Column: The sexiness of economics

I know the connection I’m trying to make in the title is a bit of a stretch, but let me take a moment to explain the concept of academic sexiness. Take the field of political science as an example: what’s sexy right now is the Middle East.

If you have any knowledge of anything that remotely relates to the Middle East – like Arabic, Islam, the difference between a Sunni and a Shiite – you’re “in the know.” You’re hot – or sexy, if you will.

Maybe you’re not into politics, but business is your chocolate pudding. Then you’d better know something about why the stock market is surging during an economic slowdown. Whatever you’re into, you get the point: Some things in academia are just sexy.

On Oct. 13, the Nobel Foundation, by awarding Bangladeshi economist Muhammad Yunus and the Grameen Bank he founded the Nobel Peace Prize, took the concept of “microcredit finance” – which has been sexy in economics for years – and made it mainstream.

You may think it’s perverse to apply the idea that “sex sells” to an economic model. But instead of exploiting women to sell a product, what we get by publicizing the sexiness of microcrediting is a push to develop and implement new ways of eradicating poverty and its underlying causes. Isn’t that hotter than a scantly clad Paris Hilton selling greasy burgers?

To understand why the Grameen Bank and the microcredit finance model has been successful in addressing poverty, let me briefly explain how it works. The goal of the Grameen Bank is to stimulate economic development and social empowerment by giving “the poorest of the poor” access to credit.

The basic idea isn’t new, but the method is. Banks serve as intermediaries, channeling funds from people who save to those who need to borrow by paying a small interest rate to the savers and charging a higher interest rate to the borrowers. Everyone wins, right? Except the poor, who desperately need credit to be able to buy land, property, tools and products to start businesses or to expand farming practices to be self-sufficient and profitable. They lose because they don’t have access to credit.

There are several reasons banks don’t usually reach out to the poor. The biggest is that banks see them as “risky” investments. The poor are too likely to default on a loan and can’t provide the bank enough collateral to compensate for a defaulted loan.

Enter Yunus and the Grameen Bank. In an online article, Yunus states that the Grameen methodology is different from that of a conventional bank. When choosing a potential lender, instead of looking at what “has already been acquired by a person … Grameen looks at the potential that is waiting to be unleashed in a person.” That means the poor don’t need collateral to get a loan.

Yunus developed a system that focuses on communities instead of individuals. For example, Grameen may provide a loan to a community of 50 people. It first gives a small loan (average $200) at a close-to-market interest rate to a group of the poorest five people (women are the primary clients of Grameen), who repay in small weekly installments. If the loans are being repaid, Grameen begins to make loans to the rest of the community. This social pressure provides enough incentive for people to repay the loans – without the need for collateral. Thus, the poor now have access to credit and a new door out of a cyclical poverty trap.

This is a very basic image of microcredit financing, and I encourage you to learn more at www.grameen-info.org. What makes microcredit so sexy is not the intricate structural details that make econ nerds, like myself, hot in the pants, but the idea that the best way to get people out of poverty is to give them the chance to be self-sufficient, self-empowered and entrepreneurial. While microcrediting isn’t flawless, giving the poor access to credit is one fundamental way of doing this – and that’s sexy.