Maxwell School, Syracuse University

The Maxwell School of Citizenship and Public Affairs


PAI 786 - Urban Policy
Professor Yinger

Case: Community Economic Development(1)

On March 21, 1994, the U.S. Department of Housing and Urban Development announced the National Community Development Initiative (NCDI), a new program to promote economic development in distressed urban communities. This program is unusual in that it involves a partnership between HUD and a group of private foundations and companies, including the Rockefeller Foundation, the Prudential Company, and J.P. Morgan and Company.

The NCDI will create an $88 million fund, with a $20 million contribution from HUD and lesser contributions from the participating foundations and companies. The money in this fund will be used to give grants and loans to community development corporations, or CDCs, which are nonprofit neighborhood groups devoted to the promotion of local business or the provision of affordable housing. Existing CDCs are very diverse, ranging from very small operations up to the New Community Corporation in Newark, which employs 1,200 people and operates 2,500 housing unites, seven day-care centers, and a shopping center. The NCDI loans and grants will be concentrated in 23 cities, with oversight by the Enterprise Foundation and the Local Initiatives Support Corporation. It is hoped that the NCDI grants and loans will help to generate up to $750 million of additional local support for particular projects.

The Role of CDCs

Building on CDCs is a controversial economic development strategy. Nicholas Lemann, a well-known journalist, writes about "The Myth of Community Development." According to Lemann,

The problem is that on the whole, urban slums have never been home to many businesses except for sweatshops and minor neighborhood provisioners. The slums are usually near downtown, and the residents, when they can find work, usually have found it downtown. Also, poor neighborhoods are usually transitional: rather than being stable self-sufficient communities on the model of a village in Vermont, they tend to be home to people who plan to move out as soon as they make a little money. The standard model of progress for poor people living in urban slums, repeated millions and millions of time over the decades, is to get a good job outside the neighborhood and then decamp for a nicer part of town.

So to try to create a lot of new economic activity in poor neighborhoods is to swim against the great sweeping tide of urban life in America. Inside the ghetto, it usually does no harm--but it doesn't help much either. Outside the ghetto, though, it does a great deal of harm. Attempts at economic revitalization often take the place of other efforts that would do much more good (especially improving schools, housing, and police protection), and they establish a public mission that can't be accomplished. Nothing does more to feed the public perception that antipoverty programs--in fact, Government programs generally--don't work than the poor physical appearance of the ghettos; the more the Government claims it's going to revitalize them, the harder it becomes politically to take on the problem in the future.

In contrast, Peter C. Goldmark Jr., president of the Rockefeller Foundation, says "the community development movement is one of the most powerful in the country, and it has been impossibly hard to get that story told." Similarly, Douglas A. Warner, president of J.P. Morgan, summarized his view of the new initiative by saying "We expect our money to come back. This is a loan. This is a business proposition."

Clear evidence about the effectiveness of CDCs is hard to come by. Anecdotal evidence of successful CDCs can be found. A CDC program to provide counseling and find employment for homeless people in Berkeley, California, for example, has found jobs for 228 people in 1993. According to a report in The New York Times, the jobs were varied: "carpenters, security guards, electricians, truck drivers, secretaries, cooks, janitors, home health care aides, and graffiti removers. The average hourly wage was $8.05, far higher than the $4.25 minimum wage. Half of those who found jobs were still working three months later." However, CDCs that reach beyond job matching and training tend to run into trouble. According to a recent study of CDCs nationwide,

Direct involvement in owning and operating a business is less common among CDCs than are activities that facilitate the ownership and operation of businesses by entrepreneurs. Thirty-seven percent of CDCs engaged in business development currently own and operate a business, and one-quarter invest venture capital. These activities expose CDCs to considerable financial risk, and occupy a great deal of staff time and energy. For these reasons, and because funding for these activities has declined, 40 percent of CDCs that have ever been venture capital investors and more than 25 percent of active business owners have ceased these types of work.

Moreover, dramatic gains from CDCs at the neighborhood level have not yet been observed. As a recent Urban Institute report put it, "There are virtually no examples of success in restoring strong economic activity and job creation to an inner-city area the size of South-Central Los Angeles."

CDCs primarily support small companies, and focusing economic development efforts on small companies also is controversial. A certain mythology has developed around the role of small business in economic growth. David Birch, a researcher at MIT, became well known because of a study he did over a decade ago claiming that small businesses created 8 out of 10 new jobs. This study has since been widely criticized (now, even by Birch himself), but researchers have not yet reached a consensus on the contributions of small business to economic growth. If one looks at a long enough time span, all jobs are created by small business, by definition; even General Motors had to start with one employee. But it is equally true that most small businesses do not make it, and the net impact of employment growth in small business in a given time period is difficult to determine. According to one recent study, for example, "small businesses do hire at twice the rate, relative to their total employment, of midsized and big ones. But they also eliminate jobs at a far higher rate. And their job cuts are less visible since large layoffs by large companies make big headlines, while the disappearance of the corner hardware store or the local car dealership is noticed mostly by the neighbors." Overall, there is no clear evidence either that small companies make a larger net contribution to employment growth than large companies or that government policies will have a larger employment impact if they focus on small rather than large firms.

Yet another controversial issue concerns the need for credit. Many CDC advocates argue that lenders use traditional and outmoded underwriting criteria that make it difficult or impossible for businesses in poor areas to obtain loans. This form of "redlining" requires government intervention, these advocates claim. Other people argue that lenders are unlikely to pass up opportunities to make profitable loans, and the only reason there are so few business loans in low-income areas is that those areas contain so few people with the necessary business skills and so few profitable business prospects. Moreover, some people who believe that lenders use outmoded underwriting criteria are nervous about turning loan decisions over to a CDC. Without extensive training on loan evaluation, a CDC is likely to go toward one of two extremes. If it provides loans to small businesses that are very poor credit risks and cannot obtain financing from private lenders, then it is likely to lose a great deal of money with little community development impact. If, on the other hand, it decides to support sure winners, who probably would get funding from private lenders anyway, then its annual reports look good but in fact it has simply displaced private loans and not made its own contribution. A promising way to overcome a CDC's lack of expertise in identifying creditworthy projects is to form a partnership with area lenders, a strategy that is now being tried by a few CDCs.

Finally, CDCs are heavily involved in attempts to address the dramatic problem of unemployment in low-income areas, particularly among African-American males. Many people claim that community development corporations are the best hope for economic development in African-American and Latino neighborhoods because they do not rely on detached bureaucrats or others who are not well informed about the neighborhoods' problems. Others believe that CDCs can do little in light of the poor educational levels, limited business experience, limited resources, and weak economies in many African-American and Latino neighborhoods. As Alexander Polikoff, director of Business and Professional People for the Public Interest, put it, "By trying to rebuild inner-city neighborhoods, we may be anchoring people to neighborhoods where there are no jobs."

The Decision

You have just been hired by HUD to help implement NCDI. In particular, you have been assigned the task of developing guidelines for the provision of funds to community development corporations in support of economic development projects. Other staff members are looking at the issue of affordable housing.

You have been asked to come to a NCDI staff meeting prepared to state your views on (1) the role of CDCs in urban economic development, (2) the prospects for improving the job picture in low-income, minority neighborhoods through CDCs, and (3) the types of projects by CDCs that are most worthy of grants or loans from NCDI. The last item on this list should be thought of as a set of guidelines for the Local Initiatives Support Corporation, which will actually make the loan and grant decisions.


1. This case was written by John Yinger for the purposes of class discussion. It draws on Jason DeParle, "HUD and Private Sector Unite to Push Development of Poor Areas, The New York Times, March 12, 1994, p. A15; Nicholas Lemann, "The Myth of Community Development," The New York Times Magazine, January 1993, p. 27 ff; Peter T. Kilborn, "Jobs Program May Become the Casualty of Its Success," The New York Times, 1993; "Sylvia Nasar, "Myth: Small Business as Job Engine," The New York Times, 1993, p. D1; and Avis Vidal, Rebuilding Communities: A National Study of Urban Community Development Corporations, Executive Summary (Community Development Research Center, New School for Social Research).



Trustee Professor of Public Administration and Economics