Local Economic Transformation, Part 2
Continued Exploring Economic Ecosystems and how to Transform them
If you missed it, my last blog post was part 1 of a 3-part series, exploring a framework I developed for Servant Partners, exploring what local economic transformation can look like as we rebuild out of COVID. I would encourage you to read that piece before you read this one.
There is a Five-Part Process I laid out to attempting local economic transformation:
Step 1 = Understand the Economy’s Big Picture
Step 2 = Listen to Community Needs
Step 3 = Identify Community Assets
Step 4 = Identify a Strategy to Prototype
Step 5 = Build a “container” that can sustain the work over a longer time frame.
We will start today by continuing to examine Step 1:
Step 1: Understand the Economy (continued)
As businesses and workers create that economic value through market exchange, wealth is created by both workers and companies. When functioning as intended, the financial sector facilitates the flow of this wealth back into productive economic activities. It can do this in all three other sectors (workers, businesses, and infrastructure) through savings, loans, or equity investment. A well-developed finance sector ensures that it is easy to finance all three sectors through various financial services. This process creates more wealth, which enables a virtuous cycle to begin where the existing wealth creates more wealth, which can keep getting reinvested in the community, creating a virtuous cycle:
Of course, in many cities and neighborhoods, this positive cycle is far from reality. Lower-income areas cannot rely on a vast stock of pre-existing wealth invested in the financial sector. The vast majority of small businesses will never access venture capital in the first place, and that is even more true outside of traditional tech hubs and for founders who are not socially and demographically connected to the right networks. Venture capital for high-potential businesses often clusters in the economic regions where those sectors are most prevalent, making it very hard to get funding in smaller cities or marginalized neighborhoods.
Historically, banks have often refused to lend to whole neighborhoods, either with explicit or implicit discriminatory intent. Historically, this happened through the practice of red-lining, where communities that were majority African-American were not given access to mortgage loans accessible in majority-white neighborhoods. Similar lending practices historically happened in small business lending, where entrepreneurs in marginalized communities cannot access credit. This history compounded the disadvantage entrepreneurs have in their networks, having less access to wealth from their friends and family.
Workers looking to improve their job skills have a bit of an easier time accessing financing. Federal and state grants and loans ensure that most low-income students looking to attend college can access financial aid in the US. But there is no equivalent set of financing programs for workers looking for financial assistance in attending job training programs outside of higher education. Given that lower-income neighborhoods have a lower percentage of residents who will attend college, this creates a gap in financial services to build up your skills as a worker. As a result, these workers often have a more challenging time finding financing to get training, even if the training would pay off in higher salaries in the long run.1
But the most direct and widespread impact of decreased neighborhood wealth is the impact of everyday consumption, making it hard for economic markets to grow. For example, a car repair costing $400 will require 47% percent of Americans to go into debt. In addition, 60% of Americans do not have significant savings, and 40% have zero savings accumulated.2 Because of the effect of historic segregation in many communities, most asset-poor families living in the community have social networks that mainly consist of other asset-poor families. Research in LA County shows that 76% of Latino households are "asset poor," meaning they would struggle to pay large unexpected bills if they occurred.3 This wealth pattern often leads to dependence on payday lenders and other forms of informal finance. Research from the US Federal Reserve found that 70% of payday lending users are either unable to prioritize regularly setting aside money for savings. In this context, payday loans can play a beneficial role for users: states with access to payday lending report fewer consumers in financial distress and faster recovery from natural disasters.4 Having access to credit, even on bad terms, is better than no access to credit. But those benefits almost exclusively accrue to users who have the discipline to only use payday loans when necessary, rather than regularly using them. One presumes that regular users of payday lenders are more at risk of falling into debt traps, while more occasional users presumably only seek payday loans in genuine emergencies.
Non-profit Credit unions have, in some cases, stepped into the gap to try to offer financial services that work for the poor. In many cities, churches have started operate a local credit union that works with low-income individuals to help cover expenses with small personal loans, as an alternative to payday lending.5 Internationally, Microfinance, pioneered in Bangladesh, has become a worldwide movement of extending credit to poor entrepreneurs. In addition, investment funds have turned their attention to the potential of funds that focus on impact, social responsibility, and funds targeted in specific localities. But generally, many mainstream financial services firms have a lot of trouble making the finances of small-dollar loans work.6 There is a great good that can be done in economic ecosystems by creative thinking around how to best get financing in the hands of working-class residents that provide the benefits of payday lending while minimizing the costs.
Many advocates seek to attract outside investment and grants into low-income neighborhoods to reverse this trend and build wealth in marginalized communities. However, while research has shown that outside investment is often beneficial,7 most experts agree that long-term development requires building up local institutions and the capacity to create economic value in the long term. A good strategy thus often includes a mix of connecting the community to outside resources and capacity building within neighborhoods, so their economy has the internal resources to finance needed investments in the long-run
The built environment is also crucial to facilitating economic exchange in an ecosystem. Workers need to be able to access work opportunities, and businesses need to reach their customers. Often we talk about this built environment as economic “infrastructure.” As I write this in Spring 2021, there is currently an ongoing debate in the US political arena about what exactly counts as infrastructure, a dispute I am not interested in litigating here. Instead, I find the best way of framing the role of urban infrastructure within the context of development comes from Alain Bertaud, the former chief planner at the world bank. Bertaud has worked in cities worldwide, including France, Algeria, New York, Yemen, China, and Thailand (and many others). Bertaud defines the role of infrastructure in the economic ecosystem as serving three primary purposes:
Firms and households have the freedom to stay put or migrate at will
Travel within the city remains fast and cheap, and
Real estate is sufficiently affordable that it does not distort the allocation of labor8
Another way of framing this is that cities should aim to create an economic environment where workers and businesses can both be mobile within the ecosystem and have access to affordable space to maximize the economic health of the ecosystem. For example, if a neighborhood has affordable rents but is geographically far from good jobs, the residents will have limited opportunities. Likewise, downtown neighborhoods usually have amble job opportunities within a short commute but have expensive rents that limit the number of residents who can take advantage of those jobs.
This feature makes inadequate infrastructure so pernicious: when infrastructure is functioning poorly, the costs are hidden. It is challenging to measure the businesses not started, the jobs not taken, the economic activity not completed because there was insufficient infrastructure to support those functions. On the flip side, well-functioning infrastructure will seldom measure, let alone capture the total economic value created. Imagine the task of trying to calculate the economic value produced by the 1811 master grid of Manhatten Island? Or calculate the value created over the 153-year history of the New York subway system? The value created by both of these pieces of urban infrastructure is almost assuredly enormous and certainly has not been captured by the city that built this infrastructure. Moreover, in the rare cases through recent history that the market does create an incentive to develop infrastructure, it often creates a powerful natural monopoly (like railroads in the 1800s/1900s, cable internet companies in the 2000s) that does not maximize the public good. This concern is why often (but not always) infrastructure is built or regulated by governments rather than private businesses: governments can ensure that there is widespread access to economic opportunity through a cities infrastructure.
So what are the different aspects of infrastructure we should be attentive to in an economic ecosystem? Here are some to consider:
Transportation: It is vital to an economic ecosystem that people can be mobile within a city. The city’s roads and public transportation systems can get people to work and access economic opportunities efficiently. But Transportation also means ensuring that an economic ecosystem can connect to other ecosystems to create the potential for traded goods to build wealth. Economic trade requires airports, trains, interstate highways, and ports that are also developed and easily used.
Utilities: Utilities represent a hidden but vital infrastructure: for economic life to function, there needs to be widespread access to power, water, and garbage disposal. Many in the rich world take these for granted, but the costs and complexity of maintaining these systems is a massive task for local governments and creates vast suffering when not done adequately.
Digital Infrastructure: Increasingly, more and more economic activity happens online. While some businesses will likely be done in person for a long-time to come, the internet has created tremendous opportunities to have global economic ties. However, access to this economy requires physical infrastructure (broadband, mobile, etc.) to connect to this online marketplace.
Now it is essential to acknowledge that infrastructure projects are not necessarily unalloyed good things. In addition to the upfront monetary costs of infrastructure, infrastructure projects can create what economists call “negative externalities,” pollution, noise, congestion, and can often displace current residents through government use of eminent domain in building the infrastructure. For example, Los Angles constructed many of its busiest highways through my neighborhood in East Los Angeles. The East Los Angeles Interchange in Boyle Heights is, by some measures, one of the busiest highway interchanges in the world.9 While these highways are used by all residents of the Los Angeles region, building them required displacing Eastside residents. Not only that, the freeways create costly pollution that falls disproportionately on residents of the Eastside of LA. Its one of the big reasons why rates of asthma are disproportionately high in South and East LA, where many residents live near freeways and highly traffic streets, as is pointed out by this chart from Cal State LA:
When considering new infrastructure projects against the benefits, we must consider these sometimes hidden costs, primarily when they concentrate in already economically marginalized communities. It is crucial to ensure that infrastructure projects balance the cost and benefits on both regional AND local levels.
Of course, talk about infrastructure should look at its expansion and use what already existing more efficiently. One can make a great case that while internationally, many cities require considerable investments in new infrastructure, American cities’ main problem is using existing infrastructure productively.10 This domain is where urban planning comes in: there is great importance to economic regions thinking critically about how land is regulated and how land is put to the highest and best use. Unfortunately, over the last 100 years, urban planning and urban economics have become largely disconnected as disciplines, so conversations about land-use regulation do not happen in concert with broader conversations about economic ecosystems. As Alain Bertaud sees it, economists have taken too academic and abstract of an approach, critiquing urban planning regulations without giving practical guides to urban planners. Meanwhile, Bertaud sees too many urban planners who do not think about how markets work; they are proud to ignore them actively.11
Thus, it is essential to consider how land-use patterns intersect with infrastructure to promote mobility and affordability within an economic ecosystem. Nowhere is it more evident than housing policy. Housing is not traditionally thought of as infrastructure because the market provides most housing. However, because local governments heavily regulate housing through land-use policy, many American cities have ended up playing a huge role in determining where people can live, what mobility they have, and at what rents they have to pay to live in the city. Ideally, land use policy would seek to maximize how easy and affordable it is to live in areas of the region that maximize access to good jobs and reliable transportation. Unfortunately, this is often the opposite of what happens: extensive research shows that land use is far more responsive to the subjective desires of homeowners in a neighborhood than city-wide economic needs.12 Moreover, this capture is made operational through a variety of regulations that limit the flexibility of individual property owners to build what the market might otherwise demand in a given neighborhood, including (but by no means limited to):
Zoning: rules limiting the types of buildings built on given land and how many households can occupy them.13
Floor Area Ratios: Regulations that limit the height of buildings in a given property.14
Parking minimums: Requirements new buildings to include new parking) have combined to strongly limit building new housing (and in some cases, office space) in highly desirable parts of wealthy cities.15
Environmental Review: Processes that require developments to access the environmental costs, often without rigorous and balanced attention to the environmental benefits of building the project.16
There is disagreement about the merits of these various regulations, but most agree that in many American cities, communities use these tools for harmful exclusionary purposes they were not designed to perform. Many economists identify this as, by far, the most considerable negative influence on a city’s economic ecosystems. For example, a study by Chang-Tai Hsieh and Enrico Moretti argued that restrictive land use reduced US GDP growth by 36 percent from 1964 to 2009. Much of this burden falls on working-class and low-income Americans by impacting their access to good jobs and increasing their rent-burdens. Often, the few neighborhoods where the development of new housing and infrastructure is allowed are in lower-income neighborhoods, leading to the much-observed phenomenon of gentrification. However, research in recent years suggests that new buildings in low-income communities do not cause gentrification; in fact, new housing seems to reduce rents, even luxury buildings in low-income neighborhoods.17 Instead, there is a more compelling case that the real driver of gentrification is the status quo of overly restrictive zoning in wealthy communities, which drives renters and new residents to seek housing in lower-income communities.
Economic opportunity requires making land-use should be an extremely high priority for anyone seeking to make a positive impact on an ecosystem.
Now that we thoroughly examined what economic ecosystems look like, it is worth bringing our focus back to the context we find ourselves in recovery from the COVID-19 pandemic. Depending on where you are, COVID is at a very different stage. Parts of the United States and other wealthy countries like Canada find themselves at points of booming economic re-openings, given the successful uptake of vaccines and low rates of COVID spread. Other places, including the American deep south, find themselves in a more liminal space, re-opening, but with low vaccine uptake rates that risk future surges of the pandemic. The majority of the world is still in the throes of the pandemic, with little access to vaccination to enable economic re-opening.
Regardless of where your local community is in COVID, it is helpful to think about the worst economic damage to your economic ecosystems. For the economic ecosystem to function at its total capacity, all four parts of the ecosystem need to be operating at full strength; COVID’s disruption came not through disrupting one part of the ecosystem but all four at the same time:
Workforce: COVID has caused many industries to close, obliterating jobs in tourism, entertainment, hospitality and food, and caretaking. Not only did COVID make these workers unable to make productive use of their skills in the short run, but COVID may (in some cases) also permanently change their industry by encouraging substituting automation for human labor. This change may make some work skills less relevant in the long run. As a result, workers need help to find new opportunities to use their existing skills and to find ways to learn new skills that have enduring economic value beyond COVID.
Business: Many businesses and industries were halted by COVID because their business operations ran the risk of virus transmission. Some of these businesses have been able to ramp back up as COVID ebbs and flows (some restaurants have done this), while others may face longer-term disruption (many small retail shops have seen their customers switch to online shopping). But it is vital to think about the disruption that happened to traded sectors. For example, regions that rely on tourism bringing in wealth have seen that dry up, especially communities that rely on international tourism. COVID has prompted some needed conversations in these regions about the importance of trying to “diversify” their economy, so they are not dependent on one sector.
Finance: The impact of COVID has significantly reduced the economy’s output, both on the business side and on the workforce side. The fallout caused a real crisis: individuals and businesses need temporary financing to get through the lean months of COVID until the economy can reopen. Some governments have tried to cover this shortfall through direct cash welfare; other communities have been forced to rely on loans and help from family and friends to get through. Ironically, businesses in wealthier neighborhoods have lost more revenue, as people working from home tend to spend less. On the flip side, lower-income communities have seen more job losses but have not seen business revenue drop as much because people still need to spend the money they earn.
Infrastructure: Given that infrastructure is pre-built, Of all four elements of our ecosystem, COVID has disrupted this area the least, and all, it is hard for a pandemic to impact the built environment. However, the lack of flexibility in land use policies showed its importance during COVID. As many office spaces emptied and people had to work from home, no regulatory mechanisms allowed real estate to shift from one use to another quickly. In many cases, this regulatory failure had deadly impacts: many low-income neighborhoods in big cities saw whole extended families trying to shelter in place in overcrowded housing, passing COVID to vulnerable family members. This strategy occurred even while many offices and hotels sat empty, theoretically providing emergency shelter for sick residents.
So as we aim to rebuild after COVID, there certainly will be ways that a local community will need to give all four elements of the ecosystem time and attention to help it recover from the impact of COVID. However, there is also clearly a need to look beyond COVID and ask: how can we rebuild in a way that addresses the issues that pre-dated COVID?
Step 2: Community Listening
You should now be familiar with the framework of an economic ecosystem and the four main elements of that economic ecosystem. Why is this important? Because to understand how to make productive economic transformations, it is crucial to have a common understanding of how economic ecosystems work on a high level and the critical issues on a wide scale.
But it is also necessary to recognize that a high-level understanding is not sufficient to make a change. Every community is different, and the more local your lens, the more those nuanced differences will be essential to make effective change. Finally, as a Servant Partners site, it is worth considering which areas to work on to make the most consequential impact possible. One team cannot and does not need to address all four of these areas. Instead, you want to focus your resources on where you can have the most impact. The first step in determining how to do this well is to engage in community listening.
Since Servant Partners staff have created many other excellent resources on community listening, this document will not reinvent that wheel. But the core idea of community listening is that you want to use various methods to get feedback from your community on the core issues facing your neighborhood. Some essential tools that you can employ to do this are:
Written or electronic Surveys
1-on-1 conversations with neighborhood residents and leaders
Time spent observing how people are going about their day to day life (which is often different than what people say they do)
Focus Groups, where multiple residents can be asked about their impressions of the community and can respond to other group member’s observations
As you start to identify these needs, I have found it helpful to use the framework developed by Alexander Osterwalder that segments need into three categories:
A “Community Pain” is something negative in the community that residents want they want to solve or end, like “Homelessness” or “Joblessness.”
A “Community Gain” is something positive they want to be created, like “Good Jobs” or “Reliable Transit to Jobs.”
A “Community Job To Be Done” is a job that needs to be done or a role that needs to be filled, like “help to get a business permit” or “legal counsel.”
Segmenting out like this can help you better think through identifying specific problems (as opposed to vaguer, more general problems). The more people you talk to, you will get a better sense of what the most common felt needs in the community are. Ideally, these needs will combine with higher-level research and data to paint a whole and nuanced picture of the economic ecosystem in your community.
When examining problems, it is vital to keep asking “why?” when someone brings an issue up. This question will help you explore the root causes of what we see in our communities, not just the surface-level symptoms. What appears as economic problems can be downstream from some other interconnected issue. For instance, issues with job skills in the labor force can be downstream from a poorly functioning educational system or a breakdown of healthy families or churches that leave people isolated and ill-equipped to succeed in the labor force. Or, as we have seen with COVID, a global pandemic can create disruptions to otherwise healthy economic ecosystems that are only fully fixed when public health is restored (as it has been in the US by vaccinations).
Of course, economic solutions can have a role to play in solving these problems. For instance, a growing economy may create job opportunities that pull otherwise disconnected individuals into the labor force, which may help them rebuild their social trust and relationships. But we need to be realistic about how much economic development can do: jumping straight to economic solutions without addressing the other root causes may limit our ability to see lasting change.
Taken from Order Without Design, by Alain Bertaud, page 19
To see this argument in full, read Chuck Marohn’s piece on the recent infrastructure debate: https://static1.squarespace.com/static/53dd6676e4b0fedfbc26ea91/t/6081c2d31857331f3c81f6a4/1619116756262/American+Jobs+Plan+Series+Booklet.pdf
Bertaud, page 17
See David Schleicher paper, City Unplanning, https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=5960&context=fss_papers
For a short overview, see Ed Glaesar’s article: https://www.brookings.edu/research/reforming-land-use-regulations/
For a short overview, see Alain Bertaud’s article: https://marroninstitute.nyu.edu/blog/density-is-not-a-design-decision
For a short overview, see Michael Manville’s article: https://www.theatlantic.com/ideas/archive/2021/05/parking-drives-housing-prices/618910/
For a short overview, see Sam Hammond’s overview: https://www.niskanencenter.org/faster_fairer/reviving_innovation_and_dynamism.html#Overhaul_Environmental_Review
To see an extensive review on the subject, see the work of the Lewis Center at UCLA here: https://www.lewis.ucla.edu/research/market-rate-development-impacts/