THE TRANSFORMATION OF OUR INNER CITIES
THE NEW MODEL vs THE OLD MODEL
Economic-Create Wealth——vs—Social-Redistribute Wealth
Private Sector—vs—Government and Social Service Organization
Profitable Businesses—-vs—Subsidized Business
Integration with the regional economy—vs–Isolation from the larger economy
Companies that are export oriented—-vs—Companies that serve the local economy
Skilled and experienced residents engaged in building business-vs-Residents in social service
Mainstream provide sector institutions—vs—Special institutions created
Inner city disadvantages addressed directly-vs-Inner city disadvantages addressed with subsidies
Government creates the environment for business-vs-Government directly provide services
WE WILL ENACT NEW LEGISLATION FOR THESE COMMUNITIES
This new legislation will be designed to encourage Commercial Banks and Lending Institutions to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods, to reduce discriminatory credit practices against low-income neighborhoods,
This new legislation instructs the Central Bank of The Bahamas and other financial supervisory agencies to encourage regulated financial institutions to help meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operations .To enforce the legislation, The Central Bank regulatory agencies will examine banking institutions for compliance, and take this information into consideration when approving applications for new bank branches or any other expansions.
We Will End The Discriminatory Practice of REDLINING in The Bahamas
Redlining is the practice of denying services, either directly or through selectively raising prices, to residents of certain areas based on the racial or ethnic composition of those areas. While the best known examples of redlining have involved denial of financial services such as banking or insurance, other services such as health care or even supermarkets] have been denied to residents (or in the case of retail businesses like supermarkets, simply located impractically far away from said residents) to result in a redlining effect
The banks in The Bahamas continue to lend to lower-income whites, AND FOREIGNERS but not to middle- or upper-income blacks, for BUSINESS INVESTMENTS. The use of blacklists is a related mechanism also used by REDLINING to keep track of groups, areas, and people that the discriminating party feels should be denied business or aid or other transactions. In the academic literature, redlining falls under the broader category of credit rationing.
Reverse redlining occurs when a lender or insurer targets nonwhite consumers, not to deny them loans or insurance, but rather to charge them more than could be charged to a comparable white consumer. The interest charged to Bahamians are among the HIGHEST IN THE WORLD.
The economic distress of The Bahamas over the hill communities, including the family of islands, may be the most pressing issue facing our nation. The lack of businesses and jobs in disadvantaged urban areas fuels not only a crushing cycle of poverty but also crippling social problems, such as drug abuse, alcohol and crime. And, as the inner cities continue to deteriorate, the debate on how to aid them grows increasingly divisive.
The sad reality is that the efforts of the past few decades to revitalize the inner cities have failed. The establishment of a sustainable economic base—and with it employment opportunities, wealth creation, role models, and improved local infrastructure—still eludes us despite the investment of substantial resources.
Past efforts have been guided by a Social Model built around meeting the needs of individuals. Aid to inner cities, then, has largely taken the form of Relief Programs such as income assistance, housing subsidies, and food vouchers, all of which address highly visible—and real—social needs.
Programs aimed more directly at economic development have been fragmented and ineffective. These piecemeal approaches have usually taken the form of subsidies, preference programs, or expensive efforts to stimulate economic activity in tangential fields such as housing, real estate, and neighborhood development. Lacking an overall strategy, such programs have treated the inner city as an island isolated from the surrounding economy and subject to its own unique laws of competition. They have encouraged and supported small, sub-scale businesses designed to serve the local community but ill equipped to attract the community’s own spending power, much less export outside it. In short, the social model has inadvertently undermined the creation of economically viable companies. Without such companies and the jobs they create, the social problems has only worsen.
The time has come to recognize that revitalizing the inner city will require a Radically different approach. While social programs will continue to play a critical role in meeting human needs and improving education, they must support—and not undermine—a coherent economic strategy. The question we should be asking is how inner-city-based businesses and nearby employment opportunities for inner city residents can proliferate and grow. A sustainable economic base can be created in the inner city, but only as it has been created elsewhere: through private, for-profit initiatives and investment based on economic self-interest and genuine competitive advantage—not through artificial inducements, charity, or government mandates.
We must stop trying to cure the inner city’s problems by perpetually increasing social investment and hoping for economic activity to follow. Instead, an economic model must begin with the premise that inner city businesses should be profitable and positioned to compete on a regional, national, and even international scale. These businesses should be capable not only of serving the local community but also of exporting goods and services to the surrounding economy. The cornerstone of such a model is to identify and exploit the competitive advantages of inner cities that will translate into truly profitable businesses.
Our policies and programs have fallen into the trap of redistributing wealth. The real need—and the real opportunity—IS TO CREATE WEALTH.
Toward a New Model: Location and Business Development
Economic activity in and around inner cities will take root if it enjoys a competitive advantage and occupies a niche that is hard to replicate elsewhere. If companies are to prosper, they must find a compelling competitive reason for locating in the inner city. A coherent strategy for development starts with that fundamental economic principle
Location can be critical to the success or failure of a business. Every location—whether it be a nation, a region, or a city—has a set of unique local conditions that underpin the ability of companies based there to compete in a particular field. The competitive advantage of a location does not usually arise in isolated companies but in clusters of companies—in other words, in companies that are in the same industry or otherwise linked together through customer, supplier, or similar relationships. Clusters represent critical masses of skill, information, relationships, and infrastructure in a given field. Unusual or sophisticated local demand gives companies insight into customers’ needs.
Clusters arise in a particular location for specific historical or geographic reasons—reasons that may cease to matter over time as the cluster itself becomes powerful and competitively self-sustaining. In successful clusters competitors often push one another to improve products and processes. The presence of a group of competing companies contributes to the formation of new suppliers, the growth of companies in related fields, the formation of specialized training programs, and the emergence of technological centers of excellence in colleges and universities. The clusters also provide newcomers with access to expertise, connections, and infrastructure that they in turn can learn and exploit to their own economic advantage.
If locations (and the events of history) give rise to clusters, it is clusters that drive economic development. They create new capabilities, new companies, and new industries applying it to the relatively large geographic areas of New Providence and Grand Bahama. But it is just as relevant to smaller areas such as Bain Town. To bring the theory to bear on the inner city, we must first identify the inner city’s competitive advantages and the ways inner city businesses can forge connections with the surrounding urban and regional economies.
The True Advantages of the Inner City
The first step toward developing an economic model is identifying the inner city’s true competitive advantages. There is a common misperception that the inner city enjoys two main advantages: low-cost real estate and labor. These so-called advantages are more illusory than real. Real estate and labor costs are often higher in the inner city than in suburban and rural areas. And even if inner cities were able to offer lower-cost labor and real estate compared with other locations in the New Providence, basic input costs can no longer give companies from relatively prosperous nations a competitive edge in the global economy. Inner cities would inevitably lose jobs where labor and real estate are far cheaper.
Only attributes that are unique to inner cities will support viable businesses. My ongoing research of urban areas across the New Providence identifies four main advantages of the inner city: strategic location, local market demand, integration with regional clusters, and human resources. Various companies and programs have identified and exploited each of those advantages from time to time. To date, however, no systematic effort has been mounted to harness them.
Inner cities are located in what should be economically valuable areas. They sit near congested high-rent areas, major business centers, and transportation and communications routes. As a result, inner cities can offer a competitive edge to companies that benefit from proximity to downtown business districts, logistical infrastructure, entertainment or tourist centers, and concentrations of companies.
There is significant potential, then, for expanding the inner-city business base by building on the advantage of strategic location. Among the initial prospects are location-sensitive industries now situated elsewhere, nearby companies and industries that face space constraints, and back-office or support functions amenable to relocation or out sourcing as is evident now in our BANKING INDUSTRY.
Local Market Demand
The inner city market itself represents the most immediate opportunity for inner-city-based entrepreneurs and businesses. At a time when most other markets are saturated, inner city markets remain poorly served—especially in retailing, financial services, and personal services. In Nassau, for example, retail penetration per resident in the inner city compared with the rest of the city is 35% in supermarkets, 40% in department stores, and 50% in hobby, toy, and game stores.
The first notable quality of the inner city market is its size. Even though average inner city incomes are relatively low, high population density translates into an immense market with substantial purchasing power higher than in the surrounding suburbs. In addition, the market is young and growing rapidly, owing in part to immigration and relatively high birth rates.
A handful of forward-looking entrepreneurs have recognized the opportunities for profit and growth in this large, underdeveloped market and have opened retail outlets in the inner city. CBS an historic retailer and QUALITY department stores found new life on Charmichael Road with a strategy built on inner city stores.
Another important quality of the inner city market is its character. Most products and services have been designed for white consumers and businesses. As a result, product configurations, retail concepts, entertainment, and personal and business services have not been adapted to the needs of inner city customers. Although micro segmentation has been slow to come to the inner city, it holds promise for creating thriving businesses.
Inner city consumers, in fact, represent a major growth market of the future, and companies based in the inner city have a unique ability to understand and address their needs
More important, businesses catering to local demand have the potential to expand beyond the inner city and become major players. Companies can target and sell not only to their own local communities but also to similar communities nationally and even internationally.
Tailored retailing concepts in a broad range of areas such as food, clothing, pharmaceuticals, toys, books, and restaurants could also set off a chain reaction of opportunities: Companies create demand for new types of products, which in turn creates new opportunities for manufacturers of specialized products. For example, tailored supermarkets are increasing the demand for established ethnic food producers and distributors.
The most intriguing attribute of the inner city market is its potential to be a leading indicator of major nationwide trends. The tastes and sensibilities of inner city communities are cutting-edge in a number of respects and often become mainstream.
Ultimately, what will attract the inner city consumer more than anything else is a new breed of company that is not small and high-cost but a professionally managed major business employing the latest in technology, marketing, and management techniques This kind of company, much more than exhortation, will attract spending power and recycle capital within the inner city community.
Integration with Regional Clusters
The most exciting prospects for the future of inner city economic development lie in capitalizing on nearby regional clusters: those unique-to-a-region collections of related companies that are competitive nationally and even globally.
Inner City Economic Development
The ability to access competitive clusters is a very different attribute—and one much more far reaching in economic implication—than the more generic advantage of proximity to a large downtown area with concentrated activity. Competitive clusters create two types of potential advantages. The first is for business formation. Companies providing supplies, components, and support services could be created to take advantage of the inner city’s proximity to multiple nearby customers in the cluster. .
The second advantage of these clusters is the potential they offer inner city companies to compete in downstream products and services.
Few of these opportunities are currently being pursued. Most of today’s inner city businesses either have not been export oriented, selling only within the local community rather than outside it, or have seen their opportunities principally in terms defined by government preference programs. Consequently, networks and relationships with surrounding companies are woefully underdeveloped. New private sector initiatives will be needed to make these connections and to increase inner city entrepreneurs’ awareness of their value. Integration with regional clusters is potentially the inner city’s most powerful and sustainable competitive advantage over the long term. It also provides tremendous leverage for development efforts: By focusing on upgrading existing and nascent clusters, rather than on supporting isolated companies or industries, public and private investments in training, infrastructure, and technology can benefit multiple companies simultaneously.
The inner city’s fourth advantage takes on a number of deeply entrenched myths about the nature of its residents. The first myth is that inner city residents do not want to work and opt for welfare over gainful employment. Although there is a pressing need to deal with inner city residents who are unprepared for work, most inner city residents are industrious and eager to work. For moderate-wage jobs that require little formal education (for instance, warehouse workers, production-line workers, and truck drivers), employers report that they find hardworking, dedicated employees in the inner city.
Admittedly, many of the jobs currently available to inner city residents provide limited opportunities for advancement. But the fact is that they are jobs; and the inner city and its residents need many more of them close to home. Proposals that workers commute to jobs in distant suburbs—or move to be near those jobs—underestimate the barriers that travel time and relative skill level represent for inner city residents. Moreover, in deciding what types of businesses are appropriate to locate in the inner city, it is critical to be realistic about the pool of potential employees. Attracting high-tech companies might make for better press, but it is of little benefit to inner city residents. —work requiring less-skilled labor, which can be drawn from the inner city. Given the workforce, low-skill jobs are realistic and economically viable: they represent the first rung on the economic ladder for many individuals who otherwise would be unemployed. Over time, successful job creation will trigger a self-reinforcing process that raises skill and wage levels.
The second myth is that the inner city’s only entrepreneurs are drug dealers. In fact, there is a real capacity for legitimate entrepreneurship among inner city residents, most of which has been channeled into the provision of social services. For instance, Some communities in New Providence have numerous social service providers as well as social, fraternal, and religious organizations. Behind the creation and building of those organizations is a whole cadre of local entrepreneurs who have responded to intense local demand for social services and to funding opportunities provided by government, foundations, and private sector sponsors. The challenge is to redirect some of that talent and energy toward building for-profit businesses and creating wealth.
The third myth is that skilled minorities, many of whom grew up in or near inner cities, have abandoned their roots. Today’s large and growing pool of talented minority managers represents a new generation of potential inner city entrepreneurs. Many have been trained at the nation’s leading business schools and have gained experience in the nation’s leading companies.
The Real Disadvantages of the Inner City
The second step toward creating a coherent economic strategy is addressing the very real disadvantages of locating businesses in the inner city. The inescapable fact is that businesses operating in the inner city face greater obstacles than those based elsewhere. Many of those obstacles are needlessly inflicted by government. Unless the disadvantages are addressed directly, instead of indirectly through subsidies or mandates, the inner city’s competitive advantages will continue to erode.
Although vacant property is abundant in inner cities, much of it is not economically usable. Assembling small parcels into meaningful sites can be prohibitively expensive and is further complicated by the fact that a number of private and government agencies each control land and fight over turf
The cost of building in the inner city is significantly higher than in the suburbs because of the costs and delays associated with logistics, negotiations with community groups, and strict urban regulations: restrictive zoning, architectural codes, permits, inspections, and government-required union contracts and minority set-asides. Ironically, despite the desperate need for new projects, construction in inner cities is far more regulated than it is in the suburbs—a legacy of big governmental politics and entrenched bureaucracies.
More damaging than regulatory costs is the uncertainty that the regulatory process creates for potential investors and frustration with the waiting periods necessary to obtain the numerous permit and site approvals required to build, expand, or improve facilities. Undeniably, the wait is expensive; but the uncertainty about whether an application will be approved or when a ruling will be made makes forming a financial strategy nearly impossible.
Compared with the suburbs, inner cities have high costs for water, other utilities, health care, insurance, permitting and other fees, real estate and NOW VAT and other taxes, mandatory compliance, and neighborhood hiring requirements and the high cost of electricity. High costs like these drive away companies and hold down wages. .
It is an unfortunate reality that many of our communities—because they have a greater proportion of residents dependent on welfare, and other social programs—require higher government spending and, as a result, high tax burden feeds a vicious cycle—driving out more companies while requiring even higher taxes from those that remain. The communities have been reluctant to challenge entrenched bureaucracies as well as inefficient and outdated government departments, all of which unduly raise city costs.
Finally, excessive regulation not only drives up building and other costs but also hampers almost all facets of business life in the inner city, Government Regulations also stunts inner city entrepreneurship, serving as a formidable barrier to small and start-up companies. Restrictive licensing and permitting, high licensing fees, and archaic safety and health regulations create barriers to entry into the very types of businesses that are logical and appropriate for creating jobs and wealth in the inner city.
Both the reality and the perception of crime represent profound impediments to urban economic development First, crime against property raises costs.than a comparable suburban center for a full-time security guard, increased lighting, and continuous cleaning—raising overall costs. Second, crime against employees and customers creates an unwillingness to work in and patronize inner city establishments and restricts companies’ hours of operation. Fear of crime ranks among the most important reasons why companies opening new facilities failed to consider inner city locations and why companies already located in the inner city left. Currently, police devote most of their resources to the security of residential areas, largely overlooking commercial and industrial sites.
Transportation infrastructure planning, which today focuses primarily on the mobility of residents for shopping and commuting, should consider equally the mobility of goods and the ease of commercial transactions. The most critical aspects of the new economic model—the importance of the location of the inner city, the connections between inner city businesses and regional clusters, and the development of export-oriented businesses—require the presence of strong logistical links between inner city business sites and the surrounding economy. Unfortunately, the business infrastructure of the inner city has fallen into disrepair. The capacity of roads, the frequency and location of highways, the links to downtown via an inadequate bus system.
Because their average education levels are low, many inner city residents lack the skills to work in any but the most unskilled occupations. To make matters worse, employment opportunities for less-educated workers have fallen markedly
The managers of most inner city companies lack formal business training. That problem, however, is not unique to the inner city; it is a characteristic of small businesses in general. Many individuals with extensive work histories but little or no formal managerial training start businesses. Inner city companies without well-trained managers experience a series of predictable problems that are similar to those that affect many small businesses: weaknesses in strategy development, market segmentation, customer-needs evaluation, introduction of information technology, process design, cost control, securing or restructuring financing, interaction with lenders and government regulatory agencies, crafting business plans, and employee training. Local community vocational institutions often offer management courses, but their quality is uneven, and entrepreneurs are hard-pressed for time to attend them.
Access to debt and equity capital represents a formidable barrier to entrepreneurship and company growth in inner city areas.
First, most inner city businesses still suffer from poor access to debt funding because of the limited attention that mainstream banks paid them historically. Even in the best of circumstances, small-business lending is only marginally profitable to banks because transaction costs are high relative to loan amounts. Many banks remain in small-business lending only to attract deposits and to help sell other more profitable products, such as CONSUMER LOANS.
The Bahamas government has made no efforts to address the inner city’s problem of debt capital. As a result of the lack of legislation in order to overcome bias in lending, banks have not begun to pay much attention to inner city areas. Direct financing efforts by government, Development Bank however, have proved ineffective. The proliferation of government loan pools and quasi-public lending organizations has produced fragmentation, market confusion, and duplication of overhead. Business loans that would provide scale to private sector lenders are siphoned off by these organizations, many of which are high-cost, bureaucratic, and risk-averse. In the end, the development of high-quality private sector expertise in inner city business financing has been undermined.
Second, equity capital has been all but absent. Inner city entrepreneurs often lack personal or family savings and networks of individuals to draw on for capital. Institutional sources of equity capital are scarce for minority-owned companies and have virtually ignored inner city business opportunities.
A final obstacle to companies in the inner city is antibusiness attitudes. Some workers perceive businesses as exploitative, a view that guarantees poor relations between labor and management. Equally debilitating are the antibusiness attitudes held by community leaders and social activists. These attitudes are the legacy of a regrettable history of poor treatment of workers, departures of companies, and damage to the environment. But holding on to these views today is counterproductive. Too often, community leaders mistakenly view businesses as a means of directly meeting social needs; as a result, they have unrealistic expectations for corporate involvement in the community. For example, some businesses interested in locating in inner city decided against it because of demands to build playgrounds, fund scholarships, and cede control of hiring and training to community-based organizations. Such demands on existing and potential businesses rarely help the community; instead, they drive businesses—and jobs—to other locations.
Demanding linkage payments and contributions and stirring up antibusiness sentiment are Political Tools that brought questionable results in the past when owners had less discretion about where they chose to locate their companies. In today’s increasingly competitive business environment, such tactics will serve only to stunt economic growth.
Changing Roles and Responsibilities for Inner City Development
Overcoming the business disadvantages of the inner city as well as building on its inherent advantages will require the commitment and involvement of business, government, and the nonprofit sector. Each will have to abandon deeply held beliefs and past approaches. Each must be willing to accept a new model for the inner city based on an economic rather than a social perspective. The private sector, not government or social service organizations, must be the focus of the new model.
The New Role of the Private Sector
The economic model challenges the private sector to assume the leading role. First, however, it must adopt new attitudes toward the inner city. Most private sector initiatives today are driven by preference programs or charity. Such activities would never stand on their own merits in the marketplace. It is inevitable, then, that they contribute to growing cynicism. The private sector will be most effective if it focuses on what it does best: creating and supporting economically viable businesses built on true competitive advantage. It should pursue four immediate opportunities as it assumes its new role.
- Create and expand business activity in the inner city
The most important contribution companies can make to inner cities is simply to do business there. Inner cities hold untapped potential for profitable businesses. Companies and entrepreneurs must seek out and seize those opportunities that build on the true advantages of the inner city. In particular, retailers, franchisers, and financial services companies have immediate opportunities. Franchises represent an especially attractive model for inner city entrepreneurship because they provide not only a business concept but also training and support.
Businesses can learn from the mistakes that many outside companies have made in the inner city. One error is the failure of retail and service businesses to tailor their goods and services to the local market. The needs and preferences of the inner city market can vary greatly— inner city customers buy to meet immediate needs, and it has to be tailored to its retail merchandise and purchasing planning to its customers’ buying habits.
Another common mistake is the failure to build relationships within the community and to hire locally. Hiring local residents builds loyalty from neighborhood customers, and local employees of retail and service businesses can help stores customize their products. Evidence suggests that companies that were perceived to be in touch with the community had far fewer security problems, whether or not the owners lived in the community.
In other cases, companies have organized themselves into associations to increase the effectiveness of security and to spread costs. The associations work closely with the police department and with members of the community to identify and address security problems.
- Establish business relationships with inner city companies
By entering into joint ventures or customer-supplier relationships, outside companies will help inner city companies by encouraging them to export and by forcing them to be competitive.
Every major company should develop business relationships with inner city companies based not on charity but on mutual self-interest.
- Redirect corporate philanthropy from social services to business-to-business efforts
Countless companies give many millions of dollars each year to worthy inner-city social-service agencies. But philanthropic efforts will be more effective if they also focus on building business-to-business relationships that, in the long run, will reduce the need for social services.
First, corporations could have a tremendous impact on training. The existing system for job training in the Bahamas is ineffective. Training programs are fragmented, overhead intensive, and disconnected from the needs of industry. Many programs train people for nonexistent jobs in industries with no projected growth. Although reforming training will require the help of government, the private sector must determine how and where resources should be allocated to ensure that the specific employment needs of local and regional businesses are met. Ultimately, employers, not government, should certify all training programs based on relevant criteria and likely job availability.
Training programs led by the private sector could be built around industry clusters located in both the inner city (for example, restaurants, food service, and food processing ) and the nearby regional economy (for example, financial services and health care ). Industry associations and trade groups, supported by government incentives, could sponsor their own training programs in collaboration with local training institutions.
Programs that help inner city residents with the school-to-work transition could also take advantage of regional clusters. Allow high school students to compete for apprentice-like positions in the health care cluster. The program will mixes classroom work and internship training during the school year and over the summer, beginning in the junior year of high school. It can also expand to include other clusters, such as utilities and financial services.
Second, the private sector could make an equally substantial impact by providing management assistance to inner city companies. As with training, current programs financed or operated by the government are inadequate. Outside companies have much to offer companies in the inner city: talent, know-how, and contacts. One approach to upgrading management skills is to emphasize networking with companies in the regional economy that either are part of the same cluster (customers, suppliers, and related businesses) or have expertise in needed areas. An inner city company could team up with a partner in the region who provides management assistance; or a consortium of companies with a required expertise, such as information technology, could provide assistance to inner city businesses in need of upgrading their systems.
Professional associations could develop advisory programs for inner city managers. Business schools could develop and teach custom-designed short and practical executive programs or assist inner city companies through field studies programs.
- Adopt the right model for equity capital investments
The investment community—especially venture capitalists—must be convinced of the viability of investing in the inner city.
The New Role of Government
To date, government has assumed primary responsibility for bringing about the economic revitalization of the inner city. Existing programs designed to create jobs and attract businesses have been piecemeal and fragmented at best. Still worse, these programs have been based on subsidies and mandates rather than on marketplace realities. Unless we find new approaches, the inner city will continue to drain our rapidly shrinking public coffers.
Undeniably, inner cities suffer from a long history of discrimination. However, the way for government to move forward is not by looking behind. Government can assume a more effective role by supporting the private sector in new economic initiatives. It must shift its focus from direct involvement and intervention to creating a favorable environment for business. This is not to say that public funds will not be necessary. But subsidies must be spent in ways that do not distort business incentives, focusing instead on providing the infrastructure to support genuinely profitable businesses. Government at all levels should focus on four goals as it takes on its new role.
- Direct resources to the areas of greatest economic need
The crisis in our inner cities demands that they be first in line for government assistance. This may seem an obvious assertion. But the fact is that many programs in areas such as infrastructure, crime prevention, environmental cleanup, land development, and purchasing preference spread funds across constituencies for political reasons. For example, most transportation infrastructure spending goes to creating still more attractive suburban areas. In addition, a majority of preference-program assistance does not go to companies located in low-income neighborhoods.
Investments that boost the economic potential of inner cities must receive priority. For example, Superfund cleanup dollars should go to sites in high-unemployment inner city areas before they go to low-unemployment suburban sites. Infrastructure improvements should go to making inner city areas more attractive business locations. And crime prevention resources should go to high-crime inner city areas. Spending federal, state, and local money in that way will have the added benefit of easing critical social problems, thus reducing social service spending.
Unfortunately, the qualifying criteria for current government assistance programs are not properly designed to channel resources where they are most needed. Preference programs support business based on the race, ethnicity, or friends, family and supporters rather than on economic need. In addition to directing resources away from the inner city, such race-based or politically-based distinctions reinforce inappropriate stereotypes and attitudes, breed resentment, and increase the risk that programs will be manipulated to serve unintended populations. Location in an economically distressed area and employment of a significant percentage of its residents should be the qualification for government assistance and preference programs. Shifting the focus to economic distress in this way will help enlist all segments of the private sector in the solutions to the inner city’s problems.
- Increase the economic value of the inner city as a business location
In order to stimulate economic development, government must recognize that it is a part of the problem. Today its priorities often run counter to business needs. Artificial and outdated government-induced costs must be stripped away in the effort to make the inner city a profitable location for business. Doing so will require rethinking policies and programs in a wide range of areas. There is early evidence that self-inflicted regulatory costs can be overcome. Consider the success of the Indianapolis Regulatory Study Commission in Indiana. In two short years, Indianapolis ended its taxi monopoly, streamlined its building permitting process, and eliminated a wide range of needless regulations.
Indeed, there are numerous possibilities for reform. Imagine, for example, policy aimed at eliminating the substantial land and building cost penalties that businesses face in the inner city. Ongoing rent subsidies run the risk of attracting companies for which an inner city location offers no other economic value. Instead, the goal should be to provide building-ready sites at market prices. A single government entity could be charged with assembling parcels of land and with subsidizing demolition, environmental cleanup, and other costs. The same entity could also streamline all aspects of building—including zoning, permitting, inspections, and other approvals.
Government entities could also develop a more strategic approach to developing transportation and communications infrastructures, which would facilitate the fluid movement of goods, employees, customers, and suppliers within and beyond the inner city.
- Deliver economic development programs and services through mainstream, private sector institutions
There has been a tendency to rely on small community-based nonprofits, quasi-governmental organizations, and special-purpose entities, such as community development banks and specialized small-business investment corporations, to provide capital and business-related services. Social service institutions have a role, but it is not this. With few exceptions, nonprofit and government organizations cannot provide the quality of training, advice, and support to substantial companies that mainstream, private sector organizations can. Compared with private sector entities such as commercial banks and venture capital companies, special-purpose institutions and nonprofits are plagued by high overhead costs; they have difficulty attracting and retaining high-quality personnel, providing competitive compensation, or offering a breadth of experience in dealing with companies of scale.
Consider access to capital. Government must help create the conditions necessary for private, mainstream financial institutions to lend and invest profitably in inner city businesses. Efforts to eliminate discrimination are vital but are not sufficient. Financing in the inner city must be profitable, or private sector institutions will never have the enthusiasm to develop it aggressively. Some conventional lenders claim that the reason they have not found inner city loans profitable is not higher default rates, as is commonly assumed, but the high transaction costs of finding and actually making inner city loans. Government should address those costs head on through better information and relaxed paperwork requirements and regulations. In addition, it could provide direct incentives, giving banks a transaction fee rather than a loan guarantee for closing a qualifying inner-city-based business loan. Such an approach would encourage banks to make and maintain good loans, instead of forcing capital into bad loans to fill lending quotas based on race, ethnicity, or gender.
The most important way to bring debt and equity investment to the inner city is by engaging the private sector. Resources currently going to government or quasi-public financing would be better channeled through other private financial institutions or directed at recapitalizing minority-owned banks focusing on the inner city, provided that there were matching private sector investors. Minority-owned banks that have superior knowledge of the inner city market could gain a competitive advantage by developing business-lending expertise in inner city areas.
As in lending, the best approach to increase the supply of equity capital to the inner cities is to provide private sector incentives consistent with building economically sustainable businesses. One approach would be for both federal and state governments to eliminate the tax on capital gains and dividends from long-term equity investments in inner-city-based businesses or subsidiaries that employ a minimum percentage of inner city residents. Such tax incentives, which are based on the premise of profit, can play a vital role in speeding up private sector investment. Private sector sources of equity will be attracted to inner city investment only when the creation of genuinely profitable businesses is encouraged.
- Align incentives built into government programs with true economic performance
Aligning incentives with business principles should be the goal of every government program. Most programs today would fail such a test. . To align incentives with economic performance, preference programs should be rewritten to require an increasing amount of non-set-aside business over time.
Direct subsidies to businesses do not work. Instead, government funds should be used for site assembly, extra security, environmental cleanup, and other investments designed to improve the business environment. Companies then will be left to make decisions based on true profit.
The New Role of Community-Based Organizations
Recently, there has been renewed activity among community-based organizations (CBOs) to become directly involved in business development. CBOs can, and must, play an important supporting role in the process. But choosing the proper strategy is critical, and many CBOs will have to change fundamentally the way they operate. While it is difficult to make a general set of recommendations to such a diverse group of organizations, four principles should guide community-based organizations in developing their new role.
- Identify and build on strengths
Like every other player, CBOs must identify their unique competitive advantages and participate in economic development based on a realistic assessment of their capabilities, resources, and limitations. Community-based organizations have played a much-needed role in developing low-income housing, social programs, and civic infrastructure. However, while there have been a few notable successes, the vast majority of businesses owned or managed by CBOs have been failures. Most CBOs lack the skills, attitudes, and incentives to advise, lend to, or operate substantial businesses. They were able to master low-income housing development, in which there were major public subsidies and a vacuum of institutional capabilities. But, when it comes to financing and assisting for-profit business development, CBOs simply can’t compete with existing private sector institutions.
Moreover, CBOs naturally tend to focus on community entrepreneurship: small retail and service businesses that are often owned by neighborhood residents. The relatively limited resources of CBOs, as well as their focus on relatively small neighborhoods, is not well-suited to developing the more substantial companies that are necessary for economic vitality.
Finally, the competitive imperatives of for-profit business activity will raise inevitable conflicts for CBOs whose mission rests with the community. Turning down local residents in favor of better-qualified outside entrepreneurs, supporting necessary layoffs or the dismissal of poorly performing workers, assigning prime sites for business instead of social uses, and approving large salaries to successful entrepreneurs and managers are only a handful of the necessary choices. Given these organizations’ roots in meeting the social needs of neighborhoods, it will be difficult for them to put profit ahead of their traditional mission.
- Work to change workforce and community attitudes
Community-based organizations have a unique advantage in their intimate knowledge of and influence within inner city communities, and they can use that advantage to help promote business development. CBOs can help create a hospitable environment for business by working to change community and workforce attitudes and acting as a liaison with residents to quell unfounded opposition to new businesses.
- Create work-readiness and job-referral systems
Community-based organizations can play an active role in preparing, screening, and referring employees to local businesses. A pressing need among many inner city residents is work-readiness training, which includes communication, self-development, and workplace practices. CBOs, with their intimate knowledge of the local community, are well equipped to provide this service in close collaboration with industry.
CBOs can also help inner city residents by actively developing screening and referral systems. Admittedly, some inner-city-based businesses do not hire many local residents. The reasons are varied and complex but seem to revolve around a few bad experiences that owners have had with individual employees and their work attitudes, absenteeism, false injury claims, or drug use
- Facilitate commercial site improvement and development
Community-based organizations (especially community development corporations) can also leverage their expertise in real estate and act as a catalyst to facilitate environmental cleanup and the development of commercial and industrial property.
Overcoming Impediments to Progress
This economic model provides a new and comprehensive approach to reviving our nation’s distressed urban communities. However, agreeing on and implementing it will not be without its challenges. The private sector, government, inner city residents, and the public at large all hold entrenched attitudes and prejudices about the inner city and its problems. These will be slow to change. Rethinking the inner city in economic rather than social terms will be uncomfortable for many who have devoted years to social causes and who view profit and business in general with suspicion. Activists accustomed to lobbying for more government resources will find it difficult to embrace a strategy for fostering Wealth Creation. Elected officials used to framing urban problems in social terms will be resistant to changing legislation, redirecting resources, and taking on recalcitrant bureaucracies. Government entities may find it hard to cede power and control accumulated through past programs. Local leaders who have built social service organizations and merchants who have run mom-and-pop stores could feel threatened by the creation of new initiatives and centers of power. Local politicians schooled in old-style community organizing and confrontational politics will have to tread unfamiliar ground in facilitating cooperation between business and residents.
These changes will be difficult ones for both individuals and institutions. Nonetheless, they must be made. The private sector, government, and community-based organizations all have vital new parts to play in revitalizing the economy of the inner city. Businesspeople, entrepreneurs, and investors must assume a lead role; and community activists, social service providers, and government bureaucrats must support them. The time has come to embrace a rational economic strategy and to stem the intolerable costs of outdated approaches.