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Can a company make money from the work of impoverished people in the developing world without taking advantage of them?
For Patrick Byrne, the answer is a qualified yes. Byrne believes that he has found a way for his company, Overstock.com, to benefit while it helps developing-world artisans connect with developed-world customers. But for Chuck Waterfield, creator of Microfin — a software program he wrote for microlenders — the answer is a qualified no, at least as it applies to Compartamos, a well-known microfinance lender operating in Mexico. Both men spoke at this year’s University of Pennsylvania Microfinance Conference.
Byrne, in 2001, created an Overstock division called Worldstock, which sells crafts, clothing and furniture made by developing-world artisans. His original idea for Overstock was to cut out middlemen in the retail industry by using the web’s expertise in logistics to sidestep the so-called “jobbers” who traditionally bought and resold retailers’ excess inventory. Byrne figured that his company could perform the same sort of service for craftspeople in the developing world, cutting out the importers and boutiques that often stand between them and consumers in the United States.
Overstock, which is publicly traded, aims to turn a profit — although it doesn’t always do so. In 2007, it lost $45 million on sales of $760 million. But Byrne operates Worldstock on a break-even basis, trying to simply cover costs. It serves the parent company by generating positive press and cementing the bonds between Overstock and its customers. “The people who buy [these products] from us are our most loyal,” he said. “Somebody who comes in and buys a stereo doesn’t have any loyalty. But if somebody comes in and learns about these products and how and where they’re made, they become our best customers — not just for Worldstock but for the whole website.”
Among the wares that Worldstock sells are stools made in Peru, table settings crafted in Indonesia and carpets woven in Tibet. “These aren’t sympathy products,” Byrne said. “We’re saying, ‘Buy this carpet because it’s beautiful.'” When these products enter the American retail system, “they end up in upper-end boutiques that charge five times what we’re charging. Some of the backlash we got was from that community. They were paying $35 for a product that had a month’s work in Indonesia in it, bringing it to the U.S. and selling it for $150. We’re buying it for $60 or $70 and selling it for $99.”
Criticism from boutique owners doesn’t really bother Byrne. In fact, it pales next to the chiding that he has received from Wall Street. For several years, Byrne has engaged in — and been lambasted for — his crusade against short sellers — investors who bet that the value of particular stocks will drop. Byrne has sued short sellers and feuded with the business media, accusing the two groups of colluding to sap the value of vulnerable companies. (Specifically, Byrne dislikes a practice called “naked short-selling” in which investors illegally sell-short shares that they haven’t borrowed. Byrne’s critics say that the practice is far less common than he contends and that his campaign merely distracts attention from Overstock’s poor performance.)
The ownership structure of Overstock enables Byrne to operate in unorthodox ways, protecting him whether he launches an unprofitable subsidiary or spars with the investment world. “I’m in a lucky position in that I own about a third of the company, and people with my last name and close friends collectively own about 80% or 85%,” he said. “So I don’t have to worry too much about a shareholder uprising.”
Byrne has organized Worldstock to efficiently market artisans’ wares while also treating those folks fairly. He has found that it can operate most effectively when it trades with small co-operatives rather than individual artisans. A solo craftsperson won’t typically have access to the Internet, and Worldstock prefers to communicate with suppliers via the web. “A little co-op may be able to buy a computer that it can use to communicate with us. What we’ve found to be the most successful is working with groups of five to 25 people.”
Worldstock won’t trade with larger groups because it might then end up selling factory-made goods, and that could hurt its reputation. Factories are more likely to exploit their workers than small co-ops are, Byrne argued. Worldstock also tries to limit the amount of child labor that its suppliers use. “We came up with a principle that said if a child is going to school and he or she works no more than two hours a day, that’s allowed,” he said. The company made an exception for Afghanistan after the woman running its program there, an Afghani, pointed out that very few Afghan girls attend school.
Byrne accuses people who would ban child labor of naiveté. “The view that children shouldn’t work at all is basically a Western bourgeois view of the last 150 years,” he said. “For most of humanity, for most of its existence, if pop was a silversmith, the kids were going to be doing some silversmithing.”
Worldstock no longer operates in Afghanistan but not because of child-labor problems. Byrne found that officials there expected bribes, and he refused to pay them. “Given that Afghanistan is the world’s largest supplier of heroin, who knew that the customs agents were going to be corrupt?” he quipped.
Byrne’s travels originally piqued his interest in the ways that for-profit enterprises could help people in the developing world. When his journeys began, he was a philosopher — he earned a doctorate in the subject from Stanford University — not a businessperson. He had also studied economics, and his travels left him wondering about the United States’ and Western Europe’s ethical obligations to the developing world.
“I was somewhat discouraged with the NGO [non-governmental organization] world,” he recalled. “I saw some [NGO] people living like it was the days of the Raj. And when I ran into NGOs that were all about saving the world — like, ‘Let’s save all of the world’s infants from something’ — I found a lot of waste. From my experiences in Southeast Asia and China, I was pretty cynical.” He had come to the conclusion, for example, that big NGOs, like the World Bank and the International Monetary Fund, “might be doing more harm than good.”
He began thinking about ways in which Western-style capitalism might succeed where the NGOs were failing. This led him to the work of economist Muhammad Yunus, who pioneered the practice of microfinance — making tiny loans to very poor people — in his native Bangladesh. Byrne sees Worldstock as a way of merging Yunus’s philosophy with Internet commerce. “I think we are the largest fair-trade-style organization in the world,” he said. “We are now in 35 countries. We’re just about to cross $50 million in lifetime sales of which $30 million has been paid back to the suppliers. We’re trying to get the money as directly to the artisans as we can with as few markups as possible. Our goal typically is to triple people’s income.”
Raking in Money
Yunus’s work didn’t just inspire Byrne. It has spawned microfinance programs throughout the developing world. Among them is Banco Compartamos, a Mexican lender. Compartamos has found success by lending to the poorest of the poor in such Mexican states as Chiapas. It sold stock to the public last year, raising $450 million, and has routinely racked returns on equity of more than 50%. A well-run bank would be happy to see a ROE of 20%.
Compartamos’ numbers have brought controversy, with critics complaining about the interest rates it charges — typically about 100% — and its roots as a nonprofit. The bank began as a charity and became a for-profit firm in 2000. Even Yunus has singled it out for criticism, accusing it of preying on its poor customers.
Waterfield, who led a case-study discussion on Compartamos at the conference, was less pointed in his remarks but hinted that he shares at least some of the skeptics’ views. He noted, for example, that Wal-Mart’s bank in Mexico usually charges less for loans than Compartamos does. Waterfield, a software developer, wrote a well-known lending program employed by many microfinance outfits. “Compartamos was one of the first organizations to use my software,” he said, adding that no one has accused Compartamos of operating illegally and pointed out that it’s one of the biggest microlenders in the world, which suggests that many of its customers don’t oppose its practices.
He also noted that, according to developed world norms, all microfinance loans look expensive, with interest rates that dwarf even those of credit cards. “There’s no one acceptable interest rate for microfinance institutions. Interest rates need to differ [depending on] the country where you’re operating, the services provided and the size of the loan.” Some countries pose more risk than others, and tiny loans cost just as much to administer as bigger ones do. Lenders must charge higher rates for smaller loans to cover their costs. “Interest is variable, but costs are fixed,” he noted.
Even so, Waterfield wondered whether Compartamos might be taking advantage of people with limited access to both credit and information about standard lending rates and policies. When compared with other microfinance firms, the bank seems to rake in money. “Other institutions with similar loan sizes are charging less than Compartamos, and that difference is profit,” he said. “There’s nothing illegal here. They charge what the market will bear.”
In theory, Compartamos’ customers will compare its rates and services with those of its competitors and go elsewhere if they feel cheated. Yet the developed-world principle of buyer beware may not work in the poorest parts of the world, Waterfield warned. “There are no truth-in-lending laws in many countries. We’ve done a good job getting the public behind the industry, but we’ve done zero in promoting pro-consumer policies and transparency.”
Thus, Compartamos borrowers who wanted to collect information on competing loans would have difficulty doing so, he noted. “The markets are so rural and separated that it’s unlikely that the [borrowers] know what’s going on with other lenders.” Very few in the industry “are against profits,” he added. “But how much profit is acceptable? It’s the degree of wealth transfer that you have to consider.”