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Can Development Reduce Poverty?

The economic opportunities found in inner cities should attract private investment, although a nudge from government can overcome traditional inertia.
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Even in an era when even some stalwart free-market thinkers are opining that only massive government spending can turn our economy around, just about everyone examining inner cities agrees that government is not the answer. Markets have a role, perhaps even a dominant role, in resuscitating urban hearts.

But in a time of financial turmoil, when banks seem reluctant to invest even in comparatively good risks, it may be natural to ask: Can development really decrease poverty?

Nonprofits like the Initiative for a Competitive Inner City and Washington, D.C.-based Social Compact highlight new kinds of data — beyond figures emphasizing poverty and deficiency — to spur private investment in these underserved areas. Their statistics underscore the economic opportunity to be found in these communities.

Addressing ICIC and Social Compact, labor economist Timothy Bartik told, "Certainly it's hard to quarrel with anyone who's trying to improve the quality of information (about inner-city markets) so people are not operating on stereotypes." But Bartik, a senior economist with the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich., noted that "local labor markets are much bigger than neighborhoods" and expressed doubt that new inner-city businesses would pull many employees from the immediate area.

Although an ICIC analysis of nearly 100 of the nation's largest central cities from 1999 to 2006 shows that every 1 percent uptick in job growth in central cities was correlated with a 0.9 percent decrease in central city poverty, Bartik maintains that the percentage job growth in the broader metropolitan area is a more significant factor in alleviating poverty than job growth in inner-city neighborhoods.

Plus, the inner-city labor force requires "a lot more human capital intervention," he said. Bartik advocates programs to train inner-city workers in expanding fields like health care, increase their "soft skills" as well as technical proficiency and establish job-hunting networks.

As examples, he cited both nonprofits like San Jose, Calif.'s Center for Employment Training and San Antonio's Project QUEST , as well as government programs such as Portland, Ore.'s welfare-to-work initiative, JOBS.

Inner-city business development, Bartik has written, may be an effective means of relieving congestion and environmental strain in outer-ring communities and increasing tax revenues and amenities in inner cities. But it "is unlikely by itself to significantly increase the employment or earnings of the inner city poor."

Urban planner Lisa Servon concurs, telling, "It's hard to do both economic development and poverty alleviation." Servon's own research on micro-enterprise — defined in the U.S. as businesses employing five or fewer workers and needing less than $35,000 in startup capital — underscores that difficulty.

Servon, the dean of Milano The New School for Management and Urban Policy, has written that starting a small business can lift individuals out of poverty; those businesses, in turn, provide stability and services for their communities. But, she acknowledged, "It's a pretty small group — maybe 3 to 5 percent" of low-income people for whom self-employment represents a realistic path out of poverty.

Servon insists that's not a reason to abandon the strategy. "You're not going to find a silver bullet," she cautioned. "It's going to be a range of solutions" that pulls inner cities back from the economic brink.

There Goes the Neighborhood
And when the turnaround occurs, will poor inner-city residents still be around to see it?

Social Compact CEO John Talmage is mindful that gentrification of previously down-at-the-heel areas often results in longtime residents being priced out of the neighborhood. Outside investment, he said, "needs to be leveraged in such a way that residents can participate in the growth generated, rather than being displaced by it." For his part, Bartik of the Upjohn Institute dismissed concerns about gentrification as having been "overhyped," although he acknowledged, "We do need to think about our overall housing policy in this country."

Both Bartik and Talmage characterized gentrification as a mixed bag, with positive results including increased tax revenues that enable city governments to provide better services to the area.

But political scientist Elgie McFayden Jr., who has studied the impact of gentrification on poor inner-city residents, sees the phenomenon in a more negative light and questions the long-term benefit of private investment, especially when tax incentives are used to attract it.

Like Talmage, McFayden — a professor at Kentucky State University — talks about the need to alleviate the so-called poverty tax: the additional disposable income that poor people spend, for example, by having to shop for groceries in expensive corner stores rather than full-service supermarkets; or the better wages they forego because of the lack of public transit to good jobs. But in an interview with, he emphasized "investing in people" with housing, vocational training, public transportation and social programs. If cities embarked on such campaigns of public investment, McFayden explained, the ultimate result would be increased disposable income for residents, more employed residents paying taxes — and the private investment would happen organically, without cities having to provide tax incentives.

"You're not going to change poverty levels or median income levels by building a Wal-Mart," he declared.

That may be a reductionist description of the approach to inner-city economic development being advocated by ICIC and Social Compact, but McFayden is not alone in his concerns about inner-city residents being displaced. In their study of Empowerment Zones, economists Matias Busso and Patrick Kline noted that even small increases in the cost of living in EZs could have a substantial negative impact on residents, most of whom are renters. "If authorities wish to use EZs as anti-poverty programs, they may wish to consider combining housing assistance or incentives for the development of mixed-income housing as complements to demand-side subsidies."

EZ Money?
With businesses from Lehman Brothers to Linens 'n Things having met their demise in 2008, and even wealthy households feeling the financial pinch, it may be hard to picture traditionally underserved inner cities as America's next hot investment opportunity, even as far-flung suburbs collapse under the weight of the subprime mortgage crisis. But the incoming administration of Barack Obama (who famously worked as a community organizer in economically devastated inner-city Chicago) has pledged to establish a White House Office of Urban Policy — and to implement a $800 billion-plus economic stimulus package for the nation.

There is precedent for significant federal intervention — and one needn't look as far back as the New Deal or even the Great Society to find it. As described by Busso and Kline, the federal Empowerment Zone program, authorized by Congress in 1993, was "a series of spatially targeted tax incentives and block grants designed to encourage economic, physical and social investment in the neediest urban and rural areas in the United States."

(Empowerment Zones should not be confused with enterprise zones, which states began designating in the 1980s. Enterprise zones ranged in scale from specific neighborhoods to areas hundreds of square miles in size and included a variety of benefits, including incentives tied to hiring and subsidies for business investment. Numerous scholarshave found that enterprise zone designation did not significantly increase job growth or employment.)

The poverty rate in the 1990 census tracts that made up the first federal Empowerment Zones (in Atlanta, Baltimore, Chicago, Detroit, New York City and Philadelphia/Camden) was 45 percent. But according to Busso and Kline's research, EZ designation — awarded through a competitive process — benefited these communities. Comparing economic indicators in Empowerment Zone neighborhoods with those in communities whose application for EZ designation had been rejected or were accepted in later rounds of the program, Busso and Kline found that "EZs led to increases in local rates of employment on the order of four percentage points and roughly similar sized decreases in unemployment and poverty rates."

In successive surveys, businesses located in the zones also reported a significantly better commercial environment in the EZs —particularly with regard to crime and public safety. Although Busso and Kline found insufficient data to attribute these improvements definitively to EZ status, they allowed that it's "reasonable to suspect that the billions of dollars spent in these neighborhoods might have resulted in substantial improvements to their public safety, physical appearance and local infrastructure."

Busso and Kline's findings can also inform the current debate over the role of tax cuts versus direct government spending in the proposed economic stimulus package. They noted that many businesses in Empowerment Zones failed to avail themselves of tax credits available under the program for employing workers residing in the EZ — and that fewer than half the companies who did take advantage of the tax credits cited the tax benefit as being a significant factor in hiring those workers. Thus, the economists questioned the likelihood that the tax incentives were the primary factor in the increased employment rate seen in EZs.

Moreover, stated Busso and Kline, "The possibility that block grants and outside funding played an important role in redeveloping EZ neighborhoods is important for understanding the likely effects of the later round EZs and various disaster oriented zones, both of which rely almost entirely upon tax subsidies."

As for public investment in inner cities, Bartik said that a sizable component of the proposed stimulus will go toward public works. "We should be debating what low-income communities need," he said. Among the areas he would target are improving public transit and retrofitting public buildings for energy efficiency.

Despite the public works emphasis of the proposed stimulus and the priority Cleveland has placed on infrastructure projects, Chris Warren — the city's regional development chief — is unimpressed with the stimulus package, telling "I wouldn't call it a well-crafted plan." Cleveland's projects are aimed at opening up previously isolated neighborhoods to "urban assets" such as the Lake Erie waterfront, medical facilities and universities.

Warren would prefer the stimulus include an extension of funds for cities like his that are faced with addressing the fallout from the foreclosure crisis — rebuilding some homes, demolishing many more, assisting dislocated households. This crisis may be a human creation but, Warren said, "It's not unlike the effects of a hurricane."

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