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Moving Inner Cities Out of the Red, Into the Black

Researchers say America's chronically underserved urban cores are an untapped market that can sustain private investment — and turn themselves around in the process.
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Ed. note: Today we begin a three-part look at urban policy, examing here and tomorrow the unrealized potential some see in flailing inner cities, and closing with a look at how the urban poor are fast becoming the suburban poor.

The copious amounts of ink, airtime and cyberspace devoted to discussions of "small town American values" in the recent presidential campaign obscured the fact that most people in the United States live not in Mayberry but in metropolitan areas.

As the Brookings Institution's Metropolitan Policy Program noted, "Metropolitan areas are home to 83 percent of the U.S. population, 85 percent of the nation's jobs and 92 percent of all college graduates. They are, in short, the drivers of our economy, and American competitiveness depends on their vitality."

But even in metro areas with significant wealth, inner cities populated largely by low-income minorities typically suffer from high rates of poverty and unemployment.

In 2000, Michael E. Porter — a Harvard Business School professor and CEO of the Initiative for a Competitive Inner City — reported that America's 100 largest inner cities were home to 8 percent of the U.S. population but accounted for nearly a third of the nation's minority residents living in poverty. ICIC figures also show that between 1998 and 2006, a mere 10,000 new jobs were created in those 100 inner cities — even as their corresponding census regions added more than 6 million jobs.

Convinced that such figures tell only part of the story, nonprofits like ICIC and Washington, D.C.-based Social Compact are highlighting new kinds of data to spur private investment in these underserved areas.

A Different View of Inner Cities
For more than a decade, Porter has been touting what he calls the competitive advantages of inner cities: strategic locations close to major centers of economic activity and transportation hubs; the opportunity to translate that proximity into new businesses linked to regional economic powerhouses (such as financial services and health care in Boston and entertainment in Los Angeles); pent-up consumer demand due to the long-standing lack of retail and financial services; and a large labor force.

Social Compact, in its market analyses of disadvantaged communities from the Sun Belt (Jacksonville, Fla.) to the Rust Belt (Detroit), has consistently found more positive economic data for these communities than do Census reports.

In its 2004 report on the city of Cleveland, Social Compact detected a residential population that was 24 percent higher than 2000 Census figures indicated. In studying the new immigrant hub of Santa Ana, Calif., for a 2006 report on that city's disadvantaged communities, Social Compact found an average household income 40 percent larger than that captured in the 2000 Census — a discrepancy Social Compact says can be partially explained by a thriving informal economy many traditional economic models don't capture.

In an interview with, Social Compact CEO John Talmage attributed the difference in the numbers to his organization's mining of data from a variety of sources — including tax rolls, utility accounts and credit companies — rather than relying on computer models based on incomplete or unreliable data. The approach tends to emphasize the economic opportunity — rather than the poverty and deficiency — to be found in low-income neighborhoods.

America's inner cities, according to ICIC's Web site, represent $122 billion worth of retail purchasing power. The market analyses it has conducted for low-income areas of cities such as Houston, New York and Oakland, Social Compact boasts, "have galvanized significant investment in underserved communities, bringing needed services, jobs and tax revenue to these areas."

Partners in Paradigm Shift
But the goal of encouraging private investment in inner cities, Talmage said, is not necessarily a Borders in every 'hood. Retail development in inner cities, he said, should be viewed not as an end in itself but as "the beginning of a process."

For example, a grocery store or home-improvement center may fulfill immediate consumer needs in an inner city area, but Talmage explained they can also serve as a sort of small business incubator — the grocery store by training employees, such as butchers, who may go on to open specialty shops; the home-improvement center by helping to train and establish a new generation of contractors.

Of course, the current global financial crisis has shaken even the most stalwart faith in the effectiveness of market-based solutions for social problems, but neither Porter nor Talmage suggests that private investment alone will turn around inner cities.

In a September 2008 address to the Inner City Economic Forum, Porter made clear his belief that government has a significant role to play in the economic recovery of inner cities.

"Federal policy should enable inner-city economic development by strengthening the inherent competitive advantages of inner cities while addressing weaknesses," which he said include inadequately trained workers and an infrastructure degrading even more severely than that in rural areas and the rest of the central city.

As lawmakers debate the capacity of public works projects and "social spending" (such as job-training programs) to revive the economy in the near term, it may be instructive to consider Porter's view that improving both the infrastructure and human capital of the inner city can provide a long-term stimulus as well.

And maximizing public investment in inner cities is crucial to support the other two elements that Talmage of Social Compact believes are required for successful community development: a strong small-business environment and affordable housing.
In Cleveland, the city has emphasized the former element even as it's been hit hard by the foreclosure crisis.

Chris Warren, chief of regional development for Cleveland Mayor Frank Jackson, said the extent of the informal economy revealed in the Social Compact study of his city was "illuminating," and that the city has undertaken a number of efforts to capitalize on that cash economy, offering loans, lines of credit and grants to inner-city businesses that he said have "historically been ignored in economic development initiatives." These businesses, which often rely heavily on pedestrian and street trade, range from coffee shops and cake makers to tax counselors and home-improvement outfits; typically, Warren said, they are "family-owned, small, very often cash-based and not financially sophisticated."

Invisible Hand vs. Iron Fist
There are some who believe that government can go too far in determining what kind of support struggling neighborhoods need. In July 2008, when the Los Angeles City Council passed a yearlong moratorium on the opening of any new fast-food restaurants in a large low-income section of the city, veteran civil rights leader Joe R. Hicks lambasted the city's action as anti-business and characterized it as "government slap[ping] food from the hands of poor black and brown residents."

But Los Angeles City Councilwoman Jan Perry, who represents the affected area of the city and sponsored the moratorium, described the ban as a stopgap measure to allow for better planning for the area's food needs. Perry pointed out that she'd also led an effort to develop a package of incentives to attract more grocery stores and sit-down restaurants to her district, where — a Perry spokeswoman told — there is an "over concentration of fast-food establishments," compared with more affluent parts of Los Angeles, as well as very few supermarkets and full-service restaurants.

Observers give this approach mixed reviews. Talmage of Social Compact said "something doesn't feel right" about government regulating fast food in poor communities but not in suburbs. "It's sometimes too convenient for local government to legislate against something than to legislate for something. I don't think limiting the market is the way to solve the problem."

Urban planner Kami Pothukuchi, who has studied cities' attempts to lure grocery stores to the inner city, gives Los Angeles high marks for offering a carrot as well as a stick. However, in an interview with, she mused, "I'd be curious to see if there are any positive responses. I'm not sure people will be lining up for these incentives."

Pothukuchi, a professor at Wayne State University, has written about how much political controversy supermarket developments in inner-city areas can generate — and that the potential for this conflict can itself deter companies that might be interested in opening retail locations in inner cities. She's ambivalent about the extent to which government should try to limit investment in inner-city areas to businesses that are politically desirable either due to their merchandise (books versus liquor) or some other factor (a unionized versus non-union grocery store). "Regulating liquor is a very good thing," she said, "and those laws need to be enforced."

Pothukuchi also noted, "If governments are putting money on the table, they can list their criteria" for the type of development they want to encourage. But she warned that economically challenged communities like Detroit and South Los Angeles need to be cautious that the conditions they impose don't end up preventing them from meeting basic community needs — like access to fresh, healthy, affordable food.

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