel economy,
in stopping the migration of youth to the urban centres, in the
industrialisation of rural areas by processing rural produce with rural labour,
and in integrating women and neglected segments of the society into the
mainstream economy, creation of this ministry will a powerful step and a clear
message to the rural areas.
Agency for Assisting Micro-Entrepreneurs
Parallel to creating new sets of laws and a regulatory system for micro-entrepreneurs,
the Ministry of Micro-Entrepreneurs can create a separate government agency
dedicated to helping the micro-entrepreneurs to deal with all government
offices and agencies. This newly created government agency, the 'Agency for
Assisting the Micro-Entrepreneurs', will be dedicated to making communication
between government and the micro-entrepreneurs very easy. This agency will
interpret the language of the government to the micro-entrepreneurs and vice
versa. It will protect the rights of the micro-entrepreneurs.
If any micro-entrepreneur or group of micro-entrepreneurs
have any problem with any government office or agency, or any entities -
government, or non-government, they will bring their issues to this office.
The responsibility of this agency is to resolve the problem
by protecting the interest of micro-entrepreneurs. The staff of this agency
should make themselves recognised as friends of micro-entrepreneurs.
This agency will also help micro-entrepreneurs to establish their 'Chambers of
Micro-Entrepreneurs' at various levels, local, district, state, and national
level, to interact, with other similar bodies, and the government.
Nobody Has to Leave the Place of Birth to Find Livelihood
The corona pandemic has brought a new opportunity for the whole world, to build
the world with a new beginning, to abandon what anything that stands on the way
to building a new economy and a new society, and introducing the new ideas and
concepts which will be the building blocks of the future. Turkey must not miss
this opportunity. Turkey needs to take very bold decisions to redesign the
economy and society.
Creating a people-centric economy must be the core of this programme. One core
goal of this redesigning programme must be to make sure that nobody - men,
women, youth, has to leave his or her place of birth to find a survival
livelihood. There should be enough opportunities for livelihood within walking
distance of one's own home.
Nobody should have a hardship to find financial resurce in order to become a
micro-entrepreneur and to take initiative. Financial institutions should be
standing by to support the entrepreneurship of all people. No young person has
to leave his/her villages to go to urban centres to pursue quality higher
education. In rural areas, the implementation of village institutes 2.0 which
has been implemented in the past of Turkey and served as a model for the World should
be relaunched. Academic institutions are already available in all cities of
Turkey in order to make sure rural people do not have to abandon their own
villages for quality healthcare and education. Art and vocational schools,
nursery and animal husbandry and agriculture schools should be built up in
rural areas of Turkey. They have to be done as a matter of policy and a matter
of right of the rural people.
Freeing the Micro-Entrepreneurs from Lack of Financial Resources
The moment we view the people in the informal sector as micro-entrepreneurs,
the scope for building new institutions emerges right away.
By building an appropriate financial system for the rural area, we can ignite
life at the base of the entrepreneurship pyramid. Finance is the basic fuel of
entrepreneurship. But fair financial services always remained far cry for the
micro-entrepreneurs. In the absence of any financial institution built for
them, they remain to be the prime meat for money lenders. Most of the
micro-entrepreneurs begin their entrepreneurial journey empty-handed. Their
entrepreneurial ventures start with financing from money lenders, and they can
hardly grow out of it because of the harsh conditionality of the loans.
Microcredit emerged as a big new support for them, but it could reach a small
part of the world as yet.
Recent Initiatives in India to Expand the Credit Horizon
India has worked on the goal of expanding the credit horizon for over the last
three decades by bringing access to credit to the financially challenged segments
of population, particularly rural women, through microfinance programmes. While
access to formal credit has improved significantly, it is still a long way to
go for the vast majority of micro-entrepreneurs to free themselves from money
lenders.
The number of borrowers under the Self-help Group (SHG) lending and the microfinance
institutions (MFI) put together is estimated to be about 85 million. Commercial
banks also work with MFIs as their channels for distributing priority sector
loans and other government schemes such as MUDRA (Micro-Units Development and
Refinance Agency) loans for micro-entrepreneurs.
Microfinance has to depend on loans from banks and equity from commercial
venture capital firms. The result is the high cost of lending to small ticket
borrowers and short duration of loans for their borrowers. Faced with the high
cost of funds, the return-seeking MFIs focus on the low-middle income segment
of the population. They added consumption loans in their portfolio to enhance
profitability, deviating from the objective of microfinance to concentrate on
income-generating loans. Being deprived of the permission to take a deposit,
the MFIs remained as agents of the financing institutions without having any
chance of ever becoming self-reliant institutions.
True Microfinance is a Social Business
In India, some MFIs were given a license to turn themselves into Small Finance
Banks. With the requirement of high capital requirement, it went to the hands
of profit-seeking investors. I always draw attention to the fundamental
features of a microfinance institution that we developed.
Basic elements in this financial institution are: a) it must be a social
business, b) dedicated to rural poorest - focusing on women, to support their
entrepreneurship, c) it will be based on banking without collateral, d) and it
will be a proper organization with deposit-taking power to make sure it remains
to be a financially self-reliant institution.
The social business part of microfinance is not only completely forgotten; many
microfinance institutions were created by enthusiastically promoting themselves
as highly profitable businesses. We created microfinance institutions to fight money
lenders but never thought a day might come when microfinance institutions
themselves may become the tool in the hands of traditional money lenders. This
abuse of the concept became quite widespread. We keep on drawing attention to
the difference between true microfinance institution and the wrong one by
insisting that a true microfinance institution must be designed and operated as
a social business.
Microfinance originated with Grameen Bank in Bangladesh by challenging the
banking system. It pointed out that the real reason for not lending money to
the poor by the banks, is not about the credit-worthiness of the people, as is
usually explained, it is the absence of people-worthiness of the banks.
Grameen Bank developed a daring concept of banking - banking without
collateral, defying the existing banking norms. This became known as
microcredit or microfinance. India adopted it and expanded to become the largest
microcredit programme in the world. Two basic features of microfinance are
missing in India: a) running it as a social business (i.e. as a business
without any intention to make a personal profit out of it by the
non-borrowers), and b) taking deposits. Now is an excellent time to integrate
these two features in the Indian microfinance world.
Will Microfinance in India survive COVID-19 Crisis?
Now corona crisis has given rise to a new question - can global microfinance
survive this massive crisis.
Given our experience in Bangladesh, the answer is a firm 'yes'. Bangladesh goes
routinely through floods and cyclones, destroying houses, possessions, animals,
businesses, even taking lives. But microfinance always bounces back. Poor
people's lives are woven with endless disasters. Coping with disasters is an
integral part of microfinance. Grameen Bank made sure its staff understood that
microfinance is about people, not about money. Money is a tool to give people a
chance to fight for their lives.
Microfinance Application in Turkey
Microfinance operations in Turkey initiated as a
collaboration project between Grameen Trust and the Turkish Foundation for
Waste Reduction. The collaboration project was initiated with the name of the
Turkish Grameen Microfinance Program (TGMP)
in 2003. As of 30th July 2020, 1 million TRY has been disbursed to
200,000 financially challenged women in the 92 branches of 64 cities of Turkey.
Since 2006, TGMP is being audited by the Pricewaterhouse
Coopers. It is a social enterprise that does not provide a single penny income
to the Board of Trustees, the Board of Directors and the Supervisory Board
under any name. The aim is to provide financing to the poor women who are in need
for entrepreneurship, without interest, for a non-profit purpose, with a small
service fee only to cover their operating expenses and without any security.
Micro-Entrepreneur Bank for Micro-Entrepreneur Sector
The micro-entrepreneur sector as a whole deserves a new class of dedicated
financial institution, as Social Business Micro Entrepreneur Bank (MEB). The
entire micro-entrepreneur sector will dramatically change if it is created by
passing a new law if needed. MFIs and small finance banks can take up a
leadership role in creating social business MEBs. It will be made legally
mandatory to make all MEBs as social businesses.
Social business is a business with zero personal profit, aiming at solving a
specific problem faced by people. This is a very important feature to be built
into any financial institution created for micro-entrepreneurs. Given the
tradition of traditional money lending, financial institutions established for
micro-entrepreneurs quickly start imitating money lenders in their operations.
If there is no bar on taking personal profit from MEBs
investors looking for high profit will rush to it attracted by the size of the
market. The safest thing to do is to close the door for personal gain by
requiring by law that MEB to be a social business.
Existing commercial banks, small finance banks, cooperative banks, any other
financial organisations, NGOs, companies, individuals, MFIs may apply for MEB
license as a subsidiary or as a new entity.
MEBs may create Social Business Venture Capital Funds as their subsidiaries to
provide equity to unemployed young people to become entrepreneurs.
The goal of MEBs would be to free all micro-entrepreneurs from money lenders -
formal, and informal so that these money lenders do not exploit
miro-entrepreneurs.
Dedicated Regulatory Authority is Crucial for Success
Another important aspect of ensuring the success of MEBs is to create a
dedicated regulatory authority. If MEBs are regulated by regulators who are not
well-versed with the concept and the creativity needed for the operation of financial
institutions for the poor, it will be doomed to failure. Unsympathetic
regulators can destroy the entire possibilities of financial institutions for
micro-entrepreneurs.
Bangladesh created a Microcredit Regulatory Authority as an
autonomous entity headed by the Governor of the Central Bank, by an Act of
Parliament back in 2006. It contributed significantly to the success of the
micro-credit system in Bangladesh.
MEB Should be Created as a Rural Institution
To make rural economies as independent economies, one fundamental
requirement would be to create institutions dedicated to rural areas.
Historically urban institutions were extended to the rural areas to fill the
need for institutional services to rural areas, ignoring the fact that urban institutions
were not a good fit for rural areas. They were not enthusiastic about doing
this job either. As result, rural areas never had the opportunity to grow in
its own way.
MEBs could be the first step to create a rural financial institution
exclusively dedicated to the needs of the rural areas. To make it grow as a
rural institution, the headquarters of MEBs should be located in rural areas.
It should mobilise rural and urban deposits to benefit the rural
micro-entrepreneurs, in contrast to urban-centric banks which mobilise rural
deposit to transfer it to urban areas.
The government may encourage all commercial banks and financial institutions to
create social business MEBs as rural subsidiaries serving rural
micro-entrepreneurs. To encourage them government may give incentives to banks
and all financial institutions such as providing preferential treatment in
their core businesses depending on the size of their MEB operations.
In addition to dedicated social business MEBs, there should be exclusively
designed social business venture capital funds, social business investment
funds, social business insurance companies, and so on.
Time is Right
Creation of Social Business Micro-Entrepreneur Bank is the key to unleashing
the entrepreneurial power of masses and creating the rural economy as a
parallel economy to the traditional urban-centric economy.
Given the right conceptual framework and appropriate institutions and policies,
rural economies can be strong economies dealing with the rest of the world.
With information and communication technology covering all rural areas in Turkey
and cleaner air quality, if we can add good political leadership, presence of
quality educational institutions and healthcare facilities rural areas will
enjoy many advantages over urban centres as a choice of location for many
businesses. Transporting unprocessed agricultural inputs and sending migrant
labour to the cities can be made a matter of past. It is the new vision of
rural economy, which will make this happen.
Time is right for this new vision.
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